Securities Snapshot
September 22, 2020

California State Court Upholds Exclusive Federal Forum-Selection Charter Provision for 1933 Act Suits

California State Court Upholds Exclusive Federal Forum-Selection Charter Provision for 1933 Act Suits; California District Court Dismisses Fraud-Related Claims Against AT&T; Third Circuit Holds Challenge to SEC’s Decision to Investigate Barred by Sovereign Immunity; California District Court Tosses Most Claims in Align Technology Class-Action Securities Suit; Delaware Chancery Court Dismisses Fiduciary-Duty Suit Against Outerwall Directors And Officer


Addressing “an issue of first impression in the United States,” a judge on the California Superior Court has held that a provision in a corporation’s certificate of incorporation specifying the federal district courts as the exclusive forum for actions under the Securities Act of 1933 (the “1933 Act”) is enforceable.

The case is a class-action lawsuit alleging 1933 Act claims against Restoration Robotics, Inc. (“Restoration”), which is incorporated in Delaware and has its principal place of business in California, and related individual and entity defendants.  The defendants moved to dismiss the lawsuit filed in California state court, arguing that it was barred by the exclusive federal forum provision for 1933 Act lawsuits (the “FFP”) in Restoration’s certificate of incorporation, which had been ratified by a shareholder vote.  These FFPs have, the Superior Court noted, become a common mechanism adopted by corporations in light of the U.S. Supreme Court’s holding in Cyan, Inc. v. Beaver County Employees Retirement Fund, 138 S. Ct. 1061 (2018), that the 1933 Act provides for concurrent jurisdiction in state and federal courts.  The Superior Court initially denied the motion to dismiss, relying on a December 2018 Delaware Court of Chancery decision that had held that such FFPs do not concern the “internal affairs” of the corporation and, thus, are invalid under Delaware law.  However, in Salzberg v. Sciabacucchi, 227 A.3d 102 (Del. 2020), the Delaware Supreme Court reversed the Chancery Court, holding that FFPs are facially valid under Section 102 of the DGCL, because they address “intracorporate” affairs that may be regulated through a corporation’s certificate of incorporation.  In light of the Delaware Supreme Court decision, the California Superior Court re-examined its prior dismissal and granted the defendants’ motion for reconsideration of the motion to dismiss.

In reconsidering the motion to dismiss, the Superior Court first found that California law, and not Delaware law, applied, and noted that the Delaware Supreme Court’s observations that FFPs do not offend federal and public policy were dicta.  Acknowledging that there were no California cases directly on point, the Superior Court found that the FFP “is most akin to a contractual forum selection clause.”  Under California law, such provisions are generally enforceable, but the trial court retains discretion  whether to decline jurisdiction, and the burden rests with the opposing party to show that application of the provision would be “unfair or unreasonable.”  The Superior Court found that the plaintiffs had not met their burden of showing the FPP to be unfair or unreasonable.  While the Superior Court held that the FFP was “glaringly” procedurally unconscionable, noting that the charter provision essentially was a one-sided “adhesion” contract that was drafted by the corporation for its own benefit without arm’s length negotiation that was “buried” in “small print,” the Court ultimately held that it was not substantively unconscionable.  The Superior Court based this ruling largely on the finding that the FFP “removed the opportunity to use the procedural advantages of a state court forum, but does not take away the substantive protections provided by the Securities Act itself.”   The Court further noted that the FFP at issue did “not particularly create any additional expense or inconvenience, as the FFP wisely permits the filing of a shareholder lawsuit in any federal district court in the US (presumably one that is the proper venue).”  While the Superior Court noted that the FFP would be unconscionable and unenforceable it if was shown to be unconstitutional or violate federal law, it found that plaintiffs cited “no federal law actually holding that the forum selection clauses are unconstitutional or illegal under federal law.”  The Superior Court accordingly exercised its discretion and declined jurisdiction over the claims against Restoration Robotics and its officers and directors.  But the court denied the motion to dismiss as to certain underwriter and venture-capital defendants, as they had not shown authority that they, as non-parties and non-signatories to the certificate of incorporation, have the right to invoke the FFP.

The decision is an important vindication of FFPs in the 1933 Act context, but not an unambiguous one.  The Superior Court emphasized that, under California law, the decision to enforce an FFP is always discretionary.  The court also voiced disapproval of the use of FFPs to “circumvent” Cyan and the plain text of the 1933 Act, and it expressed skepticism regarding the soundness of the Delaware Supreme Court’s decision in Salzberg; indeed, the court suggested there may be viable federal constitutional challenges to Salzburg’s interpretation of Section 102 of the DGCL, challenges the court declined to decide in the posture of a motion to dismiss for forum non conviens.  


In a case highlighting data-security issues in the emerging cryptocurrency space, the District Court for the Central District of California granted AT&T Mobility, LLC’s (“AT&T”) motion to dismiss several fraud-related claims against it in a lawsuit concerning the hack of a prominent cryptocurrency entrepreneur.  

The plaintiff, Michael Terpin, suffered a hack of his phone in June 2017, during which hackers successfully accessed his cryptocurrency account, impersonated him, and made away with significant funds.  Following the hack, Terpin met with representatives of AT&T, who allegedly promised him a level of “special” “celebrity” protection, including requiring a six-digit passcode known only to Terpin and his wife to alter Terpin’s account settings or transfer his number to another phone.  This protection service was allegedly created with the “knowledge and approval” of AT&T’s officers responsible for security and privacy.  But in January 2018, Terpin was hacked again; this time, an AT&T employee allegedly assisted an imposter in a SIM card swipe that allowed the imposter to steal nearly $24 million of cryptocurrency.  Terpin sued in the California district court in August 2018 and filed his first amended complaint in August 2019.  AT&T moved to dismiss both versions of the complaint, and both times the district court granted the motion in part and denied it in part.  Terpin filed his operative second amended complaint (“SAC”) in March 2020, alleging eight counts against AT&T and various “Doe” defendants.  AT&T then moved to dismiss the SAC’s claims for deceit-by-concealment and misrepresentation under California law and a  request for punitive damages.
The district court granted the motion.  The court agreed with AT&T that Terpin had failed to allege the necessary element of a duty to disclose in his deceit-by-concealment claim.  The court noted that AT&T had disclosed the limits of its protection plan, such that those limits were not exclusively within its knowledge.   Further, even crediting Terpin’s allegation that AT&T had failed to disclose that the six-digit code could be overridden or ignored by AT&T employees, Terpin had not demonstrated that AT&T actively concealed the fact, or that it promised that the passcode was foolproof.  Finally, the court rejected Terpin’s claim that AT&T had made an actionable partial representation by discussing the passcode’s protections without specifically flagging that an AT&T employee could misuse it; AT&T did disclose that “unauthorized third parties” could cause a security breach.  
Turning to the misrepresentation claim, the court found that while AT&T’s promotion of its protection plan was arguably “overoptimistic,” it was not fraudulent.  As to the punitive damages claim, the court found that Terpin had plausibly alleged that certain of AT&T’s officers had “actual knowledge of the threat posed by AT&T’s inadequate security system,” but had not plausibly alleged that the executives had “consciously disregarded the threat.”  The court generally dismissed the claims with prejudice, but allowed Terpin to move to add back the request for punitive damages within 21 days of the close of discovery.


In an important precedential decision, the Third Circuit affirmed dismissal of a lawsuit against the Securities and Exchange Commission (“SEC”) on the basis that the SEC’s decision to investigate is shielded by sovereign immunity and therefore not subject to review under the Administrative Procedure Act (“APA”).

The lawsuit concerned an investigation of alleged securities transactions through an unregistered broker-dealer in violation of Section 15 of the Securities and Exchange Act of 1934 (the “Exchange Act”).  The formal target of the investigation was Traders Café LLC, which maintained an account with a Bahamian broker-dealer that was not registered in the United States.  Later, however, and without issuing a new Formal Order of Investigation, the SEC informed Guy Gentile, who used the same Bahamian broker-dealer, that he, too, was a target.  The SEC issued a number of subpoenas in connection with the investigation, including to Gentile’s personal attorney and an entity affiliated with the Bahamian broker-dealer, both of whom refused to comply, after which the SEC instituted enforcement actions against them in the federal District Court for the Southern District of Florida.  Gentile moved to intervene in the Florida enforcement cases, but the court denied the attempt.  Gentile also filed suit in the federal District of New Jersey seeking a declaration that the investigation was unlawful, requesting that the subpoenas issued in connection with the investigation be quashed, and requesting an injunction preventing the SEC from using the fruits of the investigation against him.  The SEC moved to dismiss for lack of subject matter jurisdiction, arguing that sovereign immunity barred Gentile’s suit.  The New Jersey district court agreed, following the Second Circuit’s opinion in Sprecher v. Graber, 716 F.2d 968 (2d Cir. 1983), which held that the Exchange Act’s exclusive mechanism for disputing SEC investigative subpoenas triggered an exception to the APA’s general waiver of sovereign immunity.

On appeal, the Third Circuit affirmed dismissal for lack of subject matter jurisdiction, but on slightly different grounds.  The Third Circuit disagreed with the district court’s conclusion that the Second Circuit’s decision in Sprecher applied, because while Gentile sought to quash the subpoenas, he did so by challenging the legality of the Formal Order of Investigation, not by alleging any defect in the subpoenas themselves.  Instead, the Third Circuit found that the SEC’s decision to investigate implicated the APA’s exception from the general waiver of sovereign immunity for “agency action committed to agency discretion by law.”  The court reasoned that the exception applied because “a decision to investigate involves a complicated balancing of several factors peculiarly within the agency’s expertise,” and because the Supreme Court had already held in a pair of cases that an agency’s decisions not to investigate or prosecute were committed to agency discretion by law.  Gentile contended that the “committed to agency discretion by law” exception should not apply, because his challenge was trained specifically on the investigation’s nexus to him and its allegedly retributive motive, but the court rejected this argument, reasoning that “[a] litigant cannot . . . avoid the exception by challenging only the most problematic component of an agency action that is committed to agency discretion by law.”

The decision is a significant extension of the “committed to agency discretion by law” exception, and it shields the SEC’s decisions to investigate from judicial review under the APA.


Reaffirming the high bar plaintiffs must clear to allege an actionable misstatement under the federal securities laws, the federal District Court for the Northern District of California dismissed the majority of claims in a securities class action against Align Technology, Inc. (“Align”), a medical-device company focused on orthodontic technology, and its CEO, and CFO.

Plaintiff’s claims centered around competitive pressures faced by Align and its representations during a class period from May 23, 2018 to October 24, 2018.  In response to the announcement that Align’s competitors were releasing products at price-points below Align’s, the company allegedly developed a $200-per-unit discount (the “3Q18 Discounting Promotion”).  Plaintiff claimed that the defendants were aware of, but did not disclose, the negative effect the promotion would have on the company’s average sales prices (“ASP”).  When the defendants allegedly revealed the “truth” about the discounts and that ASP had dropped “a full $100 over the prior quarter, from $1,410 to $1,310,” Align’s stock fell by nearly $59 a share by the following day.  After the district court dismissed with leave to amend, plaintiff filed an amended complaint  on November 29, 2019.  The amended complaint alleged claims under Section 10(b) of the Securities Exchange Act of 1934 (the “Exchange Act”) and Rule 10b-5 against all defendants; Section 20(a) of the Exchange Act against Align’s CEO and CFO; and Sections 10(b) and 20A of the Exchange Act and Rule 10b-5 for insider trading against Align’s CEO. 
In an opinion issued on September 9, 2020, the district court granted in part the motion to dismiss the amended complaint.  The court dismissed with prejudice allegations as to an alleged misstatement regarding expectations for Q3 gross margins and ASPs, finding that it was protected by the Private Securities Litigation Reform Act’s “safe harbor” for “forward-looking statements” because it had been accompanied by meaningful cautionary language.  The court then dismissed, also with prejudice, four other alleged misstatements concerning characterizations of the competitive landscape, because plaintiff failed adequately to allege that the statements were false when made.  Plaintiff had, the court found, “selectively omit[ted] portions of the full statement[s]” and “fail[ed] to allege particularized facts that demonstrate why the statement[s] were false.”  
The court did, however, find the amended complaint’s allegations adequate as to one claimed misrepresentation, in which Align’s CEO stated “there’s not . . . anything we’re adjusting the business around right now” in response to an analyst’s question about impact from competition.  Although it was a “close call,” the court found the statement was conceivably false in light of the 3Q18 Discounting Promotion, even though defendants had made certain general disclosures about promotional discounts.  The court also found that the amended complaint adequately pleaded scienter, both through the “core operations” doctrine, according to which critical aspects of a business are presumed known to senior officers, and through particularized allegations from former employees of Align.  The court found defendants had not adequately addressed the Section 20(a) claims in their briefing and so let the claims proceed.  Finally, the court dismissed with prejudice the insider trading allegations against Align’s CEO, because plaintiff failed adequately to allege trading activity that was “contemporaneous” with the CEO’s, a necessary element of the private right of action for “contemporaneous” insider trading under Section 20A of the Exchange Act.  The court found that the trades identified by plaintiff were either made before the CEO’s trade, were at a price below the CEO’s selling price, or were “too distant in time” from the CEO’s trade.  


Underscoring that duty-of-loyalty claims require more than general allegations of self-interest related to pressure from a threatened proxy campaign, the Delaware Chancery Court dismissed a class-action lawsuit alleging the directors and CFO of Outerwall, Inc. (“Outerwall”) breached their fiduciary duties in connection with a tender-offer sale of Outerwall to Apollo Global Management (“Apollo”) and its affiliates.

According to the amended class-action complaint, from mid-2015 to early 2016, Outerwall began to experience disappointing revenues, particularly in the traditionally strongest of its three business segments:  the Redbox segment, which operates and maintains fully automated self-service kiosks enabling customers to rent or purchase movies and video games in leading grocery stores and retailers.  In early 2016, Engaged Capital LLC (“Engaged”) began amassing a large position in Outerwall; by February, Engaged was Outerwall’s second-largest stockholder.  When Outerwall’s chairman did not agree promptly to a meeting, Engaged attached to a public Schedule 13D filing a letter to Outerwall’s board criticizing the management of Outerwall, demanding that Outerwall explore strategic alternatives, and threatening a proxy fight if ignored.  Soon after, Outerwall announced that it had initiated a process to explore strategic alternatives.  As diligence with potential counterparties advanced, Outerwall entered into a Cooperation Agreement with Engaged, by which Engaged agreed not to contest Outerwall’s board candidates in exchange for the power to appoint a board member of its own; the Cooperation Agreement also expanded the board from seven to nine seats, and allowed Engaged to appoint directors to the two new seats by August 1, 2016, which plaintiff characterized as a “deadline for the Board to negotiate a sale or be swamped by Engaged appointees.”  On July 24, 2016, Outerwall’s board ultimately decided to sell Outerwall to Apollo via a tender offer.  The tender offer ended successfully on September 23.  Plaintiff filed the class action on September 26, 2019, and filed an amended complaint on March 4, 2020.  The amended complaint asserted a single count against Outerwall’s directors and CFO, alleging that they decided to sell the company out of self-interest, that the tender offer price was inadequate, and that defendants failed to disclose material information concerning the transaction.

The Chancery Court granted the defendants’ motion to dismiss.  The court noted that the heightened Revlon standard of review, which requires directors to maximize the sales price of an enterprise, applied to the cash-out deal.  But because the directors were protected by an exculpatory charter provision, which under Delaware law immunizes them against duty-of-care claims, the plaintiff would have to show the directors violated the duty of loyalty or good faith.  The court found that plaintiff’s allegations regarding the defendants’ conflicts fell short, both as to the directors and as to Outerwall’s CFO (who was not protected by the exculpation provision, but was not accused of a duty-of-care violation in any event).  The court rejected plaintiff’s allegations that the prospect of a proxy contest with Outerwall was enough to infer that the defendants were conflicted.  The court noted that “Delaware courts have expressed reluctance to find that directors are conflicted simply because they operate under the threat of a proxy contest . . . .  [absent] other indicia of gross negligence or dishonesty.”  Similarly, the court found that other self-interest allegations plaintiff lodged against specific defendants—related to change-in-control benefits, status as an Engaged appointee, and prospects of post-close employment—were, without more, also inadequately pleaded under precedent.