In a previous Client Advisory, USI's national Executive and Professional Risk Solutions Team discussed the Dropbox litigation and its application to the federal forum provisions (FFPs) under California law. While waiting for the Dropbox litigation decision, another California state court dismissed a Section 11 case for lack of jurisdiction due to the inclusion of an FFP in the company’s articles of incorporation.
In Wong v. Restoration Robotics Inc., et al., 18CIV02609 (Ca Sup. Ct. San Mateo County Sept. 1, 2020), the court ruled that a federal forum provision inserted in Restoration Robotics’ corporate documents prior to its IPO was “not illegal under California law and does not violate any California law or public policy.” In coming to this conclusion, the court carefully considered many arguments put forth by the plaintiffs, but ultimately found none of them persuasive in light of existing controlling California authority and the Sciabacucchi decision that we have discussed in past advisories.
So what does this mean for D&O insurance buyers? At best, a glimmer of hope in a difficult marketplace. At worst, no change at all.
This case is certainly a win for companies that are thinking about going public as state-court litigation has had a detrimental impact on D&O insurers’ profitability and, as a result, the broader D&O insurance marketplace. We have seen this manifested by less insurer capacity, higher premiums and higher retentions. Eliminating or minimizing state-court exposure may entice more insurers to consider offering relatively more competitive terms, but all is still not well in the public-company D&O insurance marketplace overall.
The last few years have seen securities class action lawsuits (even excluding state-court filings) at near all-time high levels, derivative lawsuits becoming incredibly common and expensive (with a number of companies sued in the last few weeks around alleged board diversity issues) and many large losses stemming from litigation outside the state-court forum.
The D&O marketplace will likely not level off or soften in the wake of this decision, and neither will the broad challenges faced by D&O insurers as they look for improved profitability. While we certainly welcome this decision, if only for a potentially favorable impact on certain IPO companies, we believe that any encouraging shift in the D&O marketplace will be gradual and measured.
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