Arlo Technologies IPO securities class action win upheld on appeal
We secured a dismissal for the IPO underwriters
Davis Polk represented the underwriters in connection with California state and federal court securities litigation relating to the 2018 initial public offering of Arlo Technologies, a maker of security cameras and other smart home devices. Plaintiffs alleged that Arlo, certain of its officers and directors, majority shareholder Netgear and the IPO underwriters made misleading statements and omissions in the registration statement and prospectus. The underwriters included Merrill Lynch, Pierce, Fenner & Smith Incorporated, Deutsche Bank Securities Inc., Guggenheim Securities LLC, Raymond James & Associates, Inc., Cowen Inc. and Imperial Capital, LLC.
In 2019, we succeeded in convincing the Santa Clara County Superior Court to stay the consolidated litigation pending before it, over the objections of the plaintiffs, in deference to parallel federal court proceedings. We then prevailed on a motion to dismiss the federal action in its entirety. Thereafter, the federal court action was settled for nuisance value, with no monetary payment by the underwriters. Three Arlo stockholders opted out of the federal settlement and attempted to resume litigation in the Santa Clara County Superior Court. The defendants filed motions to dismiss the state complaint based on a federal forum provision (FFP) in Arlo’s charter. Davis Polk filed a separate motion to dismiss on behalf of the underwriters arguing that, in light of the FFP’s broad language, the forum selection clause protected not only Arlo but also the underwriters. Plaintiffs argued that because the deadline to file claims in federal court had expired, a decision granting defendants’ motion would leave them with no forum in which to pursue their claims.
In September 2021, Santa Clara Superior Court Judge Patricia M. Lucas granted in full the FFP motions. Judge Lucas held that the FFP was valid not only as a matter of Delaware law, but also California law. Judge Lucas determined that the FFP was enforceable against the plaintiffs and that it was not “substantively unconscionable.” She found that the defendants had legitimate business reasons for invoking the FFP to avoid the unnecessary costs and burden of defending multiple cases simultaneously in both state and federal courts and the possibility of inconsistent rulings. Judge Lucas – relying on California case law cited in the underwriters’ motion to dismiss – also specifically agreed that the FFP could be enforced by the underwriters.
On May 5, 2023, in a 25-page opinion, the California Court of Appeal affirmed the trial court’s decision in its entirety. The decision first holds the FFP permissible and valid as a matter of constitutional and statutory law. It then finds the provision enforceable under the circumstances of the case, notwithstanding plaintiffs’ arguments that the result leaves them unable to pursue their claims in any court.
The Davis Polk litigation team included partners Neal A. Potischman and Dana M. Seshens and counsel Craig J. Bergman. Members of the Davis Polk team are based in the New York and Northern California offices.