Severed securities-related portion of dissolvable pills case may end up in Canadian court

Briefing will close next month in an appeal to the Ninth Circuit of a decision by the Central District of California dismissing counterclaims under foreign securities law, infrequently before U.S. courts, on the basis of forum non conveniens. In March 2022, the Honorable John W. Holcomb found that the counterclaim defendant sufficiently demonstrated the requirements for a forum non conveniens dismissal, i.e., an adequate alternative forum (in this case, Canada) and that the balance of private and public interest factors favored dismissal. Notably, the district court acknowledged its lack of “relevant experience or expertise with Canadian securities law,” which “weigh[ed] strongly in favor of dismissal.” Alternate Health USA Inc. v. Edalat, No. 8:17-cv-01887-JWH-JDEx, 2022 U.S. Dist. LEXIS 45201, at *24-25 (C.D. Cal. Mar. 14, 2022).

The parties hotly contest on appeal whether the district court abused its discretion in applying said private and public factors. The claimants argue, for example, that the foreign securities law at issue was copied from U.S. law, and that in any event “95% of the factual and legal issues” are domestic. “Where even some of the legal issues are governed by US law,” the claimants contend, “the case will not be transferred.”

The counterclaim defendant, a Canadian corporation, argues that the majority of “events giving rise to” the claims occurred in Canada and that “Canada has a strong interest in ensuring a Canadian stock transfer agent operating within its borders complies with a Canadian statute with respect to the transfer of publicly traded securities of a Canadian company.” The counterclaim defendant also highlights the district court’s lack of “expertise with Canadian securities law,” arguing that the legal issues are almost entirely Canadian and would “impose a substantial burden” on the court.

The original suit was filed in the Central District of California in October 2017 and alleged that the defendants misrepresented their capability to manufacture dissolvable pills. The plaintiffs ultimately sought damages, the return of restricted shares given to the defendants in exchange for consulting services and licensing agreements, and rescission of those agreements. The defendants filed counterclaims alleging violation of the Securities Transfer Act of British Columbia for failure to lift the share restrictions.

Years later in December 2021, the district court severed the only remaining contested claims in the case: the defendants’ counterclaim for alleged violation of the Securities Transfer Act of British Columbia, and a claim seeking declaratory and equitable relief.

The counterclaim defendant promptly filed a motion to dismiss the severed claims on the basis of forum non conveniens, and the district court granted the motion without prejudice. The court explained that the motion was timely as the court had severed the claims “and reopened discovery,” thereby changing the “entire procedural posture of the case.” Alternate Health USA Inc., 2022 U.S. Dist. LEXIS 45201, at *15-16.

The district court further held that Canada was an adequate alternative forum, that the private factors favored dismissal, and that the public factors “overwhelmingly” favored dismissal. Id. at *28.

Regarding the private factors weighing in favor of dismissal, the court explained: (1) the majority of parties and material witnesses resided in Canada, (2) certain witnesses could not be “compelled to testify in American courts” but could be “in Canadian courts,” and (3) that a Canadian court could enforce a judgment against a Canadian corporation more easily than an American court could. Id. at *17-23. The costs of bringing witnesses to trial weighed against dismissal in this case because various California witnesses had recently incurred “financial setbacks” and “health ailments.” Id. at *22-23. Convenience to the litigants, access to the evidence, and other practical problems did not weigh for or against dismissal.

Regarding the public factors, the court made several notable holdings. For example, the court explained that the local interest of California, notwithstanding the counter claimants’ residence there, was “greatly outweighed by Canada’s interest” because the counterclaim defendant was Canadian, the governing law was Canadian law, and the alleged conduct at issue took place in Canada. Id. at *23-24.

As discussed above, the district court also admitted “no relevant experience or expertise with Canadian securities law,” while acknowledging that a “Canadian court” on the other hand “would presumably have no difficulty applying its own law.” Id. at *24. The court explained that such “fact[s] weigh strongly in favor of dismissal because the Supreme Court has affirmed that” forum non conveniens enables courts to “avoid conducting complex exercises in comparative law.” Id. at *25.

The court further explained that applying Canadian law would “impose a substantial burden on both the court and the jurors” despite any “similarity between California law and [British Columbian] law.” Id. at *26. The court said that in fact it would still “have to rely on the declarations of Canadian law experts to determine the substance of Canadian law,” a factor weighing in favor of dismissal. Id. at *28. The court added that potential issues of “first impression” under Canadian law also strongly weighed in favor of dismissal. Id. at *27.

Finally, the court highlighted that the Central District of California is “one of the busiest districts in the nation” and that, because the claims relied “on Canadian law and events that transpired there (at least in part), it [was] appropriate that a Canadian forum bear [the] costs” of adjudicating the matter. Id. at *27-28.

The counterclaim defendant’s reply brief in the Ninth Circuit is due July 10, 2023. The Ninth Circuit has not publicly notified the parties of whether it will schedule oral argument.

The claimants are represented by Saied Kashani of the Law Office of Saied Kashani. The counterclaimant is represented by David S. Alverson and Michael E. Pappas of Lesnick Prince & Pappas LLP.

The district court case is Alternate Health USA Inc. et al v. Paul Edalat, No. 8:17-cv-01887. The Ninth Circuit case is Alternate Health USA, Inc., et al v. Paul Edalat, et al, No. 22-55353.