by Sayema Hameed
In a new decision, the California Court of Appeal has answered the following novel question: Under the conflict of law principle known as the internal affairs doctrine, does California law or foreign law apply to a claim brought by an officer of a foreign corporation for wrongful termination in violation of public policy? In Lidow v. Superior Court (International Rectifier Corp.) (filed May 23, 2012, Second District, Div. Two, Case No. B239042), the Court of Appeal answered the question as follows: “We hold that under the circumstances alleged here, specifically where a foreign corporation has removed or constructively discharged a corporate officer in retaliation for that person’s complaints of possible harmful or unethical activity, California law applies.”
The plaintiff in this case, Alexander Lidow, began working for defendant International Rectifier Corporation (“IR”), a semiconductor company founded by the plaintiff’s father, in 1977. IR is incorporated in Delaware and based in El Segundo, California. Lidow became a member of IR’s Board of Directors in 1994, Co-Chief Executive Officer (“CEO”) in 1995, and sole CEO in 1999. Lidow never had a written employment contract with IR. IR’s bylaws gives the Board of Directors the power to choose and remove the CEO.
In 2007, IR began an internal investigation after accounting irregularities surfaced at IR’s subsidiary in Japan. According to the plaintiff, the outside investigators hired by IR engaged in coercive tactics including: physically intimidating employees at IR’s Japanese subsidiary; lying to employees; failing to advise the employees that they could or should retain independent counsel. As a result, employees at the Japanese subsidiary filed complaints and threatened to resign in mass numbers.
Lidow spoke out against the tactics used by the investigators and criticized the handling of the investigation by IR’s outside counsel and internal audit committee. Thereafter, Lidow was accused of participating in the alleged accounting irregularities, placed on administrative leave, and informed that if he did not resign as CEO in seven days, he would be removed.
Prior to this, Lidow had not received any negative criticisms or reviews about his performance as CEO. Lidow stepped down as CEO and Board member pursuant to a negotiated separation agreement between him and IR. The separation agreement did not include a release of claims. Lidow subsequently sued IR for wrongful termination in violation of public policy.
IR moved for summary adjudication of Lidow’s wrongful termination claim. IR argued that, under the internal affairs doctrine, Delaware law governs Lidow’s 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 as a matter of law unless a specific statute applies. The trial court granted IR’s motion based on this argument. Lidow filed a petition for writ of mandate challenging the trial court’s order.
The Court of Appeal concluded that the trial court erred by granting summary adjudication of Lidow’s wrongful termination claim. The Court explained that 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 relationship between the corporation and its officers, directors and shareholders. In such situations, the law of the corporation’s state of incorporation normally applies.
The Court acknowledged that the removal of a CEO often falls within the scope of the corporation’s internal governance, thus triggering the internal affairs doctrine. However, the Court concluded that the facts of this case, in which the plaintiff alleged that he was removed in retaliation for his complaints about possible unethical or harmful activity, goes beyond internal governance and involves the public interest that California has a vital interest in protecting. California has long recognized that claims for wrongful termination in violation of public policy serves the vital interest of the state by imposing liability on employers who retaliate against their employees for speaking out against criminal or harmful conduct.
Thus, the Court of Appeal 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 applies.