Stuck With Your Co-Member? The Sharp Divide Between Delaware and California on LLC Expulsion

Delaware law casts a long shadow in California courtrooms.  So much so that California business lawyers are accustomed to the near-ubiquitous footnote observing that Delaware authority is persuasive given the close kinship between Delaware corporate statutes and their California counterparts. But that familiarity can obscure meaningful fault lines. One of the sharpest appears in the member expulsion remedies available in an LLC. 

In Delaware, expulsion is not a default remedy — it exists only if the operating agreement says it does. Freedom of contract reigns, and courts will not supply a removal mechanism the parties failed to draft. California, by contrast, fills the gaps. Under RULLCA, statutory defaults provide pathways to remove a member even when the operating agreement is silent.

For litigators and transactional lawyers alike, this divergence is not academic. It can define leverage, shape strategy, and determine whether an unwanted member can be forced out at all, because most LLC Agreement do not provide an express expulsion remedy. 

Delaware: Expulsion is Only a Remedy If Expressly Stated in the LLC Agreement

Although Delaware’s Limited Liability Company Act (Del. Code. Ann. tit. 6, § 18-101, et seq.) provides default rules for a number of governance issues, member expulsion is not among them.  The Court of Chancery has made clear that “under Delaware law … a majority of the members (or stockholders) of a business entity, unless expressly granted such power by contract, have no right to take the property [i.e., a membership interest in the LLC] of other members (or stockholders).”  Walker v. Res. Dev. Co., Ltd., L.L.C. (DE), 791 A.2d 799, 815 (Del. Ch. 2000); see also PJT Holdings, LLC v. Costanzo, 339 A.3d 1231, 1249 (Del. Ch. 2025) (“The LLC Act does not contain a default provision authorizing members to expel other members.”).  This rule reflects Delaware’s policy “to give the maximum effect to the principle of freedom of contract and to the enforceability of limited liability agreements.”  Del. Code Ann. tit. 6, § 18-1101(b).  While Delaware’s policy gives LLC members broad flexibility in crafting their operating agreements, it also constrains those members when an issue such as member expulsion is left unaddressed in the operating agreement.

When members of a Delaware LLC attempt to oust a fellow member in the absence of a rule authorizing that remedy, the result can be harsh.  In Walker, three LLC members sought to expel the fourth member when he failed to obtain financing for the business, which was the reason he was offered membership in the company.  791 A.2d at 812.  Despite this failure to perform, the Court of Chancery observed that the operating agreement did not allow members to expel another member, and Delaware law did not provide a default rule.  Id. at 813-15.  As a result, the three members were stuck with the fourth, and the quartet were left to resolve the value of the fourth member’s interest in light of capital contributions the three other members during the purported expulsion of the fourth.  Id. at 817-18.

California: Statutory Expulsion By Default

California has enacted the Revised Uniform Limited Liability Company Act (“RULLCA”). Cal. Corp. Code § 17701.01 et seq.  Unlike Delaware’s Limited Liability Company Act, the RULLCA provides default rules for LLC member removal that supplement operating agreements, or apply when the operating agreement is silent on member removal.

For example, members of an LLC may unanimously vote to oust a member under the following circumstances:

1. It is unlawful to carry on the LLC’s activities with the person as a member;

2. There has been a transfer of all of the person’s interest in the LLC, other than for security purposes or pursuant to a creditor’s charging order;

3. The person is a corporation no longer in good standing; or

4. The person is an LLC or partnership that has been dissolved and whose business is being wound up. 

Cal. Corp. Code § 17706.02(d).

In addition to members voting to oust another member, the LLC may apply for a court order to expel a member because the person has done any of the following:

1. Engaged, or is engaging, in wrongful conduct that has adversely and materially affected, or will adversely and materially affect, the limited liability company's activities.

2. Willfully or persistently committed, or is willfully and persistently committing, a material breach of the operating agreement or the person's fiduciary duties; or

3. Engaged, or is engaging, in conduct relating to the limited liability company's activities that makes it not reasonably practicable to carry on the activities with the person as a member.

Cal. Corp. Code 17706.02(e). 

Case law on judicial expulsion of LLC members is thin, but a U.S. magistrate judge in the Southern District of California applying California’s RULLCA recommended expulsion of a member who used the LLC’s marks, customers, and contacts for a competing purpose, which constituted wrongful conduct and made it not reasonably practicable for the LLC to carry out activities with the wrongdoer as a member.  Left Coast Wrestling, LLC v. Dearborn Int’l LLC, No. 3:17-CV-00466-LAB-NLS, 2018 WL 2328471 (S.D. Cal. May 23, 2018).  The district court subsequently adopted the magistrate judge’s report and recommendation.  Id., 2018 WL 3032585 (S.D. Cal. June 19, 2018). 

Conclusion

Litigators representing clients on either side of a potential LLC member expulsion must first look to the operating agreement for applicable bases and procedures for LLC member expulsion.  In the absence of rules in the operating agreement, potential outcomes will vary depending on which state’s law applies.  Although California’s RULLCA provides options for members or an LLC to remove a member even in the absence of provision in the operating agreement, no such alternatives exist under Delaware law.  These differences will have a material impact on case strategy and available remedies. 

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.

January Trade Secrets Litigation Brief: Record Filings, High-Stakes Verdicts, and Appellate Guardrails

Trade secret litigation often turns on fast-moving disputes over information, competition, and control. Each month, we highlight notable rulings, verdicts, and enforcement actions shaping trade secret risk and litigation outcomes.

Federal Trade Secret Filings Hit an All-Time High in 2025

Volume up, cases harder to resolve

A new report from Lex Machina shows that federal trade secret litigation reached a record high in 2025, underscoring the growing role of trade secret claims in competitive business disputes.

According to the 2026 Trade Secret Litigation Report, federal courts saw over 1,500 trade secret cases filed in 2025, the highest total recorded over the past decade. The Central District of California led all venues, with 100 newly filed cases, reflecting the continued concentration of trade secret disputes in technology-driven markets.

The report also highlights notable shifts in claim composition. While claims under the Defend Trade Secrets Act (DTSA) continue to appear in more than 80 percent of federal trade secret cases, the past two years have seen increased reliance on state-law-only trade secret claims filed in federal court.

Despite the surge in filings, settlement rates lag behind other categories of civil litigation. Approximately 65 percent of trade secret cases resolved through likely settlement between 2023 and 2025. Cases that reached trial during that period took a median of 1,124 days, and juries awarded more than $716 million in actual damages and $510 million in punitive damages.

What this means: Trade secret disputes are becoming more frequent, more protracted, and more expensive. Early case assessment, venue strategy, and realistic settlement expectations are increasingly critical in a landscape where cases tend to last longer and resolve less often than other civil matters.

Jury Convicts Former Google Engineer of Stealing AI Trade Secrets

Economic espionage charges sustained

A federal jury in San Francisco found former Google software engineer Linwei Ding guilty of stealing trade secrets related to Google’s artificial intelligence and supercomputing technology in a case involving alleged ties to China-based technology companies.

The jury convicted Ding on all 14 counts charged — seven counts of theft of trade secrets and seven counts of economic espionage — based on evidence that he copied and transferred 1,255 internal Google documents between May 2022 and May 2023. Prosecutors alleged that Ding acted while simultaneously working for, or founding, China-based technology companies.

Ding faces up to 10 years in prison and $250,000 in fines for each trade secret count, and up to 15 years in prison and $5 million in fines for each economic espionage count. The court ordered Ding released pending sentencing.

What to watch: The verdict highlights continued DOJ focus on trade secret theft involving sensitive technologies and national security concerns. Criminal enforcement remains a significant risk overlay in trade secret cases involving advanced technology and cross-border activity.

Delaware Court Awards Over $50 Million for Trade Secret Theft

Executives enjoined, punitive damages imposed

The Delaware Court of Chancery issued a sweeping ruling holding a former company founder and two departing executives liable for conspiring to steal trade secrets and launch a competing business.

Following a multi-day trial, the court found that the defendants copied tens of thousands of confidential files — including chemical formulas, customer data, and supplier information — and used them to establish a direct competitor. The court awarded approximately $900,000 in lost profits and $24.2 million in disgorgement, then imposed an equal amount in punitive damages, bringing the total judgment above $50 million, plus legal fees.

The court also enforced restrictive covenants, barring the founder from competing until October 2029 and restricting the other defendants from using the misappropriated information for one year.

What this means: The decision underscores the significant financial and injunctive exposure trade secret defendants face where courts find coordinated misconduct, weak exit controls, and deliberate efforts to conceal activity. Preventive controls around employee departures and data access remain critical risk-management tools.

Fifth Circuit Affirms $194 Million Trade Secret Award

Punitive damages upheld for willful misappropriation

The U.S. Court of Appeals for the Fifth Circuit affirmed a district court judgment awarding approximately $194 million to a DXC Technology subsidiary in a long-running trade secret misappropriation case against Tata Consultancy Services.

The court upheld findings that the defendant willfully and maliciously misappropriated trade secrets, including an award of more than $100 million in punitive damages. The court cited repeated misconduct, misrepresentations, and intentional disregard for the plaintiff’s rights.

What this means: Appellate courts continue to affirm substantial trade secret verdicts where trial courts make detailed findings of willful and malicious conduct. Punitive damages remain a significant driver of exposure in high-stakes trade secret litigation.

Federal Circuit Reinforces Requirement to Clearly Identify Trade Secrets

Summary judgment affirmed

The U.S. Court of Appeals for the Federal Circuit affirmed summary judgment against a trade secret plaintiff that failed to adequately identify its alleged trade secrets under both federal and state law.

The court agreed that high-level descriptions, generalized categories, and voluminous exhibits were insufficient to allow a fact-finder to determine whether the asserted information qualified as a trade secret under the Defend Trade Secrets Act or Utah law. The court emphasized that even where state law does not impose a heightened particularity requirement, plaintiffs must still clearly define the trade secret at issue.

What to watch: Courts continue to scrutinize trade secret identification, and plaintiffs that cannot precisely define the information at issue – and explain why it derives independent economic value – risk losing at summary judgment.

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.

January Securities Litigation Brief: Fewer Filings, Larger Exposure, and Early Signals for 2026

Developments in securities litigation move fast, and not all of them matter equally. Each month, Alto Litigation curates and summarizes the cases, rulings, and regulatory actions most likely to shape risk and strategy in the months ahead.

Securities Class Action Filings Hit Record Size in 2025

A new year-end report from Cornerstone Research and the Stanford Law School Securities Class Action Clearinghouse shows that while the number of securities class actions declined in 2025, the size of those cases reached historic levels.

According to the report, plaintiffs filed 207 securities class actions in federal and state courts in 2025, down from 226 in 2024 and marking the first year-over-year decline in filings in two years. That drop in volume, however, masks a sharp escalation in potential exposure.

Both Disclosure Dollar Loss (DDL) and Maximum Dollar Loss (MDL) increased dramatically. Total DDL rose from $429 billion in 2024 to $694 billion in 2025, setting an all-time record. MDL climbed to $2.86 trillion, a 75 percent increase year over year and the third-highest level on record.

So-called “mega filings” continued to dominate the landscape. Although only 36 mega cases were filed in 2025, they accounted for 89 percent of total MDL and 81 percent of total DDL, well above long-term historical averages. In other words, a relatively small number of cases drove the overwhelming majority of market risk.

The report also noted modest growth in AI-related filings, with 16 cases filed in 2025, though activity slowed significantly in the second half of the year. Former SEC Commissioner Joseph Grundfest highlighted that larger dollar losses tend to correlate with larger settlements, regardless of whether overall filing volume softens, and noted that private litigation often follows SEC enforcement activity.

What this means: Even with fewer filings overall, exposure risk remains elevated. Companies may face fewer suits, but those suits are increasingly high-dollar and high-impact, particularly where “mega” cases are involved. Settlement exposure tends to track the dollar amounts at issue more closely than filing volume.

Supreme Court to Clarify the SEC’s Disgorgement Powers

On January 9, 2026, the Supreme Court granted certiorari in Sripetch v. Securities & Exchange Commission, a case that will resolve a circuit split over whether the SEC may obtain disgorgement without showing that investors suffered pecuniary harm.

The case arises from allegations that Ongkaruck Sripetch used pump-and-dump schemes involving at least 20 public companies. After consenting to judgment, the district court ordered Sripetch to disgorge approximately $3.3 million in profits and prejudgment interest. On appeal, the Ninth Circuit held that disgorgement does not require proof of investor losses because its purpose is to deprive wrongdoers of ill-gotten gains, not to compensate victims.

That holding aligned the Ninth Circuit with the First Circuit, but conflicted with the Second Circuit’s 2023 decision in SEC v. Govil, which concluded that disgorgement is unavailable absent proof of investor pecuniary harm, relying on the Supreme Court’s decision in Liu v. SEC.

Why it matters: The Court’s decision will determine whether disgorgement remains available in enforcement matters where investor losses are difficult to trace to identifiable victims, a question that bears directly on the scope of the SEC’s remedial authority.

Supreme Court to Test the Boundaries of Jarkesy

The Court also agreed to hear FCC v. AT&T and Verizon Communications Inc. v. FCC, consolidated cases that ask whether the Seventh Amendment permits the FCC to impose monetary penalties through administrative proceedings without a jury trial.

The cases squarely present the question left open after SEC v. Jarkesy: whether a statutory scheme satisfies the jury-trial right when a regulated entity may obtain a jury trial only by refusing to comply with an agency penalty and forcing the government to bring a collection action in federal court.

The government contends that the system is constitutional because a jury trial is technically available. The carriers respond that this “choice” is a fallacy: to reach a jury, they would have to defy a final FCC order and absorb the reputational and business fallout of noncompliance,  a burden they argue the Seventh Amendment does not permit.

Why it matters: A ruling for the carriers could significantly extend Jarkesy beyond the SEC, narrowing Congress’s ability to authorize agencies to impose civil penalties through in-house proceedings.

Ninth Circuit Affirms Dismissal of XRP Securities Class Action

The Ninth Circuit this month affirmed the dismissal of a long-running putative class action alleging that Ripple Labs unlawfully sold XRP tokens as unregistered securities.

The district court had dismissed the case in June 2024, holding that the claims were time-barred under the Securities Act’s three-year statute of repose. On appeal, the Ninth Circuit agreed, rejecting arguments that Ripple’s 2017 distribution of XRP constituted a new offering that would reset the limitations period.

The decision leaves intact an early defense win and reinforces the importance of statute-of-repose defenses in digital asset litigation, particularly where token distributions occurred years before suit was filed.

What to watch: As digital asset litigation matures, courts continue to scrutinize timing defenses closely. Statute-of-repose arguments remain a potent tool, especially where plaintiffs attempt to recharacterize later distributions as new offerings.

D.C. District Court Upholds SEC’s Use of Administrative Proceedings for Industry Bars

In Sztrom v. SEC, the U.S. District Court for the District of Columbia held that Jarkesy does not prevent the SEC from seeking industry bars through administrative “follow-on” proceedings.

Distinguishing civil monetary penalties from equitable and remedial sanctions, the court concluded that longstanding precedent permits the SEC to pursue industry bars administratively following a federal-court injunction. The plaintiffs have appealed.

What this means: While Jarkesy reshaped how the SEC pursues penalties, it did not dismantle the agency’s administrative enforcement regime. The decision reflects courts’ continued distinction between punitive monetary remedies and remedial or equitable sanctions.

Northern District of California Dismisses DocuSign Securities Action With Prejudice

In Weston v. DocuSign, Inc., Judge Vince Chhabria dismissed a securities class action with prejudice, finding that the complaint’s characterization of internal company documents was “misleading and confusing” and incapable of cure.

The court emphasized that plaintiffs’ descriptions of internal materials were materially distorted, noting that the misrepresentations alone could justify dismissal without further analysis.

What this means: Courts remain willing to dismiss securities complaints with prejudice where plaintiffs mischaracterize internal documents or rely on selective, misleading narratives — reinforcing the importance of early, document-driven defense strategies.

Delaware Supreme Court Reverses Chancery Decision in Moelis & Co.

On January 20, 2026, the Delaware Supreme Court reversed the Court of Chancery’s decision in West Palm Beach Firefighters’ Pension Fund v. Moelis & Co., holding that a challenge to provisions of a stockholder agreement granting CEO Ken Moelis extensive approval rights was time-barred.

The Court held that the challenged provisions were at most voidable – not void – because the company could have lawfully implemented similar governance arrangements through its certificate of incorporation. As a result, the claims were subject to equitable defenses, including laches. Because the stockholder agreement was executed in 2014 and the plaintiff waited nearly nine years to sue, the Court concluded that the challenge exceeded the analogous three-year statute of limitations and was barred.

The decision comes against the backdrop of recent amendments to the Delaware General Corporation Law that expressly authorize certain stockholder governance agreements by contract. Although those amendments did not apply retroactively to the Moelis dispute, the Supreme Court’s ruling underscores the importance of timeliness in challenges to long-standing corporate governance arrangements and confirms that not every statutory defect renders an agreement void from inception.

What this means: The decision underscores the importance of statute-of-limitations and laches defenses in stockholder litigation, particularly where plaintiffs seek to invalidate long-standing contractual arrangements.

SEC Charges ADM and Former Executives Over Accounting Adjustments

Cooperation credited in $40 million settlement

The U.S. Securities and Exchange Commission announced settled charges against Archer-Daniels-Midland Company and two former executives, along with a litigated action against a third former executive, arising from alleged accounting and disclosure misconduct.

According to the SEC, the company’s Nutrition segment used targeted intersegment adjustments, including retroactive rebates and price changes, to meet publicly disclosed profit targets. The SEC alleged that these practices rendered certain public filings materially misleading.

ADM agreed to pay a $40 million civil penalty, while two former executives paid disgorgement and penalties and consented to cease-and-desist orders. One executive also agreed to a three-year officer-and-director bar. The SEC credited ADM’s cooperation and remediation efforts, including an internal investigation and enhanced accounting controls.

What this means: The resolution underscores the SEC’s focus on accounting practices and disclosures around intersegment transactions and segment performance reporting. It also reinforces the tangible benefits the Commission may credit for early cooperation, remediation, and efforts to boost internal controls.

Looking Ahead: Themes for 2026

A year-end analysis by Alyssa Aquino of the New York Law Journal highlighted several issues likely to shape securities litigation in 2026, including:

●      Increased attention to mandatory arbitration provisions following the SEC’s September policy shift

●      The potential for private actions to fill perceived gaps amid reduced SEC enforcement

●      Continued scrutiny of AI-related disclosures

●      Ongoing development of scheme liability theories under Rule 10b-5(a) and (c)

●      Expanded use of price-impact defenses at the class certification stage

What’s next:
Early rulings on arbitration provisions, AI disclosures, and class certification defenses may set the tone for securities litigation strategy in 2026 and beyond, particularly in cases involving emerging technologies or novel pleading theories.

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.

Not Yours for the Taking: Settlement and Unreachable Assets

Smart plaintiffs’ attorneys know to look into a defendants’ assets before pursuing claims for damages.  Wise attorneys know to check how those assets are structured, titled and domiciled, lest they prove unreachable even if the plaintiff prevails on liability.

Consider this common scenario.  You represent a plaintiff in litigation against a defendant who is—at least on paper—wealthy.  Settlement negotiations commence, and you begin preparing a settlement demand.  Knowing what they do (or think they do) about their adversary, your client expects a substantial recovery.  But an important issue arises: how much of the defendant’s assets are really reachable if the case goes the distance?  Are there statutory and/or judicial hurdles to collection?  Other impediments to recovery?  

Nobody wants to bring their client a Pyrrhic victory.  Understanding which of a defendant’s assets are not collectible (or might be collectible only with substantial effort, expense and time) helps counsel assess, inter alia:  (a) whether the defendant meaningfully can pay a lump-sum settlement; (b) whether a payment plan or other structured settlement might be appropriate; and (c) whether non-monetary terms such as injunctions, cooperation, or compliance commitments should play a larger role in resolution.

Below are some common types of protected assets that practitioners may run into:

1.        Retirement and Other Benefits

California law provides statutory protection for retirement accounts.  Public retirement accounts are fully protected. California Code of Civil Procedure (CCP) § 704.110 provides protection for all amounts held, controlled or in the process of a distribution by a public entity or by an officer or employee of the entity for public retirement benefit purposes, and all rights and benefits accrued or accruing to any person under a public retirement system are exempt (except for judgments in favor of a child, family or spousal support).  Private retirement plans and amounts held in accounts qualified under certain IRS provisions are protected under CCP § 704.115, except that certain retirement plans, annuities and retirement funds are exempt only to the extent necessary to provide for the support of the judgment debtor when the judgment debtor retires, and for the support of the spouse and dependents of the judgment debtor, taking into account all resources that are likely to be available for the support of the judgment debtor when the judgment debtor retires.  California also permits a full statutory exemption for funds held in private retirement accounts applied to assets that were rolled over into an IRA that otherwise would have had only a limited exemption.  McMullen v. Haycock, 147 Cal. App. 4th 753 (2007).

2.        Trusts

Assets in a revocable living trust of a deceased settlor are subject to claims of creditors to a probate estate to the extent the estate is inadequate to satisfy these claims. A trustee’s only duty to such creditors is to refrain from affirmative misconduct that defeats creditors’ reasonable expectation for a recovery from trust assets, and there is no obligation to preserve trust assets for the benefit of claims.  Arluk Med. Ctr. Indus. Grp., Inc. v. Dobler, 116 Cal. App. 4th 1324 (2004). However, creditors cannot reach the assets of an irrevocable trust.  Laycock v. Hammer, 141 Cal. App. 4th 25 (2006).

3.        Homestead Exemptions

A homestead exemption is intended to prevent the forced sale of a primary residence to satisfy the demands of creditors, except for mechanic’s liens, mortgages or sales to pay property taxes. Homestead exemptions vary from state to state and are found in state constitutions and statutes. These exemptions are extremely important for defendants seeking to protect assets from judgment creditors in litigation and therefore loom large in negotiating settlements.  They also can differ from state to state.  In California, there is a statutory homestead exemption that is the greater of $300,000 or the countywide median sale price for a single-family home in the prior calendar year up to $600,000.  These amounts are adjusted annually for inflation. CCP § 704.730.

4.        Offshore Assets

An obvious means of hiding assets from creditors is by depositing funds in offshore bank accounts.  This presents creditors with at least two challenges:  finding the offshare assets and collecting them.  Regarding the first challenge, at least, savvy litigants may have some tools available; courts have held that requiring persons using offshore accounts to keep banking records for government inspection did not violate the Fifth Amendment’s right against self-incrimination because having a foreign bank account is not inherently illegal and the required information was not inherently criminal.  In re M.H., 648 F.3d 1067 (9th Cir. 2011); In re Grand Jury Subpoena, 696 F.3d 428 (5th Cir. 2012) (same).  Retaining a private investigator or forensic accountant; using investigative data software; and searching for unusual or fraudulent transfers may help track down the location of offshore assets.  Actual collection, of course, may present its own array of difficulties, depending in part on where the assets are housed.

Not All that Glitters Is Gold

                  A defendant’s lifestyle and balance sheet may both reflect substantial wealth, but that may be cold comfort to a plaintiff if those assets are not reachable.  Where collectability is an issue, counsel may wish to pursue alternatives forms of relief, such as cooperation, compliance commitments, injunctive relief, and regulatory pressure.  And of course, experienced attorneys understand the importance of tamping down a client’s unrealistic expectations of financial recovery against a party whose assets are partially or entirely shielded.

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.

Representation at First Sight? When (and Why) Courts Sometimes Find an Attorney-Client Relationship Before (or Without) an Engagement Letter, and Why It Matters

Most attorneys, in most cases, are entering into written engagement letters with their clients if and when they intend to initiate representation.  Indeed, California Business and Professions Code Section 6147 requires attorneys to have a written agreement in contingency cases, while Section 6148 requires a written agreement in non-contingency cases where it is “reasonably foreseeable” that fees and costs will exceed $1,000.  But what many attorneys may not realize is that, at least for certain purposes, California courts will find the existence of an attorney-client relationship before a written agreement is executed—and even sometimes when the parties walk away after an initial conversation without any intention of ever signing an agreement.  This is in large part because even initial discussions between an attorney and a prospective client typically involve an expectation of confidentiality and the transmission of information based on that expectation. 

Confidentiality Obligations Routinely Predate Written Engagement Letters

Wise attorneys typically have one, if not several, discussions with prospective clients before formally entering into an engagement—a practice equally wise for the prospective clients themselves.  And because both parties to such discussions are trying to determine whether an engagement makes sense, the discussions frequently involve discussion of confidential information, including everything from material facts not yet disclosed to the other side, to settlement expectations, to legal strategy. 

As such:  “[A] formal retainer agreement is not required before attorneys acquire fiduciary obligations of loyalty and confidentiality, which begin when attorney-client discussions proceed beyond initial or peripheral contacts.”  People ex rel. Dep't of Corps. v. SpeeDee Oil Change Systems, Inc., 20 Cal.4th 1135, 1148 (1999).  Instead, such obligations arise “when attorney-client discussions proceed beyond initial or peripheral contacts.”  Id.  And don’t be fooled by the term “beyond initial”; in SpeeDee Oil Change itself, the California Supreme Court held that that point had arisen despite the fact that the party and attorney had had only preliminary meetings, at the conclusion of which the parties agreed to “prepare a document formally retaining” the attorney—something that never actually happened.  Id. at 1141.

Receipt of Confidential Information, Even Absent Engagement Letter, Can Lead to Disqualification in Subsequent Litigation

Most attorneys presumably understand their obligation to keep confidential those discussions that they had with prospective clients, even if those discussions did not turn into paid engagements.  In fact, if an attorney later takes on a representation adverse to a prospective client who previously approached them (but did not ultimately sign an engagement letter), then that lawyer potential faces disqualification for the prior “representation.”  This was the case in SpeeDee Oil Change, where the California Supreme Court held that the aforementioned preliminary meetings constituted establishment of an attorney-client relationship, at least for purposes of the disqualification analysis.

Disqualification in Subsequent Dispute Involving Prior Client Even Where Confidential Information Is Not an Issue?

Thus far, the reader may be thinking:  Of course an attorney cannot represent a party against someone the attorney previously received confidential information from; whether or not they signed a formal engagement letter, it would be unfair to let the attorney use a party’s confidential information against them!  True enough.  But as it turns out, courts are sometimes willing to disqualify attorneys upon a showing that they previously represented a party, even where there is no danger that the party’s confidential information will be misused.  This situation can arise where an attorney jointly represents two parties, and the parties’ relationship later turns sour. 

Take, for example, Fiduciary Trust Int’l of Cal. v. Superior Court.  In that case, an attorney (Sandler) drafted wills for a married couple (Husband and Wife).  After Husband died, Wife revoked her will and drafted a new one that transferred most of her assets to a new trust, to benefit her daughter.  Wife then died, and a dispute arose between Wife’s representative and the marital trust trustees.  Wife’s representative filed a motion to disqualify Sandler’s law firm, given his prior representation of the couple.  The trial court denied the motion, but the Court of Appeal vacated and instructed the trial court to enter a new order granting the motion to disqualify.  218 Cal.App.4th 465, 470-77 (2013).

The Fiduciary Trust Int’l court acknowledged that under Evidence Code section 962, attorney-client communications made during the course of the joint representation, while privileged as to the outside world, were not privileged as between Husband and Wife.  And yet, disqualification was required to maintain people’s confidence in their attorneys in general:

We are not concerned in this case with discovery of allegedly privileged communications.  Instead, the pertinent issue is the propriety of an attorney’s representation adverse to a former client . . . Not only do clients at times disclose confidential information to their attorneys; they also repose confidence in them.  The privilege is bottomed only on the first of these attributes, the conflicting-interests rule, on both.

Id. at 484-85; see also Western Continental Operating Co. v. Natural Gas Corp., 212 Cal.App.3d 752, 761 (1989) (“We are unpersuaded under the circumstances of this case that there is a joint client exception to the prohibition against representation adverse to a former client.”).

Tread Carefully from the First Step

While “pre-engagement” discussions are important to attorneys and prospective clients alike, both sides should be aware of the potential consequences of such discussions, regardless of they choose to move forward with a more formal engagement.  Because where there is exchange of confidential information, there may be an engagement, and where there is an engagement, there is a risk of future disqualification of the attorney in any action adverse to the would-be client—even if that action itself does not threaten misuse of the previously-obtained information.

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 Rated in Band 1 for Commercial Disputes in Legal 500 City Elite Guide for San Francisco & Silicon Valley

Alto Litigation Founder and CEO Bahram Seyedin-Noor has been recognized in Band 1 for commercial disputes in the 2026 Legal 500 US City Elite Guide: San Francisco & Silicon Valley. According to Legal 500, the US City Elite rankings emphasize lawyers who are handling work at the top of the legal market in their respective cities. A Band 1 ranking signifies that Bahram is among the highest rated commercial disputes lawyers in the guide.

The Legal 500 is a leading global research and data platform that benchmarks attorneys and law firms worldwide. The Legal 500 US City Elite rankings are based on interviews with top practitioners, references, and peer feedback, and evidence of key matters worked on by the ranked attorneys during the past year. The selection process begins with Legal 500’s researchers creating a list of prospective candidates that is extensively reviewed by an editorial team.

Bahram, a graduate of Harvard Law School, has tried cases before judges and juries in California and Delaware, and was a law clerk to Judge James Ware in the U.S. District Court for the Northern District of California. Over the last twenty-five years, Bahram has achieved dozens of victories in securities class actions, derivative lawsuits, arbitrations, trade secrets, and fiduciary duty disputes. He is ranked among California’s leading securities litigators by Chambers & Partners and was twice named San Francisco Litigator of the Year by Benchmark Litigation. Legal 500’s analysis calls Bahram “a key choice for those engaged in matters involving trade secrets, securities or boardroom clashes, owing to his skill in applying IP principles to securities frameworks.”

In addition to Bahram’s Band 1 honor, Alto was listed among the top commercial disputes law firms in the City Elite guide. Legal 500’s full analysis of Alto Litigation can be found here.

Legal 500 City Elite Guide Recognizes Alto Litigation and Four of its Attorneys Among the Top in San Francisco & Silicon Valley

The Legal 500, a leading global research and data platform that benchmarks attorneys and law firms worldwide, included Alto Litigation and four of its attorneys in the 2026 US City Elite Guide: San Francisco & Silicon Valley. Alto was listed among the top law firms for commercial disputes in the guide. CEO and founder Bahram Seyedin-Noor and partners Bryan Ketroser, Joshua Korr, and Kevin J. O'Brien were selected among the top attorneys for commercial disputes.

The Legal 500 US City Elite rankings are based on interviews with top practitioners, references, and peer feedback, and evidence of key matters worked on by the ranked attorneys during the past year. The selection process begins with Legal 500’s researchers creating a list of prospective candidates that is extensively reviewed by an editorial team. According to Legal 500, the US City Elite rankings emphasize lawyers who are handling work at the top of the legal market in their respective cities.

Bahram, a graduate of Harvard Law School, has tried cases before judges and juries in California and Delaware, and was a law clerk to Judge James Ware in the U.S. District Court for the Northern District of California. Over the last twenty-five years, Bahram has achieved dozens of victories in securities class actions, derivative lawsuits, arbitrations, trade secrets, and fiduciary duty disputes. He is ranked among California’s leading securities litigators by Chambers & Partners and was twice named San Francisco Litigator of the Year by Benchmark Litigation. Legal 500’s analysis calls Bahram “a key choice for those engaged in matters involving trade secrets, securities or boardroom clashes, owing to his skill in applying IP principles to securities frameworks.”

Bryan, a graduate of Yale Law School, concentrates his practice on securities litigation, complex commercial litigation, and SEC investigations. He represents technology companies, entrepreneurs, officers, directors, employees and shareholders in high-stakes matters in California, Delaware, and other courts throughout the United States. Benchmark Litigation has recognized Bryan as a Litigation Star since 2021 and, before that, repeatedly included him in its “40 & Under Hot List.” Legal 500 notes Bryan has “notable experience in emerging industries such as fintech, biotech, and AI.”

Josh is an experienced attorney, well-practiced in litigating a broad range of business disputes in California state and federal courts, and in arbitrations with JAMS and AAA. His areas of expertise include securities litigation, general business disputes, internal and government investigations, trade secrets, high-net-worth family law and Marvin actions, and appellate litigation. He has been named a “Future Star” and top “40 & Under Litigator” by Benchmark Litigation. Josh graduated in the top of his class at the University of California, Hastings College of the Law. In its analysis, Legal 500 says Josh is “particularly proficient in securities, corporate governance, trade secrets misappropriation, fraud and breach of contract claims.”

Kevin has successfully represented clients in a wide range of complex commercial matters, including intellectual property litigation, antitrust, unfair competition, and complex commercial disputes. Litigating cases from inception through trial, Kevin has represented clients across an array of industries and technical fields. Many of these disputes were valued from hundreds of millions to billions of dollars. He graduated in the top of his class at the University of California, Hastings College of the Law. Legal 500 writes Kevin has “significant experience in the sectors of biotech, clean energy, and fintech.”

Legal 500’s full analysis of Alto Litigation can be found here.

Direct v. Derivative Lawsuits – The Distinction, and Why It Makes a Difference

The Scenario

A stockholder believes that the company’s officers or directors have engaged in conduct that breached their fiduciary duties and damaged the company, thus reducing the value of her stock.  She tells an attorney that she wants to file a lawsuit. One of the first questions that the attorney must ponder is whether the potential claim constitutes a direct or derivative action.  The distinction is often outcome-determinative, and yet, as one commentator put it, it is also “subjective, opaque and muddled.”  See “The Distinction Between Directive and Derivative Claims,”  Harvard Law School Forum on Corporate Governance (May 14, 2024).

The Difference

Stockholders who assert derivative claims face many hurdles.  First, the plaintiff must have “contemporaneously” been a shareholder when the allegedly-wrongful transaction occurred.  See 8 Del. C. § 327 (Delaware); Cal. Corp. Code § 800(b)(1) (California).  There is a narrow exception to the contemporaneous ownership rule: the so-called “double derivative action,” in which a plaintiff brings an action against a parent corporation in order to enforce a claim allegedly held by a subsidiary. See Lambrecht v. O’Neal, 3 A.3d 277 (Del. 2010).)

Second, the courts in Delaware and California (and other states) require that the plaintiff continuously own the stock when the suit is filed through its resolution.  See Lewis v. Anderson, 477 A.2d 1040 (Del. 1984); Grosset v. Wenaas, 42 Cal. 4th 1100 (2008). Thus, if the company is subject to an acquisition or merger, or dissolved, and the plaintiff is no longer a stockholder, then the derivative action would be dismissed.  Again, Delaware makes a narrow exception: where the merger itself is the subject of fraud claims or is a sham intended to defeat the derivative action. 

Plaintiffs in derivative actions must also plead either demand futility or wrongful refusal.  Pleading demand futility generally requires pleading particularized facts showing that there is not a disinterested and independent board majority capable of objectively considering a demand on the board to file a lawsuit. Pleading wrongful refusal generally concedes that there was a disinterested and independent board majority, and requires a showing that such a litigation demand was in fact made, but that it was wrongfully refused.

These requirements may strangle a derivative action at the pleading stage.  However, these conditions do not apply to a direct lawsuit.

Another difference between derivative and direct actions is that the former requires judicial approval for any settlement.  That mandate became an issue in Norman v. Strateman, 112 Cal. App. 5th 92 (2025). In that matter, the Chief Executive Officer of a crypto company filed a derivative action against other founders for breach of fiduciary duty and other claims. One of the defendants filed a cross-complaint.  The trial judge referred the matter to a settlement judge and the parties reached a binding settlement agreement. The plaintiff subsequently objected to the settlement because the trial judge did not approve it (apparently because the parties and trial judge forgot the need). The trial granted a motion to enforce the settlement, noting that derivative actions were designed to protect shareholders, and all three shareholders were covered by the settlement. On appeal, the defendants argued that judicial approval was not required because the lawsuit substantively proceeded as a direct action.

The Court of Appeal, however, held that the complaint’s allegations of self-dealing and misuse of assets were derivative and that a shareholder plaintiff must obtain court approval before settling and dismissing an action in order to ensure that the settlement is fair and reasonable to the corporation and shareholders.  Because the trial court did not review and approve the settlement, the trial court’s order enforcing the settlement was vacated and the matter remanded.

The Distinction

In the simplest terms, a derivative lawsuit is brought on behalf of the corporation while a direct action is brought on the allegedly-injured stockholder’s own behalf.  But this distinction is often more difficult to determine in reality than would appear in the abstract.

In the landmark decision in Tooley v. Donaldson, Lufkin, & Jenrette, Inc., 845 A.2d 1031 (Del. 2004), the Delaware Supreme Court sought to simplify the analytical distinction between direct and derivative actions.  Under Tooley, courts must make a two-fold inquiry: who suffered the alleged harm, and who would receive the benefit of any recovery or other remedy?  If the answer is that the corporation principally suffered the harm (and that shareholders were only indirectly injured as a result of being shareholders), and any recovery would go to the corporation, then the claim is derivative.  If the stockholders were directly harmed and would receive the benefit of any recovery, then the claim is direct.

What about a claim that a controlling stockholder diluted the value of the minority shareholders? In Brookfield Asset Mgt., Inc. v. Rosson, 261 A.3d 1251 (Del. 2021), the Delaware Supreme Court overruled Gentile v. Rossette, 906 A.2d 91 (Del. 2006), which earlier case had held that such claims were permitted as direct actions.  Brookfield held that Gentile created an unnecessary exception to Tooley.  In Brookfield, plaintiffs alleged that a controlling stockholder had compelled the company to pursue a private placement of shares for inadequate value, which diluted the value of shares held by minority stockholders and their voting interest. But the court held that the company was principally injured by issuing shares at an unfairly low price and the injury to the stockholders flowed only indirectly to them in proportion to their holdings. 

In California, however, courts still recognize the possibility that a shareholder claim against a majority or controlling stockholder, in which the latter allegedly took corporate value at the expense of the former—constitutes a valid direct claim.  See, e.g., Jara v. Suprema Meats, Inc., 121 Cal. App. 4th 1238 (2004).

The Upshot

The direct-derivative distinction often drives the outcome of a given case.  As a result, parties regularly engage in hard-fought pleading challenges over how the court should classify a given breach of fiduciary duty claim.  The arguments generally are highly-technical legally, while also being driven largely by the particular facts of the case.  When such issues are in play, it is wise to retain counsel with experience litigating such disputes.

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.

The Single-Enterprise Rule: Alter Ego Liability Against Sister Companies

It is commonplace to see a company’s wholly-owned subsidiary or sole shareholder sued under an alter ego theory to recover for the alleged wrongdoing of the company, particularly when the company itself lacks sufficient funds to satisfy a judgment.  But plaintiffs are increasingly using a variation of the alter ego doctrine known as the “single-enterprise rule” to pursue claims against companies that are related to the main target through interlocking boards, shared ownership, or affiliate relationships.  This post examines the genesis of the single-enterprise rule and the types of cases where it has been applied.

The Las Palmas Decision and Birth of the Single-Enterprise Rule

Las Palmas Associates v. Las Palmas Center Associates, 235 Cal. App. 3d 1220 (1991) is often cited as the first instance in which the alter ego doctrine was extended to a sister corporation.  The cross-complainants in Las Palmas were three buyers (“Buyers”) who had sued three sellers (“Sellers”) for breaches of lease guaranties and fraud.  Id. at 1234.  Buyers planned to purchase a shopping center being developed by one of the Sellers, Hahn Devcorp but wanted to exclude from the purchase two “problem tenants” who had stopped making payments on their multi-year leases.  Id. at 1231.  To address Buyers’ concern, Sellers had Hahn Devcorp guarantee the stores’ two leases.  Id. at 1231-32.

When Hahn Devcorp failed to honor its lease guarantee, Buyers sued Sellers for fraud, alleging that Sellers had misrepresented their intent to honor the guaranties in order to induce the Buyers into consummating the sale.  Id. at 1234.  At trial, Buyers argued (and the jury found) that Hahn Devcorp was the alter ego of another entity called Ernest Hahn, Inc.  Id. at 1237.  On appeal, Ernest Hahn, Inc. argued that the record did not support a finding that Hahn Devcorp was its alter ego, because Ernest Hahn, Inc. had no ownership interest in Hahn Devcorp at the time the lease guarantees were created, having transferred all of its shares of Hahn Devcorp to another entity (“Trizec”) the year before.  Id. at 1248.

The Las Palmas court disagreed, finding instead that because the alter ego doctrine is an equitable one, “the conditions under which a corporate entity may be disregarded vary according to the circumstances of each case.”  Id.  Although alter ego liability is generally reserved for the parent-subsidiary relationship, “under the single-enterprise rule, liability can be found between sister companies.”  Id. at 1249.  The court described the rule as follows:

though there are two or more personalities, there is but one enterprise:  and … this enterprise has been so handled that it should respond, as a whole, for the debts of certain component elements of it.

Id. at 1249-51.  At trial, Buyers argued – and the appellate court agreed – that a single-enterprise existed with Trizec at the top, Ernest Hahn, Inc. in the middle, and Hahn Devcorp at the bottom.  Id. at 1249.  This finding was supported by evidence that Ernest Hahn, Inc. had guaranteed $43.2 million in loans and loan commitments to Hahn Devcorp, in addition to guaranteeing the lease payments for one of the problem tenants after Ernest Hahn, Inc. had divested its ownership interest in Hahn Devcorp.  Id. at 1250.  These guaranties demonstrated that Hahn Devcorp’s survivability as a developer was intertwined with its dependence on Ernest Hahn, Inc.  Id. at 1250-51. In addition, two individuals sat on the boards of both entities.  And when Hahn Devcorp’s board fired the corporation’s executives and staff, Ernest Hahn, Inc. used its employees to continue to manage the business.  Id. at 1251.   

Cases Post-Las Palmas Applying Single-Enterprise Rule

Since its inception, the single-enterprise rule has been applied by numerous California state and federal courts.  As a practical matter, the single-enterprise rule differs in name only from the alter ego doctrine.  Courts addressing applicability of the single-enterprise rule consider the same factors evaluated for a traditional alter ego analysis, including:  inadequate capitalization; disregard of corporate formalities (such as stock issuance, keeping of minutes, election of officers and directors, segregation of corporate records); identical directors and officers; commingling of funds and other assets; identical equitable ownership in the two entities; the holding out by one entity that it is liable for the debts of the other; use of the same offices and employees; and use of one as a mere shell or conduit for the affairs of the other.  Willig v. Exiqon, Inc., No. SA CV 11-399 DOC RNB, 2012 WL 10375, at *9 (C.D. Cal. Jan. 3, 2012).  See also Oakley, Inc. v. Trimera Mil. Tech., Inc., No. SACV141649DOCDFMX, 2016 WL 8794459, at *10 (C.D. Cal. Jan. 22, 2016); Cal-Star Prod., Inc v. Fencepost Prods., Inc., No. LACV1804490JAKEX, 2019 WL 13038581, at *2–3 (C.D. Cal. Apr. 18, 2019) (same).

In applying the single-enterprise rule, courts tend to place particular importance on evidence of “such domination of finances, policies and practices that the controlled corporation has, so to speak, no separate mind, will or existence of its own and is but a business conduit for its principal.”  Toho-Towa Co., LTD. v. Morgan Creek Prods., Inc., 217 Cal. App. 4th 1096, 1107 (2013).  Here are just a few examples of instances in which the single-enterprise rule has been successfully applied.

In Toho-Towa, the appellate court ruled that substantial evidence existed for the trial court’s finding that plaintiff could enforce a $5.7 million judgment against Morgan Creek Productions (“MCP”) that had been awarded against two MCP-affiliated companies:  Morgan Creek International B.V. (“B.V.”) and Morgan Creek International Ltd. (“Ltd.”) based on the single-enterprise rule where:

• The three entities were all owned by the same person, who was the sole decision-maker for all of the Morgan Creek entities;

• The three entities exploited the same assets;

• The “work” of B.V. and Ltd. was performed by the employees of MCP; and

• Although B.V. entered into contracts which required that monetary payments be made to them, no money was remitted, but rather was transferred directly to Ltd.’s lender.

217 Cal. App. 4th at 1100, 1109 (2013).

In Conde v. Sensa, the Court found the plaintiff had adequately alleged grounds for treating defendants IBH and JustFab as part of a “single enterprise” run by other Sensa Entities where:

• All three were headquartered in the same building, and made intercompany loans that generally had no formal agreements, bargained for consideration, or loan payment schedule;

• IBI released JustFab of nearly $20 million in debt for no consideration;

• IBI provided $10 million to IB Holding to purchase JustFab shares;

• JustFab and IB Holding prepared consolidated financials and filed a unitary tax return with IBI in 2012; and

• Ownership was largely (but not fully) consolidated between all of the entities: IBI owned 90% of Sensa Products, and IB Holding partially owned IBI and JustFab.

259 F. Supp. 3d 1064, 1072 (S.D. Cal. 2017).

In Troyk v. Farmers Grp., Inc., the appellate court found there was substantial evidence to support the trial court’s finding that defendants FGI, FIE, and Prematic acted as a single enterprise and therefore, FGI and FIE could be liable for restitution of Prematic’s violation of California’s unfair competition law where:

• Prematic was a wholly owned subsidiary of FGI, and all of its directors are officers or employees of FGI;

• Prematic performed most of its billing and forwarding activities by using FGI's equipment and personnel and paid FGI for such use; and

• FGI, as FIE’s managerial agent and attorney-in-fact, designed and effected a scheme whereby any FIE insured who elected a one-month term policy would be required by FIE to execute an agreement with Prematic, requiring the insured to pay to Prematic not only the stated premium but also a service charge for paying in full that stated premium.

171 Cal. App. 4th 1305, 1342 (2009).  The holding in Troyk is somewhat unique in that FIE did not control or own any shares of stock of Prematic.  Id. at 1342.  Nonetheless, the court of appeal held that the trial court could reasonably infer that FGI’s managerial and administrative control over FIE’s activities as FIE’s attorney-in-fact allowed FGI to control the activities of both FIE and Prematic, effectively making FIE and Prematic sister—or at least affiliated—entities for the purpose of applying the single enterprise doctrine to FGI’s scheme to require the class members to pay service charges that were not disclosed in their policies.  Id.

Conclusion

Plaintiffs who seek to recover from a party that was part of a multi-party effort to commit wrongdoing should consider whether the evidence supports the existence of a single-enterprise.  Did the entity assuming financial responsibility within the enterprise ever have enough capital to operate their business?  Have adequate records of loans and other business transactions between the entities been kept and adequate procedures observed?  If these conditions are not met, the plaintiff may have a path to recover from another party within the enterprise.

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.

Directors’ Ability to Disclose Information to Nominating Stockholders

Delaware law provides that corporate directors have virtually unlimited access to corporate information, including information protected by the attorney-client privilege.  In re Aerojet Rocketdyne Holdings, Inc., No. CV 2022-0127-LWW, 2022 WL 1446782 (Del. Ch. May 5, 2022); Kalisman v. Friedman, No. CIV.A. 8447-VCL, 2013 WL 1668205 (Del. Ch. Apr. 17, 2013).  Of course, directors’ fiduciary duties limit what they may do with that information; just because directors themselves may receive and use corporate information to benefit the corporation, does not mean they have unfettered rights to disclose that information to others.  The question often arises:  May a director disclose confidential corporation information to the stockholder or class of stockholders who appointed him or her to the board?  Generally, such disclosure is prohibited under Delaware law.  But the Delaware courts have carved out important exceptions.

No Special Duty to the Stockholders Who Voted for You . . .

As a threshold matter, Delaware law does not recognize a special duty on the part of directors to the class of stockholders who elected them, at least not by virtue of said election. Phillips v. Insituform of N. Am., Inc., No. CIV.A. 9173, 1987 WL 16285 (Del. Ch. Aug. 27, 1987) (“law does not recognize special duty by directors to class of stockholders who elected them”);  Holdgreiwe v. Nostalgia Network, Inc., No. CIV. A. 12914, 1993 WL 144604 (Del. Ch. Apr. 29, 1993) (designated director’s disclosure of confidential corporate information to affiliate of designating stockholder violated director’s fiduciary duties). Indeed, in Schoon v. Troy Corp., No. CIV.A. 1677-N, 2006 WL 1851481 (Del. Ch. June 27, 2006), the Chancery Court took the unusual step of denying a director’s request to inspect the books and records of a corporation on the ground that the request was made at the behest of a designating stockholder in order to assist the attempted sale of the corporation’s stock.

. . . Unless You Have a Special Duty to the Stockholder Who Voted for You

But what if the director has a pre-existing fiduciary duty to the stockholder that elected them?  In Kortum v. Webasto Sunroofs Inc., 769 A.2d 113 (Del. Ch. 2000), a director designated by one 50% owner of a corporation filed an action pursuant to Section 220 of the Delaware General Corporation Law seeking to inspect the company’s books and records. The other 50% owner sought to condition the inspection on the director’s agreement not to disclose confidential information to the designating stockholder, which was viewed as a potential competitor.  The Chancery Court held that such a condition was unreasonable, presumably because the director owed fiduciary duties to both the joint venture corporation and the designating stockholder.

These issues were explored in greater detail in Icahn Partners L.P. v. DeSouza, No. 2023-1045-PAF, 2024 WL 180952 (Del. Ch. Jan. 16, 2024).  In that case, Plaintiffs Icahn Partners L.P. and other entities, all controlled by Carl Icahn, held approximately 1.4% of the stock of Illumina, Inc.  Plaintiffs proposed a three-candidate slate to challenge the company’s nominees at a stockholder meeting.  The stockholders chose one of the candidates -- an employee of another Icahn-controlled entity --  to the board.  Plaintiffs subsequently filed a complaint alleging direct and derivative claims against Illumina’s officers and directors, and it was undisputed that the complaint contained attorney-client privileged information from Illumina provided by the designated director. The company and the defendants moved to strike the privileged information from the complaint.

Plaintiffs argued that their nomination of a director and public disclosure of his employment rendered unreasonable any expectation that he would not share with Plaintiffs the privileged information that he acquired as a director. Plaintiffs cited cases holding that a director who has been designated as a director may share corporate information with the designating stockholder. But as the court pointed out, these cases held that a director may provide confidential information to a stockholder in only limited circumstances: 1) where the stockholder had a right to designate a director, either by contract or voting power; or 2) the director serves as a controller or fiduciary of the stockholder (such as in Kortum).

The Contractual Right to Designate a Director Generally Encompass the Right to Receive the Same Information as the Director

In Kalisman, a director was the co-founder of a major stockholder that brought an action challenging a recapitalization. The Chancery Court held the director was entitled to corporate documents that predated the formation of a special committee that excluded the director.  When the company objected that the director would share the information with the investor that designated him, the court explained: “When a director serves as the designee of a stockholder on the board, and when it is understood that the director acts as the stockholder's representative, then the stockholder is generally entitled to the same information as the director.”  

Other cases have held similarly.  For instance, in In re CBS Corp. Litig., No. CV 2018-0342-AGB, 2018 WL 3414163 (Del. Ch. July 13, 2018), the court held that directors affiliated with a controlling stockholder and the controller itself were entitled to privileged communications other than those provided exclusively to a special committee.  In Hyde Park Venture Partners Fund III, L.P. v. FairXchange, LLC, 292 A.3d 178 (Del. Ch. 2023), two funds with a contractual right to designate a director had the right to obtain confidential information provided to the director. 

By contrast, in Icahn Partners, the Plaintiffs did not have a contractual right or the voting power to designate a director and the director was not a controller or fiduciary of the stockholders.  Thus, the court held that Plaintiffs did not have the right to access privileged information provided to the designated director -- a decision that was affirmed by the Delaware Supreme Court.

Conclusion

An entity considering investing in a Delaware corporation where it will designate a director should analyze whether the facts support allowing the director to provide confidential and privileged corporate information to the entity.  Does the entity have a contractual right to designate a director or sufficient voting power?  Is the director a controller or a fiduciary of the stockholder?  If these conditions are not satisfied, the director may be prohibited from providing confidential information to the investor.

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.

Benchmark Litigation 2026 Rankings Recognize Alto Litigation and Three of its Attorneys Among the Top in California and Nationwide

Benchmark Litigation, described as “the definitive guide to the market’s leading firms and lawyers,” recently released its 2026 rankings, and Alto Litigation and its attorneys received several prestigious honors, including Bahram Seyedin-Noor being recognized as a “National Practice Area Star” in securities and commercial litigation.

Alto Litigation was ranked a Recommended Firm in California. In addition to receiving National Practice Area Star recognition, Bahram, as well as Bryan Ketroser, were designated as a “Litigation Star,” and partner Joshua Korr as a “Future Star.” 

Rankings are based on extensive interviews with clients and peers. Benchmark’s 2026 analysis noted that Alto Litigation “is known for its trial-tested ability to dynamically punch well above its weight class against the nation’s largest top firms in several litigation niches, representing prominent companies and entrepreneurs, as well as other individual clients, in both defense and plaintiff roles” 

Bahram, a graduate of Harvard Law School, has tried cases before judges and juries in California and Delaware, and was a law clerk to Judge James Ware in the U.S. District Court for the Northern District of California. Over the last twenty-five years, Bahram has achieved dozens of victories in securities class actions, derivative lawsuits, arbitrations, trade secrets, and fiduciary duty disputes. In 2021 and 2019, Benchmark Litigation named Bahram the “San Francisco Attorney of the Year” and nominated him for “California Securities Litigation Attorney of the Year” alongside only three other attorneys in the State in multiple years. Chambers & Partners ranks Bahram among California’s top securities litigation practitioners. During Benchmark’s evaluation, a client noted that Bahram is “astute, experienced, and able to generate creative options and navigate through them.”

Bryan, a graduate of Yale Law School, concentrates his practice on securities litigation, complex commercial litigation, and SEC investigations. He represents technology companies, entrepreneurs, officers, directors, employees and shareholders in high-stakes matters in California, Delaware, and other courts throughout the United States. Benchmark Litigation has recognized Bryan as a Litigation Star since 2021 and, before that, repeatedly included him in its “40 & Under Hot List.” A client shared the following feedback with Benchmark: “Bryan is easy to talk to and personable, and he provides extremely smart and thoughtful advice. He is good at seeing through complex situations and distilling them. Any client would be lucky to have him in their corner.”

Josh is an experienced attorney, well-practiced in litigating a broad range of business disputes in California state and federal courts, and in arbitrations with JAMS and AAA. His areas of expertise include securities litigation, general business disputes, internal and government investigations, trade secrets, high-net-worth family law and Marvin actions, and appellate litigation. He graduated in the top of his class at the University of California, Hastings College of the Law. 

Benchmark’s full analysis of Alto Litigation can be found here.

Motions to Strike: When Is It the Right Tool for the Job?

Defendants faced with a complaint chock-full of aggressive claims often respond with a demurrer, hoping to chop the complaint down to size.  Far less common is the motion to strike, but it, too, can be a powerful tool. Cal. Code Civ. Proc. § 436 allows litigants to move to strike irrelevant, false, or improper matter from pleadings.  This may include anything from sensitive personal matters intended to embarrass rather than support a legal claim, to specific requests for relief unsupported by the claims and allegations.  In some situations, a motion to strike may be the better tool to carve away allegations, especially when a demurrer is unlikely to be granted, or unable to eliminate the troublesome statements in a complaint.  

A scalpel for when a cleaver won’t do

One limitation of demurrers is that they must target entire causes of action.  A motion to strike, however, may be used to challenge a portion of a cause of action that is defective on its face. “Although a defendant may not demur to that portion, in such cases, the defendant should not have to suffer discovery and navigate the often dense thicket of proceedings in summary adjudication.”  Moran v. Prime Healthcare Mgmt., Inc., 94 Cal. App. 5th 166, 174 (2023), review dismissed, cause remanded sub nom. Moran v. Prime Healthcare Mgmt., 329 Cal. 3d 815 (2025).  For example, in Moran, the plaintiff had combined two theories of liability into a single Unfair Competition Law, and therefore a demurrer could not be used to excise the facially deficient theory.  Id.  The Court of Appeal affirmed the use of a motion to strike to achieve this purpose.  Id.  Savvy plaintiffs often plead multiple theories in support of a single cause of action; in such circumstances, a motion to strike may be the only practical way to separate the wheat from the chaff.

A lasso for reigning in relief

A motion to strike may also be useful when a complaint seeks relief that is not supported by its claims.  Plaintiffs will often lard their prayer for relief with requests that a court can never grant.  In such cases, a motion to strike may be the only way to eliminate a factually unsupported threat of punitive or exemplary damages or other extraordinary relief.  See Los Angeles Unified School Dist. v. Sup. Ct., 14 Cal. 5th 758, 764 (2023) (affirming the lower court’s order striking a claim for treble damages when such damages were unavailable per statute.)  

A shield against embarrassment or abuse

Finally, a defendant may wish to strike information from a complaint that is sensitive, private, or embarrassing to the defendant.  For instance, in Overstock.com, Inc. v. Goldman Sachs Group, Inc., the court noted that documents disclosing a party’s private financial information were irrelevant and should have been ordered struck from the record.  231 Cal. App. 4th 471, 508 (2014).  The court explained that this was necessary both because the information was irrelevant to the proceeding, and because the California Constitution protects the right of privacy.  Id.  Courts also recognize that striking irrelevant, sensitive material from a complaint can save the parties and the court the burden of preparing and deciding motions to seal.  See Mercury Interactive Corp. v. Klein, 158 Cal. App. 4th 60, n.35. (2007).

Beyond guarding the right to privacy, motions to strike may be appropriate where a pleading employs irrelevant attacks on a person’s character or dignity in an effort to embarrass or harm them.  Courts have the authority to strike such scandalous and abusive statements from pleadings.  Oiye v. Fox, 211 Cal. App. 4th 1036, 1070 (2012).  In doing so, the court may prevent prying and harassing discovery aimed at bullying a defendant rather than resolving any bona fide dispute.

Conclusion

Of course, not every motion is worth the cost, even if it succeeds.  Indeed, if the target of a motion to strike is “irrelevant” allegations included only to embarrass, it is possible that motion practice itself will serve only to exacerbate the issue—particularly if there is likely to be publicity surrounding the case.  On the other hand, a motion to strike may foreclose costly discovery into irrelevant matters, or stem ongoing battles over what information will be public and what will remain under seal.  

Significantly, the parties must meet and confer in advance of filing a motion to strike (Cal. Code Civ. Proc. § 435.5), so there may be an opportunity to stipulate to the removal of facially-defective legal theories or irrelevant allegations without prolonged (and public) motion practice.  Parties should take this opportunity seriously, as it may save everyone time, money, and/or “face” in the long run.

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.

Founder and Executive Compensation in the Context of Major Transactions

Major corporate transactions such as asset sales, mergers, and acquisitions are complex undertakings that require a high degree of skill and attention from the corporation’s managers.  As a result, directors properly may structure officers’ compensation to reward their extraordinary efforts in connection with such transactions.  At the same time, managers who realize they soon may be out of a job have a tendency to begin lining up their next act, in ways that may be contrary to the best interests of the shareholders they currently serve.  

When do compensation plans run afoul of managers’ fiduciary duties to stockholders?  While the analysis in a given case can be complex, two considerations are paramount: (1) whether the plans leave stockholders in at least as good a position after a transaction as they were in before the transaction; and (2) whether independent decisionmakers acted in good faith on the basis of material information. 

“Entire Fairness” Review of Interested Transactions and the Safe Harbor of DGCL Section 144

Section 141 of the Delaware General Corporation Law (“DGCL”) sets forth the foundation of corporate governance: “The business and affairs of every corporation organized under this chapter shall be managed by or under the direction of a board of directors … .”  8 Del. C. § 141(a).  Because boards ultimately are responsible for corporate governance, courts typically begin their analysis of board decisions by recounting the “business judgment rule”: “It is a presumption that in making a business decision the directors of a corporation acted on an informed basis in good faith and in the honest belief that the action taken was in the best interests of the company … Absent an abuse of discretion, that judgment will be respected by the courts.”  Aronson v. Lewis, 473 A.2d 805, 812 (Del. 1984), overruled on other grounds by Brehm v. Eisner, 746 A.2d 244 (Del. 2000).

But where officers or directors have a financial interest in a transaction, Delaware courts may impose the “entire fairness” standard of review, which shifts to directors and managers the burden of proving that the challenged transaction was the product of fair dealing, and resulted in a fair price.  Weinberger v. UOP, Inc., 457 A.2d 701, 710-11 (Del. 1983).  At the same time, Section 144 of the DGCL provides means by which liability may be avoided in a conflicted transaction.  For example, liability may be precluded if the transaction is approved by a majority of disinterested directors or by a committee of at least two directors (each of whom is disinterested), or if the transaction is approved by an informed, uncoerced majority vote of disinterested stockholders.  

There are cases, however, in which a company argued that the business judgment rule applied but the courts rejected this assertion and concluded that the entire fairness standard controlled. These cases are instructive regarding what the Delaware courts look for in analyzing compensation plans amidst shareholder allegations of fiduciary duty breach.

Trados 

In re Trados Inc. Shareholder Litigation, 73 A.3d 17 (Del. 2013), concerned a company that developed proprietary desktop software for translating documents.  The company’s cap table included preferred stockholders – including VC investors – who were entitled to a liquidation preference in the form of accumulating dividends, and who appointed two directors to the board. The company was barely profitable, and the VC investors decided to exit the investment.  The board fired the CEO, hired a new CEO with experience readying a company for sale, and incentivized the new management team with a management incentive plan (“MIP”) that would reward management with a significant portion of the proceeds from a future merger.  Id. at 26-29.  The Board eventually approved a merger for $60 million in cash and stock, with those earnings allocated among the MIP participants and dividends to preferred stockholders.  Id at 33.  Common stockholders, meanwhile, received nothing, and brought suit.  Id. at 34.  

The court held that directors owed fiduciary duties to common stockholders, and not to preferred stockholders who hold mere contractual rights.  Because the directors who approved the transaction were conflicted, the court applied the entire fairness standard of review.  The court found that the merger process was not fair to common stockholders, with the MIP pitting management’s self-interest against the interests of the common stockholders.  Id. at 58-62.  Nonetheless, the Court ultimately held that the price was fair because the common stockholders’ shares were effectively worthless both before and after the transaction: “The common stock had no economic value before the Merger, and the common stockholders received in the Merger the substantial equivalent in value of what they had before.”  Id. at 78.

Lesson: Trados established the principle that directors owe their fiduciary duties to common stockholders, not preferred stockholders.  But although the sale process was unfair, and the common stockholders received nothing, the price was still fair.  Notably, the use of a special committee comprised of disinterested directors may have avoided the application of the entire fairness standard and saved both the company and the individual defendants a great deal of litigation expense and heartburn.

Approval of Executive Compensation Plans

As shown by the Trados case, the very managers tasked with negotiating a corporate transaction may structure the transaction for their own personal gain.  City of Fort Myers General Employees’ Pension Fund v. Haley, 235 A.3d 702, 704-05 (Del. 2020), is another example.  In that matter, Towers Watson & Co. was faced with shareholder and market opposition to a potential acquisition.  The acquirer then offered Towers’ CEO (Haley), a five-fold increase in his compensation if the deal went through and he took control of the post-merger company.  Haley did not disclose this offer to the Towers Board.  Plaintiff stockholders alleged this offer warped Haley’s incentives and caused him to seek the bare minimum deal that would gain shareholder approval.   

The Delaware Supreme Court held that plaintiffs adequately alleged that Haley had breached his fiduciary duty by failing to disclose his compensation arrangement to the Board.  “Plaintiffs have adequately alleged that the Board would have found it material that its lead negotiator had been presented with a compensation proposal having a potential upside of nearly five times his compensation at Towers, and that he was presented with this Proposal during an atmosphere of deal uncertainty and before they authorized him to renegotiate the merger consideration.”  Id. at 719.  

In Valeant Pharmaceuticals International v. Jerney, a corporation’s board and its president paid themselves large cash bonuses in connection with a corporate restructuring.  921 A.2d 732 (Del. Ch. 2007).  The plan to award bonuses to the directors was referred to a compensation committee comprised of three directors who themselves stood to receive bonuses under the proposal.  All defendants except one—former president Jerney—settled with the special litigation committee that took over the former stockholder derivative action. Id. at 735-36.  

Jerney conceded that the entire fairness review standard applied because no independent committee of disinterested directors had approved the conflicted bonuses.  Id. at 745-46.  The Chancery Court held that Jerney failed to prove the fairness of either the process for awarding the bonuses or the price terms.  Although Jerney was not the sole decisionmaker in negotiating the restructuring bonuses, he breached his fiduciary duties by participating in a process that lacked fairness.  The bonuses were not supported by any relevant market evidence, and his reliance on expert advice was unavailing because the entire process was tainted by self-interest. The court ordered Jerney to disgorge the full amount of his $3 million bonus, plus interest, and to pay his share of the special litigation committee expenses and defense costs incurred by the company.  Id. at 754-55.

Conclusion

Directors and officers of Delaware corporations are tasked with fiduciary duties of care and loyalty to their companies and shareholders.  These duties are ignored or violated when compensation plans for directors or officers create conflicts of interest.  Although Delaware law creates mechanisms to cleanse conflicted transactions, those tools only work when independent directors or stockholders approve a conflicted transaction with the benefit of all material information.  

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 Supports SEC in Disgorgement Action

On September 3, the Ninth Circuit issued an opinion in SEC v. Sripetch, 2025 WL 2525848, (9th Circ. Sept. 3, 2025), holding that the SEC may seek disgorgement from a defendant even if it cannot show that any individual investor suffered a pecuniary injury.  The Ninth Circuit thus aligned itself with the First and Fifth Circuits and against the Second Circuit, in a circuit split that the Supreme Court might decide to resolve.  

Prior Supreme Court Decision on Disgorgement Leaves an Open Question 

The issue revolves around the proper interpretation of Liu v. SEC, 591 U.S. 71 (2020).  In Liu, the Supreme Court held that disgorgement was permitted under Section 21(d)(5) of the Exchange Act, which enables courts to grant equitable relief in SEC actions.  The Court found that equitable practices routinely served to deprive wrongdoers of their ill-gotten gains.  However, Liu also held that courts could not order disgorgement to be paid to the government; instead, funds must be returned to defrauded investors whenever possible.  

Some courts (like the Second Circuit) read Liu to require the SEC to show pecuniary harm to specific investors in order to support disgorgement.  SEC v. Govil, 86 F. 4th 89 (2d Cir. 2023).  Other courts (like the First Circuit) have held that no such showing is necessary.  SEC v. Navellier & Assoc., Inc., 108 F. 4th 19 (1st Cir. 2024). Further, following Liu, Congress amended the Exchange Act by adding Section 21(d)(7), which expressly permits courts to grant disgorgement in SEC actions.  The Second Circuit in Govil held that disgorgement under Section 21(d)(7) must conform to the equitable limitations recognized in Liu, while the Fifth Circuit has held that the amendment authorized the kind of disgorgement that courts had ordered before Liu. See SEC v. Hallam, 42 F. 4th 316 (5th Cir. 2022).

The Ninth Circuit Weighs in on the Issue 

The Ninth Circuit has now weighed in on the split, siding with the First and Fifth Circuits, and against the Second Circuit.

In Stripetch, the SEC alleged that Ongkaruck Sripetch and other defendants engaged in numerous fraudulent schemes involving the sale of stock in at least 20 penny stock companies. Some of the schemes involved alleged stock scalping, in which Sripetch or third parties promoted stocks without disclosing that the actual funder of the promotions was planning to sell the stocks. Other violations involved “pump-and-dump” schemes in which the defendants allegedly used fraudulent means to inflate stock prices before selling stock and the sale of unregistered securities.  Sripetch entered into a consent decree with the SEC but the amount of disgorgement was left to the courts. The district court imposed $2,251,923.16 in disgorgement along with prejudgment interest.  SEC v. Sripetch, 2024 WL 1546917 (S.D. Cal. Apr. 8, 2024).

On appeal, Sripetch argued that the district court abused its discretion in ordering disgorgement because the SEC failed to show that any individual investor suffered pecuniary harm, relying on Liu. The Ninth Circuit disagreed, holding that there is no need to show loss causation as in private securities litigation, as the Second Circuit held in Govil.

The Ninth Circuit also rejected the Second Circuit's reasoning that disgorgement requires one or more identified victims. First, disgorgement, as Liu held, is governed by common-law principles and traditional equity practice, which only requires showing “an actionable interference by the defendant with the claimant’s legally protected interests.” The claimant need not show any loss, much less a pecuniary loss.

Second, in defining a victim as one who has suffered pecuniary harm, the Second Circuit did not properly interpret Liu’s observation that disgorgement “restores the status quo.”  The Second Circuit ignored the distinction between compensatory damages, which are designed to compensate the victim for his losses, and restitution, which is designed to deprive the wrongdoer of ill-gotten gains. Similarly, the Second Circuit wrongly reasoned that Liu’s statement that the SEC must return a defendant’s gains to wronged investors meant that funds cannot be returned if there was no deprivation in the first place. Rather, Liu simply held that disgorged profits must be disbursed to victims rather than routinely deposited with the government.

What’s Next?

How would the Supreme Court rule?  While difficult to predict, it seems likely that the Court would side with the First and Ninth Circuits in holding that disgorgement in SEC actions does not require a showing that individual investors suffered pecuniary harm.  Disgorgement traditionally has been viewed as a mechanism for depriving wrongdoers of unjust gains—a mechanism that would be defeated if the SEC in some cases could not show a specific financial injury to investors as a result of a fraudulent scheme. In enacting Section 21(d)(7), Congress expressly enabled disgorgement in SEC actions without any requirement that the SEC demonstrate that investors suffered a specific financial injury.  The Court also could find that the Second Circuit in Govil stretched certain observations and dicta in Liu into iron-clad principles of law that the Supreme Court never intended.

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.

SEC Withdraws Objection to Requiring Investors to Arbitrate Securities Claims

Companies that submit a registration statement to sell securities to the public face a mandatory waiting period.  Acceleration of the registration statement’s effective date shortens the period, and is considered an essential predicate for a successful offering.  Until recently, however, the Securities and Exchange Commission refused acceleration to companies whose bylaws or certificate of incorporation mandated arbitration for investor claims under the federal securities laws.  No more:  On September 17, 2025, the SEC issued a Policy Statement, adopted by a 3-1 vote of the SEC Commissioners, providing that requiring arbitration for securities claims will not affect a decision whether to accelerate the effectiveness of a registration statement for public offering.

The Waiting Period and the SEC’s Discretion to Accelerate It

The Securities Act of 1933 and the SEC regulations thereunder set forth the requirements for a company to offer and sell securities to the public.  Section 5 of the Securities Act states that a registration statement must be in effect as to a particular security before it can be sold.  Section 8(a) provides that a registration statement becomes effective automatically 20 calendar days after it is filed. However, a company may submit a request under SEC Rule 461 specifying the date when it wants the registration statement to become effective, and the SEC Staff in the Division of Corporation Finance may accelerate the effective date if it believes that the registration statement provides adequate disclosure.  Acceleration of the effective date is essential for the company and its investment bankers to know the precise date on which the securities may be sold.

A Change in SEC Opinion on Whether Mandatory Arbitration of Investor Claims Is Against the “Public Interest” 

The Section 8(a) criteria for an accelerated effective date are primarily focused on ensuring complete and adequate disclosure of material information, as well as “the public interest and the protection of investors.”  The SEC’s Division of Corporation Finance previously held the position that companies that required mandatory arbitration provisions for securities claims were not eligible for an accelerated effective date because such provisions were contrary to the public interest and barred by the anti-waiver provisions of Section 14 of the Securities Act. But in the late 1980s, the Supreme Court issued decisions favoring the arbitration of claims pursuant to the Federal Arbitration Act (FAA), including securities claims.  See Shearson/American Express, Inc. v. McMahon, 482 U.S. 220 (1987) (claims under Section 10(b) of the Securities Exchange Act of 1934 were subject to mandatory arbitration claims in broker agreement); Rodriguez de Quijas v. Shearson/American Express, Inc., 490 U.S. 477 (1989) (mandatory arbitration provisions did not violate Section 14 of the Securities Act).

Although these decisions concerned broker-customer agreements, the SEC stated that there is no reason to believe that a different result would apply to issuer-investor agreements. Further, the Supreme Court more recently held that in any federal statute enacted after the FAA, which include the securities laws, there must be a “clearly expressed Congressional intention” to override the FAA and if not, there is a “strong presumption” that the FAA applies exclusively to the enforceability of an arbitration provision.  Epic Sys. Corp. v. Lewis, 584 U.S. 497 (2018).  While plaintiffs may assert that issuer-investor mandatory arbitration provisions may impede the ability of investors to enforce the securities laws through class-wide proceedings, an identical argument was rejected with respect to the antitrust laws. American Express Co. v. Italian Colors Restaurant, 570 U.S. 228 (2013).  Accordingly, the economic incentive for some investors to bring private claims under the securities acts does not support overriding the FAA.

More Mandatory Arbitration of Investor Claims in the Future?

There is no guarantee that companies will rush to institute mandatory arbitration of investor claims.  Companies may prefer to address one class-wide action rather than have to confront numerous separate arbitration claims. Federal securities actions are subject to well-established procedures and legal authority, while arbitration claims may be subject to the vicissitudes of arbitrators. The settlement of a class-wide claim in a single proceeding provides greater certainty than endless arbitration claims. Adverse results in a lower court may be appealed, while arbitration rulings are rarely overturned.

Further, Delaware law permits forum selection provisions so long as there is jurisdiction in at least one Delaware court, which may be construed as barring mandatory arbitration provisions in Delaware-chartered companies.  However, the SEC’s Policy Statement noted that such statutes may be challenged on the grounds that they are preempted by federal law. 

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.

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.