March Trade Secrets Litigation Brief: Reduced Jury Award, Apple’s Injunction Request, Alleged Sneaker Extortion and More

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. 

Rocket Companies Subsidiary Hit with $175 Million Trade Secret Verdict 

Retrial produces substantial award in decade-old dispute over home valuation technology 

A San Antonio jury found that Rocket Companies subsidiary Rocket Close stole trade secrets from real estate data platform HouseCanary and awarded $175 million in damages, Reuters reported. The verdict followed a retrial in a case that has now spanned a decade.

The dispute centers on allegations that Rocket Close — formerly known as Amrock, a title insurance services company — misappropriated HouseCanary's proprietary technology for valuing home prices. A Texas appeals court had previously overturned an earlier $700 million verdict against Amrock in the case, leading to the retrial. 

Rocket Close called the award "disappointing" but noted the reduction from the original verdict as evidence that HouseCanary's claims had been inflated, and said it was confident the verdict would again be overturned on appeal. HouseCanary's counsel expressed gratitude that a jury had once more found the company's trade secrets were stolen and misused. 

What this means: The case illustrates that a reversed verdict does not end trade secret exposure — defendants who prevail on appeal may face retrial and a second damages award. The significant reduction from $700 million to $175 million also reflects how damages methodologies remain contested well after liability is established. 

Apple Seeks Preliminary Injunction Against Oppo Over Alleged Sensor Trade Secret Theft 

Court skeptical of trade secret definitions as Apple presses for broad relief 

Apple asked a federal judge in San Jose for injunctive relief against Oppo and its Palo Alto-based research arm InnoPeak Technology, Courthouse News reported, following allegations that former Apple Watch engineer Chen Shi gave confidential information on health and thermal sensors to the Chinese smartphone manufacturer.

Apple filed suit in August 2025 against Shi and Oppo, alleging that after Shi joined InnoPeak, he transmitted information from slide presentations and text messages regarding Apple's sensor technology to Oppo personnel. At a multi-hour hearing last month before U.S. District Judge Eumi Lee, Apple counsel argued that its irreparable harm was clear because "the trade secrets are already out there." Apple's proposed injunction would require Oppo to identify and quarantine employees exposed to Apple's information, wipe any developments derived from that information, and audit its data systems. 

Oppo responded that a forensic investigation — conducted after Apple alerted the company — found no Apple documents in its possession, and that any health or thermal sensor products it is developing are entirely its own. Oppo's counsel argued that Apple's definitions of the asserted trade secrets — including terms like "thermal sensors" and "product roadmaps of health sensors" — were too broad to support an injunction and would leave Oppo unable to determine whether it was in contempt or to compete in the market. 

Judge Lee signaled concern about the breadth of Apple's definitions, stating from the bench: "I am having trouble understanding the scope and breadth of the trade secrets." She did not indicate her ruling before closing the courtroom for a third closed session. 

What this means: The hearing reflects a recurring problem in trade secret injunction practice: plaintiffs seeking emergency relief must define the protected information with sufficient precision for the court to craft a workable order. Overbroad definitions risk sinking even well-founded claims for injunctive relief. 

Adidas Sues Sneaker Website, Alleging Extortion and Trade Secret Theft 

Leaked designs and a threatening email form the basis of claims against Sole Retriever 

Adidas filed suit last month in federal court in the District of Oregon against sneaker information website Sole Retriever and its founder, 28-year-old Harris Monoson of New York, alleging misappropriation of trade secrets and extortion, according to KOIN-TV.

According to the complaint, Sole Retriever conspired with five unidentified individuals — some of whom may include unauthorized Adidas employees — to obtain proprietary information including computer-aided designs, sneaker photographs, collaborations, release dates, and pricing. The site then used that access to press Adidas for preferential treatment. 

In an August 2025 email, Monoson told a group of Adidas employees it was his "last attempt" to have the company "make good" on its relationship with Sole Retriever, and stated that he had access to the full Anthony Edwards 2 lineup and would "not hold back on posting" if Sole Retriever did not receive what he believed it was owed. Two days later, the site shared images of the AE2 sneaker to its social media accounts. Adidas informed Sole Retriever the following day that the information had been obtained unlawfully and demanded its return or destruction. Sole Retriever subsequently posted additional leaked designs, including the Anthony Edwards 3 and D.O.N. Issue 8. 

Adidas is seeking a jury trial. Monoson and Sole Retriever did not respond to requests for comment. 

What this means: The case is an example of trade secret misappropriation arising not from a departing employee, but from an outside party with insider access. When third parties obtain and threaten to publish proprietary product information, they can face both a trade secret problem and a potential extortion claim. 

U.S. Strips Citizenship from Couple Convicted of Trade Secret Theft 

DOJ uses denaturalization as enforcement tool in technology theft cases 

The Trump administration secured the revocation of U.S. citizenship from Yu Zhou and Li Chen, a married California couple who emigrated from China and pleaded guilty in 2020 to conspiracy to steal trade secrets and wire fraud, Reuters reported.

U.S. District Judge James Simmons in San Diego granted the Justice Department's request, finding that Zhou and Chen had committed "crimes involving moral turpitude" during a period when they were legally required to demonstrate good moral character as part of their naturalization process. Federal law permits the Justice Department to revoke citizenship obtained by concealing or misrepresenting material facts. 

Zhou and Chen had worked as researchers at Nationwide Children's Hospital in Columbus, Ohio, arriving in the United States on H-1B visas in 2007 and 2008 before becoming citizens nine years later. They admitted to conspiring to steal trade secrets related to pediatric medical treatment for financial gain. 

What this means: Trade secret cases increasingly carry consequences that extend well beyond civil liability or criminal fines. For naturalized citizens, a guilty plea to trade secret charges could provide grounds for loss of citizenship. Companies and counsel confronting suspected misappropriation should account for this expanded enforcement environment when evaluating risk. 

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.

March Securities Litigation Brief: Crypto Clarity, SEC Enforcement Turnover and More

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.

SEC Redraws the Line Between Digital Assets and Securities

In a significant regulatory development, the SEC issued an Interpretative Release stating that most crypto assets will not be considered securities under the Federal Securities Laws.

Previously, the SEC took the position that most digital assets were considered investment contracts, which are defined as securities under the Securities Act of 1933 and the Securities Exchange Act of 1934. The SEC’s view was based on the application of the so-called Howey test, based on the Supreme Court’s 1946 decision in SEC v. W. J. Howey Co., defining an investment contract as an investment of money in a common enterprise with a reasonable expectation of profit based on the managerial or entrepreneurial efforts of others. The SEC had employed this test in bringing enforcement actions against firms issuing digital assets, which was criticized as “regulation as enforcement.”
By contrast, the SEC’s Interpretative Release, issued on March 17 for public comment, stated that it was seeking a “tailored regulatory framework” that took into account the uses and functionality of digital assets. In analyzing various categories of crypto assets, the release stated that:

1. digital commodities, like Bitcoin or Ether, would not be considered securities;

2. digital collectibles, which are intended to convey rights to artwork, music or videos, are not securities unless they are sold in a manner where the reasonable expectation of profit is based on the efforts of others;

3. digital tools, which are crypto assets that perform specific functions, are not securities;

4. stablecoins, which are intended to maintain a stable value relative to the dollar, generally are not considered to be securities (the GENIUS Act, enacted by Congress, created a comprehensive regulatory for type of stablecoin known as a “payment stablecoin”); and

5. digital securities, which are securities that are formatted or represented by a crypto asset, are considered securities.

The Release also discussed when a crypto asset would become a security and how it would lose that characteristic.

Why It Matters: This policy shift advances the pro-crypto agenda of the second Trump Administration and provides a framework for possible comprehensive regulatory legislation by Congress.

Jury Holds Elon Musk Liable for Misleading Statements, Rejects Broader Fraud Claims

On March 20, a federal jury in San Francisco found that Elon Musk committed securities fraud in a class action lawsuit brought by former investors In Twitter, which Musk acquired for $44 billion in 2022.

The jury found that Musk made materially false and misleading statements in two tweets in May 2022. One tweet stated that the Twitter acquisition was temporarily on hold while he awaited information about the volume of bots and spam on Twitter. The other tweet stated that fake and spam accounts comprised more than 20 percent of Twitter users.

However, the jury rejected the fraud allegations of the plaintiff class, composed of those who sold Twitter stock or call options or purchased put options between May 13 and October 4, 2022, in connection with Musk’s statements at a technology conference.

The jury also found that the investors failed to prove that Musk engaged in an overall scheme to defraud Twitter investors. One of the plaintiffs’ attorneys estimated the damages at about $2.6 billion. Musk attacked the verdict, and his lawyers alleged that the jury was not impartial based on a purported marijuana joke on the verdict form.

Why It Matters: Few securities class action lawsuits go to trial, so the Musk trial was a test case concerning how a jury would respond to claims against a celebrity defendant. Barring a settlement, the verdict will be appealed, and it will be interesting to see how the Circuit Court of Appeals considers allegations that the trial judge and the jury were not impartial.

Delaware Supreme Court Allows Post-Demand Evidence in Books-and-Records Disputes

The Delaware Supreme Court on March 25 issued an opinion in which it held, by a 3-2 vote, that a stockholder in Paramount could cite news reports occurring after a demand to inspect documents as evidence that the stockholder possessed the required “proper purpose” for the demand.

The stockholder had made a demand to inspect documents under Section 220 of the Delaware General Corporation Code, which permits a stockholder to inspect certain “books and records” of a company if it can demonstrate a proper purpose, which the Delaware courts have held has a low threshold of proof. The Paramount stockholder alleged that the company’s controlling stockholder was seeking to sell her ownership interest rather at the expense of seeking to sell the entire company. When Paramount challenged the demand, the Chancery Court, overturning the decision of a Magistrate, permitted the stockholder to cite news reports after the demand was made.

The court’s majority held that Section 220 itself did not prohibit the introduction of post-demand evidence, and it therefore made sense to allow the Chancery Court to exercise discretion and decide to consider or reject such evidence on a case-by-case basis. The court held that the Chancery Court here did not err in considering the post-demand evidence because it was material, credible and not prejudicial to the corporation.

The dissent, by contrast, asserted that a bright-line rule barring such evidence was preferable to the case-by-case consideration favored by the majority.

On another issue, the court unanimously held that the stockholder could cite anonymous sources in reputable publications where there was a sufficient level of specificity and there was an absence of any indicators of unreliability.

Why It Matters: The Delaware Supreme Court had never squarely confronted the issue of whether post-demand evidence could be used to show a proper purpose for an inspection demand. It is now settled that the Chancery Court has discretion to consider such evidence.

SEC’s Enforcement Director Resigns After Seven Months

On March 16, Margaret Ryan resigned as Director of the SEC’s Division of Enforcement after only seven months on the job. In February, Ryan had given a widely publicized speech outlining both substantive and procedural priorities, including revisions to the Wells Submission process after the Division notifies counsel that its client will be the subject of an enforcement proceeding. That speech was followed by publication of a revised Enforcement Manual that reflected the points made in Ryan’s speech.

Prior to being appointed as Enforcement Director, Ryan had been a judge on the U.S. Court of Appeals for the Armed Forces, an unusual background for an Enforcement Director.

While Ryan’s resignation statement did not provide a reason for her resignation, news reports stated that she had clashed with SEC Commissioners over her desire to take a more aggressive pursuit of fraud, including cases against high-profile individuals such as Elon Musk. Principal Deputy Director Sam Waldon was named acting director and the SEC said a permanent director would be named shortly.

Why It Matters: The resignation may signify that the SEC will pursue a more relaxed enforcement attitude against securities fraud, particularly concerning more controversial cases. In particular, the SEC has stated that it will not bring actions against companies issuing crypto assets based on allegations that they were selling unregistered securities.

Reversal of Fortune: SEC Now States Crypto Assets Are Usually Not Securities

In a major regulatory development, the Securities and Exchange Commission (SEC) has issued an Interpretive Release stating that most digital assets will not be considered securities under the Federal Securities Laws.  The Release, issued for public comment on March 17, signifies a radical shift from prior SEC pronouncements declaring that crypto assets largely would be regulated as securities and advances the pro-crypto agenda of the second Trump Administration.  It is also noteworthy that the Commodity Futures Trading Commission joined the Release and the CFTC’s staff will administer the commodities laws consistent with the Release’s guidance.

Background

In 2017 the SEC issued a report stating that offers and sales of digital assets by an organization called “the DAO” were investment contracts and therefore securities under Section 2(a)(1) of the Securities Act of 1933 and Section 3(a)(10) of the Securities Exchange Act of 1934. The DAO Report and subsequent SEC proceedings relied upon the “Howey” test, based on SEC v. W.J. Howey Co., 328 U.S. 293 (1946), which states that a contract or transaction is an investment contract if it involves the investment of money in a common enterprise where the reasonable expectation of profits depends on the managerial or entrepreneurial efforts of others.  The SEC invoked the Howey standard in bringing enforcement proceedings against crypto entities, which was criticized by some SEC Commissioners and other commentators as “regulation by enforcement” that created uncertainty while ignoring the realities of crypto functionality and usage.

By contrast, the SEC stated that the Interpretive Release seeks to create a “tailored regulatory framework that accommodates crypto asset innovation and entrepreneurship.”  The Release addresses the application of the securities laws to various types of digital assets and transactions and provides support for Congressional efforts to enact a comprehensive crypto market structure statute. 

Categories of Digital Assets

The Release classifies crypto assets into categories based on their characteristics, uses and functions, and analyzes each category concerning whether it would be considered an investment contract, and thus a security, under federal law. As discussed below, the critical analysis is whether any expectation of profit is based on the managerial efforts of others:

1. Digital Commodities – A digital commodity is a crypto asset that derives its value from the operation of a functional crypto system. Well-known digital commodities are Bitcoin, Ether and XRP.  The Release stated that a digital commodity does not have intrinsic economic properties or rights, or assets of a business enterprise, nor is there the expectation of profits based on the managerial efforts of others. Therefore, a digital commodity would not be considered a security.

2. Digital Collectibles – A digital collectible is a crypto asset that is designed to be collected or convey rights to artwork, music, videos, trading cards, or digital references or representations to memes, characters, current events, or trends.  Because a digital collectible’s value is not based on the managerial efforts of others, but on supply and demand, which in turn is based on popularity or scarcity, a digital collectible would not be considered to be a security.  However, the offer and sale of a digital collectible that is either fractionalized or otherwise offers the ability to acquire a fractional ownership interest of a single collectible, could constitute the offer or sale of a security because profits might be derived from the managerial efforts of others.

3. Digital Tools – A digital tool is a crypto asset that performs a practical function, such as a membership, ticket, credential, title instrument or identity badge. They are typically issued to perform certain functions within a crypto system and are non-transferable.  Because digital tools are purchased for their utility and the expectation of any profit is not based on the managerial efforts of others, they are not considered a security.

4. Stablecoins – A stablecoin is a type of digital asset intended to maintain a stable value relative to the U.S. dollar or another asset.  The GENIUS Act, enacted by Congress last year, created a comprehensive regulatory framework for a specific type of stablecoin called a “payment stablecoin,” which is intended to be used for payment or settlement.  Until the GENIUS Act is effective, the offer and sale of certain kinds of stablecoins discussed in an earlier SEC staff statement will not be subject to the securities laws.

5. Digital Securities – A digital security, commonly known as a “tokenized” security, is a financial instrument covered by the definition of a security that is formatted or represented by a crypto asset. Because there are different models of tokenized securities, the rights of the crypto holder may be different from the rights of the underlying security holder.  The Release states that a security remains a security regardless of format or label. To the extent that a purchaser expects economic returns from a third party, the asset is considered a security.

When Crypto Assets Become A Security

A non-security crypto asset becomes an investment contract when an issuer induces the investment of money in a common enterprise with representations that it will undertake managerial efforts that provide a reasonable expectation of profits. But much will depend on the reasonableness of the purchaser’s expectation of profits because of particular promises, including their source. However, a crypto asset subject to an investment contract loses that characteristic in secondary market transactions where purchasers would not reasonably expect such promises or representations to continue, such as where the issuer fulfilled its promises or failed to satisfy them.

Protocol Mining, Protocol Staking, Wrapping And Airdrops

Certain types of transactions, characterized as mining, staking and wrapping, do not involve the offer and sales of securities.  Certain crypto asset disseminations known as “airdrops” do not involve the investment of money under the Howey test and therefore do not qualify as securities.

Conclusion

The SEC’s Interpretive Release marks a significant turning point in the regulatory treatment of digital assets, providing long-awaited clarity for crypto developers, investors, and market participants. By anchoring the analysis in the Howey test's "managerial efforts of others" prong, the Release creates a workable framework that distinguishes speculative investment vehicles from functional crypto assets. While many questions remain — particularly around assets that blur category lines — the Release signals that federal regulators are prepared to engage with the crypto industry on its own terms rather than forcing digital assets into a securities framework designed for a different era. With Congress also moving toward comprehensive crypto market structure legislation, the regulatory landscape for digital assets appears to be entering a period of greater predictability and stability.

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.

Alter Egos and the Default Judgement Problem: A New Path

California courts have long recognized that a judgment creditor who has prevailed against a corporation should not be left holding an empty bag simply because the real wrongdoer operated behind a corporate shell. Thus, after obtaining a judgment against a corporation, a plaintiff may move in the original action to amend the judgment to add the corporation’s alter ego as an additional debtor. Courts have characterized this as an equitable procedure “based on the theory that the court is not amending the judgment to add a new defendant but is merely inserting the correct name of the real defendant.” Highland Springs Conference & Training Center v. City of Banning, 244 Cal.App.4th 267, 288 (2016). The judgment creditor must show: (1) the parties to be added as judgment debtors had control of the underlying litigation and were virtually represented in that proceeding; (2) there is such a unity of interest and ownership that the separate personalities of the entity and the owners no longer exist; and (3) an inequitable result will follow if the acts are treated as those of the entity alone. Id. at 280.

But what happens when the underlying judgment was obtained by default? Unfortunately, that question has generated a body of California authority that recently has become more complicated.

The Default Judgment Problem

Consider Motores De Mexicali v. Superior Court, 51 Cal.2d 172 (1958). There, the plaintiff obtained a default judgment against a corporation, then moved to summarily add three individuals as judgment debtors on alter ego grounds. Ultimately, the Supreme Court decided that summarily adding individuals to a default judgment “without allowing them to litigate any questions beyond their relation to the allegedly alter ego corporation would patently violate” the constitutional guarantee of due process under the Fourteenth Amendment. Id. at 176.

The issue popped up again in NEC Electronics, Inc. v. Hurt, 208 Cal.App.3d 772, 780 (1989). In that case, the corporation initially defended the action, but following a period of escalating financial hardship it abandoned the case and informed plaintiff that it would not appear at trial. The trial took place in the absence of the defendant, and judgment was entered in plaintiff’s favor. Shortly thereafter, the corporation filed for Chapter 11 Bankruptcy. The plaintiff filed a motion pursuant to CCP Section 187 to amend the judgment to name defendant’s owner, Porter Hurt, alleging that the corporation was his alter ego. The trial court granted the motion. 

Consistent with Motores, however, the Court of Appeal reversed because the defendant did not appear at trial and did not make any attempt to defend the lawsuit. The court reasoned that the corporation and Hurt’s interests were not the same; the corporation allowed the matter to proceed uncontested because it planned to file for bankruptcy. This strategy insulated the corporation from liability, but it deprived Hurt of an opportunity to defend himself on the merits. Id. at 780. The court also found there was insufficient evidence to show that Hurt controlled the defense of the litigation because “[t]here was no defense for Hurt to control.” Id. at 781.

The reasoning of Motores and NEC Electronics was applied again in Wolf Metals Inc. v. Rand Pacific Sales Inc., 4 Cal.App.5th 698 (2016). There, the trial court entered a default judgment against a corporation and later granted a motion to amend to add the sole shareholder as a judgment debtor, and a successor corporation. The Court of Appeal reversed as to the shareholder. Id. at 708-09. Because the corporation had “offered no defense” in the underlying action, the court held that the summary section 187 procedure was unavailable, regardless of the alter ego’s control over the corporation. Id.

Thus, over the course of fifty years, the rule was simple:  Section 187 is not available if the judgment was acquired by default.

Lopez v. Escamilla: A Distinction that Raises New Questions

Enter Lopez v. Escamilla, which gave rise to a new way for plaintiffs to enforcing a default judgment against alter egos.

Alice Lopez recovered a default judgment for fraud, negligent misrepresentation, and breach of fiduciary duty against Magnolia Home Loans, Inc. Lopez v. Escamilla, 48 Cal.App.5th 763, 764 (2020). She then filed a separate civil action against Jose Escamilla, requesting that he be found the alter ego of Magnolia. Id. at 765. Escamilla moved for judgment on the pleadings, contending that the only procedure for naming a person an alter ego is by motion in the original action, and that adding an alter ego defendant is not a valid cause of action. Id. But the Court of Appeal disagreed, stating that “[i]t does not matter whether the petition alleging Escamilla is an alter ego of the corporation is labeled a complaint or a motion, or whether the petition is assigned a case number different from the underlying action.” Id.

The trial court then granted summary judgment for Escamilla, concluding it would violate due process to hold him responsible for the Magnolia’s liability when he was not a party to the original lawsuit, and no “evidence based” defense was asserted by the defendants in that case. Lopez v. Escamilla, 79 Cal.App.5th 646, 649-50 (2022).  The case then returned to the Court of Appeal, which reversed again. The court held that there was a triable issue of fact concerning Escamilla’s alter ego liability. Id. at 651. Further, and more significantly, the court distinguished Motores and its progeny:  “Lopez did not move to summarily add Escamilla to the judgment . . . . Escamilla will have the opportunity to answer the complaint, engage in discovery, and file pre-trial motions. Lopez must meet her burden of proof to support her theory of alter ego liability claims.” Id. at 652.

The Court of Appeal reasoned that the “ultimate issue was not how the case was defended, but who in the corporation ‘controlled the litigation leading to the judgment’ against the corporation.” Id. at 654. “The sole alter ego who owns the company and makes all corporate decisions may decide that, instead of providing a defense to a meritorious lawsuit, the corporation should incur a default judgment to insulate himself from liability and to save himself from spending money on a frivolous defense.  By doing so, he ‘controlled the litigation leading to the judgment’ against the corporation and he is liable as an alter ego.” Id.

The Tension Between Lopez and Longstanding Precedent

Alas, the distinction between “summary” and “full” proceedings is not always as clean as Lopez suggests. Motores foreclosed the use of the summary amendment procedure when the judgment was obtained by default because it denied the alter ego the chance to litigate “any questions beyond their relation to the allegedly alter ego corporation.” But the very thing that Motores was protecting — the right to contest the underlying merits of the judgment — was not available to the defendant in Lopez, either. In the new lawsuit, Escamilla could litigate his alter ego status, but not the underlying default judgment against the corporation, which was res judicata. In other words, Escamilla could not re-litigate whether the corporation owed the money. The “full opportunity to defend” that Lopez celebrates is thus narrower than it appears: the alleged alter ego gets to defend on alter ego grounds only, not on the merits.

Furthermore, the Motores and NEC courts were concerned that an alter ego’s interests may be at odds with a corporate defendant. The corporation may rationally choose to allow a default judgment to enter because it plans to file for bankruptcy anyway — as was the case in NEC. But that strategy deprives the alter ego of an ability to defend themself on the merits. The court reasoned that the alter ego should not lose their due process right to defend themself because the corporation — which is actually a party to the lawsuit — opts to allow a default judgment to enter against it.

Lopez drew the opposite conclusion. The court reasoned that, if the person controlling a corporation decides to allow a default judgment to enter to “insulate himself,” then they cannot be heard to complain that they have been denied due process. Lopez, 79 Cal.App.5th at 654.

The Practical Implications

Lopez has significant practical consequences for judgment creditors and alleged alter egos alike.

For creditors, Lopez confirms that a corporate default does not permanently foreclose recovery from the person who was truly responsible. Even if a summary Section 187 motion is unavailable under cases like Motores, NEC, and Wolf Metals, the independent action route remains open. Creditors should be aware, however, that this path requires a new lawsuit, potentially including a costly trial.

For alleged alter egos, Lopez narrows the tactical value of engineering a corporate default. Merely ensuring that the corporation does not appear may not provide shelter if you are the sole owner and controller of that corporation, since a court may well infer that you chose the default strategically.

For the courts, Lopez leaves open the question of whether the independent action route is always available as an alternative to Section 187, or whether there are circumstances where Motores’ due process concerns would apply even to a separately-filed complaint. The opinion does not fully grapple with that question, but future litigants and courts presumably will.

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.

****

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.

Unity of Interest and Alter Ego Doctrine

It is a basic principle of corporate law that shareholders should not be responsible for a corporation’s liabilities and similarly, one corporation cannot be liable for another corporation’s debts.  The purpose is to encourage risk-taking and entrepreneurship.  There is enough risk in putting money into an enterprise, without the additional risk of being liable for the liabilities of the enterprise if it failed. But there are limited circumstances in which the corporate form does not provide a shield from liability – when the corporation is held to be the “alter ego” of the stockholder or other corporations, a doctrine that is commonly referred to as piercing the corporate veil. Most states have similar tests for establishing the alter ego doctrine with one important distinction, discussed below.

There are several versions of piercing the corporate veil. Standard alter ego doctrine is employed to seek the assets of an individual to pay a judgment against a corporation.  But reverse piercing the corporate veil involves allowing creditors to seize a corporation’s assets to satisfy a judgment against an individual. Horizontal piercing the corporate veil applies to companies under common control and functioning as one enterprise, making all liable for the debts of any one.

In determining whether to invoke the alter ego doctrine, courts look to a number of factors in analyzing whether there is a “unity of interest and ownership” between various entities and/or individuals such that any separation is merely fictional. These factors include:

• commingling of assets;

• an individual’s treatment of corporate assets as his own;

• the disregard of corporate formalities such as board meetings, minutes and other corporate records;

• sole ownership of stock in different companies by one individual or family;

• employment of the same employees or attorney by different companies;

• use of a shell corporation that was insolvent or undercapitalized;

• use of the same office or location for different corporations;

• shifting liabilities and/or assets from one enterprise to another; and

• the failure to maintain an arms-length relationship among related entities.

Different states have slightly different versions of the alter ego doctrine.

California

California courts consistently apply a two-part test for piercing the corporate veil under the alter ego doctrine. First, “there must be such a unity of interest and ownership between the corporation [or LLC] and its equitable owner that the separate personalities of the corporation [or LLC] and the shareholder [or member] do not in reality exist. Second, there must be an inequitable result if the acts in question are treated as those of the corporation [or LLC] alone."  Blizzard Energy, Inc. v. Schaefers, 71 Cal. App. 5th 832, 849 (2021).  See also Toho-Towa Co., Ltd. v. Morgan Creek Productions, Inc., 217 Cal. App. 4th 1096, 1106-07 (2013) (“Where a corporation is used by an individual or individuals, or by another corporation, to perpetrate fraud, circumvent a statute, or accomplish some other wrongful or inequitable purpose, a court may disregard the corporate entity and treat the corporation's acts as if they were done by the persons actually controlling the  corporation......”); Hotels Nevada, LLC v. L.A. Pacific Center, Inc., 203 Cal. App. 4th 336, 358-59 (2012) (there must be such a “unity of interest and ownership that the individuality, or separateness, of such person and corporation has ceased”).

“No single factor is determinative, and instead a court must examine all the circumstances to determine whether to apply the (alter ego) doctrine . . . .” Blizzard, 71 Cal. App. 5th at 849. In Blizzard, the court found ample evidence of a unity of interest between a corporation and a married couple: the couple owned 50% of the corporation and the husband used the corporate assets as his personal piggy bank, routinely transferring funds to his personal account. However, the court found that there would be an inequitable result because the (soon to be ex) wife was an innocent third-party and veil piercing would be an injustice to her.  Id., at 850-54.  In Toho-Towa, three separate corporations functioned as a single enterprise and it would be inequitable to allow them to escape debts incurred by one of the corporations to the plaintiff.  217 Cal. App. 4th at 1106-10.   California does not require proof of fraud in order to invoke the alter ego doctrine, only that “an adherence to the fiction of the separate existence of the corporation would, under the particular circumstances, sanction a fraud or promote injustice . . .” [citation omitted].  Hotels Nevada, 203 Cal. App. 4th at 359 (affirming finding of arbitrators that Hotels Nevada was influenced and governed by one individual and respondent was harmed as a result; also holding that Nevada followed California law).  See also Misik v. D’Arco, 197 Cal. App. 4th 1065, 1068 (2011) (California Code of Civil Procedure § 187 authorized trial court to amend judgment to add debtor who was alter ego of corporate defendant; evidence of fraud was not required, only that adherence to fiction of separate existence would promote injustice).

Delaware

Delaware, as well as other states, follows the same general standard with one significant twist: the alter ego doctrine is invoked only when there is evidence of fraud, not simply an inequitable result.   See Cleveland-Cliffs Burns Harbor LLC v. Boomerang Tube, LLC, No. 2022-0378-LWW, 2023 WL 5688392, at *5 (Del. Ch. Sept. 5, 2023) (in parent-subsidiary context, piercing the corporate veil requires showing that the subsidiary existed as a sham “for no other purpose than as a vehicle for fraud”); Mason v. Network of Wilmington, Inc., No. 19434-NC, 2005 WL 1653954, at *3 (Del. Ch. July 1, 2005) (Delaware courts “require an element of fraud to pierce the corporate veil,” citing Wallace ex rel. Cencom Cable Income Partners II, L.P. v. Wood, 752 A.2d 1175, 1184 (Del. Ch. 1999)).

In Mason, the plaintiff alleged that she was unable to collect on an employment discrimination because the individual owner of the corporation had transferred funds to another entity, and that therefore the owner should pay the judgment pursuant to the alter ego doctrine.  While describing plaintiff’s predicament as “unfortunate,” the court remarked that “[P]ersuading a Delaware Court  to disregard the corporate entity is a difficult task.” Here, the evidence did not show that her employer had been under-capitalized or that corporate formalities were not followed; the mere fact that the individual ran two separately incorporated entities out of the same building “did not show fraud or sham (or support any inference to that effect).”  2005 WL 1653954, at *2-4. See also EBG Holdings LLC v. Vredezicht’s Gravenhage 109 B.V., No. 3184-VCP, 2008 WL 4057745, at *11-12 (Del. Ch. Sept. 2, 2008) (Delaware applies alter ego theory “rather strictly” and courts generally only disregard corporate entity “when such matters as fraud, contravention of law or contract, public wrong, or equitable considerations” are involved; here, no showing that subsidiary constituted a sham and existed only as vehicle for fraud); ECB USA, Inc. v. Savencia, S.A., No. 19-731-GBW-CJB, 2025 WL 254504, at *2-7 (D. Del. Jan. 16, 2025) (alter ego theory not applicable where no showing corporate form was misused for fraud or improper purpose).

Conclusion

The alter ego doctrine is an important legal concept that prevents a judgment debtor from hiding assets behind a sham corporate façade. But if there is a choice, California is a preferable venue to Delaware in seeking to invoke the doctrine.

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.

February Trade Secrets Litigation Brief: AI Battle, Criminal Indictment, and Appellate Line-Drawing

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 Court Dismisses xAI’s Trade Secret Suit Against OpenAI — For Now

Pleading standards under scrutiny in AI rivalry

A federal judge dismissed a trade secret lawsuit brought by Elon Musk’s xAI against OpenAI, holding that the complaint failed adequately to plead the existence and misappropriation of protectable trade secrets. The court granted leave to amend, allowing xAI an opportunity to refile.

The dispute arises in the context of intense competition for AI talent and technology. According to reporting on the ruling, the judge concluded that xAI did not allege “any facts indicating OpenAI induced xAI's former employees to steal xAI's trade secrets or that these former xAI employees used any stolen trade secrets once employed by OpenAI.”

Although the dismissal was without prejudice, the ruling reinforces a recurring theme in trade secret litigation: plaintiffs must do more than allege aggressive hiring or competitive harm. They must define the trade secrets at issue with enough specificity to make the claim plausible at the outset.

What this means: In high-profile AI disputes, courts are unlikely to relax traditional pleading standards. Companies pursuing trade secret claims — particularly in fast-moving technology sectors — should expect early scrutiny of trade secret identification and misappropriation theories. Complaints built on inference rather than concrete factual allegations risk early dismissal.

Three Silicon Valley Engineers Indicted for Alleged Trade Secret Theft

Criminal enforcement expands beyond civil litigation

Federal prosecutors unsealed indictments against three Silicon Valley engineers accused of stealing trade secrets from Google and other technology companies.

The charges allege theft of proprietary information relating to advanced technologies, with some allegations involving efforts to benefit foreign entities, including Iran. The indictment alleges the defendants tried to conceal their actions by submitting false signed affidavits and concealing how the data was taken, including taking photos of computer screens.

The indictment underscore the government’s continued willingness to pursue criminal charges in cases involving alleged theft of sensitive technological information.

What to watch: Trade secret disputes increasingly carry parallel civil and criminal risk. Companies confronting suspected misappropriation must evaluate not only civil remedies but also potential engagement with law enforcement.

Seventh Circuit Tightens Proof Requirements for Customer and Business Information

Secrecy measures and economic value must be demonstrated — not assumed

In a published opinion, the U.S. Court of Appeals for the Seventh Circuit affirmed dismissal of trade secret claims arising from a commercial dispute involving alleged misappropriation of customer-related and business information.

The plaintiff asserted that the defendant improperly used materials such as customer lists, pricing information, and internal business data. The Seventh Circuit held that the plaintiff failed to meet its burden under the Defend Trade Secrets Act and parallel state law because it did not adequately establish that the information qualified as a trade secret.

The court emphasized that to qualify as a trade secret, information must derive independent economic value from not being generally known and must not readily be ascertainable. The appeals ruling cited the district court, which explained, “[d]escribing the software functions without disclosing the underlying methods is like saying someone stole your top secret apple pie recipe, but never identifying the secret recipe itself.”

What this means: Plaintiffs must present disciplined proof of both secrecy measures and secrecy-driven economic value. Without that evidentiary foundation, claims are vulnerable at summary judgment.

Fifth Circuit Affirms District Court’s Rejection of $75 Million Trade Secret Damages Award

Failure to apportion leaves plaintiff with injunction but no monetary recovery

In a published opinion, the U.S. Court of Appeals for the Fifth Circuit affirmed a district court’s decision to set aside a $75 million trade secret damages award after concluding that the plaintiff failed to properly apportion damages to the alleged trade secrets.

The jury had awarded approximately $75 million based on claims that the defendant misappropriated proprietary business information. Following the verdict, however, the district court determined that the plaintiff’s damages theory improperly attributed the defendant’s broader commercial success to the asserted trade secrets without separating their specific economic contribution.

On appeal, the Fifth Circuit agreed. The court emphasized that trade secret damages must reflect the value of the protected information itself — not the entire value of a product or business that may incorporate both protectable and non-protectable elements.

The opinion makes clear that where revenue streams are driven by multiple inputs, the plaintiff bears the burden of disentangling the portion attributable to the trade secret. A damages model that assumes misappropriation equals total revenue, without analytical separation, cannot stand.

Because the plaintiff failed to present a legally sufficient basis to isolate the incremental value of the trade secrets, the district court properly rejected the monetary award. The Fifth Circuit affirmed that ruling, leaving the plaintiff with injunctive relief but no damages recovery.

What this means: The decision reinforces a critical appellate theme: precision in damages is as important as precision in defining the trade secret itself. Even where liability is established, courts will require a disciplined methodology that isolates the economic value of the protected 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.

February Securities Litigation Brief: From Fraud Focus to Funko Fallout

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.

SEC Signals Shift in Enforcement Priorities and Wells Process

In her first public remarks as the SEC’s Director of Enforcement, Margaret Ryan outlined both procedural and substantive priorities. She stated that recipients of Wells Notices will have four weeks, rather than two, to submit Wells submissions – reflecting current practice – and will have an opportunity to meet with senior members of the Division during the Wells process. She also emphasized that the Enforcement Division will prioritize egregious fraud causing serious harm over non-fraud technical violations.

Following Ryan’s remarks, the Division of Enforcement issued a revised Enforcement Manual that reflected these changes in the Wells Submission and enforcement process.

Why it matters: Ryan’s direction and the new Enforcement Manual could materially affect the course of SEC investigations. Access to senior staff during the Wells process provides a more direct opportunity to shape charging decisions, while the emphasis on egregious fraud may result in fewer SEC actions on technicalities.

Ninth Circuit Clarifies When Risk Factors Become Misleading

In Construction Laborers Pension Trust of Greater St. Louis v. Funko, the Ninth Circuit took up a recurring question: When does a company cross the line by warning that something might happen when, in reality, it is already happening?

The case involves Funko, the company best known for its popular Funko Pop collectible figurines. Investors alleged that Funko failed to disclose it was sitting on a growing pile of “dead” inventory and struggling with inventory management. While the court agreed that some of the challenged statements were mere puffery or not independently false, it held that the company’s risk disclosures spoke only in terms of potential inventory problems. According to the complaint, excess inventory was already accumulating without proper recording, leading to significant write-downs.

The Ninth Circuit also held that scienter was adequately pleaded under the “core operations” theory. Because inventory management was central to Funko’s business model, the court concluded that it was reasonable at the pleading stage to infer that senior executives would have known about serious inventory problems.

Why it matters: The Ninth Circuit’s risk-factor jurisprudence has at times created confusion for district courts. The decision reinforces that companies cannot rely on boilerplate warnings about hypothetical risks when known problems are developing in real time. It also underscores the continued importance of the core operations theory in the circuit, an important consideration for both plaintiffs and defendants at the pleading stage.

Northern District of California Rejects “Fraud by Hindsight” in Liquidity Case

A Northern District of California court dismissed securities claims against Maxeon Solar Technologies and its former CEO and CFO, holding that plaintiffs again failed to allege materially false statements. In Menon v. Maxeon Solar Technologies, Ltd, Plaintiffs had claimed that the defendants concealed a severe liquidity crisis and the company’s dependence on financing from a Chinese shareholder, allegedly jeopardizing a Department of Energy loan. The court found no well-pleaded facts showing that, at the time of certain statements in November 2023, the defendants knew the company would be forced to obtain that financing, a development not announced until months later.

Why it matters: The ruling reinforces a core principle of securities law: Claims cannot rest on “fraud by hindsight.” The mere possibility that an adverse event might occur does not mean that executives knew it would occur. For companies facing liquidity-based claims, what matters is what executives knew at the time – not how the company performed later.

Court Denies Elon Musk’s First Amendment Arguments in SEC Matter

On February 3, the U.S. District Court for the District of Columbia denied Elon Musk’s motion to dismiss the SEC’s action (in SEC v. Musk) alleging violations of Section 13(d) of the Exchange Act, which requires investors who acquire more than 5% of a public company’s stock to make specified public disclosures. Musk argued that Section 13(d) violates the First Amendment as compelled speech and that he was subject to selective enforcement. The court rejected those arguments, allowing the case to proceed.

Separately, in a related class action in the Northern District of California, a judge excused 38 of 92 prospective jurors who stated they could not be fair and impartial due to their views about Musk.

What to watch: The First Amendment challenge tees up a potentially significant appellate issue. The federal securities disclosure framework rests on compelled disclosures, and a ruling that Section 13(d) is unconstitutional could have implications beyond this case. Moreover, the difficulty in jury selection demonstrates the challenge of finding neutral, objective jurors in cases involving polarizing public figures.

SDNY Allows IPO Claims to Proceed in Part Against Hesai Group

The U.S. District Court for the Southern District allowed part of an IPO-related securities lawsuit against Hesai Group to move forward. In Wong v. Hesai Group, the investor claims that the company’s IPO registration statement and prospectus downplayed a shift toward lower-margin products and failed to disclose the risk that Hesai could be labeled a “Chinese Military Group” by the U.S. government.

The court found that the complaint adequately alleged the company was already moving toward lower-margin products at the time of the IPO and allowed that claim to proceed. But it dismissed the claim tied to the military designation as too late; under Section 11, investors have one year to sue after they have enough information to bring a claim. Here, the court held that a Department of Defense memorandum explaining why Hesai was added to the list was publicly available and provided enough detail to put a reasonably diligent investor on notice.

The court also held that the plaintiff lacked standing to bring the Section 12(a)(2) claim because he did not actually buy shares in the IPO, which is required to bring such a claim.

Why this matters: For companies and their counsel, the decision highlights the importance of tracking what information about the company is publicly available (and when). Courts may start the statute of limitations clock once detailed, entity-specific facts enter the public domain, even if they are disclosed in regulatory filings or court memoranda that are not widely publicized. Defense strategy should account for whether and when public materials could be deemed sufficient to put a reasonably diligent investor on notice.

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.

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.