Internal Affairs Doctrine May Not Control Alter Ego Liability

The internal affairs doctrine “is a conflict of laws principle which recognizes that only one State should have the authority to regulate a corporation’s internal affairs — matters peculiar to the relationships among or between the corporation and its current officers, directors, and shareholders — because otherwise a corporation could be faced with conflicting demands.” Edgar v. MITE Corp., 457 U.S. 624, 64 5(1982).  Because so many publicly traded companies incorporate in Delaware, the application of the internal affairs doctrine often leads to the application of Delaware law.  But the internal affairs doctrine isn’t the only choice of law principle and courts don’t necessarily apply to every situation.  A point that was made in a ruling issued this week by Judge Richard G. Seeborg.

In Perez v. e-Smart Technologies, Inc., U.S. Dist. Ct. Case No. C 14-00835 RS (May 14, 2014), the former Chief Operating Officer (COO) of the defendant asked to intervene in an action by the Secretary of Labor against the defendant under the Sarbanes-Oxley Act whistleblower protection provisions, 18 U.S.C. § 1514.  The Secretary had found that the COO had been constructively discharged by the defendant as a result of his complaints about the accuracy of a public filing that the defendant had been preparing to submit to the Securities and Exchange Commission.  The Secretary was seeking a judgment against the defendant corporation only.  Consequently, the COO wanted to intervene in order to pierce the corporate veil and impose liability on the corporation’s control person.  Judge Seeborg allowed the COO to intervene but did not decide the substantive question of whether the corporate veil should be pierced.  In allowing intervention, Judge Seeborg noted that “In considering whether to disregard the corporate form, we apply federal substantive law, although we may look to state law for guidance.” quoting Board of Trustees v. Valley Cabinet & Mfg. Co., 877 F.2d 769, 772 (9th Cir.1989).



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