California Supreme Court Upholds Forum Selection Clause

In a significant decision, the California Supreme Court has upheld a corporation’s forum selection clause requiring stockholder lawsuits to be tried in Delaware Chancery Court despite the unavailability of jury trials in that court, unanimously reversing the decisions of lower courts invalidating such clauses on the grounds that they violated California’s public policy favoring jury trials.  The Court, however, held open the possibility that a forum selection clause may still be challenged based on its manner of adoption.

In EpicentRX, Inc. v. Superior Court, 18 Cal. 5th 58 (July 21, 2025), the plaintiff invested $5 million in EpicentRX, and later filed an action against the corporation, its controlling stockholder and certain individuals for fraudulent concealment, breach of fiduciary duty, breach of contract and other claims.  Defendants moved to dismiss on the grounds that the corporation’s certificate and bylaws required stockholder actions to be brought in Delaware Chancery Court.  The trial court denied the motion and the Court of Appeal affirmed, holding that California’s public policy guaranteeing the right to a jury trial would be violated by moving the action to Chancery Court, which sits as a court in equity without juries. The Court of Appeal relied on Handoush v. Lease Finance Group, LLC, 41 Cal.App. 5th 729 (2019), which invalidated a forum selection clause because it impaired the right to a jury trial.

The Supreme Court reversed.  The Court explained that forum selection clauses generally are enforceable, and that while courts may refuse to enforce them on public policy grounds, those policy grounds generally are expressly set forth in statutes, such as prohibitions of forum selection clauses in franchise agreements; consumer personal property lease agreements; or where an employee residing and working in California is required to adjudicate a claim outside the State. 

According to the EpicentRX court, “California’s strong public policy protects the jury trial right in California Courts, not elsewhere.  It does not speak to the availability of the jury trial right in other forums.”  Id. at 67.  The Court thus declined to analogize the forum selection clause at issue to a predispute jury trial waiver, which is unenforceable. “The former reflects where a dispute will be litigated, while the latter reflects how it will be litigated.”  Id. at 79 (emphasis in original). The Court also effectively overruled Handoush, stating that its reasoning was “unpersuasive.”  While California has a strong public policy favoring a right to a jury trial, California does not have a strong public policy against forum selection clauses requiring litigation in a jurisdiction that lacks the same right.  The Court also recognized that a contrary ruling could have a chilling effect on interstate commerce:  “under the framework adopted by the courts below, any forum selection clause designating the foreign forum would essentially be unenforceable” and “[a] foreign business may be reluctant to enter into a transaction with a California business without an enforceable forum selection clause, and the California business would be deprived of the benefit of the transaction[.]”  Id. at 67.

That said, the Court noted that the plaintiff had also challenged enforcement of the forum selection clause based on its manner of adoption as part of the Certificate of Incorporation and bylaws because it was not freely and voluntarily negotiated at arms-length.  Because the lower courts did not consider this issue, the Supreme Court remanded the matter for further proceedings.

For more information regarding Alto Litigation’s litigation practice, please contact one of Alto Litigation’s partners: Bahram Seyedin-Noor, Bryan Ketroser, Joshua Korr, or Kevin O’Brien.

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Disclaimer: Materials on this website are for informational purposes only and do not constitute legal advice. Transmission of materials and information on this website is not intended to create, and their receipt does not constitute, an attorney-client relationship. Although you may send us email or call us, we cannot represent you until we have determined that doing so will not create a conflict of interests. Accordingly, if you choose to communicate with us in connection with a matter in which we do not already represent you, you should not send us confidential or sensitive information, because such communication will not be treated as privileged or confidential. We can only serve as your attorney if both you and we agree, in writing, that we will do so.

The materials on this website are not intended to constitute advertising or solicitation. However, portions of this website may be considered attorney advertising in some states.

Unless otherwise specified, the attorneys listed on this website are admitted to practice in the State of California.

Subpoenaing California Witnesses in Non-California Actions

It’s a big, interconnected world out there.  Disputes filed in one state regularly involve witnesses and documents located in other states.  Fortunately, the Uniform Interstate Depositions and Discovery Act – adopted in 49 states and territories and introduced in two others – provides a mechanism for parties to “domesticate” foreign subpoenas in the “discovery state” where desired evidence is located.  

Under California’s version of the Uniform Depositions and Discovery Act (California Code of Civil Procedure (“CCP”) §§ 2029.100 et seq.), either a clerk of court or a licensed California attorney can issue subpoenas for testimony, the production or inspection of documents or things, or the inspection of premises found in California.  The subpoena must otherwise comply with the California Civil Discovery Act (CCP §§ 2016.010 et seq.) and will be enforced, if necessary, by California courts.  

This article will briefly summarize the process for out-of-state litigants to obtain a California subpoena; unique considerations in serving said subpoena; and how to enforce a subpoena in California courts, if necessary.  

Obtaining the Subpoena

Parties to non-California litigation seeking to serve a subpoena on a California resident have options.  The first option is to ask a clerk of the superior court in the California county in which the discovery is to be conducted to issue a subpoena.  CCP § 2029.300.  The party must submit to the clerk the original and one copy of the foreign subpoena, along with the required application and payment of the required fee.  Id.  Alternatively, a party to a foreign action may hire a California attorney to issue a subpoena for discovery in California.  CCP § 2029.350.  

Whether issued by a clerk of court or a California attorney, the California subpoena must incorporate the terms of the foreign subpoena, and must be on a form prescribed by the Judicial Council.  CCP §§ 2029.300(d)(1), (5); 2029.350(d)(1), (5).  

Once the clerk or attorney issues the subpoena, it must be served in compliance with California law, which usually means personal service unless the witness agrees to accept service in some other fashion.  CCP §. 2029.400.  The conduct of the ensuing non-party witness deposition, production of documents or things, or inspection of premises must comply with California law.  CCP § 2029.500.  If a dispute arises relating to such discovery, a party or witness may file a “petition” in the applicable California superior court for a protective order or to enforce, quash, or modify a subpoena.  CCP § 2029.600.  

Attempts to enforce the California subpoena in a non-California court are likely to be challenged.  For instance, in Quinn v. Eighth Judicial District Court in and for County of Clark, the Nevada Supreme Court vacated a lower court’s attempt to enforce subpoenas issued to California witnesses, holding that California courts had jurisdiction over the discovery dispute.  134 Nev. 25 (2018).  As the court wrote:  “[T]he discovery state has a significant interest in protecting its residents who become non-party witnesses in an action pending in a foreign jurisdiction from any unreasonable or unduly burdensome discovery requests.”  134 Nev. at 30.  

Considerations for California Subpoenas 

Since a California subpoena for a foreign action must comply with California law, it is important for foreign parties to keep California’s subpoena requirements in mind.  For instance, the deposition of a natural person must take place within 75 miles of the deponent’s residence (or, technically, within the county where the action is pending and within 150 miles of the deponent’s residence, though this is irrelevant in the case of a foreign action).  CCP § 2025.250(a).  If the subpoena seeks the records of a “consumer” (CCP § 1985.3(a)(2)) or “employment records” (CCP § 1985.6(a)(3)), then the affected consumer or employee must also be given notice and an opportunity to object to production of the records sought.  

Foreign parties also should be aware of the deadline to seek the court’s intervention if the witness has not complied with the subpoena.  Code of Civil Procedure section 2025.480(b) states that a party may move to compel answers or production of documents “no later than 60 days after the completion of the record of the deposition.”  In Board of Registered Nursing v. Superior Court, the California Court of Appeal confirmed that the 60-day deadline starts to run on the compliance date stated on the subpoena, and is not extended if the party and witness meet and confer over the scope of the subpoena, or if the witness makes a rolling or piecemeal production of documents.  59 Cal.App.5th 1011, 1034-35 (2021).  

Conclusion

The Uniform Interstate Depositions and Discovery Act provides a mechanism for foreign parties to obtain evidence in California.  However, the foreign party must play by California’s rules, including due consideration for the rights of non-party witnesses and firm deadlines to ask courts to intervene, if required.  To navigate these requirements, it may be best to hire local California counsel who can issue the subpoena and guide the way through service and enforcement.  

For more information regarding Alto Litigation’s litigation practice, please contact one of Alto Litigation’s partners: Bahram Seyedin-Noor, Bryan Ketroser, Joshua Korr, or Kevin O’Brien.

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Disclaimer: Materials on this website are for informational purposes only and do not constitute legal advice. Transmission of materials and information on this website is not intended to create, and their receipt does not constitute, an attorney-client relationship. Although you may send us email or call us, we cannot represent you until we have determined that doing so will not create a conflict of interests. Accordingly, if you choose to communicate with us in connection with a matter in which we do not already represent you, you should not send us confidential or sensitive information, because such communication will not be treated as privileged or confidential. We can only serve as your attorney if both you and we agree, in writing, that we will do so.

The materials on this website are not intended to constitute advertising or solicitation. However, portions of this website may be considered attorney advertising in some states.

Unless otherwise specified, the attorneys listed on this website are admitted to practice in the State of California.

Measuring Damages in Trade Secret Misappropriation Cases

Once a defendant’s theft of trade secrets has been proven, courts and juries must decide how to compensate the plaintiff.  The California Uniform Trade Secrets Act (CUTSA) provides successful plaintiffs with a few options.  First, a plaintiff may seek the actual losses it suffered as a result of defendant’s misappropriation.  Cal. Civ. Code § 3426.3(a).  In the alternative, a plaintiff can measure their damages in terms of the defendant’s unjust enrichment, i.e. the benefits it acquired from plaintiff’s trade secret.  Id.  The first approach measures damages in terms of plaintiff’s losses; the second approach measures damages in terms of defendant’s ill-gotten gains.  

Sometimes, however, neither method will be sufficient.  Indeed, there are many cases in which a defendant has either not utilized the stolen secret commercially or has not benefitted from its use of the trade secret in any way that can be measured in monetary terms.  In those cases, the plaintiff would be unable to present any sufficient evidence to support a monetary award measured by the defendant’s unjust enrichment.  Likewise, a plaintiff's actual losses may be speculative or nonexistent.  See Ajaxo Inc. v. E*Trade Fin. Corp., 187 Cal. App. 4th 1295, 1310 (2010).  In these types of cases, whether the parties stipulate to the lack of proof or a court rules that the evidence is insufficient, the first two measures of damages provided by CUTSA would not be “provable,” and a third option becomes available: a reasonable royalty.  Id.  

Significantly, a reasonable royalty is only available if damages or unjust enrichment are not provable.  California law differs on this point from both the Uniform Act and Federal patent law, neither of which requires actual damages and unjust enrichment to be unprovable before a reasonable royalty may be imposed.  Cacique, Inc. v. Robert Reiser & Co., Inc., 169 F.3d 619, 623 (9th Cir. 1999); Morlife, Inc. v. Perry, 56 Cal. App. 4th 1514, 1529 (1997).  

Calculating a Reasonable Royalty: It’s All Hypothetical

The calculation of a reasonable royalty begins with a hypothetical negotiation between the trade secret owner and the infringer at the time the misappropriation occurred.  It approximates the price that would be set by a willing buyer and a willing seller for the use of the trade secret. When calculating a reasonable royalty, Courts consider factors such as similar license agreements in the industry, anticipated profits, the trade secret’s contribution to the product, the nature of the market, the parties’ competitive positions, and development costs of similar trade secrets.  Ajaxo, Inc. v. E*Trade Fin. Corp., 48 Cal. App. 5th 129, 166 (2020).  In total there are fifteen factors courts may consider in determining the proper royalty, which were first identified in Georgia-Pacific Corp. v. U.S. Plywood Corp., 318 F. Supp. 1116, 1120 (S.D.N.Y. 1970), modified sub nom. Georgia-Pac. Corp. v. U.S. Plywood-Champion Papers, Inc., 446 F.2d 295 (2d Cir. 1971), commonly referred to as the “Georgia-Pacific factors.”  Id. at 161.  “As with any hypothetical inquiry informed by a range of evidentiary factors, the reasonable royalty offers no promise of mathematical precision.  It is a purely theoretical measure, appropriate where no established royalty can be proved.  Id. at 162 (cleaned up). 

No Profits, No Problem

California courts have explicitly recognized that reasonable royalties can be awarded even when the misappropriator does not make any profit.  See Ajaxo Inc. v. E*Trade Fin. Corp., 187 Cal. App. 4th at 1311.  This approach ensures that the trade secret owner is compensated for the value of the misappropriated information, regardless of the infringer’s financial condition.

For example, in Ajaxo Inc. v. E*Trade Financial Corp., the court explained that evidence of negotiations between the parties and comparable licensing agreements could serve as a basis for determining a reasonable royalty, even if the infringer did not generate profits from the misappropriation.  Ajaxo Inc., 187 Cal. App. 4th at 1313.  Similarly, in Altavion, Inc. v. Konica Minolta Systems Laboratory, Inc., the court upheld a reasonable royalty award based on the “equitable” value of the misappropriated trade secrets, even though the technology was never commercialized.  Altavion, Inc. v. Konica Minolta Systems Laboratory, Inc., 226 Cal. App. 4th 26, 68 (2014).  This equitable value was what the license price should have been, had the parties negotiated a fair license at the time of the beginning of the infringement.  Id. 

This approach is consistent with courts’ calculation of reasonable royalties in other cases of intellectual property misappropriation or misuse.  For example, in patent cases, “a reasonable royalty rate . . . is based not on the infringer’s profit, but on the royalty to which a willing licensor and a willing licensee would have agreed at the time of infringement.”  Radio Steel & Mfg. Co. v. MTD Products, Inc., 788 F.2d 1554, 1557 (Fed. Cir. 1986).  Optimistic business projections may be taken into account when determining the likely outcome of a hypothetical negotiation, even if reality never meets expectations and the infringer loses money on the product.  Interactive Pictures Corp. v. Infinite Pictures, Inc., 274 F.3d 1371, 1384-85 (Fed. Cir. 2001).

Also, while reasonable royalties are often calculated by determining the royalty that would have been paid for each infringing unit sold by the defendant during the time the trade secret was being used—which may be difficult when the infringing product has not yet gone to market—the royalty may also be the hypothetical lump-sum payment a licensee would pay up-front for the continuing right to use the plaintiff’s intellectual property.  Pelican International, Inc. v. Hobie Cat Co., 655 F. Supp. 3d 1002, 1042 (S.D. Cal. 2003).  For example, in, the 02 Micro Int’l Ltd. v. Monolithic Power Sys., Inc., the plaintiff was unable to prove unjust enrichment or damages, but the court affirmed an award of a reasonable royalty based on an estimated one-time “paid-up royalty” of $900,0000.  399 F. Supp. 2d 1064, 1078 (N.D. Cal. 2005), amended sub nom. O2 Micro Int’l Ltd. v. Monolithic Power Sys., Inc., 420 F. Supp. 2d 1070 (N.D. Cal. 2006), aff’d, 221 F. App’x 996 (Fed. Cir. 2007), and aff'd, 221 F. App’x 996 (Fed. Cir. 2007).  In that case, plaintiff’s expert opined that the parties would have negotiated a lump-sum payment with the belief that the trade secret would remain valuable for two years.  Defendant balked, arguing that the secret was made public a mere six months after the misappropriation, and therefore the reasonable royalty should be reduced by seventy-five percent.  The court disagreed, explaining “parties often enter into an agreement not knowing when the trade secret will become public; it is something the parties consider, and sometimes risk, during their negotiations.”  Id.  This is a good reminder that a hypothetical negotiation over a royalty need not take into consideration the ultimate real-world success or failure of the hypothetical licensee. 

Takeaways

If the plaintiff in a trade secret misappropriation case cannot prove either actual losses, or unjust enrichment, a reasonable royalty is available.  A reasonable royalty can be calculated regardless of whether the defendant was able to successfully commercialize the trade secret.

• Plaintiffs should be prepared to show the value of a hypothetical license for their trade secret.

• Defendants should not rely on a lack of profits to argue a royalty is unreasonable. 

For more information regarding Alto Litigation’s litigation practice, please contact one of Alto Litigation’s partners: Bahram Seyedin-Noor, Bryan Ketroser, Joshua Korr, or Kevin O’Brien.

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Disclaimer: Materials on this website are for informational purposes only and do not constitute legal advice. Transmission of materials and information on this website is not intended to create, and their receipt does not constitute, an attorney-client relationship. Although you may send us email or call us, we cannot represent you until we have determined that doing so will not create a conflict of interests. Accordingly, if you choose to communicate with us in connection with a matter in which we do not already represent you, you should not send us confidential or sensitive information, because such communication will not be treated as privileged or confidential. We can only serve as your attorney if both you and we agree, in writing, that we will do so.

The materials on this website are not intended to constitute advertising or solicitation. However, portions of this website may be considered attorney advertising in some states.

Unless otherwise specified, the attorneys listed on this website are admitted to practice in the State of California.

Will Courts Still Presume that Plaintiffs in Trade Secret Cases are Likely to Suffer Irreparable Harm?

It is black-letter law that a party seeking preliminary injunctive relief must show (1) it is likely to succeed on the merits, and (2) that it will suffer irreparable harm without an injunction.  For years, plaintiffs in intellectual property cases in the Ninth Circuit could count on courts presuming irreparable harm if they could show a likelihood of success on the merits. See e.g. Brookfield Commc'ns, Inc. v. W. Coast Ent. Corp., 174 F.3d 1036, 1066 (9th Cir. 1999) (trademark infringement); Rosen Entm't Sys, LP v. Icon Enters, Inc., 359 F. Supp. 2d 902, 910 (C.D. Cal. 2005) (patent infringement); Ticketmaster L.L.C. v. RMG Techs., Inc., 507 F. Supp. 2d 1096, 1113 (C.D. Cal. 2007) (copyright infringement); W. Directories, Inc. v. Golden Guide Directories, Inc., No. C 09-1625 CW, 2009 WL 1625945, at *6 (N.D. Cal. Jun. 8, 2009) (trade secrets). 

All of that changed when the Supreme Court eliminated the presumption of irreparable harm in the context of patent cases.  No longer can a plaintiff rely on the basic fact of infringement to secure an injunction.  But does this holding extend to a trade secret injunction?  This question has been left for the lower courts to sort out.  The result is a split of opinion between courts that believe they may still presume irreparable harm, and those that believe only a showing that irreparable harm is likely will support a preliminary injunction.  

Supreme Court Precedent: eBay and Winter 

The Supreme Court expressly rejected any automatic presumption of irreparable harm upon a finding of patent infringement in eBay Inc. v. MercExchange, L.L.C., 547 U.S. 388 (2006).  The Court emphasized that the decision to grant or deny permanent injunctive relief rests within the equitable discretion of the district courts, consistent with traditional principles of equity. Similarly, in Winter v. Natural Resources Defense Council, Inc., 555 U.S. 7 (2008), the Court clarified that plaintiffs seeking preliminary injunctions must demonstrate that irreparable harm is likely, not merely possible, further reinforcing the requirement for evidence-based findings rather than reliance on presumptions. 

Ninth Circuit Authority: The Presumption of Irreparable Harm Fades Away 

There is an animating principle behind the decision to eliminate the presumption for patent cases.  It rests on the fact that many patent plaintiffs are non-practicing entities, colloquially referred to as “patent trolls.”  By their very nature, non-practicing entities do not commercialize the patented product, so they are less likely to suffer classic forms of irreparable harm—lost market share or customer relationships—due to infringement.  They instead primarily exist primarily to secure licensing fees.  This typically makes money damages adequate compensation.  EBay, 547 U.S. at 396 (J. Kennedy, concurring); Evolutionary Intel. LLC v. Yelp Inc, No. C-13-03587 DMR, 2013 WL 6672451, at *8 (N.D. Cal. Dec. 18, 2013). 

Despite the fact that other forms of intellectual property rights generally do not deal with non-practicing entities, the Ninth Circuit has extended the eBay and Winter reasoning to other areas of intellectual property law: 

For example, in Flexible Lifeline Systems, Inc. v. Precision Lift, Inc., 654 F.3d 989 (9th Cir. 2011), the court held that the logic of eBay and Winter ruled out applying the presumption of irreparable harm in copyright infringement cases.  Likewise, in Herb Reed Enterprises, LLC v. Florida Entertainment Management, Inc., 736 F.3d 1239 (9th Cir. 2013), the Ninth Circuit rejected the presumption of irreparable harm in trademark cases.  Irreparable harm must be proven with evidence and factual findings, not merely conclusory statements or reliance on other cases. 

Application to Trade Secret Cases: The Split 

Post-eBay and Winter, the Ninth Circuit has not issued a definitive, published opinion squarely addressing the presumption of irreparable harm in trade secret misappropriation cases.  This uncertainty has left district courts within the Circuit divided:  

Some district courts, following the logic of eBay, Winter, Flexible Lifeline, and Herb Reed, have held that there is no automatic presumption of irreparable harm in trade secret cases. See Cutera, Inc. v. Lutronic Aesthetics, Inc., 444 F. Supp. 3d 1198, 1208 (E.D. Cal. 2020). 

These courts require plaintiffs to present evidence demonstrating that irreparable harm is likely if an injunction is not granted. This approach is supported by the trend in Ninth Circuit jurisprudence, which rejects presumptions in favor of evidence-based findings. 

Other district courts, however, have continued to apply a presumption of irreparable harm in trade secret cases, relying on authority predating Flexible Lifeline Systems to hold that a district court may presume irreparable harm when proprietary information is misappropriated. See Comet Techs. United States of Am. Inc. v. Beuerman, No. 18-CV-01441-LHK, 2018 WL 1990226, at *5 (N.D. Cal. Mar. 15, 2018).  

And other courts have tried to have it both ways, finding a presumption of irreparable harm when proprietary information is misappropriated, but that a plaintiff must still demonstrate immediate threatened injury as a prerequisite to preliminary injunctive relief. See Sitrus Tech. Corp. v. Le, 600 F. Supp. 3d 1106, 1110 (C.D. Cal. 2022). 

Do Not Presume a Presumption 

In an unpublished—and therefore not precedential—decision the Ninth Circuit rejected the argument that trade secret misappropriation always leads to at least a presumption of future irreparable harm, and explained permanent injunctive relief does not “automatically flow[]” from a successful trade secret misappropriation claim. Citcon USA, LLC v. RiverPay Inc., No. 20-16929, 2022 WL 287563, at *2 (9th Cir. Jan. 31, 2022). While this decision does not fully dispatch with the presumption, it comes awfully close, and there is little reason to believe that the Ninth Circuit will treat trade secret cases differently than other IP cases. 

Takeaways 

The trend to apply the same injunction standard to trade secrets as other forms of intellectual property may ultimately do a disservice to protecting trade secrets.  A trade secret is a unique property right in an important way: mere disclosure may destroy it.  This makes it a more fragile property right than a patent, trademark, or copyright.  And without a protective injunction, there is nothing stopping a defendant from disclosing—and thus destroying—the property right on a whim.   

A trade secret litigant will thus be well-served to emphasize this risk when seeking injunctive relief, regardless of whether the presumption formally applies.     

For more information regarding Alto Litigation’s litigation practice, please contact one of Alto Litigation’s partners: Bahram Seyedin-Noor, Bryan Ketroser, Joshua Korr, or Kevin O’Brien.

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Disclaimer: Materials on this website are for informational purposes only and do not constitute legal advice. Transmission of materials and information on this website is not intended to create, and their receipt does not constitute, an attorney-client relationship. Although you may send us email or call us, we cannot represent you until we have determined that doing so will not create a conflict of interests. Accordingly, if you choose to communicate with us in connection with a matter in which we do not already represent you, you should not send us confidential or sensitive information, because such communication will not be treated as privileged or confidential. We can only serve as your attorney if both you and we agree, in writing, that we will do so.

The materials on this website are not intended to constitute advertising or solicitation. However, portions of this website may be considered attorney advertising in some states.

Unless otherwise specified, the attorneys listed on this website are admitted to practice in the State of California.

Delaware Creates Safe Harbors for Corporate Transactions

On March 25, 2025, Delaware Governor Matt Meyer signed into law legislation creating significant revisions to the Delaware General Corporation Law (DGCL).  In a previous post, we discussed how the revisions significantly narrow the scope of an allowable stockholder's demands to inspect Delaware corporations’ books and records.  This post discusses certain other revisions, which significantly relax corporate requirements for approving conflicted transactions.

Under prior Delaware law, the Business Judgment Rule—in which a board of directors is presumed to act in good faith, on an informed basis and in the best interests of the company—applied to conflicted transactions involving fiduciaries, including a control group, only if two hurdles were cleared.  First, the transaction had to be approved by a Special Committee consisting entirely of members who were independent and disinterested.  And then the transaction had to be approved by a majority of uncoerced, fully informed and unaffiliated stockholders.  If the transaction did not clear both of these hurdles, it would be evaluated under the much tougher Entire Fairness standard, requiring a showing that the transaction was fair to the company and its stockholders. See In re Match Group, Inc. Deriv. Litig., 315 A. 3d 446 (Del. 2024). This process was often described as the MFW framework, after Kahn v. M&F Worldwide Corp., 88 A. 3d 635 (Del. 2014), in which the Delaware Supreme Court approved this standard of review.  

Business leaders and corporate lawyers alike attacked the standard as expensive, complicated, and unpredictable, and several corporations left Delaware to reincorporate in other states.

The Delaware legislature heard these concerns loud and clear.  The amended DGCL creates safe harbors under § 144 (a-c) in which conflicted transactions, with one major exception, will not be subject to claims for equitable relief and damages if either 1) the transaction is approved by a majority of disinterested directors, or if a majority of the directors are not disinterested, by a properly formed and functioning special committee consisting of at least two disinterested directors or 2) the transaction is approved by a majority vote of informed, uncoerced, and disinterested stockholders.  Critically, the test is now disjunctive:  Corporations no longer are required to use both procedures, just one of them. (The company also may still rely on demonstrating that the transaction is fair to the corporation and its stockholders).  

The one exception is for a controlling stockholder transaction that constitutes a “going private” transaction, which is defined as either an SEC Rule 13e-3 transaction for a public company, or specified transactions for a private company in which all of the stock held by disinterested stockholders is cancelled, converted, purchased, acquired or is otherwise no longer outstanding.  For such a transaction, approval by a disinterested special committee and by a majority of informed, uncoerced and disinterested stockholders is still required to avoid claims for equitable relief and damages.

The amendments also provide important definitional clarifications.  A “disinterested director” is now defined as one who is not a party to or has a material interest in the act or transaction at issue and does not have a material relationship with a person who has a material interest in the act or transaction.  Further, a director of a public company is presumed to be disinterested if the director satisfies the independence standards for any exchange on which the company is listed. A “material interest” is defined as an actual or potential benefit, including the avoidance of a detriment, other than one which would apply to the corporation or all stockholders generally, that would reasonably be expected to impair the objectivity of the director.  A “material relationship” is defined as a familial, financial, professional, employment or other relationship that also would be reasonably expected to impair the director’s object.  The mere fact that a director was nominated by a stockholder does not mean that the director is not disinterested with respect to a transaction involving the stockholder.  The goal of these definitions is to make clear that a director is not disinterested simply because of a tangential relationship with a stockholder and/or another director.

“Controlling stockholder” got a definition as well:  a person who, together with affiliates and associates, owns or controls either a majority of the voting power of a company’s stock; has the contractual right to elect a majority of directors; or owns or controls at least one-third of the voting power of the outstanding stock and has the power to exercise managerial authority over the company’s business.  This definition was intended to overturn decisions in which stockholders with only 20% or less of the company’s stock were deemed to be controlling.

Further, the amendments eliminate liability for monetary damages for a controlling stockholder or member of a control group for a breach of fiduciary duty other than for a breach of the duty of loyalty or intentional misconduct.  This provision is similar to the ability of corporations to exculpate directors and officers for mere negligent conduct.

On top of the obvious, material changes to various aspects of Delaware corporate law, the recent DGCL amendments highlight Delaware’s clear desire to remain one of, if not the, preeminent jurisdictions for incorporators (and re-incorporators) looking for a well-reasoned and predictable body of statutory and common law to govern their entity. 

For more information regarding Alto Litigation’s litigation practice, please contact one of Alto Litigation’s partners: Bahram Seyedin-Noor, Bryan Ketroser, Joshua Korr, or Kevin O’Brien.

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Disclaimer: Materials on this website are for informational purposes only and do not constitute legal advice. Transmission of materials and information on this website is not intended to create, and their receipt does not constitute, an attorney-client relationship. Although you may send us email or call us, we cannot represent you until we have determined that doing so will not create a conflict of interests. Accordingly, if you choose to communicate with us in connection with a matter in which we do not already represent you, you should not send us confidential or sensitive information, because such communication will not be treated as privileged or confidential. We can only serve as your attorney if both you and we agree, in writing, that we will do so.

The materials on this website are not intended to constitute advertising or solicitation. However, portions of this website may be considered attorney advertising in some states.

Unless otherwise specified, the attorneys listed on this website are admitted to practice in the State of California.

Is it SAFE? A New-ish Investment Tool Triggers Old Concerns

Startup businesses need access to quick, easy cash.  

Investors want an easy way to get early access to the next breakout company. 

In 2013, technology startup accelerator Y Combinator released its solution to these challenges: the Simple Agreement for Future Equity, or SAFE.  With a SAFE, an investor pays for a promise: in exchange for payment of cash, the company promises that it will give the investor a return upon the happening of possible future events.  The investor’s return may be a grant of stock, or a payment of cash.  

While SAFEs address some of the needs of investors and startups, other issues remain.  As has been noted elsewhere, a startup does not owe a SAFE investor the same fiduciary duties that corporations owe to their stockholders.  If something goes wrong, the investor may be limited to remedies for breach of contract.  

The government has also noticed the risks investors face in SAFEs, and the U.S. Securities and Exchange Commission (“SEC”) has used its time-honored tools to address them: public education and enforcement actions.  Private lawsuits vindicate private rights, but also serve to educate the public. 

Stockholders Are Owed Fiduciary Duties; Parties to Contracts Are Not

It is all but axiomatic that corporate directors owe fiduciary duties to the corporation and its stockholders.  Guth v. Loft, Inc., 5 A.2d 503 (Del. 1939).  But that benefit of stock ownership has not been extended to persons who hold a potential or future interest in owning stock of the corporation.  See, e.g., Simons v. Cogan, 549 A.2d 300, 303 (Del. 1988) (“[A] convertible debenture represents a contractual entitlement to the repayment of a debt and does not represent an equitable interest in the issuing corporation necessary for the imposition of a trust relationship with concomitant fiduciary duties.”).  Similarly, the Delaware Court of Chancery has held that preferred stockholders are not owed fiduciary duties beyond those enjoyed by common stockholders, because the rights and preferences of preferred stock are contractual in nature.  In re Trados Inc. Shareholder Litigation, 73 A.3d 17, 38-39 (Del.Ch. 2013).  And while creditors may have standing to maintain derivative claims against directors for breaches of fiduciary duties if the corporation is insolvent, fiduciary duties only apply to stockholders while the corporation is solvent.  North Am. Cath. Educ. Programming Found., Inc. v. Gheewalla, 930 A.2d 92, 101-03 (Del. 2007).

We have found no court cases holding that SAFE investors are owed fiduciary duties or have rights beyond those found in their contract.  Parties to a SAFE do not own equity in the corporation unless and until a triggering event occurs.  In this way, SAFE investors are akin to parties to a traditional convertible debenture.  

SEC Public Service Announcements

Although Y Combinator’s SAFE template includes an investor representation that they are an accredited investor for purposes of Rule 501 of Regulation D under the Securities Act (allowing investors to purchase unregistered securities), the advent of SAFEs coincided with the rise of crowdfunding, an exception to securities laws that allows relatively inexperienced investors to make small investments in companies at an early stage.  With many new investors off to the races, the SEC published an Investor Bulletin warning the public that SAFEs are not quite an “investment” in the traditional sense because the investor does not immediately receive equity in return.  The Bulletin warns the public to carefully consider the terms of the proposed SAFE, including in particular the triggering events that may convert the SAFE investment to equity or a payout.  The Bulletin also points out that, if the company never again needs to raise capital and never gets acquired, the conversion of the SAFE may never be triggered, leaving the investor with nothing.

SEC Enforcement Actions

Devoted readers of this page will recall that we first mentioned the legal perils of AI washing (that is, the making of exaggerated or untrue statements about a company's AI capabilities to attract investors and customers) in July 2024, and revisited the topic earlier this year.  A recent SEC enforcement action highlights the convergence of AI washing and SAFEs on an unsuspecting public. 

On October 10, 2024, the SEC announced charges against Rimar Capital USA, Inc. (“Rimar USA”), Rimar Capital, LLC (“Rimar LLC”), Itai Liptz, and Clifford Boro for making false and misleading statements about Rimar LLC’s purported use of AI to perform automated investment trades for client accounts.  The parties settled the SEC charges and agreed to pay $310,000 in total civil penalties. 

The SEC’s order details the conduct leading up to the charges.  The charged parties used SAFEs to lure their victims into making “investments” in Rimar USA, assuring the investors they would get equity in Rimar USA in the event of any equity financing.  Rimar USA raised $3.725 million from 45 investors with this scheme.  The charged parties made numerous false and misleading statements to investors during this round, including false statements about Rimar LLC having an artificial intelligence platform for trading stock and crypto assets.  In truth, no such platform existed.  Some of the investors were even deceived into becoming advisory clients of Rimar LLC.  

The Rimar USA case underscores that, despite the novelty of SAFEs as a way for investors to get in on the ground floor of an exciting new venture, this new tool can be abused for garden variety securities fraud.

Private Actions Interpreting SAFE Terms

The good news: that “space propulsion company” you invested millions in with a SAFE is going public!  The bad news: did you fill out the paperwork for your shares?  Worse news: actually, the SEC has issued a cease-and-desist against the company for making false statements about its space tech, and the shares you should have gotten are now worth substantially less than they were as of the triggering event.

These are the basic facts of Larian as Trustee of Larian Living Trust v. Momentus Inc., an unpublished January 2024 order on a motion for partial summary judgment before the Superior Court of Delaware.  No. N22C-07-133 EMD CCLD, 2024 WL 386964 (Del. Jan. 31, 2024).  The Trust sued for breach of contract (the SAFE) and fraudulent inducement.  Defendant Momentus moved to dismiss the breach of contract claim.  

The Trust argued that the October 2020 Momentus IPO was a Liquidity Event as defined in the SAFE, and that the Trust should have received equity upon the company going public.  Presumably, the Trust could have sold those shares for a handsome profit long before the SEC’s July 2021 cease and desist order caused the shares to fall well below the value of the Trust’s original $4 million investment.  

Momentus countered that it went public by merging with a SPAC, and that SAFE investors were required to execute a Letter of Transmittal to receive their equity (the Trust argued said letter allegedly contained release language that would cover potential claims relating to the SEC’s cease and desist order a few months earlier).  Momentus argued the Trust failed to satisfy this condition precedent to receiving its shares, so it was entitled to nothing.  

The Trust replied that it was not bound by the terms of the merger agreement, and that the SAFE did not include the clear, unambiguous language that would be required to effect the forfeiture that Momentus was advocating.  

The trial court ultimately denied Momentus’s motion, reasoning that there were genuine disputes over the merger agreement’s impact, if any, on the SAFE; whether the Trust forfeited its interest by failing to timely execute the Letter of Transmittal; and whether Momentus prevented the Trust from complying with a possible condition precedent by failing to answer straightforward (but no doubt awkward) questions about the looming SEC cease and desist order while insisting that the Trust sign the Letter of Transmittal.  

Conclusion

While SAFEs are a relatively new and novel investment tool, they remain subject to many classic risks.  Investors should carefully review the terms of the SAFE to ensure they understand the nature of their investment, and what conditions must be satisfied in order for their payment to convert into equity.  And if the new SAFE instrument is paired with outlandish promises about new technologies, the very old adage may apply: caveat emptor (“let the buyer beware”).

For more information regarding Alto Litigation’s litigation practice, please contact one of Alto Litigation’s partners: Bahram Seyedin-Noor, Bryan Ketroser, Joshua Korr, or Kevin O’Brien.

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Disclaimer: Materials on this website are for informational purposes only and do not constitute legal advice. Transmission of materials and information on this website is not intended to create, and their receipt does not constitute, an attorney-client relationship. Although you may send us email or call us, we cannot represent you until we have determined that doing so will not create a conflict of interests. Accordingly, if you choose to communicate with us in connection with a matter in which we do not already represent you, you should not send us confidential or sensitive information, because such communication will not be treated as privileged or confidential. We can only serve as your attorney if both you and we agree, in writing, that we will do so.

The materials on this website are not intended to constitute advertising or solicitation. However, portions of this website may be considered attorney advertising in some states.

Unless otherwise specified, the attorneys listed on this website are admitted to practice in the State of California.

Beyond Fee-Shifting: Leveraging California’s “Tort of Another” Doctrine to Recover Attorney Fees as Compensatory Damages

When clients ask whether they can recover attorney’s fees in litigation, most lawyers instinctively think about statutory or contractual fee-shifting. But California law recognizes a different, often-overlooked avenue to recovering fees: compensatory damages. In short, where a defendant’s tortious conduct forced the plaintiff into litigation against yet another party, the plaintiff may be able to seek their fees in litigating against that other party, from the former defendant.

Known as the “tort of another” doctrine, this principle opens the door to recovering substantial litigation expenses—not as costs, but as damages.

What Is the Tort of Another Doctrine?

The elements of a “tort of another” doctrine are straightforward enough: a plaintiff may recover attorney’s fees incurred in third-party litigation as damages if:

1. The defendant committed a legal wrong (typically a tort); and

2. That wrong made it reasonably necessary for the plaintiff to protect its interests by suing or defending against a third party.

The doctrine emerged from the seminal case of Prentice v. North American Title Guaranty Corp. (1963) 59 Cal.2d 618.  There, a paid escrow holder’s negligence forced the plaintiff to file a quiet title action against another party.  This satellite lawsuit was considered the “natural and proximate consequence” of the escrow holder’s misconduct.  The court consequently allowed the plaintiff to recover its attorney’s fees incurred pursuing the satellite claim from the escrow holder. Id.; see also Priority Pharmacy, Inc. v. Serono, Inc., No. 09CV1867 BTM POR, 2010 WL 2011514, at *5 (S.D. Cal. May 20, 2010).  

The doctrine also extends to cases where the “tort of another” claimant was forced to defend a suit that was the direct result of the tortfeasor’s negligence or other wrongdoing toward the claimant. See, e.g., Sindell v. Gibson, Dunn & Crutcher, 54 Cal.App.4th 1457, 63 Cal.Rptr.2d 594 (1997) (defendant attorneys, who prepared decedent’s estate plan, were liable to decedent’s children under the “tort of another” doctrine because the children were sued by decedent’s second wife over what property was included in the decedent’s estate solely as a result of the attorneys’ failure to obtain a written consent from the second wife regarding certain gift and sale transfers).

How Does the Law Limit Tort of Another Damages?

The sweep of “tort of another” damages is not without limits.  The law makes sure that the remedy does not apply in “every multiple tortfeasor case[.]” For example, in Vacco Indus., Inc. v. Van Den Berg, 5 Cal. App. 4th 34, 57 (1992), the Court clarified that if two tortfeasors are equally at fault, a plaintiff cannot pursue attorney’s fees against one of them for the legal costs incurred in pursuing the other.  This ensures that the “tort of another” doctrine does not undermine the “American Rule” that each side bears its own attorney’s fees.  

What’s the lesson? Think cause-and-effect. If you represent a plaintiff, develop facts showing how a particular defendant sparked a chain reaction that led to other lawsuits or claims. If you represent a defendant, demonstrate why your client and the “other” party in the plaintiff’s crosshairs are, at most, alleged joint tortfeasors.

Intellectual Property Applications?

The seminal Prentice case involved disputes over real property transactions.  Can the logic extend to intellectual property disputes?  Yes, according to the matter of Vanguard Recording Soc'y, Inc. v. Fantasy Recs., Inc., 24 Cal. App. 3d 410, 419 (Ct. App. 1972).  

Joan Baez and her record label filed a lawsuit against a rival record company that distributed an unauthorized recording of a Baez concert. Baez not only sued the rival record distributors but also sought to enjoin third parties from distributing and selling the bootleg record. The Court of Appeal, applying the tort of another doctrine, permitted Baez to recover her legal fees incurred in pursuing the third parties, directly from the rival record company.

The logic of the Vanguard Recording case can apply to other intellectual property scenarios. For instance, if someone steals trade secrets and uses them for a new employer, the case suggests seeking damages against the original misappropriator for legal fees spent pursuing the employer. This is because the original misappropriator’s wrongful conduct necessitated legal action against the employer in order to protect the plaintiff’s rights and prevent further harm.

Conclusion

The “tort of another” doctrine offers a powerful tool for plaintiffs navigating complex litigation landscapes.  The ideal fact pattern “tort of another” pattern has a “cause and effect” logic to it.  Search for a single tortfeasor who set into motion a chain reaction that led to litigation with third-parties.  By pinpointing the original wrongful act that necessitated additional legal battles, the doctrine—in the right circumstances—appropriately recognizes attorney’s fees as compensatory damages, and bridges gaps where traditional fee-shifting mechanisms fall short. It’s a strategic avenue that not only amplifies recovery but also serves as a potent deterrent against cascading misconduct.

For more information regarding Alto Litigation’s litigation practice, please contact one of Alto Litigation’s partners: Bahram Seyedin-Noor, Bryan Ketroser, Joshua Korr, or Kevin O’Brien.

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Disclaimer: Materials on this website are for informational purposes only and do not constitute legal advice. Transmission of materials and information on this website is not intended to create, and their receipt does not constitute, an attorney-client relationship. Although you may send us email or call us, we cannot represent you until we have determined that doing so will not create a conflict of interests. Accordingly, if you choose to communicate with us in connection with a matter in which we do not already represent you, you should not send us confidential or sensitive information, because such communication will not be treated as privileged or confidential. We can only serve as your attorney if both you and we agree, in writing, that we will do so.

The materials on this website are not intended to constitute advertising or solicitation. However, portions of this website may be considered attorney advertising in some states.

Unless otherwise specified, the attorneys listed on this website are admitted to practice in the State of California.

Making a Difference Through Pro Bono Legal Service

At Alto Litigation, we pride ourselves on delivering exceptional legal counsel to our clients. But our commitment to justice doesn’t end there. We believe that lawyers have a responsibility to use their skills and expertise to serve those who might otherwise face the legal system alone. 

Over the last two years, Alto has deepened its investment in pro bono legal service. Spearheaded by attorney Monica Mucchetti Eno, with assistance from paralegal Silvia Kuhn, the firm has taken on a range of matters that have made a real difference in people’s lives—especially those navigating vulnerable circumstances without the means to access representation. 

Through partnerships with the Legal Aid Society of San Mateo County and the Lawyers’ Committee for Civil Rights of San Francisco, Alto has provided critical support in areas such as: 

• Limited conservatorship petitions for families seeking to care for adult children or siblings with developmental and physical disabilities. These are complex, sensitive matters that require not only legal acumen but deep empathy and an understanding of the court’s processes. Monica has prepared petitions, shepherded families through hearings, and ensured the proper filing of post-hearing documents to protect her clients’ rights and obligations. 

• Federal habeas corpus petitions for immigrant detainees, including a recent case involving an individual granted asylum but still held in detention pending appellate review. Working closely with LCCR-SF, Monica prepared filings aimed at securing a bond hearing so that the client could await the next phase of his case outside of custody. 

These matters rarely generate headlines—but they change lives. And they represent the best of what our profession can offer. 

We’re incredibly proud of Monica’s leadership, compassion, and tenacity in managing these cases and ensuring that Alto’s pro bono work remains a vibrant and ongoing part of the firm’s mission. 

Motion to Compel GRANTED, Fees Request DENIED: A Disappointing but Avoidable Outcome

In theory, the prevailing party on a motion to compel in California usually should recover their reasonable attorney’s fees.  In reality, attorneys who win the discovery war often lose the fee battle, seeing their requests either denied entirely or dramatically reduced. Why does this happen?

Here are some of the most common reasons:

Inadequate Meet and Confer Efforts—or the Appearance Thereof

Most attorneys understand that parties are required to meet and confer in good faith in an effort to resolve their discovery disputes before bringing it to the court.  But many underestimate courts’ ability to sniff out superficial meet and confer efforts.  Moreover, numerous courts have implemented local rules mandating the parties undertake specific meet and confer efforts before a motion to compel may be filed.  Separately, even extensive and good-faith meet and confer efforts may not be enough if the well-meaning attorney does a poor job documenting their reasonable efforts.  

Failure to Submit Proper Evidence with the Motion

Another common reason why fees requests are reduced or denied is because they are not adequately or timely evidenced.  Courts are unlikely to award fees unless they have evidence showing how much was billed and for what. In federal court, counsel bear the burden of submitting detailed time records justifying the hours claimed to have been expended. Chalmers v. City of Los Angeles, 796 F.2d 1205, 1210 (9th Cir. 1986).  Similarly, in state court, a motion to compel must be accompanied by a declaration setting forth facts supporting the amount of the monetary sanction sought. Cal. Code Civ. Proc. § 2023.040.  Vague or otherwise-thin evidence supporting a fee request may be rejected. See, e.g. Weinstein v. Blumberg, 25 Cal. App. 5th 316, 321 (2018); Hernandez v. Welcome Sacramento, LLC, No. 2:20-CV-02061-KJM-JDP, 2024 WL 4520145, at *7 (E.D. Cal. Oct. 17, 2024).  Counsel should provide clear and accurate records of the time spent preparing the motion to compel and supporting documents, and the amount billed for that time.

Timing matters, too.  It is tempting to tell the court in an opening brief that you will submit evidence with your reply brief, when you know the full amount of hours expended (at least before oral argument).  But counsel who waits until their reply brief to in evidence of fees may be out of luck, as the court may find that such delay improperly deprives the non-moving party of their ability to contest the amount.  

Overreaching or Inflated Requests

Courts considering fee requests typically evaluate them for reasonableness.  Actual fees incurred by a party often are an important part of determining their reasonableness, but not the only part.  Was the number of hours spent reasonable?  The number of attorneys working on the matter?  Courts are not shy about giving haircuts for any perceived duplicative work, excessive hours, or overstaffing.  See, e.g., Cash v. County of Los Angeles, 111 Cal. App. 5th 741 (2025).  Courts also pay attention to billing rates; are they reasonable given the experience of the attorneys, their practice area, the expertise needed for the case, and the local market?  Parties who submit comprehensive evidence supporting the reasonableness of their request have a leg up.

Be careful, too, in deciding which hours of work to represent to the court were necessary for the motion at issue.  For example, courts may be loathe to award fees for time spent reviewing discovery responses, since that work would have been done regardless of whether a motion to compel was filed.  See Doe v. Cnty of Sacramento, 2024 WL 2022871, at *2 (E.D. Cal. May 7, 2024).  Likewise, time spent on the meet and confer process will typically not be included in a fee award.  Id.  

Takeaways for Winning the Battle and the War 

Fee-shifting in discovery motions is not automatic. To maximize your chances of recovering fees on a motion to compel, counsel should:

• Engage in a thorough and well-documented meet and confer process

• Submit detailed and timely evidence of fees, and their reasonableness, with their first brief

• Only ask for fees to which they are entitled

For more information regarding Alto Litigation’s litigation practice, please contact one of Alto Litigation’s partners: Bahram Seyedin-Noor, Bryan Ketroser, Joshua Korr, or Kevin O’Brien.

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Disclaimer: Materials on this website are for informational purposes only and do not constitute legal advice. Transmission of materials and information on this website is not intended to create, and their receipt does not constitute, an attorney-client relationship. Although you may send us email or call us, we cannot represent you until we have determined that doing so will not create a conflict of interests. Accordingly, if you choose to communicate with us in connection with a matter in which we do not already represent you, you should not send us confidential or sensitive information, because such communication will not be treated as privileged or confidential. We can only serve as your attorney if both you and we agree, in writing, that we will do so.

The materials on this website are not intended to constitute advertising or solicitation. However, portions of this website may be considered attorney advertising in some states.

Unless otherwise specified, the attorneys listed on this website are admitted to practice in the State of California.

Reasonable Attorneys’ Fees: Getting What’s Deserved, Not What Was Paid

Statutes and contracts often permit a prevailing party to recover “reasonable” attorneys’ fees.  But what is “reasonable”?  

Many attorneys in the enviable position of filing fee-shifting motions believe their own fees to be reasonable, and thus reflexively ask the court or arbitrator to award the amount their client actually paid them.  Alas, this often results in an award of less than what the attorney charged because courts and arbitrators often apply a “haircut” to such requests.

As it turns out, “reasonable” fees can be—and often are—higher than the amount paid by the client. 

Under California law, the “reasonableness” of attorneys’ fees in a given situation is driven not so much by the specific terms of the fee arrangement between the attorney and client, but rather, by the fair market value of the legal services rendered in that case.  See Syers Props. III, Inc. v. Rankin, 226 Cal. App. 4th 691, 701 (2014). “There is no requirement that the reasonable market rate mirror that actual rate billed.” Id. Consequently, courts will consider the complexity of the case, the skill and experience of the attorneys, and the prevailing market rates in deciding what a reasonable fee should be. “This standard applies regardless of whether the attorneys claiming fees charge nothing for their services, charge at below-market or discounted rates, represent the client on a straight contingent fee basis, or are in-house counsel.” Charon v. Litke, 181 Cal. App. 4th 1234, 1260 (2010). 

Reasonable Fees are Set by the Market—Not by Clients

This focus on market value of services rather than specific arrangement makes good sense.  Attorneys have all kinds of arrangements with clients, including many that don’t involve any express, hourly fees at all.  Consider contingency arrangements, pro bono arrangements, and even cases litigated by in-house counsel; attorneys perform valuable services in such cases, and awards of attorneys’ fees are available in them even if no money at all changes hands between client and attorney.  See, e.g. Nemecek & Cole v. Horn, 208 Cal. App. 4th 641, 652 (2012).  Indeed, even in cases litigated by outside counsel charging by the hour, attorneys can and do often provide discounts to clients for all sorts of reasons, including the client’s ability to pay, the attorney’s prior relationship with the client, demands by the client’s insurance carrier, and more.  None of these reasons suggest that the attorney’s work is somehow rendered less valuable than it would have been if they had charged full price. 

The Prevailing Party Should Benefit from a Discount on Attorneys’ Fees, Not the Losing Party

Of course, the reader may be thinking:  That’s not fair!  Why should the prevailing party get more money in a fee award than they paid their attorneys in the first place?  The answer is that the alternative—reducing a fee award simply because the prevailing party paid their attorney less than market—would be a windfall to the non-prevailing party.  After all, if legal services have a determinable value independent of what someone pays for them in one instance, why should the party who loses the case be the party that reaps the benefit of the discount?

Takeaways

Attorneys seeking fee-shifting should seriously consider whether, under the unique circumstances of their case, “reasonable fees” means something more than what they charged their client in that case.  Even if the tribunal disagrees, such a request, if supported by evidence, may result in an award of actual fees paid, without any further “haircut” that the Tribunal might otherwise have been inclined to impose.  

Simply put:  Don’t sell yourselves (or your clients) short.

For more information regarding Alto Litigation’s litigation practice, please contact one of Alto Litigation’s partners: Bahram Seyedin-Noor, Bryan Ketroser, Joshua Korr, or Kevin O’Brien.

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Disclaimer: Materials on this website are for informational purposes only and do not constitute legal advice. Transmission of materials and information on this website is not intended to create, and their receipt does not constitute, an attorney-client relationship. Although you may send us email or call us, we cannot represent you until we have determined that doing so will not create a conflict of interests. Accordingly, if you choose to communicate with us in connection with a matter in which we do not already represent you, you should not send us confidential or sensitive information, because such communication will not be treated as privileged or confidential. We can only serve as your attorney if both you and we agree, in writing, that we will do so.

The materials on this website are not intended to constitute advertising or solicitation. However, portions of this website may be considered attorney advertising in some states.

Unless otherwise specified, the attorneys listed on this website are admitted to practice in the State of California.

No NDA, No Trade Secret? Not Always.

Imagine this: an employee shared your company’s secret sauce in a pitch meeting or during the course of an exploratory partnership, and the idea is stolen. There’s no NDA in sight. Are you out of luck? Not necessarily. Even without a signed agreement, the law still may protect your trade secret under an implied duty of confidentiality.

Express vs. Implied: What's the Difference?

To win a trade secret case, a plaintiff must prove that the defendant had a duty of confidentiality. These come in two varieties:

· Express Duty: This is the straightforward kind—clearly stated in a written contract or NDA. It’s enforceable and predictable.

· Implied Duty: This arises from the nature of the relationship or the context in which the information was shared. Courts find an implied duty of confidentiality when “the other party has reason to know that the information was in fact confidential.” Valmarc Corp. v. Nike, Inc., No. 3:21-CV-01556-IM, 2024 WL 5056960, at *10 (D. Or. Dec. 10, 2024) (citing Carr v. AutoNation, Inc., 798 F.App’x 129, 130 (9th Cir. 2020); see also Tele-Count Eng’rs, Inc. v. Pac. Tel. & Tel. Co., 168 Cal. App. 3d 455, 466 (1985) (“The basis of the breach of confidence action is an obligation created by law for reasons of justice where no contract otherwise exists.”)

In short, even when nothing is signed, the law can and will read between the lines and recognize a confidentiality expectation based on how and why the information was shared. Both the federal Defend Trade Secrets Act (DTSA) and California’s Uniform Trade Secrets Act (UTSA) acknowledge this implied duty under the right circumstances.

When the Law Implies a Secret:

Cases involving arguments about implied duties unsurprisingly turn on their facts, but certain circumstances make a court more likely to find an implied duty.

· Oral and Written Reminders: Even absent a formal agreement, oral and written reminders to employees or vendors to keep information confidential may be enough to create an implied duty. Starship, LLC v. Ghacham, Inc, 2023 WL 5670788, at *19 (C.D. Cal. July 17, 2023); VBS Distribution, Inc. v. Nutrivita Lab’ys, Inc., 811 F. App’x 1005, 1009 (9th Cir. 2020).

· Deceptive Solicitation: Courts may impose an implied duty when a party deceptively solicits confidential information—such as a buyer coaxing a supplier into revealing product details only to steal the design. Pachmayr Gun Works, Inc. v. Olin Mathieson Chem. Corp., Winchester W. Div., 502 F.2d 802, 807 (9th Cir. 1974); Gunther-Wahl Prods., Inc. v. Mattel, Inc., 104 Cal. App. 4th 27, 36 (2002).

· Joint Venturers: Sharing confidential information to evaluate a business’s value for investment or acquisition can create an implied duty of confidentiality. Thompson v. California Brewing Co., 150 Cal. App. 2d 469, 476 (1957).

· Notice from Affiliate: If a defendant knows that the plaintiff has an NDA with the defendant’s affiliate, then that knowledge may impute a duty of confidentiality—even if the defendant wasn’t directly bound by that NDA. Valmarc Corp. v. Nike, Inc., No. 3:21-CV-01556-IM, 2024 WL 5056960, at *10 (D. Or. Dec. 10, 2024).

When Nothing Secret Is Implied:

However, courts are cautious. They won’t imply a duty of confidentiality in every situation. Here are some where they typically won’t:

· Unsolicited Disclosure: If you submit an idea to a potential business partner without any opportunity for them to reject confidentiality obligations, courts may not find a confidential relationship, even if recipient then shares the idea with a competitor. Faris v. Enberg, 97 Cal. App. 3d 309, 324 (1979).

· NDA Declined: If a recipient expressly declines to sign an NDA—but you share it with them anyway—an implied duty argument becomes a tough sell. Hooked Media Grp., Inc. v. Apple Inc., 55 Cal. App. 5th 323, 333 (2020).

· Failure to Follow NDA Strictures: If you have an NDA but don’t follow its terms (e.g., requirements to mark confidential information as such), the law will not step in to create an implied duty. Convolve, Inc. v. Compaq Computer Corp., 527 F. App’x 910, 925 (Fed. Cir. 2013).

Don't Rely on Hopes and Hunches

Courts don’t imply duties lightly. If you want to protect your secrets, the gold standard is still a well-drafted NDA. But if you forgot—or strategically skipped—an NDA, all is not lost.

To strengthen your case, show that:

· The relationship involved trust;

· The context clearly signaled confidentiality; and

· The recipient knew or should have known that the information was confidential.

And, of course, hire counsel who has experience litigating and winning such issues.

For more information regarding Alto Litigation’s litigation practice, please contact one of Alto Litigation’s partners: Bahram Seyedin-Noor, Bryan Ketroser, Joshua Korr, or Kevin O’Brien.

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Disclaimer: Materials on this website are for informational purposes only and do not constitute legal advice. Transmission of materials and information on this website is not intended to create, and their receipt does not constitute, an attorney-client relationship. Although you may send us email or call us, we cannot represent you until we have determined that doing so will not create a conflict of interests. Accordingly, if you choose to communicate with us in connection with a matter in which we do not already represent you, you should not send us confidential or sensitive information, because such communication will not be treated as privileged or confidential. We can only serve as your attorney if both you and we agree, in writing, that we will do so.

The materials on this website are not intended to constitute advertising or solicitation. However, portions of this website may be considered attorney advertising in some states.

Unless otherwise specified, the attorneys listed on this website are admitted to practice in the State of California.

Bahram Seyedin-Noor is Ranked by Chambers and Partners for Fifth Year in a Row

Alto Litigation Founder and CEO Bahram Seyedin-Noor has been recognized as a top securities litigator in California in the 2025 edition of Chambers USA. This is the fifth straight year he has been included in the rankings, a remarkable achievement given that Alto is a boutique firm and Chambers rankings are dominated by lawyers at much larger firms. 

Chambers and Partners’ annual rankings are a well-respected publication that recognizes firms and lawyers for excellence in their chosen practice areas. Chambers rankings are thoroughly vetted by hundreds of researcher analysis, and includes interviews of thousands of lawyers and clients each year. Individuals and firms demonstrate sustained excellence to be considered for the publication. 

Among the feedback provided in support of Bahram’s recognition is that, “Clients are lucky to get to work with him” and “I can't say enough positive things about working with Bahram.”

Responding to the recognition, Bahram stated, “It’s an honor to be recognized again by Chambers USA. Litigation is a team sport, and this reflects the talent, commitment, and creativity of the entire Alto team. We’re proud to stand shoulder to shoulder with our clients in high-stakes matters—and to consistently deliver results that earn their trust.”

AI Washing Revisited – Trying to Predict the Future

Yogi Berra famously observed: “It’s tough to make predictions, especially about the future.”

Predictions are having a moment, in the form of the predictive language models fueled by artificial intelligence (“AI”) which form the backbone of countless disruptive products and services. Last year we shared our thoughts on the practice of “AI washing,” or the misuse of exaggerated or untrue statements about a company’s AI capabilities to attract investors and customers. The Securities and Exchange Commission (“SEC”) and Federal Trade Commission (“FTC”) continue their enforcement efforts under the new administration, with resolutions to existing cases and new actions underway. Although Congress is on the verge of passing a 10-year moratorium on state-level regulations of AI, that ban does not appear to limit the ability of federal agencies to enforce existing laws against deceptive practices – or the rights of private actors to pursue traditional civil remedies for fraud or breaches of fiduciary duties.

Ecommerce Empire Builders

In September 2024 the FTC charged Empire Holdings Group and its principal, Peter Prusinowski, with falsely claiming that the “Ecommerce Empire Builders” tool could help consumers make up to millions of dollars in e-commerce. The civil complaint alleged that defendants promoted their program though social media channels such as Facebook, Instagram, TikTok, and YouTube, claiming that the tools they built for customers were “powered by artificial intelligence to make your life easier” and could get people “on the road to replacing your full-time income.” The Complaint went on to allege, however, that the program took many hours for clients to review, required significant time and effort to implement, and income, if any, was far from certain. The Complaint alleged five counts against defendants under the FTC Act and Consumer Review Fairness Act.

On May 9, 2025, the FTC and defendants entered a stipulated order banning Empire and Prusinowski from offering this purported business opportunity to the public and requiring the defendants to surrender assets to the FTC in order to refund consumers.

Nate, Inc.

In April 2025 the Acting U.S. Attorney for the Southern District of New York charged Albert Saniger, the former Chief Executive Officer of Nate, Inc. (“nate”), with engaging in a scheme to defraud investors by making false and misleading statements about nate’s use of proprietary AI technology. The indictment alleges that Saniger and nate brought in over $40 million in investments by representing to investors that nate’s shopping app used AI “to intelligently and autonomously complete customers’ merchandise orders across e-commerce websites.” The indictment further alleges that the nate app was not powered by unique AI capabilities, and at times, customer transactions were manually completed by contractors in the Philippines and Romania (the company eventually managed to develop “bots” to assist with some transactions). The indictment charges Saniger with securities fraud and wire fraud. The SEC filed a parallel civil complaint against Saniger, seeking civil money penalties, disgorgement of ill-gotten gains, and injunctive relief.

Possible Moratorium on State-level Regulation of A.I.

Meanwhile, the House of Representatives recently passed H.R. 1, the One Big Beautiful Bill Act (yes, that is the official short title of the bill). Section 43201(c) of the Act requires, subject to modest limitations, that “no State or political subdivision thereof may enforce any law or regulation regulating artificial intelligence models, artificial intelligence systems, or automated decision systems during the 10-year period beginning on the date of the enactment of this Act.” While this is a broad prohibition, two things are clear. First, the moratorium does not tie the hands of federal regulators, who have shown a willingness across administrations to apply time-tested civil and criminal tools against companies and their principals who are engaging in AI washing. Second, private plaintiffs continue to have at their disposal civil claims for false or misleading statements, from federal securities claims under the Securities Act of 1933 and Securities Exchange Act, to state law claims for breaches of fiduciary duties and state claims for false advertising and other consumer protections.

It's Like Déjà vu All Over Again

Despite a change in administrations and a likely state-level ban on A.I. regulation, federal agencies continue to take enforcement action against those who make false or misleading statements about their AI capabilities. Surely private plaintiffs will follow suit.

While AI is cutting-edge technology, companies should continue to apply traditional safeguards to claims about its capabilities. This includes truthful and precise communication, robust internal controls and oversight, and staying informed about regulatory developments and best practices.

For more information regarding Alto Litigation’s litigation practice, please contact one of Alto Litigation’s partners: Bahram Seyedin-Noor, Bryan Ketroser, Joshua Korr, or Kevin O’Brien.

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Disclaimer: Materials on this website are for informational purposes only and do not constitute legal advice. Transmission of materials and information on this website is not intended to create, and their receipt does not constitute, an attorney-client relationship. Although you may send us email or call us, we cannot represent you until we have determined that doing so will not create a conflict of interests. Accordingly, if you choose to communicate with us in connection with a matter in which we do not already represent you, you should not send us confidential or sensitive information, because such communication will not be treated as privileged or confidential. We can only serve as your attorney if both you and we agree, in writing, that we will do so.

The materials on this website are not intended to constitute advertising or solicitation. However, portions of this website may be considered attorney advertising in some states.

Unless otherwise specified, the attorneys listed on this website are admitted to practice in the State of California.

Ninth Circuit Holds that Bankruptcy Trustee Need Not Establish Injury to Creditors to Void Actual Fraudulent Transfer by Debtor

Creditors who find themselves fighting for a piece of bankruptcy pie just got a boost.  In a precedential ruling, the Ninth Circuit recently recognized in In re O’Gorman that the trustee in bankruptcy proceedings can void a pre-bankruptcy fraudulent transfer even without establishing creditor injury.  115 F.4th 1047 (2024).   

Fraudulent Transfers Under the Bankruptcy Code 

Codified at 11 U.S.C. § 548, the Bankruptcy Code’s fraudulent transfer provision in many ways parallels the Uniform Voidable Transactions Act.  Section 548(a)(1) provides that a bankruptcy trustee:  

“may avoid any transfer … of an interest of the debtor in property … that was made or incurred on or within 2 years before the date of the filing of the [bankruptcy] petition, if the debtor voluntarily or involuntarily …  

[(A)] made such transfer … with actual intent to hinder, delay or defraud any entity to which the debtor was or became, on or after the date that such transfer was made …, indebted; …” 

O’Gorman 

In O’Gorman, the bankruptcy trustee sought to set aside the debtor’s alleged fraudulent transfer of her home to an irrevocable land trust that was established by several trustees (the “Land Trustees”) to make improvements to the home and then sell it.  Id. at 1052.  The Land Trustees—who stood to profit handsomely from the sale of the home—maintained that the bankruptcy trustee lacked standing to bring a Section 548 claim because no creditors had been injured as a result of the debtor’s transfer to the land trust.  Id.   

The bankruptcy court granted summary judgment on the bankruptcy trustee’s actual fraudulent transfer claim, and the Bankruptcy Appellate Panel affirmed.   

On review, the Ninth Circuit explained that in order to have standing in bankruptcy court, the plaintiff must satisfy Article III constitutional requirements by showing that:  (i) he suffered an injury in fact that is concrete, particularized, and actual or imminent; (ii) the injury was likely caused by the defendant; and (iii) the injury would likely be redressed by judicial relief.  Id. at 1054-55.  But in O’Gorman, the only (potentially) secured creditor purportedly injured by the transfer did not have a valid claim to the property, and the unsecured creditors could be paid from the anticipated distribution of funds to the debtor.  Id.  Hence, the Land Trustees argued, the bankruptcy trustee could not meet the “injury” showing needed for Article III standing.  Id. at 1055. 

The court rejected the Land Trustees’ argument as reading too much into Article III’s injury requirement.  Id. at 1055.  According to the Ninth Circuit, the bankruptcy trustee need not demonstrate injury to a creditor, just that they have a “judicially cognizable interest” in avoiding the transfer on behalf of the estate.  Id.  To have such a judicially cognizable interest, the bankruptcy trustee was required to establish an injury to the estate—not to other creditors.  Id. at 1056.  And that showing, the court held, was easily satisfied in O’Gorman because the debtor’s transfer of her home to the Land Trustees’ trust depleted the assets in the estate.  Id.   

In reaching its decision, the Ninth Circuit looked to Fourth Circuit and Eighth Circuit holdings for guidance, including case law focusing on the debtor’s intent:  “for if a debtor enters into a transaction with the express purpose of defrauding his creditors, his behavior should not be excused simply because, despite the debtor’s best efforts, the transaction failed to harm any creditor.”  Id. at 1057 (citing Tavenner v. Smoot, 257 F.3d 401, 407 (4th Cir. 2001).   

Takeaways 

In removing “creditor injury” as a hurdle that must be cleared for a bankruptcy trustee to set aside an actual fraudulent transfer by the debtor, the Ninth Circuit has made life more uncertain for even well-meaning creditors who happen to have done business with a party within two years of that party subsequently filing for bankruptcy.  At the same time, the O’Gorman decision could be a boon to many other creditors as bankruptcy trustees increasingly void fraudulent transfers in an effort to increase overall payouts. 

For more information regarding Alto Litigation’s litigation practice, please contact one of Alto Litigation’s partners: Bahram Seyedin-Noor, Bryan Ketroser, Joshua Korr, or Kevin O’Brien.

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Disclaimer: Materials on this website are for informational purposes only and do not constitute legal advice. Transmission of materials and information on this website is not intended to create, and their receipt does not constitute, an attorney-client relationship. Although you may send us email or call us, we cannot represent you until we have determined that doing so will not create a conflict of interests. Accordingly, if you choose to communicate with us in connection with a matter in which we do not already represent you, you should not send us confidential or sensitive information, because such communication will not be treated as privileged or confidential. We can only serve as your attorney if both you and we agree, in writing, that we will do so.

The materials on this website are not intended to constitute advertising or solicitation. However, portions of this website may be considered attorney advertising in some states.

Unless otherwise specified, the attorneys listed on this website are admitted to practice in the State of California.

Multifront Legal Battles

Parties to commercial disputes typically resolve their differences in a single forum, either through a civil action or an arbitration.  In complex commercial litigation, however, parties often must attack or defend on multiple fronts simultaneously.  As discussed below, this can raise a host of procedural and strategic considerations.  

Parallel Civil Actions and Arbitrations

Arbitration requires unambiguous consent from all parties.  Thus, an overly-narrow arbitration clause in a contract may deprive an arbitrator of authority to resolve all disputes between two parties.  Even a broad arbitration clause may not reach all parties to a given dispute, where the operative agreement is between only two of several relevant parties.  Or a single dispute will involve multiple contracts, only one (or some) of which contain arbitration provisions.  All of these situations may lead to civil actions and arbitrations being filed simultaneously.

This can be problematic for several reasons. First, and most obviously, suing or being sued is costly, stressful, and time-consuming; parallel proceedings only multiply these negative effects.  Parallel proceedings also raise complicated questions of claim and issue preclusion and—in turn—proper sequencing.  A common way to mitigate these concerns is to stay one matter so that the parties may focus their attention and resources.  Of course, careful consideration must be paid to how any potential resolution of the “first” matter could or would impact the second/others.

Parallel Arbitrations

Most litigators are familiar with the concept of consolidating civil actions pending in the same court and involving common questions of fact or law.  But what happens when a group of employees or businesses have signed similar contracts (with arbitration provisions) with the same counterparty and assert similar grievances in multiple arbitrations?  Or when one party files arbitrations against several respondents based on similar issues but different agreements?

Good news:  AAA recently revised its rules to allow for consolidation of otherwise-separate arbitrations.  A related rule permits joinder of additional parties to an ongoing arbitration.  JAMS similarly allows for the consolidation of arbitrations when they have been filed by the same party, or the arbitration demand names a party already involved in a pending arbitration.  Both AAA and JAMS have also revised their rules to facilitate the more efficient resolution of mass arbitrations, giving some limited relief to businesses facing proliferating, similar claims.  
What if a dispute arises that involves separate contracts with different arbitration provisions (e.g., one AAA and one JAMS)?  Arbitrators themselves may lack the authority to consolidate or coordinate arbitrations being administered before entirely different organizations, elevating the importance of inter-party negotiation.  One potential solution is to negotiate an agreement to move one of the arbitrations so that they are all before the same tribunal.  Another is to request a stay so that the matters can be resolved sequentially—to the extent that resolution of first does not drive resolution of the second.

Parallel Books and Records Actions and Civil Actions 

Suspicious stockholders have tools to investigate possible mismanagement, including inspection demands and inspection actions.  Typically, such inspection (or “books and records”) actions precede more substantive (or “plenary”) lawsuits, but sometimes it may be necessary or advisable for a plaintiff to file them in tandem, especially since inspection actions tend to get resolved on an expedited basis.  Still, filing both at the same time may rightly or wrongly play into the corporate defendant’s argument that the shareholder is not pursuing inspection for the requisite “proper purpose.”

Takeaways

Successful navigation of parallel actions and arbitrations requires forethought, diplomacy, and a deep knowledge of all applicable rules—all things that experienced complex commercial litigation counsel can provide.  In the meantime, businesses would be wise to conduct periodic review of their contracts to ensure, among other things, that if they contain arbitration provisions, those provisions are either consistent or purposefully inconsistent with one another.  

For more information regarding Alto Litigation’s litigation practice, please contact one of Alto Litigation’s partners: Bahram Seyedin-Noor, Bryan Ketroser, Joshua Korr, or Kevin O’Brien.

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Disclaimer: Materials on this website are for informational purposes only and do not constitute legal advice. Transmission of materials and information on this website is not intended to create, and their receipt does not constitute, an attorney-client relationship. Although you may send us email or call us, we cannot represent you until we have determined that doing so will not create a conflict of interests. Accordingly, if you choose to communicate with us in connection with a matter in which we do not already represent you, you should not send us confidential or sensitive information, because such communication will not be treated as privileged or confidential. We can only serve as your attorney if both you and we agree, in writing, that we will do so.

The materials on this website are not intended to constitute advertising or solicitation. However, portions of this website may be considered attorney advertising in some states.

Unless otherwise specified, the attorneys listed on this website are admitted to practice in the State of California.

New Law Expands Right to Third Party Discovery Under California Arbitration Act Beyond that Available Under the Federal Arbitration Act

As of January 1, 2025, whether a party can obtain prehearing documents or testimony from third parties in an arbitration depends in large part on whether the California Arbitration Act (“CAA”) or Federal Arbitration Act (“FAA”) governs their dispute.  

Recent Amendment to the CAA Permits Expansive Discovery, Including Third Party Subpoenas 

At the turn of this year, the CAA was amended to significantly broaden the scope of discovery allowed in arbitration proceedings.  Prior to this year’s amendment, Code of Civil Procedure (“CCP”) §§ 1283.05 and 1283.1(b) only allowed parties to an arbitration agreement governed by the CAA to take depositions and obtain discovery if their arbitration agreement allows it (or if they are arbitrating a personal injury or wrongful death dispute).  The new law repealed CCP § 1283.1 and amended CCP § 1283.05(a) to afford CAA arbitration participants more expansive discovery rights.   

Section 1283.05(a) as amended provides that: 

“the parties to the arbitration shall have the right to take depositions and to obtain discovery regarding the subject matter of the arbitration, and, to that end, to use and exercise all of the same rights, remedies, and procedures, and be subject to all of the same duties, liabilities, and obligations in the arbitration with respect to the subject matter thereof, … as if the subject matter of the arbitration were pending before a superior court …”  

Parties to arbitration under the CAA can even obtain the deposition testimony and documents of third parties by having a subpoena issued by the arbitrator in accordance with the procedures set forth in amended CCP § 1282.6.  Note that some restrictions remain:  The arbitrator or arbitrators must be appointed before discovery can commence (see CCP § 1283.05(a)), and depositions for discovery may not be taken unless leave to do so is first granted by the arbitrator or arbitrators (CCP § 1283.05(e)).   

The FAA’s Silence on the Issue of Discovery 

The overarching purpose of the FAA is “to ensure the enforcement of arbitration agreements according to their terms so as to facilitate informal, streamlined proceedings.”  AT&T Mobility LLC v. Concepcion, 563 U.S. 333, 131 S. Ct. 1740, 1743 (2011).  Consistent with its purpose, while some courts have recognized a right to limited discovery related to the making or alleged violation of the arbitration agreement, the FAA does not provide a mechanism for parties to obtain discovery related to their dispute.  

For that reason, parties to an arbitration agreement governed by the FAA can – and often do – expressly provide for discovery in one of two ways.   

First, parties may agree that their arbitration will be subject to an identified arbitration organization’s rules, which in turn do or may permit discovery.  For instance, the American Arbitration Association Commercial Rules (“AAA Rules”) do not expressly provide for the deposition of witnesses, but they do give the arbitrator the authority to “manage any necessary exchange of information among the parties” and to respond to “reasonable document requests.”  See AAA Rule 23(a) and (b).  And the JAMS Comprehensive Arbitration Rules & Procedures (“JAMS Rules”) provide for the “voluntary and informal exchange of all non-privileged documents and other information … relevant to the dispute or claim” and the names of all individuals they may call as a witness at the arbitration hearing.  See JAMS Rule 17(a).  The JAMS Rules allow each party to take one deposition of an opposing party or an individual under the control of the opposing party.  Id. 17(b).  Parties can take additional depositions if permitted to do so by the arbitrator based on their weighing of the reasonable need for the information, availability of other discovery options, and burdensomeness of the request.  Id.   

Second, parties may incorporate customized language into their arbitration agreement whereby they agree, for example, to arbitrate pursuant to the Federal Rules of Civil Procedure, or pursuant to another discovery process similar to that in litigation.   

Arbitrators Have No Ability to Issue Discovery Subpoenas Under the FAA 

Even where parties have incorporated the AAA Rules, JAMS Rules or custom discovery language into their arbitration agreement governed by the FAA, one question remains:  How, if at all, can a party obtain pre-hearing deposition testimony or documents from non-parties to the dispute?  The answer is that they cannot. 

The only authority given to an arbitrator under the FAA to compel the appearance of a witness or the production of documents is set forth in FAA § 7, which gives arbitrators authority to: 

“summon in writing any person to attend before them … as a witness and in a proper case to bring with him or them any book, record, document, or paper which may be deemed material as evidence in the case.” 

The Ninth Circuit in CVS Health Corp. v. Vividus, LLC, 878 F.3d 703, 706-08 (2017) addressed for the first time whether Section 7 of the FAA empowered arbitrators to order third parties to produce document for review prior to an arbitration hearing.  Based on a plain reading of Section 7, the Ninth Circuit concluded that the statute granted the arbitrator “no freestanding power to order third parties to produce documents other than in the context of a hearing.”  Id. at 706.  Other courts in California, applying the holding in CVS, have similarly recognized that the FAA does not grant an arbitrator authority to issue prehearing discovery subpoenas for documents.  See e.g., Harris v. T-Mobile US, Inc., No. EDMC204JGBPLAX, 2020 WL 4032289, at *2 (C.D. Cal. May 5, 2020); Aixtron, Inc. v. Veeco Instruments Inc., 52 Cal.App.5th 360, 404 (2020).  Although the Ninth Circuit has yet to consider whether Section 7 affords arbitrators the power to issue subpoenas for prehearing deposition testimony, it is likely that courts in this Circuit would apply the reasoning of the CVS court to find that such power is also prohibited.   

The Takeaway 

Many cases are won or lost on discovery, and third parties often have critical documents and/or testimony to give.  Laying the foundation to obtain and present the evidence one needs in litigation—even before any dispute arises—can pay dividends later on.   

For more information regarding Alto Litigation’s litigation practice, please contact one of Alto Litigation’s partners: Bahram Seyedin-Noor, Bryan Ketroser, Joshua Korr, or Kevin O’Brien.

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Disclaimer: Materials on this website are for informational purposes only and do not constitute legal advice. Transmission of materials and information on this website is not intended to create, and their receipt does not constitute, an attorney-client relationship. Although you may send us email or call us, we cannot represent you until we have determined that doing so will not create a conflict of interests. Accordingly, if you choose to communicate with us in connection with a matter in which we do not already represent you, you should not send us confidential or sensitive information, because such communication will not be treated as privileged or confidential. We can only serve as your attorney if both you and we agree, in writing, that we will do so.

The materials on this website are not intended to constitute advertising or solicitation. However, portions of this website may be considered attorney advertising in some states.

Unless otherwise specified, the attorneys listed on this website are admitted to practice in the State of California.

Delaware Reins in Stockholder Demands for Books and Records

For decades, Section 220 of the Delaware General Corporation Law (“Section 220”) has been a powerful tool for shareholders of Delaware corporations to investigate suspected wrongdoing. And as the way people communicate has changed from formal, hard-copy letters to more “informal” types of correspondence like emails and text messages, the Delaware Court of Chancery increasingly has found such informal correspondence fair game for shareholder inspection demands. Now, the Delaware legislature is pulling back on the reins.

On March 25, 2025, Section 220 of the Delaware General Corporation Law was amended to impose stricter requirements on stockholders seeking to inspect corporate books and records. These changes are meant to reduce the burdens of Section 220 demands upon corporations and to limit their use as a prelitigation tool for evidence gathering. The revisions impact both the types and vintage of records amenable to shareholder inspection demands.

Too Demanding

Section 220 has long provided stockholders a qualified right to inspect the books and records of Delaware corporations for a “proper purpose,” so long as those books and records were deemed “necessary and essential” to that purpose. Over time, courts have broadened their interpretation of these terms. Where once demands were limited to formal Board materials and minutes, stockholders more recently have been able to compel corporations to disclose a wide range of documents including even informal communications such as emails, text messages, and more. Courts acknowledged that Section 220 demands were being used as a prelitigation discovery tool and were willing to provide stockholders access to documents that could be used to evaluate their potential legal claims. Predictably, the burden and expense of Section 220 demands on corporations increased dramatically.

“Books and Records” Defined, More Narrowly

The Delaware legislature has elected to reverse this trend. Following the amendment, Section 220 specifies the types of documents that stockholders can request, in some cases specifying the permissible age limit of the documents. The new list includes:

· Certificates of incorporation and bylaws;

· Minutes of stockholder and board meetings for the past three years;

· Written communications to stockholders within the past three years;

· Materials provided to the board or committees in connection with actions taken by the board;

· Annual financial statements for the past three years;

· Certain corporate contracts with stockholders; and

· Director and officer independence questionnaires

Other Documents

If documents specified in Section 220 are unavailable, then the Court of Chancery may order the production of their “functional equivalents,” but only if they are “necessary and essential to fulfill the stockholder’s proper purpose.”

And if a stockholder wants access to other documents, beyond those specified in the new statutory definition of “books and records” (or their “functional equivalents”), then they must:

· Demonstrate a proper purpose for the request;

· Show a “compelling need” for the additional records; and

· Provide “clear and convincing evidence” that the requested documents are necessary and essential to achieve the stated purpose

Takeaways

For Delaware corporations, the changes to Section 220 highlight the importance of proper recordkeeping. In addition to other, more obvious benefits, having such materials as board and stockholder minutes, financial statements, and so forth available for provision as legally-required will reduce the possibility of needing to provide less formal, “functional equivalents” to shareholders.

For shareholders, the statutory revisions change the calculus for decisions about the expected value of taking a recalcitrant Delaware corporation to court. And for those shareholders who do move forward with inspection actions, the changes provide a roadmap for how best to fortify any request for “informal” materials.

For more information regarding Alto Litigation’s litigation practice, please contact one of Alto Litigation’s partners: Bahram Seyedin-Noor, Bryan Ketroser, or Joshua Korr.

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Disclaimer: Materials on this website are for informational purposes only and do not constitute legal advice. Transmission of materials and information on this website is not intended to create, and their receipt does not constitute, an attorney-client relationship. Although you may send us email or call us, we cannot represent you until we have determined that doing so will not create a conflict of interests. Accordingly, if you choose to communicate with us in connection with a matter in which we do not already represent you, you should not send us confidential or sensitive information, because such communication will not be treated as privileged or confidential. We can only serve as your attorney if both you and we agree, in writing, that we will do so.

The materials on this website are not intended to constitute advertising or solicitation. However, portions of this website may be considered attorney advertising in some states.

Unless otherwise specified, the attorneys listed on this website are admitted to practice in the State of California.

AI and Copyright Law: The Thaler Decision and Human Authorship Requirement

On March 18, 2025, the U.S. Court of Appeals for the District of Columbia Circuit affirmed the D.C. District Court's and U.S. Copyright Office's decisions, holding that a copyrighted work cannot be authored exclusively by an AI system. This decision reinforces the fundamental principle that human creativity remains central to copyright protection in the United States.  

Case Background 

Computer scientist Dr. Stephen Thaler claims to have created a generative-AI system dubbed "Creativity Machine," which Dr. Thaler says created a picture that he titled "A Recent Entrance to Paradise" (the "Artwork"). Dr. Thaler submitted the Artwork to the Copyright Office for registration, listing the Creativity Machine as the sole author of the work and himself as the work's owner, stating that the Artwork was "autonomously created by artificial intelligence." The Copyright Office denied registration because "a human being did not create the work." 

The Litigation 

Dr. Thaler sought judicial review of the Office's decision. The D.C. District Court agreed with the Copyright Office and declined to recognize copyright protection in works created solely by AI systems, holding that "[h]uman authorship is a bedrock requirement of copyright." Thaler v. Perlmutter, 687 F. Supp. 3d 140 (D.D.C. 2023). The district court also found that Dr. Thaler waived his argument that he should be regarded as the author (because he created and used the Creativity Machine), as his case presented "only the question of whether a work generated autonomously by a computer system is eligible for copyright."  

Affirming the district court's decision, the U.S. Court of Appeals for the District of Columbia Circuit rejected Dr. Thaler's reading of the Act and held that "the current Copyright Act's text, taken as a whole, is best read as making humanity a necessary condition for authorship under the Copyright Act." Thaler v. Perlmutter, No. 23-5233 (D.C. Cir. Mar. 18, 2025). It also rejected Dr. Thaler's work‑made-for-hire argument, because, the court explained, the Creativity Machine did not have authorship that could be imputed to him. 

The Court then made a crucial clarification that, contrary to Dr. Thaler's position, "the human authorship requirement does not prohibit copyrighting work that was made by or with the assistance of artificial intelligence," it merely requires that the "author" of the work be a human being—not the AI system itself. 

Implications for AI-Human Collaboration 

This ruling clarifies that works created with AI assistance can still receive copyright protection when human authors exercise sufficient creative control and input. The decision leaves open the possibility that a human who uses AI as a tool—similar to using a camera, word processor, or other technology—may claim authorship of the resulting work if they contribute sufficient creative elements. 

While this case addressed an extreme scenario where no human authorship was claimed, it sets the stage for more questions about the degree of human involvement required for copyright protection.  

Conclusion 

The Thaler case touches on the very essence of U.S. copyright law, which historically has protected the fruits of human intellectual labor for the public benefit. The law rewards the judgment, skill, and creative choices that humans exercise when creating works, recognizing the uniquely human aspects of the creative process. 

Thaler confirms that an AI system—by itself—cannot be the sole author of a copyrightable work because it does not satisfy the human authorship requirement. However, the ruling also acknowledges the reality of AI as a creative tool and preserves the copyright system's fundamental purpose of promoting human creativity while adapting to technological evolution. 

For more information regarding Alto Litigation’s litigation practice, please contact one of Alto Litigation’s partners: Bahram Seyedin-Noor, Bryan Ketroser, or Joshua Korr.

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Disclaimer: Materials on this website are for informational purposes only and do not constitute legal advice. Transmission of materials and information on this website is not intended to create, and their receipt does not constitute, an attorney-client relationship. Although you may send us email or call us, we cannot represent you until we have determined that doing so will not create a conflict of interests. Accordingly, if you choose to communicate with us in connection with a matter in which we do not already represent you, you should not send us confidential or sensitive information, because such communication will not be treated as privileged or confidential. We can only serve as your attorney if both you and we agree, in writing, that we will do so.

The materials on this website are not intended to constitute advertising or solicitation. However, portions of this website may be considered attorney advertising in some states.

Unless otherwise specified, the attorneys listed on this website are admitted to practice in the State of California.

New Developments in Crypto Litigation and Regulation

On February 26, 2025, the United States Court of Appeals for the Second Circuit affirmed the dismissal of federal securities claims against developers of a decentralized cryptocurrency exchange and their venture capital investors in Risley v. Universal Navigation Inc. The court held that these developers could not be liable under federal securities laws for alleged fraud perpetrated by third parties on their exchange.

The case involved a decentralized exchange operating through self-executing "smart contracts" that autonomously facilitate cryptocurrency trades. Plaintiffs alleged the exchange enabled trading of fraudulent "scam tokens" that constituted unregistered securities.

The Second Circuit, assuming for argument's sake that the tokens were securities, nevertheless dismissed the Securities Act claims. The court reasoned that the defendants were neither direct sellers of the tokens nor actively soliciting their sale. The court analogized the exchange's role to that of traditional exchanges like Nasdaq or NYSE, determining they were merely "collateral to the offer or sale" rather than participants in the transactions themselves.

Additionally, the court rejected Exchange Act claims, finding no rescindable contract existed between plaintiffs and defendants. However, the Second Circuit did vacate dismissal of state law claims and remanded them for consideration under diversity jurisdiction.

SEC Declares "Meme Coins" Not Securities

On February 27, 2025, the SEC's Division of Corporation Finance provided clarity on crypto regulation by declaring that "meme coins" do not fall under the definition of "security" under federal law.

The SEC defined meme coins as crypto assets inspired by internet memes, characters, or trends that attract online communities primarily for entertainment, social interaction, and cultural purposes. Since these assets don't generate yield or convey rights to future income or business assets, they don't qualify as securities under the Securities Act or Exchange Act definitions.

This determination means meme coin transactions don't require SEC registration, though the agency warned this doesn't extend to products merely labeled as "meme coins" to circumvent securities laws or those used for fraudulent conduct.

The Division also analyzed meme coins under the "investment contract" test from SEC v. W.J. Howey Co., concluding that meme coin purchasers are not making investments into enterprises, nor are their profit expectations derived from others' efforts, but rather from speculative trading and market sentiment.

SEC Moves to Drop Lawsuit Against Coinbase

In a major shift signaling the Trump administration's friendlier approach to cryptocurrency, Coinbase announced recently that SEC staff have agreed in principle to dismiss their lawsuit filed during the Biden administration. The original suit had accused Coinbase of operating as an unregistered securities broker.

The move aligns with President Trump's campaign promises to roll back strict crypto enforcement and make the United States the "crypto capital of the world." While SEC staff have, according to Coinbase, agreed to the dismissal in principle, the agency must still formally vote to drop the suit.

Conclusion

As courts continue to refine the application of securities laws to various crypto assets and activities, and with regulatory approaches evolving under the Trump administration, we will continue to monitor these rapidly developing trends in the crypto space.

For more information regarding Alto Litigation’s litigation practice, please contact one of Alto Litigation’s partners: Bahram Seyedin-Noor, Bryan Ketroser, or Joshua Korr.

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Disclaimer: Materials on this website are for informational purposes only and do not constitute legal advice. Transmission of materials and information on this website is not intended to create, and their receipt does not constitute, an attorney-client relationship. Although you may send us email or call us, we cannot represent you until we have determined that doing so will not create a conflict of interests. Accordingly, if you choose to communicate with us in connection with a matter in which we do not already represent you, you should not send us confidential or sensitive information, because such communication will not be treated as privileged or confidential. We can only serve as your attorney if both you and we agree, in writing, that we will do so.

The materials on this website are not intended to constitute advertising or solicitation. However, portions of this website may be considered attorney advertising in some states.

Unless otherwise specified, the attorneys listed on this website are admitted to practice in the State of California.

Ninth Circuit Dismisses Slack Technologies Securities Suit: Investors Must Trace Shares to Registration Statement

In an important decision affecting securities litigation, the U.S. Court of Appeals for the Ninth Circuit has dismissed claims against Slack Technologies, holding that investors must be able to trace their shares directly to an allegedly misleading registration statement to maintain a lawsuit under Sections 11 and 12(a)(2) of the Securities Act of 1933. 

The February 10, 2025 decision in Pirani v. Slack Technologies, Inc. comes after the Ninth Circuit's previous ruling was vacated by the U.S. Supreme Court in 2023. While the Ninth Circuit had initially affirmed the district court's denial of Slack's motion to dismiss, the Supreme Court held that Section 11 requires plaintiffs to show their securities are traceable to the particular registration statement alleged to be misleading. On remand, the Ninth Circuit reversed its earlier position and instructed the district court to dismiss the complaint in full. 

Case Background 

Slack Technologies went public in June 2019 through a direct listing, a process that differs from traditional IPOs in that the company simply lists already-issued shares rather than issuing new ones. On the first day of trading, both registered shares (118 million) and unregistered shares (165 million) became available simultaneously on the New York Stock Exchange. 

When Slack Technologies' shares subsequently lost more than a third of their value following service disruptions and disappointing financial results, investor Fiyyaz Pirani filed a class action lawsuit, alleging the company's registration statement contained material misstatements and omissions. 

The Traceability Requirement 

The critical issue in the case was whether Pirani could establish that the shares he purchased were "traceable" to the registration statement containing the alleged misrepresentations. Unlike traditional IPOs where investors can typically trace purchased shares to a specific registration statement during the lock-up period, direct listings make this virtually impossible since registered and unregistered shares trade simultaneously after the direct listing becomes effective. 

Pirani had previously conceded that he could not trace his shares to the registration statement, but later attempted to establish traceability through statistical probability, arguing that given the proportion of registered shares available (approximately 42%), it was statistically likely that at least some of his 30,000 shares were registered. 

Court's Analysis 

The Ninth Circuit rejected Pirani's statistical approach, finding it both: 

1. Barred by his earlier concessions that he "did not and cannot allege that he purchased shares registered under and traceable to Slack's Registration Statement" 

2. Fundamentally flawed as a legal theory, as it conflicts with precedent requiring investors to "trace the chain of title for their shares back to the" allegedly misleading registration statement. 

The court also determined that Section 12(a)(2) of the Securities Act imposes the same traceability requirement as Section 11, citing the Supreme Court's decision in Gustafson v. Alloyd Co. (1995), which established that liability under Section 12(a)(2) applies only to securities sold in public offerings under a registration statement. 

Key Implications 

By requiring direct traceability between purchased shares and the registration statement, the ruling effectively makes it more difficult for investors to bring Section 11 and 12(a)(2) claims in the context of direct listings, where registered and unregistered shares are commingled from day one. Companies may now view direct listings as offering certain liability advantages compared to traditional IPOs, while investors will face additional hurdles in establishing standing to sue for disclosure deficiencies. 

For more information regarding Alto Litigation’s litigation practice, please contact one of Alto Litigation’s partners: Bahram Seyedin-Noor, Bryan Ketroser, or Joshua Korr.

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