Lidow v. Superior Court
141 Cal. Rptr. 3d 729, 206 Cal.App.4th 351, 33 I.E.R. Cas. (BNA) 1589 (2012)
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Rule of Law:
A claim for wrongful termination in violation of public policy, brought by an officer of a foreign corporation, is governed by the law of the forum state (California) and not the state of incorporation (Delaware) when the termination implicates vital public interests that fall outside the scope of the internal affairs doctrine.
Facts:
- Alexander Lidow was the CEO of International Rectifier Corporation (IR), a company incorporated in Delaware but based in El Segundo, California.
- IR's bylaws stated that officers serve at the pleasure of the Board of Directors and can be removed with or without cause.
- In 2007, IR initiated an internal investigation into accounting irregularities at its Japanese subsidiary, hiring the law firm Sheppard Mullin.
- Lidow complained internally that the investigators were using coercive and intimidating tactics against Japanese employees.
- Lidow also criticized the audit committee for rising investigation costs and for hiring Sheppard Mullin to defend IR in a related securities lawsuit, which he viewed as a conflict of interest.
- Following Lidow's complaints, Sheppard Mullin issued a report implicating him in the accounting irregularities.
- The Board's audit committee then placed Lidow on administrative leave and informed him that he would be removed if he did not resign within seven days.
- In October 2007, Lidow stepped down as CEO and Board member under a negotiated separation agreement stating the resignation was at the company's request.
Procedural Posture:
- Alexander Lidow sued International Rectifier Corporation (IR) in California superior court (a trial court) for several claims, including wrongful termination in violation of public policy.
- IR filed a motion for summary adjudication on the wrongful termination claim, arguing Delaware law applied and barred the claim.
- The superior court granted IR's motion, finding that the internal affairs doctrine mandated the application of Delaware law.
- Lidow (petitioner) filed a petition for a writ of mandate in the California Court of Appeal, challenging the superior court's order.
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Issue:
Does the internal affairs doctrine require the application of Delaware law to a wrongful termination claim brought by a California-based officer of a Delaware corporation, when the termination allegedly violates California's fundamental public policy against retaliating against employees who complain about illegal or harmful conduct?
Opinions:
Majority - Boren, P. J.
No. The internal affairs doctrine does not require the application of Delaware law because a claim for wrongful termination in violation of fundamental public policy falls outside the scope of the doctrine. The court reasoned that while the internal affairs doctrine typically applies the law of the state of incorporation to matters of internal corporate governance (like shareholder voting or dividend payments), it does not apply when vital statewide interests are at stake. California has a fundamental public policy interest in protecting employees from retaliation for reporting potentially illegal or harmful conduct. Firing an officer for such reasons goes beyond internal governance and touches upon broader public interest concerns, giving California a more significant relationship to the dispute and a greater interest in applying its own law.
Analysis:
This decision carves out a significant public policy exception to the internal affairs doctrine, limiting the ability of foreign corporations to use the law of their state of incorporation to shield themselves from tort liability in California. It establishes that when a corporate action, such as terminating an officer, implicates fundamental public policies of the forum state, that state's interest can outweigh the interests of uniformity and predictability underlying the internal affairs doctrine. This ruling strengthens protections for corporate whistleblowers in California, ensuring that the state's robust public policy protections apply to employees of foreign corporations operating within its borders.
