The novel question presented in this case is whether, under a conflict of laws principle known as the internal affairs doctrine, California law or foreign law applies to a claim brought by an officer of a foreign corporation for wrongful termination in violation of public policy. We hold that under the circumstances alleged here, specifically where a foreign corporation has removed or constructively discharged a corporate officer in retaliation for that person’s complaints of possible harmful or unethical activity, Cаlifornia law applies.
BACKGROUND
The parties do not dispute the following facts for the purposes of summary adjudication:
Petitioner, Alexander Lidow, has a Ph.D. in applied physics. Real party in interest, International Rectifier Corporation (IR), is incorporated in Delaware and based in El Segundo, California. IR is a semiconductor company founded by petitioner’s father. Petitioner began working for IR in 1977 after graduating from Stanford University. Petitioner became a member of IR’s board of directors (Board) in 1994, co-chief executive officer (CEO) in 1995, and sole CEO in 1999. At no point in time did petitioner have a written employment contract with IR. IR’s bylaws provided at all relevant times that the corporation’s officers (including the CEO) “shall be chosen annually by, and shall serve at the pleasure of, the Board, and shall hold their respective offices until their resignation, removal, or other disqualification from service.” Removal of an officer, according to IR’s bylaws, may be “with or without cause, by the Board at any time.”
In early 2007, IR commenced an internal investigation after accounting irregularities surfaced at IR’s subsidiary in Japan. In late August 2007, the Board placed petitioner оn paid administrative leave. Prior to being placed on administrative leave, petitioner had not received any negative criticisms or negative reviews about his performance as CEO. Petitioner stepped down as CEO and Board member in October 2007 pursuant to a negotiated separation agreement entered into by petitioner and IR. Although the separation agreement did not include a release of liability for either party, it did specify that petitioner’s resignation was “[a]t the Company’s request,” and that petitioner had signed the agreement “freely аnd voluntarily.”
IR moved for summary adjudication of petitioner’s cause of action for wrongful termination on three grounds: First, pursuant to the “internal affairs doctrine,” Delaware law governed petitioner’s wrongful termination claim. Under Delaware law, a CEO serves at the pleasure of the corporation’s board of directors and is barred from bringing a wrongful termination claim (unless authorized by specific statutory enactments) as a matter of law. Second, to bring a claim for wrongful termination, a plaintiff must either be terminated or constructively discharged. Here, petitioner freely and voluntarily resigned as CEO. Third, even assuming IR had removed or constructively discharged petitioner, IR had legitimate, nonretaliatory reasons for doing so.
Petitioner opposed the motion for summary adjudication, arguing the following: First, the circumstances underlying his wrongful termination claim did not constitute an internal affair of the corporation, and thus California law (and not Delaware law) governed his claim. Second, petitioner had raised a triable issue of material fact as to whether he was constructively discharged. Third, petitioner had raised a triable issue of material fact аs to whether IR had retaliated against him for complaints he raised about the treatment of Japanese employees during the investigation into the alleged accounting irregularities.
The superior court granted IR’s motion for summary adjudication on the first ground raised by IR. It reasoned that pursuant to the internal affairs doctrine, Delaware law applied to petitioner’s wrongful termination claim, and under Delaware law, petitioner “could be removed without the threat of litigation arising from a wrongful termination claim (except a claim based upon a subsequent statutory enactment such as one relating to discrimination of which there is no allegation or proof before this Court).”
Petitioner timely filed the present petition for writ of mandate challenging the superior court’s order. After considering IR’s preliminary opposition to the petition, this court issued an alternative writ of mandate directing the
Based on our de novo review, we conclude the superior court erred by granting summary adjudication in favor of IR. Accordingly, we direct the superior court to vacate the order in question and to enter a new order denying IR’s motion for summary adjudication of petitioner’s cause of action for wrongful termination in violation of public policy.
STANDARD OF REVIEW
The standard of review for an order granting or denying a motion for summary judgment or adjudication is de novo. (Aguilar v. Atlantic Richfield Co. (2001)
A party moving for summary adjudication “bears the burden of persuasion that there is no triable issue of material fact and that he is entitled to judgment as a matter of law” on a particular cause of action. (Aguilar, supra,
DISCUSSION
I. Overview
In the published portion of this decision, we hold that a claim for wrongful termination in violation of public policy brought by an officer of a foreign
II. Internal Affairs Doctrine
A. Allegations
As related to the claim for wrongful termination in violation of public policy, petitioner alleged the following events took place:
In October 2006, IR’s internal finance department raised concerns that possible accounting improprieties were taking place at the corporation’s subsidiary in Japan. In response, the Board’s audit committee, which was comprised of all the Board members except for petitioner and his father, and IR’s general counsel hired the law firm of Sheppard Mullin Richter & Hampton LLP (Sheppard Mullin) to conduct an investigation into the possible accounting improprieties. Sheppard Mullin had a long-standing relationship with the general counsel and had advised him on past occasions when he had received negative performance reviews from petitioner.
Sheppard Mullin outsourced the accounting investigation to a private company made up predominantly of ex-law enforcement officers from the United States and the United Kingdom. The investigators conducted interrogations during which they physically intimidated employees at IR’s Japanese subsidiary, lied to these еmployees in an attempt to coerce inconsistent statements, and failed to advise these employees that they could, or should, retain independent counsel, despite the possibility that the employees could be criminally prosecuted based on the statements they gave during the interrogations. As a result of the investigators’ aggressive and coercive tactics, employees at the Japanese subsidiary filed multiple complaints and threatened to resign in mass numbers. Productivity at the Japanese subsidiary came to a halt.
When news broke that IR was investigating possible accounting improprieties at its Japanese subsidiary, a class action securities lawsuit was filed against IR. IR’s general counsel decided to retain Sheppard Mullin to defend the lawsuit. Petitioner protested Sheppard Mullin’s retention, complaining that it would be a conflict of interest for Sheppard Mullin to defend a lawsuit based on accounting irregularities and to conduct a purportedly independent investigation into the irregularities at the same time.
Because of petitioner’s complaints about the manner in which employees were being treated in Japan, his critical remarks about how the investigation was progressing, and his protestations over Sheppard Mullin’s retention to defend the securities lawsuit, petitioner became a target of Sheppard Mullin, the general counsel, and the audit committee. Approximately 10 mоnths after the investigation commenced, Sheppard Mullin issued a report to the audit committee implicating petitioner in the alleged accounting irregularities. According to the report, which petitioner claims is pure conjecture, petitioner either ordered employees at the Japanese subsidiary to create false accounting documents, or knew that the employees were creating false accounting documents and turned a blind eye to the fraud.
Based on the report, the audit committee, which was now acting as the de faсto Board, placed petitioner on administrative leave without giving him an opportunity to respond to the charges. Shortly after the audit committee placed petitioner on administrative leave, it informed him that if he did not resign as CEO in seven days, he would be removed. Petitioner entered in a separation agreement with IR wherein he agreed to step down as CEO and Board member at IR’s request.
B. Legal Framework
“ ‘The internal affairs doctrine is a conflict of laws principle which recognizes that only one State should have the authority to regulate a
“Matters falling within the scope of the [internal affairs doctrine] and which involve primarily a corporation’s relationship to its shareholders include steps taken in the course of the original incorporation, the election or appointment of directors and officers, the adoption of by-laws, the issuance of corporate shares, preemptive rights, the holding of directors’ and shareholders’ meetings, methods of voting including any requirement for cumulative voting, shareholders’ rights to examine corporate records, charter and by-law amendments, mergers, consolidations and reorganizations and the reclassification of shares.” (Rest.2d Conf. of Laws, § 302, com. a, p. 307; see State Farm-Mutual Automobile Ins. Co. v. Superior Court (2003)
“ ‘The policy underlying the internal affairs doctrine is an important one . . . : “Under the prevailing conflicts practice, neither courts nor legislatures have maximized the imposition of local corporate policy on foreign corporations but have consistently applied the law of the state of incorpоration to the entire gamut of internal corporate affairs.’ ” (State Farm, supra,
There is, however, a vital limitation to the internal affairs doctrine: “The local law of the state of incorporation will be applied . . . except where, with respect to the particular issue, some other state has a more significаnt relationship ... to the parties and the transaction . . . .” (Rest.2d Conf. of Laws, § 309, italics added.) Indeed, “[t]here is no reason why corporate acts” involving “the making of contracts, the commission of torts and the transfer of property” “should not be governed by the local law of different states.” (Id., § 302, com. e, p. 309.)
In Western Air Lines, Inc. v. Sobieski (1961)
The plaintiff sought review of the commissioner’s decision through a petition for writ of administrative mandate before the superior court. The superior court granted the petition and ruled that the commissioner had acted without jurisdiction because the amendment of the plaintiff’s articles of incorporation was an “internal affair” of the corporation and its shareholdеrs. (Western, supra,
In Friese v. Superior Court (2005)
The Court of Appeal granted writ relief. It explained that “California’s corporate securities laws are designed to protect participants in California’s securities marketplace and deter unlawful conduct which takes place [in California].” (Friese, supra,
The Court of Appeal’s decisions in Western and Friese serve as instructional contrasts to the decisions in State Farm, supra,
In Vaughn, supra,
(3) What we learn from the decisions in Friese and Western is that courts are less apt to apply the internal affairs doctrine when vital statewide interests are at stake, such as maintaining the integrity of California security markets and protecting its citizens from harmful conduct. In contrast, what we learn from the decisions in State Farm and Vaughn is that when less vital state interests are at stake (e.g., whether a foreign corporation headquartered in another state pays promised dividends to its shareholders, or whether the shareholder of a foreign corporation must fulfill certain procedural requirements set before bringing a derivative suit), courts are more apt to apply the internal affairs doctrine.
We now turn to the situation presented in this case. Certainly, the removal of a CEO for any number of reasons (e.g., the corporation is not performing well, the CEO did not meet certain financial expectations set by the board of directors) falls within the scope of a corporation’s internal governance, thus triggering the application of the internal affairs doctrine. This case, however, presents an entirely different set of allegations. Removing an officer in retaliation for his complaints about possible illegal or harmful activity (e.g., witness intimidation, physical threats to employees, etc.) and breaches of ethical conduct (e.g., defending a client against allegations of accounting irregularities and conducting an independent investigation in the same irregularities) goes beyond internal governance and touches upon broader public interest concerns that California has a vital interest in protecting. (Accord, Rest.2d Conf. of Laws, § 6, subd. (2)(b); id., com. c, p. 12 [under general choice-of-law principles, one factor to consider is the relevant public policies of the forum state].)
VantagePoint involved three Delaware entities: Examen, a corporation incorporated in Delaware; VantagePoint, a limited partnership organized under Delaware law, and a Delaware subsidiary of Reed Elsevier Inc. Examen and Reed proposed a merger. VantagePoint, which owned 83 percent of Examen’s series A prеferred stock, and none of Examen’s common stock, wanted to block the proposed merger. Under Delaware law, which makes no distinction between preferred and common stock shareholders when voting for mergers, VantagePoint did not have sufficient shares to block the merger; under California law, VantagePoint did. VantagePoint claimed that California law applied because Examen met the criteria of California’s “outreach statute,” codified at Corporations Code section 2115.
The Delaware Supreme Court held that Delaware law aрplied in that case because “courts must apply the law of the state of incorporation to issues involving corporate internal affairs, and . . . disputes concerning a shareholder’s right to vote fall squarely within the purview of the internal affairs doctrine.” (VantagePoint, supra,
This court agrees that the voting rights of shareholders, just like the payment of dividends to shareholders (see State Farm, supra,
Our Supreme Court has long recognized that claims for wrongful termination in violation of public policy serve vital interests insofar as they impose liability on employers who coerce their employees to engage in
For these reasons, we conclude that under the circumstances presented here, i.e., where there are allegations made by a corporate officer that he was removed for complaining about possible illegal or harmful activity, the internal affairs doctrine is inapplicable and California law governs the claim.
III. Alternative Grounds for Summary Adjudication
DISPOSITION
The alternative writ is discharged. Let a peremptory writ of mandate issue directing the superior court to vacatе its order of February 6, 2012, granting real party in interest’s motion for summary adjudication of petitioner’s claim
Ashmann-Gerst, J., and Chavez, J., concurred.
The petition of real party in interest for review by the Supreme Court was denied August 15, 2012, S203729.
Notes
For the purposes of this opinion, we assume, without deciding, that the policies implicated here satisfy the requirements to support a tortious discharge claim. (Stevenson v. Superior Court (1997)
We emphasize that these are petitioner’s allegations and for this reason entirely one-sided. At this juncture, a trier of fact has made no findings about the truth or falsity of these allegations, and our discussion of these allegations should not be interpreted as lending any credibility to them.
At the time, Corporations Code section 25500 provided that “ ‘No company shall sell any security of its own issue . . . until it has first applied for and secured from the commissioner a permit authorizing it to do so.’ ” (Western, supra,
Corporations Code section 2115, as succinctly explained by IR, enumerates the various California laws that apply to certain foreign corporations that meet specified financial and operating criteria. IR points out that section 2115 “expressly states that it does not apply to companies, like IR, whose securities are listed on the New York Stock Exchange.”
Because we conclude that California law governs in this instance, we need not address IR’s argument and supporting authorities that the Board was entitled to remove petitioner under Delaware law.
See footnote, ante, page 351.