Lidow v. Superior Court: California Law Applies to Wrongful Termination Claim by Officer of Company Incorporated in Delaware

In Lidow v. Superior Court (International Rectifier Corp.) (5/23/12) --- Cal.App.4th ----, the Court of Appeal held that California law, rather than Delaware law, applies to the wrongful termination claim of an officer of a corporation organized under Delaware law.

Alexander Lidow was the CEO of International Rectifier Corp. ("IR"). IR is incorporated in Delaware and based in El Segundo, California. In 2007, IR began investigating certain financial improprieties and placed Lidow on administrative leave. It eventually terminated him, and he sued for wrongful termination and other claims. The Court (Los Angeles Superior, Judge Highberger) granted IR's motion for summary adjudication of Lidow's wrongful termination claim, holding that Delaware law insulated IT from any action by its CEO. The Court of Appeal granted Lidow's petition for writ of mandate and reversed.  

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. 

Slip op. at 7.  The law of the state of incorporation ordinarily controls.  Ibid.  

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 significant relationship . . . to the parties and the transaction[.]" 

Slip op. at 8 (ital. in original).  After reviewing relevant cases, the Court divined a rule for application of the internal affairs doctrine: 

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 ... 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.

Slip op. at 11.  This case, involving allegations that the corporation removed an officer in retaliation for his complaints about possible illegal or harmful activity and breaches of ethical conduct, goes beyond internal governance and "touches upon broader public interest concerns that California has a vital interest in protecting."  Slip op. at 12.  Because " claims for wrongful termination in violation of public policy serve vital interests," California law applies.  

The opinion is available here.