The Long Arm of California Law: Lidow v. Superior Court

Second Quarter 2012Articles California Update

Following complaints of accounting irregularities, a Delaware corporation negotiated a separation agreement with its then CEO. The separation agreement did not include a release of liability, but did state that the CEO was resigning "freely and voluntarily…at the company's request." The CEO then sued in California (where he worked) claiming that he was terminated in retaliation for complaining about overly aggressive tactics used by the investigators hired to look at the accounting problems and conflicts of interest by a law firm representing the company.

The employer prevailed on summary judgment by relying on the internal affairs doctrine. Under Delaware law, a CEO serves at the pleasure of the Board of Directors and cannot sue for wrongful termination unless a specific statute authorizes such a claim. The doctrine stems from the premise that it is impractical to have multiple states regulating a corporation's internal affairs.

The employee took a writ and the appellate court, in a decision handed down last month, reversed. While paying lip service to the internal affairs doctrine, the appellate court decided that California had "vital interests" at stake that justified applying California law. The two lessons from this decision are (1) don't assume that California courts won't get involved in an issue just because applicable law or the parties' agreement specifies that another state's law will control; and, on a more practical level (2) a separation agreement that doesn't include a release of claims leaves the employer vulnerable.