June Trade Secrets Litigation Brief: OpenAI Wins Again, Edelman Falls Short, Fintech and Fleet Tech Competitors Clash

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 Judge Dismisses With Prejudice xAI's Trade Secret Claims Against OpenAI

Court finds insufficient the allegations that OpenAI induced a former employee to disclose confidential information

U.S. District Judge Rita Lin dismissed with prejudice xAI's trade secret lawsuit against OpenAI. The suit, filed in February, centered on former xAI employee Xuechen Li, who xAI accused of downloading source code while being recruited by OpenAI and disclosing a confidential xAI presentation during the recruiting process.  The case followed the departure of eight xAI engineers and executives in the summer of 2025, most of whom joined OpenAI.

Judge Lin had previously dismissed the misappropriation claim with leave to amend.  In the amended complaint, xAI asserted two theories of misappropriation: (1) OpenAI induced xAI’s former employee to misappropriate xAI’s trade secrets; and (2) xAI’s former employee disclosed trade secrets to OpenAI in a presentation delivered during the recruitment process. 

Both theories still failed to state a claim as a matter of law.

First, Judge Lin rejected xAI's argument that OpenAI's hiring process amounted to inducement.  She held that "Merely asking Li to discuss his previous work — a routine part of the hiring process — does not allow a plausible inference that OpenAI induced Li to reveal anything confidential or secret about that work."

Second, Judge Lin held that the OpenAI’s alleged receipt of trade secrets during a recruitment presentation could not amount to misappropriation.  At most, the allegations amounted to OpenAI passively receiving the trade secrets rather than actively attempting to acquire them:     "Mere possession of trade secrets is not sufficient to constitute misappropriation," she wrote.

Since Judge Lin had previously given xAI leave to amend the misappropriation allegations—and it failed to do so adequately—she dismissed the amended complaint with prejudice. 

What this means: A Plaintiff that sues a competitor over a former employee's alleged theft must allege that the competitor actively participated in the acquisition or use of trade secrets — not simply that it hired someone who may have taken confidential information. Routine recruiting conduct, including asking candidates about prior work, is unlikely to support a misappropriation claim.

Samsara Secures Permanent Injunction Against Former Employee Who Joined Motive

Settlement resolves individual dispute even as broader litigation between the fleet-tech rivals continues

Samsara resolved a trade secret dispute with William Reich, a former senior manager in enterprise field sales who left the company to join competitor Motive. Under a stipulated permanent injunction entered by the U.S. District Court for the Northern District of California, Reich agreed to comply with the confidentiality agreement he signed when he joined Samsara in 2022, including a bar on disclosing Samsara proprietary information to any third party, "including any future employer or his former employer Motive." Samsara said Reich also agreed to pay an undisclosed but substantial sum for breaching his employment agreement and has since resigned from Motive.

Samsara's 2024 complaint had alleged that Reich downloaded a large volume of trade secrets and confidential information, including in-development product offerings and customer data, in the days before he resigned. Samsara Chief Legal Officer Adam Eltoukhy said the company "will always take decisive action to safeguard the innovations that power our platform and serve our customers."

The injunction closes one piece of litigation between the two companies. Motive was recently cleared in a patent infringement suit brought by Samsara, while Samsara separately won a $30.3 million judgment against Motive over false advertising claims earlier this year. Samsara filed a new patent infringement suit against Motive the same day the Reich settlement was disclosed.

What this means: A signed confidentiality and invention-assignment agreement, paired with prompt legal action, can allow a company to resolve an individual departing-employee dispute through a stipulated injunction without fully litigating the merits — even as separate, larger disputes between the same corporate rivals remain unresolved.

Pagaya Sues Klarna Over Point-of-Sale Underwriting Technology

Fintech company alleges former partner used shared data to build a competing system

Pagaya Technologies sued its former partner Klarna, alleging that the buy-now-pay-later company misappropriated trade secrets tied to point-of-sale loan underwriting. Pagaya, which had assessed subprime borrowers for Klarna at checkout since 2022, claims Klarna "distilled Pagaya's core underwriting technology for POS loans and then willfully misappropriated its trade secrets" and breached related agreements.

 According to the lawsuit, filed May 14, Klarna's goal was to "absorb Pagaya's trade secrets, use them to build its own competing capabilities, and cut Pagaya out of the very business Pagaya made possible for Klarna," all while misrepresenting an intent to expand the partnership. Pagaya pointed to public statements by Klarna CEO Sebastian Siemiatkowski, including a claim on a February earnings call that Klarna's underwriting relied on "proprietary underwriting systems that we've developed" built on "the knowledge we have built around risk management for the past 20 years." Pagaya alleges that statement was false and that Klarna CFO Niclas Neglén signaled on the same call that Klarna intended to move more transactions onto its own systems.

Klarna disputes the claims, saying it notified Pagaya on March 25 that it was ending the commercial relationship "as is our contractual right," and that it considers the lawsuit meritless.

What this means: Long-running commercial partnerships that involve sharing proprietary technology with a vendor or counterparty can leave both sides exposed once the relationship ends, particularly where one party's later public statements about its own capabilities can be used as evidence of what it allegedly absorbed from the other.

Mariner Wins Summary Judgment Over Edelman in Financial Advisor-Poaching Dispute

Federal judge also faults Edelman's briefing tactics while rejecting claims tied to client lists

Federal judge Holly L. Teeter for the District of Kansas granted summary judgment to Mariner Wealth Advisors, dismissing trade secret claims brought by Edelman Financial Engines over the departure of 10 former Edelman planners who joined Mariner. Edelman first sued in 2023, alleging that Mariner encouraged advisors to breach non-solicitation agreements and misappropriate client information.

The court found that Edelman failed to establish either that the partial client lists the planners brought with them qualified as trade secrets or were improperly acquired under the Defend Trade Secrets Act.  Edelman also had insufficient evidence that Mariner directed its new hires to bring client data rather than simply retaining knowledge of client names — which the court held does not rise to the level of a protected trade secret. Teeter concluded that no reasonable jury could find for Edelman on the trade secret claims.

The judge separately admonished Edelman's legal team for what she described as improper briefing tactics, including misrepresenting evidence and missing citations.  She noted that the problems "appear throughout Edelman's briefing, to the point that the court cannot excuse them." Edelman said in a statement that it disagreed with the ruling and would continue to pursue its claims; Mariner said it was pleased the court agreed the claims lacked merit.

What this means: Departing employees' memory of client names and relationships generally will not support a trade secret claim absent proof that specific, protectable information was taken or that the new employer directed its acquisition. Litigants should also take note that evidentiary shortcuts in briefing can draw judicial criticism that colors the outcome of a case.

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.

June Securities Litigation Brief: SCOTUS Reshapes the SEC’s Playing Field

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. 

SCOTUS Backs SEC on Disgorgement

On June 4, a cheer likely echoed through the halls of the Securities and Exchange Commission in Washington, D.C.. After a series of legal setbacks at the Supreme Court, the SEC finally won one: In Sripetch v. SEC, the Court unanimously held that the SEC may seek disgorgement of illicit profits from a wrongdoer without the need to show any actual pecuniary harm to investors. 

The decision resolved a split among the Circuit Courts of Appeal, in which the First Circuit and Ninth Circuit (where Sripetch originated) held that there was no requirement to show that investors suffered pecuniary damages, whereas the Second Circuit held that such harm needed to be demonstrated. The Sripetch decision followed the Court’s 2020 decision in Liu v. SEC, which held that Section 21(d)(5) of the Securities and Exchange Act, authorizing courts to grant equitable relief in SEC actions that is “appropriate or necessary for the benefit of investors,” included the remedy of disgorgement, but also holding that, among other things, disgorgement must be awarded for the benefit of investors, not the Treasury. After the Liu decision, Congress enacted Section 21(d)(7) of the Exchange Act expressly authorizing the SEC to seek disgorgement. 

In the underlying case, the SEC alleged that Ongkaruck Sripetch ran a pump-and-dump fraud, and in connection with a settlement, obtained a court order requiring disgorgement of over $4.1 million. Sripetch objected to the order on the grounds that there were no victims for whom disgorgement could be ordered under Liu. 

The opinion of Justice Gorsuch held that there was no need to decide whether Section 21(d)(5) or (7) applied, because under traditional equitable principles, a court could order a defendant “to disgorge the value attributable to his invasion of the plaintiff’s legally protected interests without requiring a showing of pecuniary loss.” Here, the fraudulent stock scheme violated the legally protected interests of defrauded investors. The Court rejected Sripetch’s concern that the SEC might use Section 21(d)(7) to obtain penalties without a jury trial, stating that the Court would remain vigilant against any effort by the SEC to transform disgorgement into penalties because that would exceed basic equitable principles and require a jury trial. In a concurring opinion, Justice Thomas suggested that Congress’ decision to separate disgorgement from equity indicated that disgorgement was a legal remedy requiring a jury trial.

Why It Matters: The Sripetch decision preserves the SEC’s ability to obtain disgorgement so long as it can show that a defendant invaded the “legally protected interests” of investors even if the SEC cannot show actual financial harm to investors. But the victory came with a warning that the Court will ensure that the SEC does not overstep its boundaries and use traditional equitable principles as a basis for disguised penalties. Justice Thomas’ concurring opinion may foreshadow a coming battle over whether disgorgement orders require a jury trial.

SCOTUS Rejects Private Right of Action to Sue Investment Companies

On June 11, a divided Supreme Court held that investors do not have the right to sue an investment company under the Investment Company Act of 1940 to rescind a contract that violates the ICA’s provisions, holding that only the SEC has the authority to bring suit.

Section 47(b) of the ICA provides that a contract that violates the ICA or any rule thereunder is unenforceable by either party and that to the extent that such a contract has been performed, “a court may not deny rescission at the instance of any party” unless the denial of rescission would produce a more equitable result. 

In FS Credit Opportunities Corp. v. Saba Capital Master Fund, the Court, in a 6-3 vote, reaffirmed prior decisions holding that courts will not imply private rights of action where Congress has not expressly authorized lawsuits, even if that means that there is a purported “right” that cannot be enforced. The decision by Justice Barrett reversed a decision by the Second Circuit holding that a private right of action existed under Section 47(b), in contrast to other Circuit Courts, including the Ninth Circuit, holding to the contrary.

In FS Credit Opportunities Corp., Saba Capital, a shareholder activist, sued 16 closed-end mutual funds, alleging that the funds violated the ICA’s requirement that every share of stock shall have equal voting rights with every other outstanding stock. The Court held that the language of Section 47(b) did not create a private right of action, but was only a “mandate . . . directed to courts” that they cannot deny rescission to parties who request it unless the equities and statutory purposes favor a different result.

Section 47(b)’s text presupposes that parties are already before the court and directs the court’s use of remedial authority. But the statute empowers the SEC to enforce the ICA, not private parties, except for two provisions that expressly authorize private lawsuits, which shows that Congress knew how to create express rights of action when it wanted to do so. The dissent by Justice Jackson, in which Justice Sotomayor joined and Justice Kagan joined in part, held that the text, structure and statutory history of the ICA supported a private right of action under Section 47(b).

Why It Matters: The decision is mildly surprising, given that at oral argument, Chief Justice Roberts and Justice Kavanaugh appeared to express sympathy for a private right of action under Section 47(b). But the conservative majority‘s hostility to private rights of action for the past 30 years won out. Congress could always create an express right of action under Section 47(b) but does not appear interested in doing so. A more interesting question is whether the Court at some point would consider reversing longstanding implied private rights of action under the securities laws, such as Section 10(b) of the Exchange Act.

SCOTUS Limits Scope of Right to Jury Trial Under SEC v. Jarkesy

On June 4, in addition to the decision in Sripetch v. SEC (see above), the Supreme Court issued another decision which, although concerning the powers of the Federal Communications Commission, addressed the scope of the Court’s decision two years ago in SEC v. Jarkesy. That decision held that defendants in SEC actions alleging fraud and seeking penalties were entitled to a jury trial under the 7th Amendment to the Constitution and could not have their case adjudicated by an in-house administrative proceeding. 

Jarkesy set the stage for the decision in FCC v. AT&T, in which the FCC investigated AT&T and Verizon regarding their treatment of cellular location data. Concluding that the carriers had violated rules requiring them to keep the information confidential, the FCC issued orders seeking forfeiture from the carriers in the amount of $57 million from AT&T and $47 million from Verizon. After such an order, the carrier could pay the fine and appeal to a Circuit Court, or it could not pay the fine, in which case the Government could file a lawsuit to collect the fine that would be a jury trial de novo. The Fifth Circuit held that the action against AT&T violated the right to a jury trial, while the Second Circuit held that the FCC did not violate the 7th Amendment when it issued a forfeiture order against Verizon.

Reversing and remanding the decision of the Fifth Circuit, the Court ruled 8-1, in a decision by Chief Justice Roberts, that the forfeiture orders did not determine the carriers’ legal obligations because there was no final obligation to pay. There were no penalties for nonpayment, interest did not accrue, and there were no collateral legal consequences. Thus, this situation differed from Jarkesy, in which penalties were immediately enforceable without a jury trial. The 7th Amendment does not apply to preliminary legal proceedings or the risk of reputational harm. Justice Thomas dissented, stating that there would not have been the kind of jury trial that the Government now promised when the forfeiture orders were entered in 2024.

Why It Matters: It is interesting that at oral argument the Government’s attorney represented to the Court that the forfeiture orders were fairly worthless, without any binding legal effect. Will that be the means by which agencies now will use to circumvent Jarkesy – arguing that the in-house administrative proceedings are only preliminary and really pointless, so that the 7th Amendment does not apply. Also noteworthy is that the Court rejected the carriers’ argument that the Government had violated their constitutional rights by making it too costly to exercise them – either the companies would have to pay the fine and appeal, or not pay and wait nervously to see if the Government brought a collection action within the five-year statute of limitations. Maybe that argument does not apply to wealthy companies like AT&T and Verizon, but would it have more clout with a smaller company or an individual?

SCOTUS Decides the President May Fire Agency Commissioners

In a decision that will affect the operation of the SEC, as well as many other federal agencies, the Supreme Court on June 29 overturned a 91-year-old decision and in a 6-3 vote struck down a federal law barring the President from firing members of the Federal Trade Commission except for “inefficiency, neglect of duty or malfeasance in office.” In other words, so-called “independent regulatory agencies” are no longer independent; they are merely part of the executive branch and a President may fire commissioners without cause.

The SEC, like other regulatory agencies, has five commissioners, of which no more than three may be from one party. Typically, three commissioners, including the chairman, come from the party of the President and two are from the opposition party. The commissioners are nominated by the President and confirmed by the Senate. But Congress prohibited the President from firing the commissioners without cause, a structure affirmed by the Supreme Court’s 1935 decision in Humphrey’s Executor v. U.S., in which the Court held that President Roosevelt lacked authority to fire an FTC Commissioner because the agency had a quasi-legislative and quasi-judicial function, and therefore was not part of the executive branch.

But Chief Justice Roberts, writing for the Court in Trump v. Slaughter, held that the President could remove Rebecca Slaughter, a Democratic appointee to the FTC, without cause because the for-cause removal provision enacted by Congress violated the Constitution’s separation of powers doctrine. The majority opinion held that the FTC was now invested with sweeping powers to conduct investigations, bring lawsuits and issue regulations, far different than conditions in 1935. Because the FTC’s activities fall well within “the heartland” of executive power, they must be controlled by the President. Justice Sotomayor dissented, in an opinion joined by Justices Kagan and Jackson.

Note: The Court separately held that the President could not fire a Governor of the Federal Reserve without cause, given the structure of the statute creating the Federal Reserve and the traditional independence accorded national banks.

Why It Matters: It is unclear how the Court’s decision will impact the SEC and securities regulation. It may mean that a President will not nominate members of the opposition party to be SEC Commissioners. After all, why nominate someone and have the Senate bother to confirm, when the President could fire the new Commissioner immediately after the swearing-in? Indeed, the SEC presently has three Republican and no Democratic Commissioners.

There will be a loss in not having members of the opposition party as Commissioners. They function to “keep the majority honest,” asking pointed questions at Commission meetings and issuing dissenting decisions to regulatory actions. The presence of opposition commissioners may force a compromise on more controversial decisions. Thus, the Slaughter decision may mean that securities regulation will swing more wildly from Administration to Administration. There may be some institutional barriers to firing commissioners of the opposite party; if the Senate is controlled by the opposition party, the majority may send word that if the President keeps firing its commissioners, the Senate will not confirm the President’s nominees.  

Delaware Chancery Court Splits on Chairman’s Equity Grant and Director Pay Claims 

On June 15, the Delaware Chancery Court split the baby when it came to derivative claims concerning a one-time equity grant to the company’s chairman and increased compensation to non-employee directors.

The decision in Ayers v. Foley analyzed the impact of the 2025 amendments to the Delaware General Corporation Law. First, because the two committees that approved the chairman’s equity grant were composed of directors that met independence standards, the plaintiff had to overcome the heightened presumption of disinterestedness codified in Section 144(d)(2). In conjunction with Delaware Civil Procedure Rule 23.1, this statutory mandate elevates the burden to rebut a director’s impartiality, requiring substantial and particularized allegations of a material interest or relationship. The Court held that the complaint failed to satisfy this standard. Nor did the plaintiff plead facts showing that a majority of the Board faced a substantial likelihood of liability for approving the grant.

By contrast, the directors’ self-compensation was a different matter, because the approving committee members were inherently interested. Absent a stockholder vote compliant with Section 144(a)(2), the approval had to meet the entire fairness standard, meaning that defendants bear the burden of showing that the transaction was both the product of fair dealing and that the price was fair. At the pleading stage, the plaintiff had satisfied the burden of pleading facts showing that the enhanced compensation was the product of unfair dealing and an unfair price. The breach of fiduciary duty claim survived against the directors who approved the compensation, but not against the passive recipients of the award.

Why It Matters: This decision illustrates the application of the new amendments to the DGCL in analyzing conflicted transactions. In particular, the decision demonstrates the importance of having conflicted transactions approved by committees composed of independent directors. But where the directors themselves are conflicted, it is necessary for the transaction to be approved by an informed, non-coerced majority of disinterested stockholders.

Five Days or Several Weeks? Section 709 and Section 225 as Pressure Tools in Director Disputes

When a board fight moves from the boardroom to the courtroom, a key factor in the outcome is how quickly a court can and will declare a victor. California and Delaware each provide a purpose-built answer. California Corporations Code section 709 requires a hearing within five days of filing. Delaware General Corporation Law section 225 channels the same dispute into the Court of Chancery's summary docket, where trial typically arrives within roughly forty-five to ninety days. The two regimes share a common animating policy, but they diverge in important ways, and for litigators on either side of a contested election, removal, or appointment, the differences matter. The discussion that follows walks through the policy logic the two statutes share, the procedural and substantive lines that distinguish them, and the strategic uses each provision offers for plaintiffs and defendants in corporate governance disputes.

A Shared Policy of Quick Answers

A corporation cannot function for long with two slates claiming the same seats. Both California and Delaware have recognized that, when control is genuinely in dispute, ordinary civil procedure is too slow to keep an enterprise from being immobilized by uncertainty about whose vote counts and whose signature binds.

Section 709(a) authorizes any shareholder or any person who claims to have been denied the right to vote to file an action in Superior Court to determine the validity of any election or appointment of a director of a domestic corporation, or of a foreign corporation where the election was held in California. Section 709(b) then imposes an unusually short procedural runway: the court must enter an order setting a hearing date “within five days unless for good cause shown a later date is fixed.” Cal. Corp. Code § 709(a), (b). The relief available is correspondingly direct. The court may determine the person entitled to the office of director, order a new election to be held, and/or rule on the validity and construction of voting agreements, voting trusts, the issuance of shares, and the right of persons to vote. Id. § 709(c).

Section 225 of the Delaware General Corporation Law speaks to the same need. Upon application of any stockholder or director, or any officer whose title to office is contested, the Court of Chancery may hear and determine “the validity of any election, appointment, removal or resignation of any director or officer” and “the right of any person to hold or continue to hold such office.” 8 Del. C. § 225(a). The Delaware Supreme Court has explained that section 225 exists “to provide a quick method for review of the corporate election process to prevent a Delaware corporation from being immobilized by controversies about whether a given officer or director is properly holding office.” Box v. Box, 697 A.2d 395, 398 (Del. 1997). Section 225 actions are litigated as summary proceedings, and the Chancery Court routinely brings them to trial within a few months of filing.

Same problem and same animating policy, but different procedural cadences. And that cadence is just one way in which the two statutes diverge.

Where the Two Provisions Diverge

Despite the common purpose, practice under section 709 and section 225 are meaningfully different.

Speed. Section 709(b)’s five-day clock is the more aggressive of the two statutes by a considerable margin. California courts will adjust the date for good cause, but the default expectation places the entire dispute in front of a judge in less than a week. Section 225, by contrast, runs on Chancery’s summary calendar, which typically yields a trial in roughly forty-five to ninety days depending on complexity, with bench trials and pre- and post-trial submissions in lieu of opening and closing statements.

Scope of Office. Section 709 targets the election or appointment of any director. Cal. Corp. Code § 709(a). Section 225 is broader, reaching the validity of any election, appointment, removal or resignation of a director or officer. 8 Del. C. § 225(a). Thus, a practitioner whose dispute centers on the validity of an officer’s purported removal or resignation has a textual hook in Delaware that the California statute does not cleanly provide.

Breadth of Issues That Travel With the Office Dispute. At the same time, Delaware draws a strict perimeter around its statute. Because section 225 actions are in rem proceedings, the Court of Chancery will only adjudicate questions whose answers would “help the court decide the proper composition of the corporation’s board or management team.” Genger v. TR Investors, LLC, 26 A.3d 180, 199-202 (Del. 2011) (record ownership of shares is within scope; ultimate beneficial ownership is not). Collateral fiduciary claims and damages issues must be filed as a separate, plenary action. California has taken the opposite tack. The Court of Appeal has held that the summary procedures of section 709 may be used to contest corporate elections predicated upon complex and substantive allegations, including conflicts of interest and breaches of fiduciary duty. Morrical v. Rogers, 220 Cal. App. 4th 438, 450-60 (2013). That means California courts may wind up hearing a wide array of issues on extremely short notice—which is a feature for some clients and a problem for others.

Forum. A related difference is that Section 709 is litigated in California Superior Court, a court of general jurisdiction. Section 225, however, is litigated in the Court of Chancery, a specialized equity court whose judges write extensively (and most prominently) on corporate governance and whose decisions carry national weight.

Other Determinations Made Along the Way. Both statutes permit ancillary findings on voting agreements, voting trusts, share validity, and the right of persons to vote. Cal. Corp. Code § 709(c); 8 Del. C. § 225(a). The Court of Chancery, however, will refuse to use those tools to reach questions not strictly necessary to determine the composition of the board, while California's broader treatment under the case law allows the court to push further.

Taken together, the two statutes operate from a shared blueprint but with different default settings. California is faster and broader at the front of the case. Delaware is more constrained in scope, more specialized in forum, and more deliberate in pace.

The Litigator's Toolbox: Pressure, Sequencing, and Leverage

The reason why both of these statutes deserve a permanent place in the corporate governance practitioner's arsenal has less to do with what they let a court decide and more to do with how their pace and structure reshape the dynamics around them.

For plaintiffs, the expedited posture is the lever. Filing a section 709 petition turns a control dispute into a near-immediate evidentiary hearing in which a recalcitrant board must arrive in court with documents, witnesses, and a coherent story before its lawyers have finished onboarding. The five-day clock leaves limited room for delay tactics, and the breadth allowed under Morrical gives a plaintiff a credible vehicle for pulling fiduciary-duty and conflict-of-interest theories into the same hearing, rather than splitting them off into a parallel proceeding. In Delaware, the trial-in-weeks timeline of a section 225 petition may leave just enough time to force prompt settlement discussions, particularly when a transaction, financing, or stockholder meeting waits on resolution. Many such disputes never reach the courtroom because the side without a viable position would rather negotiate than face a fast bench trial in a specialized court.

For defendants, these same statutes are tools too. In Delaware, the in rem and non-collateral boundaries that the Supreme Court drew in Genger give a respondent a credible basis to carve fiduciary-breach, damages, and beneficial-ownership claims out of the section 225 case and push them to plenary actions where ordinary scheduling applies. That can fracture a plaintiff's strategy and slow down the components of the dispute that are not strictly about who occupies the chair. In California, defendants can invoke the good-cause exception in section 709(b) to push the hearing date out, while still using the summary posture to narrow the issues and to obtain an early adjudication that may have practical preclusive effect on a broader stockholder action that follows. In either jurisdiction, where the defendant believes the record will support the incumbent slate, an early hearing fixes the question of office in a public ruling that nominators, exchanges, lenders, counterparties, and proxy advisers will treat as dispositive.

Conclusion

Section 709 and section 225 do similar work in somewhat different ways. Both provisions reflect a considered policy choice: corporate governance disputes warrant speed, because uncertainty about who holds office can paralyze a company and harm constituencies who never agreed to bear that cost. The procedural details, the breadth of cognizable issues, the choice of forum, and the speed at which each statute moves shape the strategy available to litigants on both sides. For practitioners who do not regularly handle election contests, building familiarity with these tools is well worth the time. They can compress months of motion practice into a single hearing, recast the negotiating leverage in a control fight, and deliver a clean judicial answer to the threshold question that often controls everything that follows.

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.

Fairness in Two Dialects: Delaware’s Entire Fairness and California’s Inherent Fairness Standards for Interested Corporate Transactions

For a corporate fiduciary contemplating a self-interested transaction, the legal landscape can look like one continent with two languages. Delaware speaks of “entire fairness.” California, on the other hand, speaks of “inherent fairness.” Both doctrines spring from the same equitable instinct—a deep suspicion of the fiduciary who tries to wear two hats at once—but they have developed in different ecosystems, with different statutes, different case law, and different procedural plumbing. Three observations follow. 

First, California’s trigger for fairness review is broader on the page than Delaware’s, even after Delaware’s recent expansions. Second, the standards are similar in substantive aspiration but materially different in mechanics, and they are not interchangeable. Third, California courts occasionally borrow Delaware’s “entire fairness” terminology, and that borrowing is sometimes careless in ways that can mislead litigants and trial courts.

The Trigger: Where Fairness Review Begins

Delaware. Delaware’s entire fairness standard is engaged when the board’s decision-making is compromised by self-interest or domination. Classically, that means a controller stands on both sides of the transaction, Weinberger v. UOP, Inc., 457 A.2d 701, 710-11 (Del. 1983), or a majority of the board lacks disinterest and independence, In re Trados Inc. S’holder Litig., 73 A.3d 17, 44-46 (Del. Ch. 2013). The Delaware Supreme Court has continued to refine the inquiry. Most recently, In re Match Group, Inc. Derivative Litig., 315 A.3d 446 (Del. 2024), extended the MFW framework to controller transactions conferring a non-ratable benefit even outside the classic freeze-out context, and the 2025 amendments to Section 144 of the DGCL have begun to codify when those standards attach. The trigger, in other words, is keyed to specific structural defects in the deliberative process.

California. California’s trigger draws a wider arc. Section 310 of the Corporations Code reaches any contract or transaction “between a corporation and one or more of its directors, or between a corporation and any corporation, firm or association in which one or more of its directors has a material financial interest.” Cal. Corp. Code § 310(a). The statute does not require that the conflicted director stand on both sides of the deal in any controlling sense; a material financial interest will do. The case law extends fairness review well beyond the boardroom. In Remillard Brick Co. v. Remillard-Dandini Co., 109 Cal. App. 2d 405, 420 (1952), the Court of Appeal articulated a “comprehensive rule” demanding “inherent fairness from the viewpoint of the corporation and those interested therein.” The California Supreme Court extended that rule in Jones v. H.F. Ahmanson & Co., 1 Cal. 3d 93, 108 (1969) to controlling shareholders “in the exercise of powers that are theirs by virtue of their position.” That phrasing reaches well beyond a single conflicted contract; it gestures at any use of controlling power, in any form, that disadvantages the minority.

The upshot. On paper, California’s trigger is broader. A Delaware plaintiff often must show that the controller stood on both sides or that a majority of directors lacked independence. A California plaintiff need only show a material financial interest, or more sweepingly, an exercise of control to the detriment of the minority. Delaware has worked hard to catch up. Match Group, in particular, sweeps in non-ratable-benefit controller transactions that would have escaped review under earlier readings. But the textual starting line in California remains noticeably closer to the runner.  

That said, Match Group itself is no longer definitive Delaware law for all conflicted transactions. Match Group held that the entire fairness standard of review applied to any transaction where a controlling stockholder received a non-ratable benefit. To secure the more lenient Business Judgment Standard, defendants were required to satisfy both parts of the MFW framework, requiring approval by an independent committee and a vote by a non-coerced, informed minority stockholders.  The 2025 Amendments to the Delaware General Corporation Law provided a safe harbor for conflicted transactions if only one of these procedures is followed.

The Test: Similar in Principle

Once a transaction enters the fairness lane, the two doctrines do similar work with different instruments.

Delaware. Delaware’s Weinberger test is famously two-pronged: “[t]he concept of fairness has two basic aspects: fair dealing and fair price.” 457 A.2d at 711. Fair dealing examines “when the transaction was timed, how it was initiated, structured, negotiated, disclosed to the directors, and how the approvals of the directors and the stockholders were obtained.” Id. Fair price examines the economic and financial terms. The burden begins on the defendant fiduciary and can shift to the plaintiff through, for example, a vote by fully-informed, disinterested stockholders, or the use of an independent special committee. See Kahn v. Lynch Commc’n Sys., Inc., 638 A.2d 1110, 1117 (Del. 1994). Most powerfully, Kahn v. M & F Worldwide Corp., 88 A.3d 635 (Del. 2014), provided a cleansing path: if a controller transaction is conditioned ab initio on both an independent, fully functioning special committee and an uncoerced majority-of-the-minority vote, the business judgment rule applied. However, as discussed above, this framework was nullified by the 2025 Amendments. 

California. California’s framework is closer to first principles. Section 310 articulates a “just and reasonable” standard, with three pathways: (1) full-disclosure approval by disinterested directors; (2) full-disclosure approval by disinterested shareholders; or, failing those, (3) proof by the proponent “that the contract or transaction was just and reasonable as to the corporation.” Cal. Corp. Code § 310(a). The case law overlay sounds in equity rather than mechanics. Jones v. Ahmanson’s “fair, just, and equitable” formulation, 1 Cal. 3d at 108, and Remillard Brick’s “inherent fairness from the viewpoint of the corporation and those interested therein,” 109 Cal. App. 2d at 420, were not drafted to map cleanly onto a fair-dealing-versus-fair-price binary. Rather, they are open-textured invitations to scrutinize self-dealing for what it is.

Where the doctrines diverge. Delaware and California law’s substantive concerns are the same: fair price, fair process, and no opportunistic taking by a fiduciary. The mechanics, however, differ in ways that matter. Three stand out. First, Section 310’s cleansing turns on disclosure and approval; it does not allow approval of a conflicted transaction solely by an Independent Committee, which is now permitted by the 2025 Delaware Amendments. Second, Delaware’s burden-shifting has been refined through decades of case law, whereas California’s burden allocation under Section 310 is comparatively spare on paper and underdeveloped in the case law. Third, the cleansing effect of a fully informed disinterested stockholder vote, now codified in the 2025 Amendments, has no clean California analog beyond the textual safe harbors of Section 310 itself.

Put another way:  The standards are similar in aspiration, but not in their machinery. Delaware speaks in code, through switches, conditions, and fallbacks. California, by contrast, speaks in prose, through an equitable invitation atop a statutory backbone. If a transaction must pass through both states’ courts, counsel must plan for both.

When California Speaks Delaware: The Citation Problem

Because Delaware corporate law casts such a long shadow in California courtrooms, California opinions routinely cite Delaware authorities. The question worth asking, before any such citation, is whether the borrowing fits the corporation.

Legitimate borrowing. When a Delaware corporation is sued in California court, the internal-affairs doctrine mandates that the court rely on Delaware law, and Delaware’s entire fairness standard travels with it. Take, for example, Central Laborers’ Pension Fund v. McAfee, Inc., 17 Cal. App. 5th 292, 311-15 (2017). The defendant in Central Laborers’ was a Delaware corporation, and the California Court of Appeal applied Delaware’s entire fairness framework, including Weinberger’s fair-dealing/fair-price dichotomy, exactly as a Delaware court would.

Careless borrowing. Sometimes, however, California courts are less careful in their borrowing. California opinions analyzing California corporations under Section 310 and the Remillard/Ahmanson line sometimes reach across the bench for Delaware’s “entire fairness” vocabulary, including its labels, its burden-shifting mechanics, and even its cleansing process, without pausing to ask whether such doctrinal architecture really fits the California statute. The result is an occasional opinion that purports to apply California law, reads like a Delaware Chancery Court decision, and has holdings that may not square with either the California Corporations Code or the equitable tradition that animates it.

California and Delaware have different statutory safe harbors. The process for cleansing conflicted transactions under Delaware law, is not Section 310 cleansing. The procedural-protection regime under Delaware law, codified in the 2025 Amendments, has no Section 310 counterpart. Treating “entire fairness” and “inherent fairness” as synonyms invites lawyers and trial courts to import burden allocations and safe harbors that the California Legislature did not enact and the California Supreme Court has not adopted. The doctrines share DNA, not vocabulary, and the difference is not merely cosmetic. 

Conclusion

Delaware’s entire fairness and California’s inherent fairness are cousins, not twins. They share an ancestor, the equitable principle that a fiduciary who deals with herself bears the burden of justifying her conduct. But they have grown up speaking different languages, in different climates, surrounded by different statutory landscaping. California’s trigger is broader on paper; Delaware’s machinery is more elaborate in operation; and the growing line of California opinions that have ventured to borrow Delaware’s vocabulary is a useful reminder that fairness is not a single word in two accents but two doctrines with overlapping concerns and distinct mechanics. For litigators and transactional lawyers advising clients on either side of a conflicted deal, the practical lesson is to start with the right statute, end with the right standard, and never assume that what works in Wilmington works the same way in San Francisco, or that what works in San Francisco needs to be translated into the language of Delaware to count.

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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Ownership Requirements for Derivative Plaintiffs in California: The Contemporaneous and Continuous Ownership Rules

Shareholder derivative litigation is a powerful tool for holding corporate officers and directors accountable for breaches of fiduciary duty. Before a stockholder can pursue such a claim, however, California law imposes threshold ownership requirements that courts rigorously enforce. Under California Corporations Code § 800(b)(1) and the case law interpreting it, a derivative plaintiff generally must own stock in the corporation: (1) when the challenged transaction or conduct occurred; (2) at the time the lawsuit is filed; and (3) during the pendency of the lawsuit. See Grosset v. Wenaas, 42 Cal. 4th 1100, 1110-19 (2008).

These requirements—the “contemporaneous ownership” and “continuous ownership” rules—reflect two conceptually distinct doctrines, each with its own purpose, exceptions, and developing case law. Understanding both is essential for any stockholder contemplating derivative litigation in California.

The Contemporaneous Ownership Requirement

The contemporaneous ownership requirement mandates that a derivative plaintiff was a stockholder at the time of the alleged misconduct—or that the ownership interest devolved upon the plaintiff by operation of law from a holder who owned shares at that time. California Corporations Code § 800(b)(1) codifies this requirement, providing that no derivative action may be instituted unless “plaintiff was a shareholder, of record or beneficially … at the time of the transaction or any part thereof of which plaintiff complains or that plaintiff’s shares … thereafter devolved upon plaintiff by operation of law from a holder who was a holder at the time of the transaction or any part thereof complained of.”

The purpose of the contemporaneous ownership rule is to prevent “strike suits”—situations where an opportunistic investor purchases stock after learning of reported misconduct in order to manufacture standing to sue. Grosset, 42 Cal. 4th at 1109.  By requiring that the plaintiff have held shares during the conduct at issue, the rule ensures that the derivative plaintiff has a genuine and pre-existing stake in the corporation whose rights are being vindicated.

The Continuous Ownership Requirement and Its Two Elements

While the contemporaneous ownership requirement concerns the plaintiff’s stockholding at the inception of the alleged wrong, the continuous ownership requirement addresses the plaintiff’s ongoing stake in the litigation. As the California Supreme Court confirmed in Grosset, Cal. Corp. Code § 800(b)(1)’s language that no derivative action may be “instituted or maintained” without an ownership interest imposes a continuous ownership requirement: the plaintiff must hold shares both at the time of filing and throughout the pendency of the derivative action. (emphasis in original). Id. at 1111.

The continuous ownership requirement serves a distinct purpose from the contemporaneous rule. Its intent is to ensure that the derivative plaintiff continues to have “skin in the game” by maintaining an ownership interest throughout the pendency of the litigation. Grosset made this principle concrete by holding that a derivative plaintiff lost standing when he lost his stockholding as a result of a merger—even though he had properly held shares when the suit was filed. In doing so, the Supreme Court disapproved Gaillard v. Natomas Co., 173 Cal. App. 3d 410 (1985)  which had previously rejected a continuous ownership requirement under California law.

The continuous ownership requirement thus comprises two distinct elements: (1) the plaintiff must own stock when the suit is filed; and (2) the plaintiff must maintain that ownership interest throughout the litigation. Both elements must be satisfied to maintain derivative standing.

Exceptions to the Contemporaneous Ownership Requirement

Unlike Delaware law, California provides a statutory mechanism permitting courts to allow a derivative plaintiff who does not meet the contemporaneous ownership requirement to nonetheless maintain the action. Under California Corporations Code § 800(b)(1), a court may grant such an exception when the plaintiff demonstrates all five of the following elements:

(1)  There is a strong prima facie case in favor of the claim asserted on behalf of the corporation;

(2)  No other similar action has been or is likely to be instituted;

(3)  The plaintiff acquired the shares before there was disclosure to the public or to the plaintiff of the wrongdoing of which the plaintiff complains;

(4)  Unless the action can be maintained, the defendant may retain a gain derived from the defendant’s willful breach of a fiduciary duty; and

(5)  The requested relief will not result in unjust enrichment of the corporation or any shareholder of the corporation.

This statutory exception reflects a careful balancing of competing policy concerns. On one hand, the five-factor test maintains a meaningful barrier to opportunistic litigation. On the other hand, it recognizes that there may be circumstances—particularly where a plaintiff acquired shares before any public disclosure of wrongdoing, and where the wrongdoer stands to retain ill-gotten gains absent litigation—where equity demands flexibility. A similar exception applies to derivative actions brought on behalf of limited liability companies under California Corporations Code § 17709.02.

Equitable Exception to Continuous Ownership Rule

A critical question in derivative practice is whether the five-factor statutory exception described above can also excuse a plaintiff’s failure to meet the continuous ownership requirement. Under California law, the answer is no. The statutory exception under § 800(b)(1) addresses only the contemporaneous ownership requirement and does not extend to excuse a loss of standing caused by a plaintiff’s failure to maintain ownership throughout the litigation.

This distinction flows directly from Grosset. The California Supreme Court recognized the continuous ownership requirement as independently grounded in the statutory text’s requirement that an action be “maintained” with an ownership interest—a requirement separate from the “instituted” language that governs the contemporaneous ownership requirement. By treating continuous ownership as a freestanding and independently derived requirement, the Court’s analysis confirms that the statutory carve-outs applicable to the contemporaneous requirement do not automatically carry over to cure a mid-litigation loss of standing.

While the statutory exception is unavailable to cure a loss of continuous standing, Grosset acknowledged that equitable considerations may warrant an exception to the continuous ownership requirement. The Supreme Court identified two circumstances in which equity might intervene to preserve standing: (1) where a merger or similar transaction is used to wrongfully deprive the plaintiff of standing; or (2) where the transaction is merely a reorganization that does not meaningfully affect the plaintiff’s underlying ownership interest. Grosset, 42 Cal. 4th at 1119.

Subsequent California appellate decisions have elaborated on the contours of this equitable exception. In Haro v. Ibarra,  180 Cal. App. 4th 823, 836-37 (2009), the court reversed a trial court’s order sustaining a demurrer, holding that derivative plaintiffs should be permitted to allege that their shares were forfeited as a result of a fraudulent conversion. The Haro decision confirmed that equity can intervene to preserve derivative standing where the plaintiff’s loss of shares was itself the product of the wrongdoing at the heart of the case—effectively preventing defendants from weaponizing their own misconduct as a procedural shield against derivative claims. But see J.B.B. Inv. Partners, Ltd. v. Fair, No. A160098, 2022 WL 2071012 (Cal. Ct. App. June 9, 2022) (unpublished) (equitable considerations did not directly implicate plaintiffs’ ownership interests so as to trigger exception contemplated by Grosset and applied in Haro). 

EBO Properties North v. Sirott: A Significant New Development

A particularly important recent development comes from EBO Properties North v. Sirott, No. A169638, 2026 WL 205519, at *19 (Cal. Ct. App. Jan. 27, 2026) (unpublished). In EBO, the court addressed the equitable exception in the context of a limited liability company derivative action and reached a notable holding regarding the standard for invoking Grosset’s equitable exception: unlike Delaware law, California’s equitable exception to the continuous ownership requirement does not require proof of fraud in connection with the transaction that deprived the plaintiff of standing. Instead, it requires only that the reorganization was used “wrongfully” to remove standing.

This is a meaningful distinction with real practical consequences. Under Delaware’s continuous ownership framework, plaintiffs seeking to avoid dismissal on loss-of-standing grounds typically must show that the transaction was fraudulent or specifically designed to eliminate derivative claims. EBO signals that California courts may apply a more plaintiff-friendly standard—one that is satisfied by showing a transaction was used “wrongfully” (a broader concept than fraud) to strip the plaintiff of standing. While the decision concerned a limited liability company, the analysis of Grosset should apply equally to corporations.

Although EBO is unpublished and therefore not directly citable as binding precedent under California Rules of Court, it offers a valuable window into how California courts are developing the equitable exception to the continuous ownership requirement. The decision suggests that California’s approach may diverge meaningfully from Delaware’s in this area—and that the equitable exception, once viewed as narrow, may have more room to breathe than previously understood. Practitioners advising derivative plaintiffs who have lost (or are at risk of losing) their ownership stake mid-litigation should take careful note of this development.

May Trade Secrets Litigation Brief: Fed. Circuit Reversal on Damages, Insulin Pump Verdict Thrown Out, Disney's Fee Award, 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. 

Federal Circuit Reverses District Judge for Excluding Unjust Enrichment Damages Theory in Versata v. Ford, Orders New Trial 

Unjust enrichment available as measure of trade secret damages — not just the cost of a license 

The U.S. Court of Appeals for the Federal Circuit held that trade secret plaintiffs may seek unjust enrichment damages measured by a defendant's gains from misappropriated technology and ordered a new trial on trade secret damages in Versata Software's long-running case against Ford Motor Co. The court also reinstated $82.2 million of a $104.6 million jury verdict on the accompanying breach of contract claims. 

The trade secret misappropriation claims arise from Versata's allegation that Ford began copying its automotive software rather than continue paying annual licensing fees. Versata had licensed the software to Ford from 1998 to 2015, enabling Ford's engineers and marketing teams to collaborate on vehicle design with real-time updates across global operations. A Detroit jury awarded Versata $82.2 million for breach of contract and $22.4 million for trade secret misappropriation in 2022. U.S. District Judge Matthew Leitman overturned both awards in 2023, finding that Versata had not presented sufficient evidence to allow jurors to calculate damages accurately. The Federal Circuit reinstated the contract damages, holding the jury had calculated them with "reasonable certainty," but ordered a new trial on trade secret damages — and in doing so, reaffirmed that unjust enrichment, measured by what the defendant gained from the stolen technology, is an available measure of recovery, even if the record also supports the plaintiff having an established royalty fee for the trade secrets at issue.  The plaintiff has the right to elect either remedy.    

Reporting on the decision noted that the ruling could expose Ford to up to $1 billion in additional damages at retrial. 

What this means: The Federal Circuit's ruling upholds the statutory text of the Defend Trade Secrets Act (DTSA) by confirming that a plaintiff may elect unjust enrichment recovery even if the record otherwise supports a reasonable royalty. Where a defendant has profited from misappropriated technology, plaintiffs are not limited to seeking the value of a license they would have negotiated. The decision is a reminder that defendants must account not only for what the stolen information was worth to the plaintiff, but for what it may have been worth — or generated — in the defendant's hands. 

Federal Circuit Throws Out $59 Million Verdict Against EOFlow on Limitations Grounds 

Insulet's delay in filing suit bars recovery despite jury finding of misappropriation 

The U.S. Court of Appeals for the Federal Circuit overturned a $59 million verdict that medical device maker Insulet Corp. had won against Korean rival EOFlow Co. for misappropriating trade secrets related to its Omnipod insulin pump, holding that Insulet waited too long to bring its claim.  

The court found that Insulet should have known of the alleged theft by 2019 — four years before it actually sued. The three-year statute of limitations for trade secret claims under the DTSA ran from that point, and the complaint, filed in 2023, was too late. In doing so, the Federal Circuit held that the statute of limitations may be triggered even if the plaintiff lacks all of the evidence that may be needed to prove misappropriation. So long as the plaintiff has enough circumstantial evidence to plead misappropriation, the statutory period is triggered. 

What this means: This decision adds teeth to the DTSA’s statute of limitations.  Companies that observe warning signs — a competitor's sudden entry into the market, the departure of employees with access to sensitive information, a new product that resembles their own — must assess whether they are on inquiry notice and act accordingly. Waiting too long to build a stronger merits case risks the claim’s viability altogether.   

Texas Business Court Denies Texas Instruments' Bid to Sideline Former Executive 

Preliminary injunction rejected one day after filing as trade secret dispute heads to full litigation 

The Texas Business Court denied Texas Instruments' request for a preliminary injunction against former vice president Kannan Soundarapandian in a one-page order issued on May 21, 2026 — one day after Texas Instruments filed suit — allowing Soundarapandian to continue working at semiconductor competitor GlobalFoundries US Inc. while the trade secret case proceeds. 

Texas Instruments' complaint, filed in Fort Worth, alleges that Soundarapandian cannot perform his new role at GlobalFoundries "without drawing on TI's confidential recipes, roadmaps, targets, and positive and negative know-how." The suit followed an abrupt resignation in which Soundarapandian declined to identify his new employer. Texas Instruments says it subsequently learned he had joined GlobalFoundries, which it contends plans to offer clients process power to manufacture semiconductor devices using the same proprietary technology Texas Instruments developed. Judge Jerry Bullard rejected the company's bid to pause that employment without extended explanation. 

What this means: Obtaining preliminary injunctive relief in trade secret cases against departing executives is difficult, even where the underlying concerns may be well-founded. Courts require a plaintiff to demonstrate not only likelihood of success on the merits, but also a concrete threat of irreparable harm that cannot be adequately addressed through damages at the end of litigation. The court's swift refusal to pause Soundarapandian's employment does not determine how the underlying trade secret claims will be resolved — but it does mean Texas Instruments will need to develop its evidentiary record before it can expect a court to restrict where its former officer works. 

Disney Awarded $1.6 Million in Attorney Fees After Court Finds Moana Claims Were Brought in Bad Faith 

Forged confidentiality agreement and fabricated timeline draw sanctions for plaintiff and counsel alike 

Senior U.S. District Judge Consuelo Marshall awarded Walt Disney Co. $1.6 million in attorney fees after finding that Buck Woodall, a former animator, had brought federal and California trade secret misappropriation claims in bad faith — supported by a forged confidentiality agreement and a false account of when he first saw the film "Moana." 

The trade secret claims rested on Woodall's allegation that he had shared proprietary materials for a project called "Bucky the Surfer Boy" with Jenny Marchick — the stepsister of his brother's wife, who worked at Mandeville Films on the Disney studio lot in Burbank — and that Marchick had passed his materials to Disney Animation, which released "Moana" 13 years later. In support, Woodall attached to his 2020 complaint a purported 2003 confidentiality agreement bearing Marchick's signature. At trial, he admitted the document had actually been signed by a Hawaii model who had worked for him, that he had substituted Marchick's name, and that he had backdated it to October 22, 2003. The court found that the misrepresentations showed his "trade secrets claims were objectively specious and brought/maintained with subjective bad faith." 

The fabrication was compounded by a false account of when Woodall first saw the film. To avoid a statute of limitations problem, he alleged he had not seen "Moana" until June or July 2017. The court found he had seen it in theaters in 2016 and on DVD by March 2017 at the latest, and that he had continued litigating "based on this falsity for over four years, until the court ultimately granted summary judgment in favor of defendants." A Los Angeles jury, after deliberating for three hours, found that Woodall had not proven Disney Animation had access to his "Bucky" materials at all. In a separate order, Marshall sanctioned Woodall's attorney, Gustavo Lage, $476,000 for failing to investigate the confidentiality agreement's authenticity in a timely manner and for continuing to press claims he knew were barred by the statute of limitations. To avoid double recovery, Disney agreed that Woodall's fee liability would be reduced by any amount recovered in sanctions from his lawyer. 

What this means: The Moana case illustrates what courts characterize as "objectively specious" trade secret litigation — claims grounded not in disputed facts but in manufactured ones. Attorney fee awards under the Defend Trade Secrets Act are available where a claim is brought in bad faith, and this decision shows courts are prepared to use that tool when the record warrants it. The parallel sanctions against counsel reinforce that the obligation to investigate a claim's factual foundation does not end at filing. 

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.

Supreme Court Affirms Ninth Circuit Decision on Disgorgement, Upholds Structure of FCC Proceedings

The Supreme Court on June 4 issued two opinions concerning securities-related matters. Here’s what they mean and why they are important:

Court Resolves Circuit Split on SEC Disgorgement

The Supreme Court’s opinion in Sripetch v. SEC unanimously affirmed a Ninth Circuit decision holding that the SEC, when seeking a court order requiring disgorgement from a defendant, does not have to show actual pecuniary harm to any investors that were the defendant’s victims. The Court resolved a Circuit split where the First and Ninth Circuits held that the SEC did not have to show pecuniary harm to investors, while the Second Circuit held that such a showing was required to support disgorgement. 

The Court's decision is a sequel to Liu v. SEC in 2020, which held that the SEC's ability to seek equitable relief included disgorgement, but that, among other things, disgorgement must be awarded for victims and not simply paid to the government. In Sripetch, the SEC accused the defendant of running a pump and dump scheme and sought $4.1 million in disgorgement. Sripetch objected on the grounds that there was no evidence that his scheme caused any financial losses among his victims, and therefore, under Liu, no disgorgement should be permitted. 

The Court, in affirming the holding of the Ninth Circuit, ruled that it did not need to address whether disgorgement was permitted under Section 21(d)(5), which permits the SEC to seek appropriate equitable relief, or Section 21(d)(7), which was enacted after Liu and expressly permits the SEC to seek disgorgement. Rather, after surveying precedent concerning restitution and equitable relief, dating as far back as 1760, the Court stated that "applying traditional equitable principles, a court ordered the defendant to disgorge the value of the gain attributable to his invasion of the plaintiff's legally protected interests without requiring a showing of pecuniary loss ... Whatever else traditional equitable principles demand, they do not require a showing of pecuniary loss before a court may issue an award of unjust profits.” 

The Court rejected Sripetch’s argument that allowing the SEC to obtain disgorgement where the alleged victims did not suffer any financial loss went beyond simply restoring the status quo. Courts may choose to restore the status quo by stripping a defendant of unjust gains. Justice Gorsuch wrote the opinion with Justice Thomas concurring.

Court Upholds Structure of FCC Proceedings

In a separate decision, the Supreme Court upheld the structure of proceedings by the Federal Communications Commission in which the FCC administratively impose fines for violations of the FCC Act, but the collection of the fines could be subject to a trial in federal court. The case tested the scope of the Supreme Court's 2024 decision in SEC v. Jarkesy, which held that the SEC could not bring in-house administrative proceedings seeking penalties because the Seventh Amendment to the Constitution required a jury trial.  

The decision in FCC v. AT&T resolved a Circuit split. The Fifth Circuit in the AT&T case held that the FCC's administrative forfeiture proceeding was unconstitutional, while the Second Circuit held the opposite in a case involving Verizon. 

The Court, in an 8-1 decision By Chief Justice Roberts, with Justice Thomas dissenting, reversed and remanded the Fifth Circuit decision. The Court held that the FCC's enforcement structure passed constitutional muster because the initial administrative proceeding did not require payment and the factual proceedings were not conclusive. A carrier could choose to pay the fine and appeal to a Circuit Court. But the carrier could refuse to pay, in which case the FCC would have to bring a collection action in which there would be a trial de novo in federal court. That makes this situation different from Jarkesy, where the SEC's administrative proceeding created the obligation to pay. The FCC's administrative forfeiture order also has no collateral effect while the action is pending.  The FCC’s forfeiture order does not determine any legal rights but is simply a prerequisite to a suit prior to the FCC bringing a collection action, and the Seventh Amendment right to a jury trial does not attach to such preliminary proceedings. The asserted reputational harm from an FCC forfeiture order does not pose a Seventh Amendment problem because any legal proceeding may result in such harm.

Interestingly, Justice Gorsuch, who waxed eloquent in Jarkesy about the right to a jury trial, did not dissent. Still undecided is how Jarkesy may affect other agencies' efforts to enforce their statutes.

Bahram Seyedin-Noor and Alto Litigation Recognized by Chambers USA Among the Best for Securities Litigation in California

Alto Litigation Founder and CEO Bahram Seyedin-Noor is once again ranked among California’s leading securities litigators by Chambers & Partners, which also awarded the law firm its first overall ranking for securities litigation in its 2026 Chambers USA guide. Bahram earned a Chambers USA ranking for the sixth consecutive year. 

Chambers is a leading independent professional legal research company that for the last 30 years has compiled detailed rankings and insights into the world's top lawyers and law firms by analyzing case work, client references, and peer feedback.  

Respondents to Chambers’ research survey said Bahram was “an intellectual powerhouse in how he runs cases” and “a sophisticated and creative lawyer who miraculously manages incredible outcomes for his clients.” Bahram has achieved dozens of victories in securities class actions, derivative lawsuits, arbitrations, trade secrets, and fiduciary duty disputes over the past 25 years. 

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. In addition to his Chambers USA ranking, Bahram was twice named San Francisco Litigator of the Year by Benchmark Litigation and is ranked in Band 1, the highest distinction, for commercial disputes in the 2026 Legal 500 US City Elite Guide: San Francisco & Silicon Valley.  

Chambers’ full analysis of Bahram and Alto Litigation is available here.

May Securities Litigation Brief: No More No-Deny and Four Rulings Worth Watching

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 Rescinds No-Deny Rule for Settlements

On May 18, the SEC formally rescinded its 54-year-old rule requiring defendants or respondents in SEC proceedings, as a condition of any settlement, to agree that while there would be no obligation to admit to the truth of the SEC’s allegations, the defendant could not publicly deny the allegations.

This so-called “no admit/no deny” rule, codified in Section 202.5 of the SEC’s Informal Rules of Practice, was criticized as violating First Amendment free speech rights, although Circuit Courts of Appeal, including the Ninth Circuit, had rejected challenges on those grounds. Notably, the SEC’s rescission release did not assert that the “no deny” policy was unconstitutional, only wrongheaded. Further, the SEC’s rescission release stated that the SEC would not enforce the “no deny” policy in existing settlements, meaning that in the event of a breach of an existing “no deny” policy, the SEC will not seek to vacate a settlement or reopen an adjudicatory proceeding.

Why It Matters: The rescission of the “no deny” policy marks the latest business-friendly action of the SEC in the second Trump Administration, which include a release stating that, with some exceptions, most digital assets are not securities and a recent proposal to rescind the Biden Administration’s climate disclosure regulations (which were held up in court anyway). But the rescission of the longstanding “no deny” policy may have a significant impact on SEC settlements. Will the current or future SEC demand tougher settlement terms if a defendant will publicly deny the SEC’s allegations? Will the ability to publicly deny the SEC’s claims encourage defendants to settle earlier during the investigative or litigation process? Now that the entire “no admit/no deny” policy is rescinded, will the SEC more frequently demand admissions of misconduct as the price of settlement? Will denying the SEC’s allegations subject a defendant to criticism of the decision to settle rather than litigate? Of course, a future SEC may reinstate the policy, but not for the foreseeable future (and administration).

Second Circuit Tightens Standard for Item 303 Omission Claims

On May 28, the Second Circuit Court of Appeals affirmed dismissal of a securities class action against The Gap, Inc., based on allegations that the company had violated the anti-fraud provisions of Section 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder by failing to disclose that an initiative to increase plus-sized clothing options in Old Navy stores would adversely impact financial results by forcing the sale of surplus inventory at deep discounts.

In Smith v. The Gap, Inc., the Second Circuit affirmed the lower court’s dismissal on various grounds. In particular, the Second Circuit panel rejected the plaintiffs’ claim that The Gap violated Item 303 of Regulation S-K, by failing to disclose problems in a Quarterly Report on Form 10-Q. Item 303 requires disclosure of any known trends or uncertainties that could have a material impact on net sales and revenues. The Second Circuit relied on the Supreme Court’s decision in Macquarie Infrastructure Corp. v. Moab Partners, L.P., 601 U.S. 257 (2024), which held that an alleged omission in Item 303 cannot support a Rule 10b-5 claim unless the omission rendered an actual statement misleading. Plaintiffs argued that the disclosure failure made misleading a statement that the clothing program was a “key initiative.” The court held that the alleged omission did not render the statement misleading.

Why It Matters: Plaintiffs in securities class actions had long argued that an alleged omission of information required by Item 303 by itself could support a Rule 10b-5 claim. The Supreme Court in Macquarie rejected the argument and required plaintiffs to show how the alleged omission made an actual statement materially misleading. The decision by the Second Circuit, which is considered prominent in securities law matters, demonstrated that a high bar will be required for plaintiffs to show that an alleged Item 303 omission actually rendered a specific statement misleading.

D. C. Circuit Rejects SEC’s Denial of Whistleblower Claim

The Court of Appeals for the District of Columbia rejected the SEC’s denial of a whistleblower award because the agency failed adequately to explain why it denied the claim of an individual who provided information that led to a successful enforcement action.

In Doe v. SEC, the SEC had asserted that the individual (who was not identified in the proceeding) had not voluntarily provided information to the SEC before the SEC reached out to him after he made disclosures to the media, and therefore he did not qualify for a whistleblower award under the Dodd-Frank Act and SEC rules. While the court rejected the petitioner’s claim concerning the voluntariness of his information, it agreed with his contention that the SEC had not explained why granting an exception was not necessary or appropriate in the public interest. Where the SEC receives an application for an award based on the submission of information leading to a successful and significant enforcement action, and the applicant pointed to the SEC’s past grants of such exceptions, the agency must do more than restate general policy goals. The court remanded the action to the SEC for further consideration.

Why It Matters: The D.C. Circuit remonstrated the SEC for acting in an arbitrary and capricious manner, which is a useful reminder to all government agencies. It is also significant that the ruling cited the Supreme Court’s decision in Loper Bright Enters. v. Raimondo, 603 U.S. 369 (2024), which held that courts need not defer to an agency’s decision and may exercise their own independent judgment concerning whether an agency acted within its authority. Thus, this decision is an example of a court declining to accept the SEC’s own interpretation of the applicable authority.

Delaware Chancery Court Holds That Directors Breached Fiduciary Duties in Financing

In Guilbeau v. Footprint International Holdco, Inc., the Delaware Chancery Court held that plaintiffs sufficiently had alleged that directors had breached their fiduciary duties when they approved a financing that was proposed and largely funded by three institutional investors that were among Footprint’s largest shareholders. The court also held that it was reasonable to infer that the funds may have aided and abetted the directors’ breach.

The financing had been approved by a committee of independent directors and approved by the entire Board. The plaintiffs had alleged that the financing was below market levels; the Board did not consider other financing proposals; there was no disclosure to stockholders concerning special benefits granted to the Funds and another major stockholder; the Funds were provided with control over the Board; and protections for another class of stockholders were eliminated. The court found it reasonable at the pleading stage to impute the knowledge of the Funds’ designees on the Board to the Funds themselves and conclude that the Funds were acting in their own self-interest.

Why It Matters: Although the company was near insolvency, the directors could not ignore their fiduciary duties in approving the financing. The court emphasized that there is “no dilution” of the duty of loyalty when a director holds dual fiduciary roles. When the interests of those to whom the directors owe loyalties conflict, the director faces an inherent conflict of interest. An entire fairness review was required because a majority of the Board was not independent. The court noted that the Delaware Supreme Court in recent decisions had raised the standard for the “knowing participation” element of aiding and abetting, but that those decisions applied to third-party acquirors and possibly not to the Funds with designees on the Board.

Further, the decision did not apply the 2025 amendments to the Delaware General Corporation Code (because the suit was filed before the amendments became effective) and if the amendments had been applicable, the claims against the directors likely would have been dismissed. But the aiding and abetting claims against the Funds may still have survived a motion to dismiss.

Ninth Circuit Sets Evidentiary Bar for Lead Plaintiff Challenges

In re: Crain Walnut Shelling, LP, issued on May 7, concerned a securities class action lawsuit against Super Micro Computer. The district court found that one investor, Crain Walnut, had the largest loss from its investment, and appointed it as the presumptive class plaintiff, a ruling that was challenged by another investor, Universal-Investment. The district court initially held that the standard for challenging a presumptive plaintiff under the Private Securities Litigation Reform Act (PSLRA) was “genuine and serious doubt” about the plaintiff's adequacy, under which it held that Universal had rebutted the presumption of adequacy. Upon a motion for reconsideration, the district court reaffirmed the “genuine and serious doubt” standard but also determined that Crain Walnut was inadequate to be lead plaintiff under a preponderance of the evidence standard.

On a petition for a writ of mandamus, the Ninth Circuit held that the “genuine and serious standard” was improper and misconstrued prior Ninth Circuit rulings. Although the PSLRA is silent on the proper standard, the default standard in civil litigation is preponderance of the evidence based on Supreme Court and Ninth Circuit precedent, and a balancing of the interests analysis. However, the court upheld that district's determination that Crain Walnut was inadequate under a preponderance of the evidence standard, because it had filed inaccurate documents concerning its ownership structure which it failed to correct and its representative testified at a deposition that he would refuse to produce documents even under a court order. Thus, the district court's ruling was not “clear error” that would justify granting the writ of mandamus. 

Why It Matters: This case is apparently the first time a Circuit Court of Appeals addressed the standard of proof for rebutting the presumption of adequacy and typicality to a presumptive lead plaintiff under the PSLRA. The court’s decision that the default standard is a “preponderance of the evidence” may influence other Circuit Courts. But the decision also emphasizes that a presumptive lead plaintiff cannot make misleading representations or suggest that it would not obey court orders.

The SEC Walks Back “Admit and Deny”: What the Repeal of the Admissions Policy Means for Enforcement Practice

For fifty-four years, in virtually every settlement with the Securities and Exchange Commission (SEC) in which a sanction was imposed, the settling defendant or respondent agreed that as a condition of the settlement the defendant/respondent would not publicly deny the allegations in the SEC’s complaint filed in federal court or in an administrative order. Under this policy, codified in Rule 202.5(e) of the SEC’s Informal Rules of Practice, the settling defendant/respondent would not be required to admit the truth of the SEC’s allegations, but there could be no public denial either, under the threat that the SEC would seek to vacate the settlement and resume its investigation or litigation.  Settling defendants and their counsel disdained the no admit/no deny requirement (sometimes disparagingly called a “gag rule”), but it was the necessary price to pay in order to make peace with the SEC.

But no more.  On May 18, 2026, the SEC formally rescinded this long-standing policy with barely a fare-thee-well. In a prepared statement, SEC Chair Paul Atkins stated “I am pleased that we are rescinding the no-deny policy today. Speech critical of the government is an important part of the American tradition. This rescission ends the policy prohibiting such criticism by settling defendants.”

Further, in light of the rescission, the SEC stated that it will not enforce existing no admit/no deny provisions in prior settlements. “In the event of a breach of an existing no-deny provision, the Commission will take no action to ask a district court to vacate a settlement (or to reopen an adjudicatory proceeding) in connection with the terms of the settlement agreement.”

Origins of the No Admit/No Deny Policy

The “no admit/no deny” policy dates back to 1972, almost simultaneous with the creation of the SEC’s Division of Enforcement and an effort to formalize enforcement procedures. SEC officials were frustrated that defendants, some of whom had substantial legal exposure and settled precisely to avoid even harsher penalties, would immediately declare after the settlement was executed that they were actually innocent and settled only to avoid the expense and distraction of litigation.  Thus, the SEC settled on a compromise: the SEC could obtain injunctive relief, disgorgement, and civil penalties without protracted litigation; defendants could resolve matters without making admissions that would be devastating in parallel private securities litigation or other governmental actions, but they would not be permitted to publicly deny the allegations.

Criticism of No Admit/No Deny Policy

The no admit/no deny policy faced criticism from both the left and the right.  On the left, in the aftermath of the 2008 financial crisis, there were protests about letting malefactors “off the hook” by not requiring admissions of misconduct. See SEC v. Citigroup Glob. Markets Inc., 827 F. Supp. 2d 328 (S.D.N.Y. 2011) (concluding that a consent decree that did not require defendant to admit SEC’s allegations was not fair, reasonable or in the public interest), vacated and remanded, 752 F.3d 285 (2d Cir. 2014). Thus, in 2012, the SEC announced that it would no longer permit “no admit/no deny” resolutions where a defendant had already admitted facts in a parallel criminal proceeding. The bigger shift came in 2013, when then-Chair Mary Jo White announced that, in cases involving particularly egregious conduct, harm to large numbers of investors, or obstruction of an investigation, the Division of Enforcement would seek admissions as a condition of settlement. This practice was narrowly applied —used in fewer than two dozen matters per year. The first Trump Administration abandoned this policy, but it was resumed in the Biden Administration, where settlements in certain kinds of cases -- off-channel communications sweeps, certain market manipulation cases, and a handful of high-profile auditor and gatekeeper matters --- all featured admissions language.

Coming from a different direction, conservative legal scholars, the defense bar and the business community asserted that the no admit/no deny policy violated a defendant’s First Amendment free speech rights.  Every Court of Appeals to consider the issue rejected such claims. See SEC v. Romeril, 15 F.4th 166 (2d Cir. 2021); Powell v. SEC, 149 F.4th 1029 (9th Cir. 2025). The Supreme Court declined to take up the Romeril case and a petition in the Powell case is pending before the Supreme Court.  Of course, that action presumably has been mooted by the SEC’s rescission decision.

Criticism of the no admit/no deny policy also was grounded on practical concerns. A settling defendant would face a quandary in discussing an SEC settlement with partners, clients, investors and other regulators.  What was private and what was public? What could the defendant state without the risk that the SEC would assert that the policy had been violated and seek to vacate the settlement?  Because the SEC staff would not provide guidance, defendants and their counsel could only proceed at their own risk.

Going Forward

The future of SEC settlements has now become more unpredictable.  Perhaps nothing will change. On the other hand, the SEC staff may still object to particular statements by a settling defendant in particular situations. The ability to publicly deny the SEC’s allegations may encourage defendants to agree to an earlier settlement, which will conserve resources both for the SEC and the defendant.  On the other hand, the SEC may demand more onerous settlement terms if a defendant insists on publicly denying the SEC’s allegations.  Further, a future SEC may reinstate the no admit/no deny policy.

***

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.

April Trade Secrets Litigation Brief: AI Cardiology Dispute, Aviation Engineer’s Guilty Plea, and Insurance Exec Accused of Data Theft

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.

Heartflow Sues Rival Cleerly Over AI Cardiology Technology 

Trade secret and patent claims follow consultant's alleged defection 

Medical technology company Heartflow filed suit in the Eastern District of Texas against competitor Cleerly, alleging that Cleerly's AI-powered cardiac imaging products were developed using trade secrets. 

The complaint centers on James Min, who served as a Heartflow consultant from 2012 to 2017. According to the filing, Min secretly founded Cleerly in 2017 while still working for Heartflow, using technology copied from the company to build a competing AI-based heart disease diagnostic tool. 

According to the complaint, two of Cleerly’s products fall within the field defined in Min’s consulting agreement with Heartflow. While he was a Heartflow consultant, the company was well underway with active research, development, and inventions related to AI analysis of coronary anatomy, plaque, and lesion-specific ischemia. Heartflow alleges Min “conceived of these products, or the inventions underlying them, in connection with his services to Heartflow.” 

Heartflow, which went public on Nasdaq last year at a valuation of $2.27 billion, says its platform — developed over more than a decade — enables personalized 3D cardiac modeling from a single specialized scan. Cleerly's CEO Min denied the allegations, which also include patent infringement, stating that the company's work is grounded in "landmark clinical science" it has independently published on cardiovascular disease. Heartflow is seeking an unspecified amount of monetary damages. 

What this means: The case raises a recurring issue in technology disputes: the consultant who transitions from advisor to founder. When a company engages outside consultants with access to proprietary systems and methods, it assumes the risk that those individuals may later build on — or in a plaintiff's framing, misappropriate — what they encountered. Companies that rely on consultants for sensitive development work should consider whether their agreements and confidentiality protections are calibrated to that risk.

Aviation Engineer Pleads Guilty After Customs Agents Find Stolen Trade Secrets

Airport inspection surfaces confidential documents; employer confirms no authorization

A Tulsa, Oklahoma man with access to sensitive aviation data pleaded guilty on April 1 to making a false statement to federal agents after Customs and Border Protection officers discovered proprietary documents on his personal devices at a Dallas airport.

Junjie Zhang, 57, who was a senior material and process engineer at a Wichita, Kansas aviation company, was stopped in 2019 as he attempted to board a flight to China. When agents asked whether he carried any work-related materials, he reportedly said no. A search of his devices uncovered documents marked "Proprietary" and "Confidential," including graphs and blueprints connected to his employer's aviation work. Zhang then changed his account, claiming his employer had authorized him to have the files. His employer confirmed he had no such authorization.

The investigation had begun a year earlier, in 2018, after Zhang's employer reported him to the FBI following suspicious behavior during a work trip to China. Investigators estimated the proprietary data found on his devices was worth more than $100,000. Zhang is scheduled to be sentenced on July 23.

What this means: The case illustrates how border inspections have become an enforcement mechanism in trade secret investigations. When employees carry confidential materials on personal devices across international borders, they expose themselves to scrutiny outside the ordinary employment context — and false statements to federal agents carry independent criminal liability. For companies operating in sectors with foreign counterintelligence concerns, the Zhang matter reinforces the importance of clear device policies, authorization documentation, and employee training on data handling obligations.

Assurant Sues Former Sales Executive and Warranty Rival Over Alleged Data Theft

Departing executive accused of emailing files, wiping devices, and joining direct competitor

Assurant, Inc. and two of its affiliates filed suit on April 28 in the Southern District of Texas against Brent Schouten, a former district manager in Assurant's dealer services division, and his new employer, iA American Warranty Group — a direct competitor in the auto finance and insurance market.

According to the complaint, Schouten told Assurant he was retiring, but Assurant alleges he was actually moving to iA in an executive leadership role. In the weeks before and on his final day of employment, the filing claims, Schouten emailed himself a set of sensitive materials — financial forecasts, pricing model spreadsheets, a "Go-To-Market Strategy" document, customer lists and contact information, and what the complaint describes as "system access credentials." He also, Assurant alleges, used an unauthorized USB device on his company laptop. After being told in writing to preserve everything, Schouten allegedly wiped his email and OneDrive accounts before returning the device.

Adding a contractual dimension to the dispute: Schouten and iA had signed an agreement acknowledging that his Assurant covenants were "valid" and making compliance a condition of his employment. Once Assurant raised its concerns, iA reversed course — characterizing the noncompetition covenant as "unenforceable" and Assurant's allegations as "unfounded."

Assurant is seeking a one-year restraint on Schouten's role, return of all confidential materials, forensic access to devices and accounts on both sides, and damages under the Texas Uniform Trade Secrets Act, the federal Defend Trade Secrets Act, and theories of tortious interference and breach of contract. The allegations have not been tested in court, and Schouten and iA have not yet filed a response.

What this means: The case presents two distinct issues worth tracking. First, the allegation that an executive signed an agreement acknowledging his post-employment obligations and then — at the direction or with the acquiescence of his new employer — disavowed them almost immediately. That sequence, if proven, can support claims against both the individual and the incoming employer. Second, the alleged destruction of data after a written litigation hold demand, if established, is the kind of conduct that can carry consequences well beyond the underlying trade secret claims.

April Securities Litigation Brief: A New Enforcement Director, A Defense Verdict and Ninth Circuit News

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 Appoints New Enforcement Director

On April 8, the Securities and Exchange Commission appointed David Woodstock as the new director of the SEC’s Division of Enforcement. Woodstock was chair of the Securities Enforcement Practice Group at Gibson, Dunn & Crutcher and previously had been head of the SEC’s Fort Worth Regional Office.

Woodstock replaces Judge Margaret Ryan, who resigned as the Enforcement Director after only seven months amid reports that she feuded with SEC Chair Paul Atkins about enforcement practices.

Why It Matters: It remains to be seen whether Woodstock changes the Division’s enforcement orientation. On April 7, the SEC announced its enforcement results for Fiscal Year 2025 (ended September 30, 2025), revealing a sharp reduction in enforcement actions. The SEC filed 456 enforcement actions in FY 2025, representing a 22% decrease from FY 2024. The SEC characterized the fewer enforcement actions as a positive development, declaring that it was moving away from the alleged “regulation by enforcement” by the SEC in the Biden Administration.

In particular, the SEC has voluntarily dismissed or settled actions alleging that the offer and sale of crypto assets constituted violations of the federal securities laws because they were unregistered securities. The SEC has also stated that it will not bring enforcement actions based on so-called technical violations but will focus on combating fraud.

Federal Jury Returns Defense Verdict in Vaxart Class Action

On April 28, 2026, a federal jury in San Francisco found that hedge fund Armistice Capital and two of its executives were not liable on securities claims that the firm engaged in market manipulation of the shares of Vaxart, Inc., by inflating its stock price through materially false and misleading press releases in order to sell $250 million in Vaxart stock.

The plaintiffs also alleged in the class action that the defendants engaged in insider trading by selling Vaxart stock while in possession of material, nonpublic information. Defendants had told the jury that they had no involvement in Vaxart’s press releases, which they also contended were accurate. (Vaxart Inc. Securities Litigation, Case No. 3:20-cv-05949, U.S. District Court for the Northern District of California)

Why It Matters: Very few securities class action lawsuits ever reach trial, so the few that manage to get to a verdict provide test cases concerning how juries view these cases. A defense verdict likely will persuade defense counsel and their clients that it is worth risking taking a case to trial or demanding a low settlement amount.

Ninth Circuit Refuses to Vacate FINRA Arbitration Award Because Proceedings Were Not Recorded

The Ninth Circuit Court of Appeals refused to vacate an arbitration award even though the proceedings were not recorded. In Uddin v. TD Ameritrade, Inc., 2026 WL 982854 (9th Cir. Apr. 13, 2026) (Not for Publication), the appellant appealed an award by the Financial Industry Regulatory Authority (“FINRA”) to TD Ameritrade, asserting that the apparently inadvertent failure of the FINRA panel to record or transcribe the proceedings, as required by the arbitration agreement, deprived him of a fundamentally fair hearing.

But the panel ruled that under the Federal Arbitration Act, a court may vacate an arbitration award where the award was procured by corruption, fraud or undue means; where there was evident partiality or corruption in the arbitrators; where a party was “prejudiced” by the arbitrators’ misconduct or misbehavior; or where the arbitrators exceeded their powers. 

The court ruled that even if the inadvertent failure to record the proceedings amounted to “misbehavior,” Uddin failed to show how his rights were prejudiced by an absence of a transcript or recording. The Ninth Circuit therefore affirmed the district court’s decision to confirm the FINRA award.

Why It Matters: This decision demonstrates the difficulty in convincing the federal courts to overturn an arbitration award. Here, even a significant failure by the arbitration panel to adhere to the terms of the arbitration agreement was not deemed sufficient grounds for vacating the award.

Ninth Circuit Reverses Insider Trading Conviction Because of Juror Doubt

The Ninth Court of Appeals reversed a conviction for insider trading because a juror expressed doubts about his ability to be fair to both sides even though defense did not object to the juror’s continued service.

In U.S. v. Bolandian, 2026 WL 1076834 (9th Cir. Apr. 21, 2026), the defendant and his relatives allegedly traded in stocks based on tips about potential mergers from a former college classmate working as a banking analyst at J.P. Morgan. During the trial, a juror sent the trial judge a note stating that his uncle owned a private investment firm that had conducted business with J.P. Morgan and might have a relationship with a witness.

In a colloquy with the judge, the juror was asked if he could be fair to both sides and responded that he “was not sure.” Nonetheless, defense counsel did not object to the continued service by the juror, who became the foreman of the jury.

The Ninth Circuit held that the trial judge had a duty to investigate possible jury bias that could not be waived by defense counsel. The court held that there was plain error because the trial judge impermissibly delegated the responsibility to investigate potential juror bias to the juror himself. The court vacated the judgment and remanded the case for a new trial.

Why It Matters: The court held that the Sixth Amendment guarantees a defendant the right to trial by an impartial jury. Here, the juror volunteered his potential bias, and the trial judge merely instructed the juror to advise the Court if he still believed he could not be fair after he had heard all the evidence.

Counting Interrogatories in the Northern District of California: When Do Subparts Count?

Federal Rule of Civil Procedure 33(a) limits parties to 25 interrogatories, “including all discrete subparts.” The recurring—and often disputed—issue is when subparts are treated as part of a single interrogatory and when they must be counted separately. In the Northern District of California the short answer: it depends on whether the subparts are logically and factually related to a single line of inquiry or instead introduce distinct subjects.

The Rule (and Why It Exists)

Rule 33(a)(1) sets the default cap: 25 interrogatories, including all discrete subparts.

That cap was added to curb abuse. The Advisory Committed explains, the purpose of the numerical limit is not to prevent needed discovery, but to ensure judicial scrutiny before parties make potentially excessive use of interrogatories.[1]

The Advisory Committee also cautioned against gamesmanship: “Parties cannot evade this presumptive limitation through the device of joining as ‘subparts’ questions that seek information about discrete separate subjects.” [2]  The Committee did provide one bright line, rule, however: “a question asking about communications of a particular type should be treated as a single interrogatory even though it requests that the time, place, persons present, and contents be stated separately for each such communication.”[3]

The Rule 33 Framework in the Northern District

The Northern District’s local rules track the plain language of Rule 33(a)(1) and require a motion showing good cause to exceed the limit.[4] Although Rule 33 does not define “discrete subparts,” courts in this district have developed a pragmatic, case-by-case approach grounded in substance over form.[5]

Northern District courts generally apply the principle that interrogatory subparts are counted as a single interrogatory when they are “logically or factually subsumed within and necessarily related to the primary question.”[6]  In contrast, subparts that reach different subjects, theories, or factual areas are treated as separate interrogatories.

In other words:

• If answering the primary question necessarily answers the subparts (because the subparts simply ask for details of the same inquiry), courts tend to treat it as one interrogatory. [7]

• If the subpart can be answered fully and independently—without answering the primary question (or vice versa)—it is more likely a separate interrogatory. [8]

• If the subpart may be admitted and the primary question denied (or vice versa) – it is more likely a separate interrogatory.[9]

Court have recognized that while here is no bright-line test, the “weight of authority” looks to whether the subparts are logically or factually subsumed and bear a direct relationship to the information requested by the primary question.[10]

Substance controls over formatting with courts focusing on whether the subparts create multiple lines of inquiry rather than one coherent inquiry, regardless of whether the subparts are explicitly broken out alphanumerically.[11]

Application in Patent Litigation

Patent cases in the Northern District provide particularly clear guidance. In Synopsys, Inc. v. ATopTech, Inc., the court held that contention interrogatories seeking the facts, documents, and witnesses supporting a single contention or affirmative defense were logically and factually related and therefore counted as one interrogatory.[12] The court explained that where subparts are directed to different types of information—facts, documents, or persons—but all relate to the same contention, they do not multiply the interrogatory count.

This approach reflects the district’s practical understanding of contention discovery, particularly in complex patent cases where identifying supporting evidence is a natural extension of a single substantive inquiry.

The analysis changes when an interrogatory sweeps in multiple distinct products, patents, or subject matters. In Collaboration Props., Inc. v. Polycom, Inc., the court held that interrogatories addressing 26 different accused products contained 26 discrete subparts—each product representing a separate subject of inquiry.[13] The court rejected attempts to evade Rule 33 by packaging unrelated questions as “subparts.”

Courts outside the Northern District—particularly in the Central District of California—have sometimes taken a stricter view, treating requests for facts, documents, and witnesses as separate subparts. Synopsys acknowledged this split but expressly declined to adopt that approach where the requests relate to a single contention or theory.[14] In the Northern District, substance controls: the question is not how many categories of information are requested, but whether the interrogatory pursues one coherent subject.[15]

Takeaways for Litigants

The Northern District’s approach to counting interrogatories under Rule 33 is functional and context-driven. Subparts are counted collectively when they are logically and factually tied to a single primary question. But courts when an interrogatory reaches multiple products, patents, defenses, or otherwise distinct subjects the putative subparts will be regarded as separate interrogatories.

For practitioners, the lesson is straightforward: draft with discipline. Interrogatories that genuinely seek information on one topic are more likely to survive scrutiny as a single interrogatory, while those that combine multiple independent inquiries—no matter how artfully labeled—risk being counted against the Rule 33 limit.

***

[1] “The aim is not to prevent needed discovery, but to provide judicial scrutiny before parties make potentially excessive use of this discovery device. In many cases it will be appropriate for the court to permit a larger number of interrogatories in the scheduling order entered under Rule 16(b)”. Amendments to Federal Rules of Civil Procedure, 146 F.R.D. 401, 676 (1993)

[2] Amendments to Federal Rules of Civil Procedure, 146 F.R.D. 401, 675-676 (1993)

[3] Amendments to Federal Rules of Civil Procedure, 146 F.R.D. 401, 675-676 (1993)

[4] N.D. Cal. Civ. L.R. 33-3.

[5] See Trevino v. ACB Am., Inc., 232 F.R.D. 612, 614 (N.D. Cal. 2006).

[6] Trevino, 232 F.R.D. at 614.

[7] See Superior Commc’ns v. Earhugger, Inc., 257 F.R.D. 215, 218 (N.D. Cal. 2009).

[8] Trevino, 232 F.R.D. at 614.

[9] Safeco of Am. v. Rawstron, 181 F.R.D. 441, 446 (1998).

[10] Chapman v. Cal. Dept. of Ed., No. 01-1780, 2002 WL 3285376 at *1 (N.D. Cal. 2002) (See also Collaboration Props., Inc. v. Polycom, Inc., 224 F.R.D. 473, 475 (N.D. Cal. 2004) (interrogatory limit exceeded where “most of the previous interrogatories asked for information about all of the accused Polycom products (totaling 26 different products)” (emphasis in original).)

[11] Seoul Semiconductor Co., Ltd. v. FEIT Elec. Co., Inc., No. 22-cv-05097, 2024 WL 3086641 at *13 (C.D. Cal. May 23, 2024) (interrogatory seeking priority date for each patent asserted claim constituted discrete subparts where the asserted patents were unrelated); Safeco of Am. v. Rawstron, 181 F.R.D. 441, 444 (C.D. Cal. 1998) (“One question that is easily answered is whether subparts must be separately numbered or lettered to count as multiple interrogatories. The better view is that they need not be, or any party could easily circumvent the rule simply by eliminating the separate numbering or lettering of the subparts.”)

[12] 319 F.R.D. 293, 297–98 (N.D. Cal. 2016).

[13] 224 F.R.D. 473, 475 (N.D. Cal. 2004).

[14] 319 F.R.D. at 298.

[15] Trevino, 232 F.R.D. at 614

***

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.

Natasha Saputo Joins Alto Litigation

SAN FRANCISCO (April 22) – Experienced patent litigator Natasha Saputo has joined Alto Litigation, the firm announced today.

Saputo will focus on trial and appellate matters before U.S. federal courts and the International Trade Commission. Her practice spans a range of technologies, including semiconductors and genome sequencing. 

Before joining Alto, Saputo practiced at Boies, Schiller & Flexner LLP and served as a law clerk in the Office of the Legal Adviser at the U.S. Department of State. She holds a J.D. from George Mason University School of Law and an L.L.M. in International Business and Economic Law from Georgetown University Law Center. She earned her undergraduate degree in government and international politics at George Mason University.

About Alto Litigation

Alto Litigation advises clients in high-stakes business disputes, regulatory investigations, and litigation, and has represented Fortune 500 companies, a prestigious university, and Silicon Valley technology companies across two decades of practice. The firm is recognized by Chambers USA, Best Law Firms and Benchmark Litigation, which described Alto Litigation as a “powerhouse litigation boutique.”

Learn more at www.altolit.com.

Post-Demand Evidence and Anonymous Sources in Delaware Section 220 Inspection Actions: The Delaware Supreme Court’s 3–2 Decision in Paramount Global

On March 25, 2026, the Delaware Supreme Court issued a significant and closely divided opinion in Paramount Global v. State of Rhode Island Office of the General Treasurer,[1] addressing two unsettled questions in stockholder books-and-records litigation under Section 220 of the Delaware General Corporation Law (DGCL).[2] By a 3–2 vote, the court affirmed the Court of Chancery’s ruling that post-demand evidence may, under appropriate circumstances, be used to establish the “proper purpose” required for a stockholder inspection demand.  Further, the Court held that reports in reputable publications citing anonymous sources can constitute sufficiently reliable evidence of a credible basis to suspect corporate wrongdoing, and thus support a “proper purpose” for inspection.  As one of the first Delaware Supreme Court decisions following the 2025 amendments to Section 220, Paramount Global will have lasting practical significance for stockholders, corporations, and practitioners navigating inspection demand proceedings.

I.   Background: The Paramount Sale Process and the Inspection Demand

The dispute arose from Shari Redstone’s control of Paramount Global through National Amusements, Inc. (“NAI”), which owned a supermajority of Paramount’s voting Class A shares. Beginning in 2023, financial pressures on NAI, including a dividend cut by Paramount’s board and NAI’s difficulty servicing its debt, prompted a flurry of media reporting about whether Redstone would sell NAI’s controlling interest in Paramount potentially in lieu of seeking a sale of the company as a whole.

Over the course of roughly a year, outlets including the Wall Street Journal, the New York Times, Bloomberg Law, the Financial Times, the New York Post, and Variety published dozens of articles—citing confidential sources described as people “familiar with the situation,” “close to the negotiations,” or “briefed on the matter”—reporting that Redstone had fielded acquisition proposals from Amazon, Apple, Netflix, Skydance Media, Apollo Global Management, and others. The articles suggested that Redstone, in her capacity as Paramount’s controlling stockholder, was steering potential buyers toward acquiring NAI’s controlling block rather than the company as a whole—and in some instances appeared to be blocking whole-company sale opportunities in favor of transactions that would benefit her personally.

On April 5, 2024, the Employees’ Retirement System of Rhode Island (“Rhode Island”), a holder of Paramount Class B common stock, served a Section 220 demand on Paramount. The demand alleged that it had a credible basis to suspect that Redstone and NAI had “usurp[ed] Paramount’s corporate opportunity by marketing National Amusements to buyers who otherwise would be interested in Paramount or its assets,” and that the Paramount board had “done nothing to ensure that Redstone is not diverting corporate opportunities or interfering with Paramount’s ability to seek the best deal for Paramount and its other stockholders.” The demand sought board materials, communications concerning proposed transactions, the special committee’s mandate, and informal electronic communications of Redstone and her advisors.

Paramount rejected the demand. Rhode Island filed a complaint in the Court of Chancery on April 30, 2024. During the pendency of the proceeding, additional media reporting and Paramount SEC filings continued to corroborate and amplify the earlier accounts, culminating in the announcement of the Skydance transaction—which closed on August 7, 2025—under which Skydance acquired NAI for $2.4 billion and then merged with Paramount.

II.   The Proceedings Below: The Magistrate and the Vice Chancellor Diverge

The case was tried on a paper record before a Magistrate in Chancery in July 2024. Rhode Island relied on pre-demand news reporting as well as post-demand articles and SEC filings that corroborated the earlier accounts. The Magistrate, however, declined to consider the post-demand evidence, holding that the stockholder could only rely on information that existed when the demand was served. Applying that limitation, the Magistrate found no credible basis to suspect wrongdoing and recommended judgment for Paramount.

Rhode Island disputed the Magistrate’s recommendation, and the Vice Chancellor conducted a de novo review of both the facts and the law. The Vice Chancellor declined to adopt the Magistrate’s recommendation. He held that “there are settings when a stockholder can legitimately rely at trial on post-demand evidence”—specifically, when a material event occurs after the demand but before trial and the stockholder’s reliance on such evidence does not prejudice the corporation.[3] He also held that “articles from reputable publications that rely on anonymous sources will generally be sufficiently reliable for a court to consider when assessing” whether a proper purpose exists.[4] On that basis, the Vice Chancellor found that Rhode Island had demonstrated by a preponderance of the evidence a credible basis to infer that Redstone and NAI had breached the duty of loyalty by channeling potential buyers away from a company-level transaction and into an NAI-level transaction, and ordered the matter remanded to the Magistrate to determine the scope of production. Paramount sought and obtained certification for interlocutory appeal.

III.   The Delaware Supreme Court’s Decision: Two Key Holdings

A. Post-Demand Evidence: A Discretionary Standard, Not a Categorical Bar

The central legal question before the Supreme Court was whether a Court of Chancery, when determining whether a stockholder has shown a “credible basis” to suspect wrongdoing, may consider evidence concerning events that are disclosed or occur after the stockholder has served its Section 220 demand.

Paramount argued for a categorical rule: any evidence postdating the demand should be inadmissible for purposes of establishing a proper purpose—by either side. It grounded this argument in the text of Section 220(c), which requires a stockholder to “first establish” a proper purpose, and in Court of Chancery transcript rulings that it read as supporting a time-of-demand limitation. It also raised policy concerns, warning that permitting post-demand evidence would “invite[] stockholders to use the Section 220 demand process to keep corporate books and records open in perpetuity as long as some rumors about the corporation circulate in the news.”

The Supreme Court’s majority, written by Justice Traynor and joined by Justices LeGrow and Griffiths, rejected Paramount’s categorical approach. The court concluded that “[w]e discern nothing in [§] 220’s text that prohibits the consideration of post-demand evidence; on the contrary, we see the same signposts identified by the Court of Chancery, all of which point in the direction of admissibility under appropriate circumstances.”[5] The majority noted that Section 220(c)’s “first establish” language describes what a stockholder must demonstrate to the court after the corporation has rejected a demand, a showing that necessarily occurs well after the demand itself, and thus does not constrain what evidence is admissible at that later proceeding.

The majority determined that the rulings on which Paramount relied did not support a categorical bar. Instead, the courts had declined to consider post-demand evidence for reasons unrelated to timing, such as preventing stockholders from using discovery in a books and records case to obtain the very documents at issue in the proceeding. The majority likewise noted that the Delaware Supreme Court itself had previously relied on post-demand evidence in Wong Leung Revocable Trust v. Amazon.com, Inc., 345 A.3d 965 (Del. 2025), where it credited a federal antitrust court ruling published after the demand was made.

Having rejected a bright-line rule, the court endorsed the standard articulated by the Vice Chancellor: the general rule is that a stockholder is limited to evidence identified in the demand and information available when the demand was served, but under appropriate circumstances the Court of Chancery may, in its sound discretion, consider post-demand evidence that is material to the credible-basis inquiry and not prejudicial to the corporation.[6] On the facts presented—where the post-demand evidence concerned the company’s own public conduct, the parties had stipulated to the admissibility of certain such evidence, and Paramount itself had introduced post-demand evidence—the majority saw no abuse of discretion in the Vice Chancellor’s consideration of that evidence.[7]

B. Confidentially Sourced News Reporting: A Reliable Basis for Credible Suspicion

The majority and dissent were in agreement on the second issue. Both accepted the proposition that hearsay statements in news articles attributed to unnamed, confidential sources may, if sufficiently reliable, support a “credible basis” finding under Section 220.

This was consistent with prior precedent. The Supreme Court had previously stated in NVIDIA Corporation v. City of Westland Police and Fire Retirement System that in the § 220 context, the use of ‘sufficiently reliable hearsay’ is allowed.[8] The “credible basis” standard itself has been described as the “lowest possible burden of proof”—satisfied by “a credible showing, through documents, logic, testimony or otherwise, that there are legitimate issues of wrongdoing.”[9]

Paramount challenged the Vice Chancellor’s statement that “[n]ews articles from reputable publications that rely on anonymous sources will generally be sufficiently reliable for a court to consider when assessing whether a stockholder has a credible basis to suspect wrongdoing” as creating an impermissible categorical shortcut.[10] Reading the Vice Chancellor’s opinion as a whole, the majority was satisfied that the court had not relied on outlet reputation as a conclusive proxy for reliability. Rather, the Vice Chancellor properly conducted a multi-factor analysis considering: the volume of articles (47); the level of specificity in the source descriptions; instances where Paramount’s own SEC filings corroborated the reporting; the reputation of both the outlets and the specific journalists; the absence of indicators of unreliability or conspiratorial character; and the fact that Paramount itself had relied on articles with similar characteristics. The majority found this reliability analysis “passes muster.”[11]

IV.   The Dissent: A Categorical Rule Is the Better Policy

Chief Justice Seitz and Justice Valihura agreed with the majority’s conclusion on the confidential source issue but dissented on post-demand evidence. The dissenters acknowledged the majority’s practical observation—that a stockholder denied the use of post-demand evidence at trial can simply serve a new demand, as Rhode Island did here—but concluded that the better policy choice is a categorical bar.[12]

The dissent advanced several structural and policy arguments in support of a bright-line rule. First, the dissenters noted that Section 220(c)’s five-day waiting period—which gives the corporation a brief litigation-free window to consider the demand before suit may be filed—would be undermined if stockholders can supplement their demands with post-filing evidence: a stockholder could serve a thinly supported demand, race to the courthouse, and then rely on subsequently developed evidence to establish a proper purpose that did not exist at the time of the demand.

Second, the dissenters took issue with the practical workability of the majority’s “material event” exception, arguing that “[l]itigation over what events are ‘material’ will add one more layer of complexity to what should be a summary proceeding.”[13] Section 220 proceedings are designed to be prompt and narrow. The dissenters worried that the majority’s discretionary approach would make them more complex and time-consuming.

Finally, the dissenters observed that confining the stockholder to evidence available at the time of the demand is not unworkable—it simply incentivizes stockholders to bring inspection demands only when they have a concrete, contemporaneous basis for suspicion, rather than serving speculative demands in hopes that supporting evidence will emerge before trial.

V.   Key Takeaways for Practitioners

The decision provides clarity on two key questions in Section 220 practice and has immediate practical implications for both sides of books-and-records disputes.

For stockholder plaintiffs, the ruling confirms that post-demand events and disclosures are not categorically off-limits in a Section 220 proceeding. Where material developments occur after the demand is served, whether through SEC filings, additional media reports, or other public disclosures, and where reliance on that evidence would not prejudice the corporation, courts have discretion to consider it. Plaintiffs should preserve and introduce such evidence and be prepared to demonstrate both materiality and non-prejudice.

For corporations, the decision underscores that post-demand evidence is admissible as a discretionary matter, not as a matter of right. The Court of Chancery retains discretion to exclude post-demand evidence—as the Magistrate did in this very case—where, for example, the demand is premature or the evidence would prejudice the corporation. The majority’s affirmance rested heavily on the facts that the post-demand evidence here consisted of publicly available disclosures about the company’s own conduct, that Paramount had stipulated to some of it, and that Paramount itself had proffered similar evidence.

On the anonymous source question, the unanimous agreement across the majority and dissent is itself significant: reporting by reputable news organizations citing anonymous sources close to corporate negotiations can be sufficient to meet the “credible basis” threshold, provided the court conducts a fact-specific reliability analysis of the kind the Vice Chancellor performed here. Parties relying on confidentially sourced reporting should be prepared to demonstrate the reliability factors that carried the day: specificity of sourcing, corroboration by independent events or public filings, outlet and journalist reputation, and the absence of indicators of unreliability.

Finally, the March 2025 amendments to Section 220—which now require that demands be made in good faith, for a proper purpose, and with reasonable particularity as to the books and records sought—were not at issue in this case, which arose under the pre-amendment version of the statute. Practitioners should take note that the new, heightened specificity requirements may bear on both the temporal framing of the demand and the question of which post-demand evidence is “material” under the majority’s standard.

Conclusion

The Delaware Supreme Court’s 3–2 ruling in the Paramount case is an important development in Section 220 jurisprudence. By adopting a discretionary, case-by-case standard for post-demand evidence rather than the categorical bar urged by Paramount, the majority has chosen flexibility over certainty. The dissenters’ concern—that the majority’s rule will encourage premature demands and complicate summary proceedings—reflects real policy tradeoffs that the Court of Chancery will need to manage through the prudent exercise of its discretion. And the court’s unanimous endorsement of confidentially sourced news reporting as a potential basis for credible suspicion reflects the practical reality of how corporate transactions of this magnitude are documented in the public record.

****

[1]Paramount Global v. State of R. I. Off. of the Gen. Treasurer, No. 129, 2026 WL 820647 (Mar. 25, 2026).

[2]Del. Code Ann. tit. 8, § 220 (2026).

[3] State of R. I. Off. of Gen. Treasurer v. Paramount Glob., 331 A.3d 179, 191–92 (Del. Ch. 2025), aff'd and remanded sub nom. Paramount Glob. v. R. I. Off. of Gen. Treasurer, No. 129, 2026 WL 820647 (Mar. 25, 2026).

[4] Paramount Glob., 331 A.3d at 199.

[5] Paramount Glob., 2026 WL 820647, at *7.

[6] Paramount Glob., 2026 WL 820647, at *9.

[7] Id. at *10

[8]NVIDIA Corp. v. City of Westland Police & Fire Ret. Sys., 282 A.3d 1, 22 (Del. 2022).

[9]Seinfeld v. Verizon Commc’ns, Inc., 909 A.2d 117, 123 (Del. 2006).

[10] Paramount Glob., 331 A.3d at 199.

[11] Paramount Glob., 2026 WL 820647, at *10

[12] Id.  at *12 (Seitz, C.J., & Valihura, J., dissenting).

[13] Paramount Glob., 2026 WL 820647, at *13 (Seitz, C.J., & Valihura, J., dissenting).

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.

Inside Alto Litigation: Employee Spotlight with Silvia Kuhn

What is your title and position?

I am a Senior Paralegal at Alto Litigation, where I support attorneys across all stages of the litigation process.

What is your role at Alto Litigation, and what is a typical day like?

My role is to help manage cases from start to finish, which includes drafting and reviewing legal documents, coordinating discovery, conducting legal research, maintaining case files, and working closely with attorneys to keep everything on track. A typical day starts with assessing deadlines and setting priorities, it often involves preparing filings, organizing and managing case files, and coordinating various aspects of discovery.

What drew you to this field, and how did you get started?

I was drawn to the legal field because of its focus on critical thinking and real-world impact. I started my career in a legal support role and quickly found that I enjoyed the detail-oriented and strategic aspects of litigation.

What is your favorite part of your job?

My favorite part of the job is the opportunity to continuously learn—both about the subject matter of each case and from the attorneys I work with. Being exposed to strong legal writing and thoughtful strategy has helped me grow my own skills and deepen my understanding of litigation.

What makes Alto Litigation stand out?

Alto Litigation stands out for its collaborative environment and commitment to delivering high-quality work. What further sets the firm apart is its dynamic group of attorneys who combine strong legal expertise with a fresh, forward-thinking perspective, leveraging technology and innovation to consistently deliver for clients.

What aspect of Alto Litigation makes you most proud to work here?

I’m most proud of the team’s dedication to excellence and strong ethical foundation. It’s an environment where I feel valued and respected, and where everyone is aligned in delivering strong results while maintaining a positive workplace.

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.

****

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.

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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.