In Lidow v. International Rectifier Corp. (2012) 206 Cal. App. 4th 351, the court held that, notwithstanding the conflict of laws principle known as the internal affairs doctrine, where a foreign corporation is alleged to have removed or constructively discharged a corporate officer in retaliation for that person’s complaints of possible harmful or unethical activity, California law applies.
Alexander Lidow was CEO of International Rectifier Corporation, a public company that had been started by his father. In early 2007, the corporation commenced an internal investigation after accounting irregularities surfaced at the corporation’s subsidiary in Japan. After the investigation became public, a securities law class action followed. Lidow allegedly spoke out against the tactics used in the internal investigation, and he allegedly criticized the outside law firm, the general counsel, and the audit committee for their management of the investigation and lawsuit. The outside law firm ultimately issued a report to the audit committee implicating Lidow in the alleged accounting irregularities. Based on the report, the audit committee placed Lidow on administrative leave. Shortly after the audit committee placed Lidow on administrative leave, it informed him that if he did not resign as CEO in seven days, he would be removed.
At no point in time did Lidow have a written employment contract with the corporation. The corporation’s bylaws provided 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 the corporation’s bylaws, may be “with or without cause, by the board at any time[.]”
In late August 2007, the board placed Lidow on paid administrative leave. Petitioner stepped down as CEO and board member in October 2007 pursuant to a negotiated separation agreement entered into by Lidow and the corporation. Although the separation agreement did not include a release of liability for either party, it did specify that Lidow’s resignation was “[a]t the Company’s request,” and that Lidow had signed the agreement “freely and voluntarily.”
Approximately 18 months later, Lidow sued the corporation in superior court, alleging several causes of action, including wrongful termination in violation of public policy. Lidow alleged that he became a target of the outside law firm, the general counsel, and the audit committee because of his complaints about their allegedly improper and unethical handling of the investigation and lawsuit.
The corporation moved for summary adjudication of Lidow’s cause of action for wrongful termination on the ground that under the “internal affairs doctrine,” Delaware law governed Lidow’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. The court noted that the issue of whether the termination of a corporate officer for reasons that allegedly violate public policy falls within the scope of a corporation’s internal affairs is one of first impression.
The court acknowledged the internal affairs doctrine but said that there is a 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 significant relationship… to the parties and the transaction[.]” (Rest.2d Conf. of Laws, § 309, p. 332.) 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. at § 302, com. e, p. 309.)
The court observed that 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) would certainly fall within the scope of a corporation’s internal governance, thus triggering the application of the internal affairs doctrine.
This case, however, presented an entirely different set of allegations the court said. 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.
The court distinguished between cases that dealt with a corporation’s internal governance (such as declaring dividends or voting rights) and those that had an external effect (such as the need for a permit to issue stock to California residents or imposing liability on directors and officers for insider trading). In so doing, the court partly relied on VantagePoint Venture Partners 1996 v. Examen, Inc. (2005) 871 A.2d 1108, a Delaware Supreme Court decision that rejected the application of California Corporations Code section 2115 to Delaware corporations.
The court said 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 criminal or other harmful conduct or on employers who retaliate against their employees for speaking out against such conduct. For that reason, the court concluded that 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.
The court came to the wrong conclusion. Corporations Code section 312(b) provides “Except as otherwise provided by the articles or bylaws, officers shall be chosen by the board and serve at the pleasure of the board, subject to the rights, if any, of an officer under any contract of employment.” The statute distinguishes between holding office and employment. Accordingly, the court should have held that the removal of Lidow, as an officer, was governed by Delaware law under the internal affairs doctrine and the termination of employment of Lidow, as an employee, was governed by California law.