The internal affairs doctrine does not apply to a claim by an officer of a foreign corporation that he was terminated wrongfully for complaining about possible harmful or illegal activity. The court of appeal held that the officer’s claim for wrongful termination in violation of public policy is governed by California law. (Lidow v. The Superior Court of Los Angeles County (--- Cal.Rptr.3d ----, Cal.App. 2 Dist., May 23, 2012).
Alexander Lidow (“Lidow”) began working for International Rectifier Corporation (“IR”) in 1977, became a member of IR’s Board of Directors in 1994, and chief executive officer (“CEO”) in 1999. Lidow did not have a written employment contract with IR. IR is incorporated in Delaware but is based in El Segundo, California. IR’s bylaws provide that an officer may be removed at any time by the Board, with or without cause.
IR began an internal investigation after it noticed accounting irregularities at its subsidiary in Japan. The Board placed Lidow on administrative leave in August 2007. Lidow had never received negative reviews or criticisms about his performance as CEO prior to this. Lidow stepped down as a Board member and as CEO. IR and Lidow entered into a separation agreement but the agreement did not contain a release of liability. Although the agreement provided that Lidow was resigning at the corporation’s request, it also provided that Lidow had freely and voluntarily signed the agreement.
Lidow brought a lawsuit against IR claiming, among other things, that it wrongfully terminated him in violation of public policy. Lidow claimed that IR had retaliated against him because he raised questions regarding IR’s treatment of its Japanese employees during the investigation of the alleged accounting irregularities at the corporation’s subsidiary in Japan. The trial court granted summary judgment in favor of IR.
The question presented to the court of appeal was whether under the internal affairs doctrine, foreign law or California law applies to a lawsuit brought by an officer of a foreign corporation for wrongful termination in violation of public policy. The internal affairs doctrine provides “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.” Matters that generally fall within this doctrine involve a corporation’s relationship with its shareholders. However, corporate acts such as “the making of contracts, the commission of torts and the transfer of property” are generally “governed by the local law of different states.”
IR argued that Delaware law should apply to Lidow’s case because IR is incorporated in Delaware. According to IR, under Delaware law, a CEO serves only at the pleasure of the board of directors of a corporation and a CEO is barred from bringing a wrongful termination claim as a matter of law, unless there is a specific statutory enactment to the contrary.
Courts are less likely to find that the internal affairs doctrine applies to corporate action “when vital statewide interests are at stake, such as maintaining the integrity of California security markets and protecting its citizens from harmful conduct.” The court held that where a foreign corporation removes or constructively discharges an officer of the corporation in retaliation for the officer’s complaints about unethical or harmful activity, California law will be applied in the officer’s lawsuit for wrongful termination.
The court noted that the removal of a CEO for reasons directly related to the CEO’s or the corporation’s performance fall within the scope of internal governance of the corporation and would trigger the internal affairs doctrine. However, removal of an officer in retaliation for his or her complaints regarding possible harmful or illegal activity or breaches of ethical conduct “goes beyond internal governance and touches upon broader public interest concerns that California has a vital interest in protecting.”
Claims for wrongful termination in violation of public policy in California “serve vital interests insofar as they impose liability on employers who coerce their employees to engage in criminal or other harmful conduct, or employers who retaliate against their employees for speaking out against such conduct.” The court held the internal affairs doctrine is not applicable where a corporate officer alleges he or she was removed because of complaints made about possible harmful or illegal activity.
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