Five Things to Know When Litigating in Santa Clara County Superior Court’s Complex Division

Home to Silicon Valley, Santa Clara County has seen countless tech fairy tales over the past 70 years.  In turn, the Santa Clara County Superior Court—and in particular, its Complex Division—has been the backdrop to myriad Silicon Valley nightmares.  

We’ve written in the past about reasons to consider designating your case as complex in California Superior Court.  Here, we discuss some of the more distinctive characteristics of one of the most important departments, in one of the most important courts, of the state.

Discovery Routinely Is Stayed Until the Initial Case Management Conference

Aggressive advocates often take advantage of rules that permit defendants to begin serving discovery at the outset of a case, and permit plaintiffs to begin serving discovery just ten days after a defendant has been served with the summons.  At present, the Complex Division of the Santa Clara Superior Court (“SC Complex Division”) has no local rule or standing order to the contrary.  However, for many years, the SC Complex Division has, as a matter of practice, routinely stayed discovery (and responsive pleading deadlines) at the same time it designates a case as complex, until the initial case management conference.  Since it sometimes take 2-3 months (or more) before the SC Complex Division conducts the initial CMC, counsel and parties should carefully consider the implications of such a stay.

“Informal Discovery Conferences” Are Not Just for Party Discovery Disputes

While hardly the only court to utilize the “Informal Discovery Conference” or “IDC” procedure, the SC Complex Division judges are, in our experience, superfans.  They regularly invite parties to come to them with IDC requests, and typically are available on relatively short notice (1-2 weeks, rather than months).  Indeed, SC Complex Division judges often are willing to help resolve disputes involving non-parties (like subpoena recipients) and even non-discovery matters through IDCs.  

Parties Often Set Briefing Schedules—So Long as the Court Gets Extra Time to Review Replies

In an age when parties often wait months after filing their motion before it is heard, one might question the logic of giving the responding party until just nine court days before the hearing to file their opposition, and then jamming the moving party with a reply brief just four court days later.  (The Northern District of California’s Civil Local Rules set briefing deadlines based on the timing of the opening brief, rather than the timing of the hearing date.)  Fortunately, the SC Complex Division encourages parties to set their own stipulated briefing schedule.  Just keep in mind that, in our experience, the SC Complex Division judges want at least two weeks between the reply brief and the hearing date, rather than the statutory one week. 

The Court Has Its Own Model Protective Order

Parties to complex civil litigation typically want assurances that the information and documents they produce in discovery will not be made public or used outside of the litigation.  This typically is accomplished through a stipulated protective order at the outset of the case.  However, lawyers often have their own preferred templates, which of course can vary significantly from person to person.  It is worth noting, then, that the SC Complex Division itself has a model protective order for parties to use.  Parties looking for the ability to designate produced documents or information as “Confidential” should start by reviewing the model order to see whether it suits their needs.  The model order only provides for one level of confidentiality, and if any (or all) of the parties require the possibility of “Attorneys’ Eyes Only” protection, or otherwise want additional or different terms, the SC Complex Division judges typically are amenable.  

Familiarize Yourself with Both the Complex Civil Guidelines and the Other Rules Cited Therein

Lawyers practicing in the SC Complex Division are expected to familiarize themselves with its Complex Civil Guidelines.  In addition to certain unique rules and procedures (such as a requirement for joint case management statements), the Complex Civil Guidelines point to another important ruleset:  the Santa Clara County Bar Association Code of Professionalism.  The SC Complex Division judges take the Code of Professionalism seriously.  Several years ago, the author’s opposing counsel made the mistake of employing ad hominem attacks in their briefing and at oral argument.  When the author commented that the personal attack violated Section 19 of the Code of Professionalism, the judge responded:  

Counsel invoked the code of professionalism.  Anytime someone does that, a little bell goes off.  He gets $50 for doing that.  Because he is right.

The judge then proceeded to lament at length the lack of decorum “in a lot of places” before concluding:  “But here in Department 1 . . . it is alive and well.”  Opposing counsel lost that motion.  The ad hominem attacks were not the primary reason, but they clearly did not help. 

The Complex Division of the Santa Clara County Superior Court is filled with great judges, skilled attorneys, and top companies with interesting legal issues.  It’s a great place to litigate.  Just make sure to bring your A-game (if you’re a lawyer) or your A-team (if you’re a party).

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

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

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

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

Territorial Reach of the Federal Securities Laws

The Steve Miller Band had a major hit song, “Living in the U.S.A.”  But increasingly, it is difficult to know if a securities lawsuit may live in the U.S. or belongs in a foreign jurisdiction, as reflected in recent decisions by federal courts.

The turning point was the Supreme Court’s decision in Morrison v. National Australia Bank Ltd., 561 U.S. 247 (2010).  Prior to Morrison, the Second Circuit Court of Appeals had adopted a standard—followed by other Circuits—characterized as the “conduct-and-effects” test for determining whether U.S. courts had jurisdiction over a securities transaction: “(1) whether the wrongful conduct occurred in the United States, and (2) whether the wrongful conduct had a substantial effect in the United States or upon United States citizens..”  See, e.g., SEC v. Berger, 322 F. 3d 187, 192-93 (2d Cir. 2003).  

In Morrison, Australians filed suit in the United States against an Australian bank for allegedly concealing financial problems at a Florida mortgage-servicing company that the bank acquired. Plaintiffs brought claims under Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The Second Circuit affirmed dismissal of the suit, holding that jurisdiction was lacking under the conduct-and-effects analysis because the fraudulent scheme occurred outside the U.S.  The Supreme Court, while agreeing that dismissal was justified, rejected the conduct-and-effects standard, finding that the controlling issue was not jurisdiction, but rather, the presumption against extraterritorial application of federal statutes in the absence of express Congressional support. Because of this presumption, Section 10(b) and Rule 10b-5 applied only in connection with the purchase or sale of a security where that security was listed on a U.S. stock exchange, or the transaction occurred in the U.S.  561 U.S. at 273.

After Morrison, the analysis of extraterritorial jurisdiction falls into two categories – actions by the Securities and Exchange Commission (SEC), and private lawsuits.

SEC Actions

Almost simultaneous with the Morrison decision, Congress enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act, which included a provision (Section 929(p)(b)) conferring jurisdiction on U.S. federal courts for any action filed by the SEC alleging a violation of the antifraud laws involving either: (a) conduct within the U.S. constituting significant steps in furtherance of the violation (even if the transaction occurred outside the U.S.); or (b) conduct occurring outside the U.S. that has a foreseeable substantial effect within the U.S.

Critics charged that Congress had codified the conduct-and-effects test that Morrison had repudiated.  However, the Tenth Circuit Court of Appeals in SEC v. Scoville, 913 F.3d 1204 (2019), held that Dodd-Frank reflected the Congressional intent that the substantive antifraud provisions of the securities laws should apply extraterritorially in SEC actions.  Other courts similarly have endorsed the SEC’s jurisdiction where there were sufficient contacts between the alleged fraudulent scheme and the U.S. See, e.g., SEC v. Montano, 2020 WL 5534653 (D. Fla. July 24, 2020) (following Scoville, holding defendant took significant steps in pursuing fraud in U.S.); SEC v. Terraform Labs Pte Ltd, 2022 WL 2066414 (2d Cir. June 8, 2022) (jurisdiction where defendants purposefully availed themselves of U.S. by promoting digital assets to U.S. consumers and investors).

Private Actions

Determining whether jurisdiction exists in private litigation has become more problematic.  Morrison instructs parties and courts to ask whether a securities transaction “occurred in the United States,” but what does that mean? One formulation, adopted by the Ninth Circuit, is the “irrevocable liability” test: whether the purchaser of a security incurred irrevocable liability within the U.S. to take and pay for a security or the seller incurred irrevocable liability within the U.S. to deliver the security. See Stoyas v. Toshiba Corp., 896 F.3d 933, 949 (9th Cir. 2018). Thus, the analysis focuses on the nature of the securities transaction, and not the underlying fraud allegations.  And even if a plaintiff purchased a security in the U.S., it would not be considered a domestic transaction if it only became binding outside the U.S. In addition to the Ninth Circuit, the “irrevocable liability” test also has been adopted by the First, Second and Third Circuits.

But even that analysis does not always control.  For example, while the Second Circuit has adopted the “irrevocable liability” test, several decisions have held that although a transaction might be domestic, jurisdiction still is absent if the transaction is “predominantly foreign.” See, e.g., Cavello Bay Reinsurance Ltd. v. Stein, 961F.3d 161 (2d Cir. 2021); Parkcentral Global HUB Ltd. v. Porsche Automobile Holdings SE, 763 F. 3d 198 (2d Cir. 2014).

A separate analysis applies to RICO allegations.  A private RICO plaintiff must allege and prove a domestic injury to its business or property.  RJR Nabisco, Inc. v. European Community, 579 U.S. 325 (2016). Therefore, the plaintiff must show an injury to property occurred in the U.S. See City of Almaty v. Khrapunov, 956 F. 3d 1129 (9th Cir. 2020) (expenditure of funds to trace allegedly stolen funds of initial theft outside U.S. was not domestic injury); Fund Liquidation Holdings LLC v. UBS AG, 2021 WL 4482826 (S.D.N.Y. Sept. 30, 2021) (use of U.S. wires to send fraudulent confirmations and receive money and sending communications through U.S. did not constitute domestic injury).

Like much of securities law, even simple questions about the territorial reach of the law can have complicated answers.  Particularly when filing or defending securities litigation actions involving foreign parties or transactions, it is important to have experienced, competent counsel who is up-to-date on the latest legal developments.

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

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

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

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

Benchmark Litigation 2024 Rankings Recognize Alto Litigation and Three of its Attorneys Among the Top in California

Benchmark Litigation, described as “the definitive guide to the market’s leading firms and lawyers,” recently released its 2024 rankings, and Alto Litigation and its attorneys received several honors.

Alto Litigation was ranked a Recommended Firm in California, a Tier 1 Firm in San Francisco for Dispute Resolution, and was also highly ranked in San Francisco for Securities Litigation. Benchmark also recognized founding partner Bahram Seyedin-Noor as a “Litigation Star” in Securities and General Commercial Litigation; partner Bryan Ketroser as a “Litigation Star” in Securities Litigation; and partner Joshua Korr as a “Future Star” (40 and under). 

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

Bahram, a graduate of Harvard Law School, has tried cases before judges and juries in California and Delaware, and was a law clerk to Judge James Ware in the U.S. District Court for the Northern District of California. Over the last twenty-three years, Bahram has achieved dozens of victories in securities class actions, derivative lawsuits, arbitrations, trade secrets, and fiduciary duty disputes. In 2021 and 2019, Benchmark Litigation named Bahram the “San Francisco Attorney of the Year” and nominated him for “California Securities Litigation Attorney of the Year” alongside only three other attorneys in the State in multiple years. Chambers & Partners ranks Bahram among California’s top securities litigation practitioners. During Benchmark’s evaluation, a client noted, “Bahram is a brilliant attorney and excellent problem-solver. He is responsive, thorough, effective, and pragmatic – a rare combination.”

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

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

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

Litigating Against Pro Se Parties in Complex Disputes

Lawyers are used to dealing with other lawyers.  We talk to and negotiate with each other in a certain way, in part because we all start with a (largely) common understanding of basic law and procedure.  Sometimes, though, the party on the other side decides they don’t need a lawyer to represent them—or has that decision made for them when their counsel withdraws in the middle of the case.  And if you think that dealing with competent, stubborn, insert-your-preferred-adjective-here opposing counsel is a challenge, just wait until you have to engage in a lengthy discovery meet and confer with an opposing party directly.  

Below, we offer some thoughts on dealing with pro se litigants in complex disputes.

First, Make Sure They’re Actually Pro Se

Some pro se litigants begin a case with an attorney who then withdraws due to nonpayment or other issues.  Before engaging directly with such a litigant, make sure that they are now, in fact, pro se.  In California state court, where an attorney and client both agree to part ways, they can file a formal substitution of attorney (MC-050) form, which is effective without court order.  Where one or the other does not agree to terminate the representation, a court order is required.  If an opposing party or their “former” attorney tells you that the party is newly pro se, don’t blindly take their word for it; check the docket.  If you don’t, you may run afoul of applicable rules of professional conduct by contacting them.

Make Sure They’re Only Representing Themselves

Just because a person is entitled to represent themselves, does not mean that they can represent others.  This of course precludes a non-lawyer from representing other individuals, or even various entities that they might own, control, or otherwise have a financial or other interest in.  But it also typically precludes a non-lawyer from asserting certain claims in a case, even where they are the sole putative plaintiff.  For instance, class actions, shareholder derivative actions, and qui tam actions all involve claims asserted by a plaintiff in a “representative capacity,” such that the plaintiff typically may only assert them with the assistance of counsel.  Simon v. Hartford Life, Inc., 546 F.3d 661, 664 (9th Cir. 2008).  

Ask that They Be Held to the Same Rules and Standards as Attorneys

In theory, a party who acts as his or her own attorney “is to be treated like any other party and is entitled to the same, but no greater consideration than other litigants and attorneys.”  Stover v. Bruntz, 12 Cal. App. 5th 19, 31 (2017) (citation omitted).  This includes everything from discovery and briefing deadlines, to pleading standards, to basic courtroom decorum.  In practice, our experience is that pro se litigants sometimes try to use their unrepresented status as both a sword and a shield—for instance, filing unauthorized pleadings and outrageously-broad discovery, while simultaneously demanding extensions of time and other concessions on account of their pro se status.  If this happens, politely remind them (and the court) that they have to play by the same rules as everyone else.

Don’t Assume that They Actually Will Be Held to the Same Rules and Standards as Attorneys

Notwithstanding the above, don’t be surprised (or discouraged) if a pro se litigant seems to “get away with” a certain amount of intentional or unintentional misconduct.  While it varies by judge and by case—and, perhaps, by day—judges are human, and may show a greater degree of empathy and patience to pro se litigants.  This can, for instance, result in courts granting pro se litigants more time for certain matters than represented parties would get.  An attorney zealously pursuing their own client’s interests might reasonably be more flexible with a pro se opponent, for fear of coming across as a bully and/or alienating the judge.

Expect Erratic Behavior

As heated as attorney exchanges can be, they often can’t hold a candle to the passion exhibited by the parties themselves for their own case.  Attorneys typically view the lawyer on the other side of a case as their “opponent.”  That opponent may be a colleague, a stranger, or even a friend.  It may be someone you like, or someone you dislike.  But to a pro se party on the other side of the ‘v,’ there is a good chance that you are not just an opponent; you are the enemy.  They may yell at you and send you nasty emails.  They may go to the press.  They may even attack the judge, or file a bar complaint against you.  Whatever they do, it’s imperative that you keep your cool, and remember both your professional responsibilities and also that you are dealing with a person who has an emotional stake in the outcome of the case that you do not (or should not) have.

Document Everything

Good lawyers know to document material oral discussion between the parties.  This is particularly important when dealing with pro se parties, who may not understand many of the things that you are obligated to meet and confer with them about, and thus may be more likely to dispute the record if and when it comes to motion practice.  Documentation simultaneously helps mitigate this concern and, when done well, goes a long way toward convincing the court that you’re treating your pro se opponent fairly and with respect.

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

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

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

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

Service 2.0: Courts Increasingly Embrace Service of Process Through Email, Text and Social Media

When FTX collapsed, a number of high-profile celebrities, including Larry David, Tom Brady, and Shaquille O’Neal, were swept up in lawsuits alleging they played roles in defrauding investors. O’Neal made headlines because, in addition to being sued, the 7’1” former NBA superstar deftly dodged service of the complaint for months. The lawyers representing investors resorted to tweeting at O’Neal in an effort to get him to accept service, and asked the judge to allow service via social media, to no avail.

Despite being stymied in the FTX case, however, plaintiffs are increasingly finding success convincing courts to allow service of defendants through social media and other digital channels.

What’s Required for Service of Process?

When a lawsuit is filed, the next step is to serve the defendant with a copy of the summons and complaint. According to the U.S. Supreme Court, due process requires that service be “reasonably calculated, under all the circumstances, to apprise interested parties of the pendency of the action and afford them an opportunity to present their objections.” Mullane v. Cent. Hanover Bank & Trust Co., 339 U.S. 306, 314 (1950).

Historically, that meant serving papers in-person, via mail or, when those means weren’t available, by “alternative” means such as publication in a local newspaper. 

Alternatives Means of Service in the Digital Age

In recent years, there has been a notable shift in the methods permitted by courts for serving lawsuits, reflecting rapid technological advancements and changes in communication preferences. Traditional methods of service, such as personal service or service via mail, have at times proven inadequate or inefficient, especially when dealing with elusive parties. Recognizing the ubiquity of digital communication, many courts allow alternative means of service in appropriate circumstances to ensure justice is not hindered by logistical barriers. 

Thus, many courts have found that service by email satisfies due process in situations where the plaintiff shows that the email is likely to reach the defendant (such as evidence the party has recently used the email address at issue) and that the plaintiff previously engaged in diligent efforts to effectuate traditional service.

Another method is service through social media platforms. Particularly in cases where traditional methods have been exhausted or are impractical, courts have sometimes permitted plaintiffs to serve defendants via platforms like Facebook, Twitter, or LinkedIn. The rationale is that if a person is actively using a social media account, they are likely to receive and take notice of the message. 

For example, in a copyright infringement lawsuit brought by Sony Music against rapper Trefuego, a Texas district court allowed service on the defendant via direct message on TikTok, Twitter and SoundCloud. The court reasoned:  “Modern problems require modern solutions. And this Court has concerns as to whether SoundCloud and TikTok rapper extraordinaire Trefuego is a regular reader of the Fort Worth Star Telegram or that he regularly visits the information tab of Fort Worth’s city website.”

Text message service has also gained traction. Given that a significant portion of the global population owns a mobile phone and frequently uses it for communication, a lawsuit notification via text can sometimes be more immediate and direct than other methods. 

Challenges Related to Alternative Methods of Service

The technologies that make the convenience of digital service possible also create challenges. One primary concern is the verification of the recipient's identity. For instance, while a social media profile might bear the name and photograph of an individual, there's no guarantee that the person managing or accessing the account is indeed the intended recipient. Multiple people might have access to a single account, or accounts may be impersonated or hacked, leading to potential miscommunication or non-receipt of the lawsuit notice.

Another challenge is ensuring that the delivered message is both seen and understood. Unlike a mailed legal document or a personal service where the receipt is more tangible, digital notifications can get marked as spam or otherwise buried under the mountain of email most of us receive each day.  Such challenges can be partially mitigated by, for instance, using a read receipt feature, securing a response from the party being served, and/or taking screenshots showing the message's delivery and visibility on the recipient's platform. 

Procedural Roadmaps

As alternative service becomes more ubiquitous, more courts are providing parties and their lawyers with clearer roadmaps on how to proceed. For instance, earlier this year, the Illinois Supreme Court announced an amended rule permitting service of summons through electronic means of communication, including email, text messaging, and social media, although traditional methods of service must be attempted first.

In California, there is no rule expressly allowing service of process by email, text messaging, or social media. Under the Federal Rules of Civil Procedure, Rule 4(e) provides that service of process on an individual in the United States is to be made pursuant to the laws of the state where the district court is located—so alternative methods may be possible in states such as Illinois that expressly permit such service, provided relevant rules are followed and standards are met. Serving foreign defendants also poses unique challenges. To learn more about serving foreign defendants, you can read our prior posts on that topic here and here.

Conclusion

The fundamental principle underpinning all alternatives methods of service is due process. And the heart of due process is fairness: ensuring that individuals are given proper notice and an opportunity to defend themselves. As technological methods evolve and become more integrated into legal processes, courts will balance efficiency with ensuring that rights are not compromised. Alternative digital service methods must prioritize the principle that individuals deserve a clear, comprehensible, and fair notification when legal action is initiated against them.

And in case you were wondering, Shaquille O’Neal was eventually served in the FTX lawsuit. A process server purchased a ticket to an NBA playoff game and approached O’Neal while he was on the “Inside the NBA” set (O’Neal is an analyst on the show), and delivered the document during the broadcast of the game. Ironically, service was made at the Miami Heat arena, which was formerly called FTX Arena.

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

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

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

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

Are Crypto Tokens Securities? SDNY Judges Reach Different Conclusions

For years, the Securities Exchange Commision (SEC) has been adamant that, according to SEC chair Gary Gensler, the “vast majority” or cryptocurrency tokens are securities and that offers and sales of such tokens are covered by the securities laws. As the SEC ramps up efforts to regulate the cryptocurrency industry in accordance with that position, courts have begun weighing in on the issue—and the results are mixed.

SEC v. Ripple: Tokens Sold Over Exchanges to the General Public are Not Securities

In SEC v. Ripple Labs, Inc, a case we addressed in a previous post, Judge Analisa Torres in the United States District Court for the Southern District of New York held that sales of XRP to institutional investors involved securities under the test articulated by the Supreme Court in SEC v. W.J. Howey Co., 328 U.S. 293 (1946). 

However, the court ruled that so-called Programmatic Sales on crypto exchanges to the general did not involve securities because the purchasers were not buying directly from Ripple, and therefore could not reasonably expect a profit derived from Ripple's efforts (the third prong of the Howey test).

The Court in SEC v. Terraform Labs Pte. Ltd. Reaches a Different Conclusion

On July 31, 2023, Judge Jed S. Rakoff in the United States District Court for the Southern District of New York reached a conclusion at odds with Judge Torres’ ruling in an opinion denying Terraform Labs’ motion to dismiss a case brought by the SEC. 

In this case, the SEC alleges, among other things, that Terraform Labs and its CEO, Do Hyeong Kwon, failed to register the offer and sale of Terraform’s crypto-assets and committed fraud in connection with those transactions. Judge Rakoff denied Terraform Labs’ motion to dismiss, ruling that the SEC adequately pled that Terraform’s crypto-assets qualified as securities under the Supreme Court’s Howey test. 

Judge Rakoff explicitly addressed—and rejected—the distinction Judge Torres drew between sales to institutional and retail investors, respectively, when evaluating whether the securities laws are implicated. According to Judge Rakoff, “It may also be mentioned that the Court declines to draw a distinction between these coins based on their manner of sale, such that coins sold directly to institutional investors are considered securities and those sold through secondary market transactions to retail investors are not.”

Moving Forward

So where does this leave us? While the Ripple and Terraform decisions add additional data points to the discussion, there is still no consensus as to whether crypto-assets are securities. While Judge Torres’ ruling briefly raised hopes in the crypto industry that selling tokens on digital asset exchanges to retail investors could allow such transactions to escape SEC enforcement, Judge Rakoff’s rejection of her reasoning highlights the ongoing uncertainty about this important legal issue.

Are crypto tokens securities? Unless Congress intervenes, it will likely be up to the courts of appeal to answer that question. On August 9, 2023, the SEC announced its intention to appeal the Ripple decision. We will continue to keep you apprised of further developments in these and other cases at the intersection of the cryptocurrency industry and the securities laws.

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

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

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

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

Board Diversity Requirements in the Wake of Weber

In 2020, California passed Assembly Bill 979, which required California-headquartered public companies to appoint a minimum number of individuals from underrepresented communities to their boards.  This bill followed on the heels of a 2018 Senate Bill that required publicly listed corporations headquartered in California to have two or three female board members, depending on the size of the board.  

Following a recent trial-court decision out of the Eastern District of California as well as two earlier state court decisions, both board requirements have been found to violate equal protection.  That creates significant compliance uncertainty for corporations while these decisions wind through the appellate courts.  At the same time, the benchmarks set out in both bills reflect an interest that many institutional investors have publicly prioritized.  Furthermore, certain publicly listed companies are required to disclose the diversity metrics of their boards.  As a result, even though these bills are currently enjoined, their diversity frameworks will likely continue to be important considerations for boards as they seek to respond to the real expectations of their constituents in a merits-based and non-discriminatory way.   

Trial Courts Find California’s Board Diversity Statutes to be Unconstitutional

In 2020, California passed Assembly Bill 979, which required California-headquartered public companies to appoint a minimum number of individuals (dependent on the size of the corporation) from underrepresented communities to their boards. This law has been challenged, and the U.S. District Court for the Eastern District of California (the “District Court”) became the latest court to rule it unconstitutional.

California Assembly Bill 979

CAB 979 defines “underrepresented communities” as individuals who identify as “Black, African American, Hispanic, Latino, Asian, Pacific Islander, Native American, Native Hawaiian, or Alaska Native, or who self-identifies as gay, lesbian, bisexual, or transgender.” One to three persons from underrepresented groups must be members of a corporation’s board (again, based on the corporation’s size). Fines for noncompliance are $100,000 for an initial violation and $300,000 for subsequent violations.

Alliance for Fair Board Recruitment v. Weber

The Alliance for Fair Board Recruitment (the “Alliance”) challenged the constitutionality of CAB 979 in a lawsuit in the District Court. On May 15, 2023, the District Court, in Alliance for Fair Board Recruitment v. Weber, ruled that CAB 979 violates the Equal Protection Clause of the U.S. Constitution’s Fourteenth Amendment, as well as 42 U.S.C. §1981.

The Alliance argued that CAB 979’s imposition of board requirements based on select racial and ethnic classifications constitutes an impermissible race-based quota in violation of the Equal Protection Clause of the Fourteenth Amendment to the U.S. Constitution and federal statute 42 U.S.C. §1981, which prohibits racial discrimination on the basis of race in the making and enforcing of contracts. 

The District Court granted Alliance’s motion for summary judgment, ruling that CAB 979’s racial and ethnic quotas are “facially invalid” based on relevant U.S. Supreme Court precedent, including its ruling in the affirmative action case Grutter v. Bollinger.

The District Court is not the only court to consider the constitutionality of California’s board diversity requirements. In two cases, Crest v. Padilla I and II, filed in California state courts, the courts ruled in favor of the plaintiffs and entered injunctions against the implementation and enforcement of CAB 979 and California Senate Bill 826, which requires gender diversity on boards. The courts found that the statutes violated the equal protection provisions of the California Constitution. 

Crest v. Padilla I and II were both appealed and the appeals remain pending. Alliance for Fair Board Recruitment v. Weber was also recently appealed.

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

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

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

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

The U.S. Supreme Court Expands Corporate Personal Jurisdiction via Mallory v. Norfolk Southern Railway Co. Ruling

The U.S. Supreme Court recently issued an opinion in Mallory v. Norfolk Southern Railway Co. that will likely have a significant impact on where litigation is initiated in the United States, particularly if more states follow Pennsylvania’s lead in passing legislation requiring companies who do business locally to consent to personal jurisdiction. 

The Underlying Case

In Mallory v. Norfolk Southern Railway Co., No. 21-1168 (U.S. June 27, 2023), plaintiff Robert Mallory, a resident of Virginia, sued Virginia-based Norfolk Southern, his former employer, in Pennsylvania. The lawsuit alleged that Mallory suffered damages related to exposure to toxic chemicals while working for Norfolk Southern in Virginia and Ohio. The alleged basis for jurisdiction in Pennsylvania was that Norfolk Southern consented to it by registering to do business there.

All out-of-state corporations that desire to do business in Pennsylvania must register as foreign corporations. Pennsylvania law provides that “qualification as a foreign corporation” allows state courts to “exercise general personal jurisdiction” over the corporation.

Norfolk Southern argued that Pennsylvania’s law tying registration to jurisdiction violated the U.S. Constitution’s Due Process Clause.  Pennsylvania’s own courts agreed.

The Supreme Court’s Decision

On June 27, 2023, the U.S. Supreme Court, in a 5-4 decision, reversed the Pennsylvania courts and ruled that the Due Process Clause does not prohibit a state from requiring an out-of-state corporation to consent to personal jurisdiction. Justice Gorsuch, writing for the majority, explained:  “If having to defend this suit in Pennsylvania seems unfair to Norfolk Southern, it is only because it is hard to see Mallory’s decision to sue in Philadelphia as anything other than the selection of a venue that is reputed to be especially favorable to tort plaintiffs. But we have never held that the Due Process Clause protects against forum shopping.”

The dissent argued that the majority’s ruling permits states to bypass due process requirements and manufacture consent to jurisdiction. Moreover, the dissent asserted that Pennsylvania’s registration process does not explicitly explain that registration results in consent.

Implications

The Mallory decision will almost certainly increase forum shopping, particularly if more states adopt foreign corporation registration requirements similar to those in Pennsylvania. Corporations who do business in multiple states should carefully review, and continue to monitor, statutory developments that could impact whether they may be subject to jurisdiction in states in which they’re not headquartered, and in which they have what they might consider—in business (if not legal) terms—a relatively minor presence.

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

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

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

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

Eleventh Circuit Case Examines Loss Causation Allegations Where Lead Plaintiff Sold Shares Between Company Disclosures Regarding the Existence and Results of an Investigation

“Loss causation”—the notion that a plaintiff generally must plead and prove that the defendant’s action (or inaction) caused their loss—is one of the most fundamental concepts in all of law.  But while the basic concept is easily explained, the devil of its application is in the details.  Nowhere is this more true than in securities fraud cases, where thousands of individuals and entities trade stock based on company and third-party statements alike.

A perennial question in securities fraud cases is whether a given corporate announcement regarding an investigation constitutes a “corrective disclosure,” such that supports a loss causation argument.  For instance, the Ninth Circuit Court of Appeals has held that merely alleging that a company has announced an SEC investigation does not adequately plead loss causation in a securities fraud case.  However, the announcement of an investigation, when coupled with a subsequent confirmation of wrongdoing, can constitute a corrective disclosure.

What about a situation involving both an announcement of an investigation and a subsequent confirmation of wrongdoing, where the plaintiff sells their stock before the final announcements?

That is the fact pattern that the Eleventh Circuit Court of Appeals recently faced.  In MacPhee v. MiMedx Group, Inc., the plaintiffs alleged that MiMedx, the “leading global supplier of amniotic tissue products,” reported “explosive” growth between 2012 and 2017 that was, in fact, predicated on improper sales and distribution practices, as well as a “massive accounting fraud.”  The plaintiffs alleged that the truth regarding the misconduct “leaked into the market through a series of partial corrective disclosures” that included, among other things:  (a) a December 2014 press release that the company was under government investigation; (b) September 2017 and February 2018 press releases regarding audit committee investigations; and (c) a July 2018 announcement of the results of the final audit committee investigation, and related resignations.

The wrinkle?  The lead plaintiff sold its stock after the announcement of the final internal investigation, but before the announcement of the results of that investigation.  Per the Supreme Court’s decision in Dura Pharms., Inc. v. Broudo, there is no loss causation where a shareholder sells their stock “before the relevant truth begins to leak out.”  Accordingly, the MacPhee court held that because the lead plaintiff sold its stock in February 2018, before the announcement of the results of the investigation:  “the announcement of an internal investigation, a government investigation, and a whistleblower lawsuit” “did not qualify as corrective disclosures.”

While it remains unclear how the Ninth Circuit Court of Appeals would rule on such a fact pattern, California practitioners should keep MacPhee in mind, should they find themselves faced with similar circumstances.

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

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

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

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

Does a Director of a California Non-Profit Lose Derivative Standing If They Lose Reelection to the Board During Litigation?

A director of a California nonprofit corporation has standing to bring derivative lawsuits on behalf of the nonprofit in appropriate circumstances. Corp. Code § 5710. But what happens when a director who began the litigation with standing loses their bid for re-election to the board?  In 2021, the California Supreme Court granted certiorari to resolve a split of authority on that very question. Given the Court’s two-year average for civil cases, we expect a ruling on this issue in the coming months.  

The case on review is Turner v. Victoria, (2021), 67 Cal. App. 5th 1099, where the California Court of Appeal, Fourth Appellate District, ruled that standing is lost in such circumstances. In reaching its conclusion, the court analogized to cases involving for-profit corporations, which have held that California law “generally requires a plaintiff in a shareholder derivative suit to maintain continuous stock ownership throughout the pendency of the litigation.” Grosset v. Wenaas, 42 Cal. 4th 1100 (2008). The court found no indication that the legislature intended to depart from the ordinary principles requiring a plaintiff to maintain standing throughout litigation.  

However, Turner acknowledged that its decision was at odds with Summers v. Colette, 34 Cal. App. 5th 361 (2019), a decision by the California Court of Appeal, Second Appellate District, which held that a director who brought a derivative action against another director alleging self-dealing and misconduct did not lose standing when removed from such position. And there is some sense in that position, as one can imagine a circumstance where a director is removed precisely to defeat standing in the pending derivative action (purportedly brought for the benefit of the non-profit). That might be more likely to happen in the non-profit context than in the context of a publicly traded corporation. For these reasons, it will be fascinating to see what the California Supreme Court decides.  

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

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

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

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

SEC v. Ripple Labs Split-Decision Makes Waves in the Crypto Industry

In a closely watched case, a federal judge in New York has granted partial victories to both the Securities and Exchange Commission and Ripple Labs Inc. in ruling on cross-motions for summary judgment regarding whether sales of Ripple's digital token XRP violated the federal securities laws. 

On the one hand, Judge Analisa Torres in the United States District Court for the Southern District of New York held that sales of XRP to institutional investors involved securities under the test articulated by the Supreme Court in SEC v. W.J. Howey Co., 328 U.S. 293 (1946).  The sale of securities that are not registered with the SEC violates Section 5 of the Securities Act of 1933 unless there is an applicable exemption.  To determine if the sale of an asset constituted a securities transaction, courts look at the underlying economic reality and the totality of the circumstances.  In Ripple, the court held that the institutional XRP sales satisfied the three prongs of the Howey test:  there was the investment of money, in a common enterprise, with the reasonable expectation of profit derived from the entrepreneurial or managerial efforts of others.

However, the court ruled that so-called Programmatic Sales on crypto exchanges did not involve securities because the purchasers were not buying directly from Ripple, and therefore could not reasonably expect a profit derived from Ripple's efforts (the third prong of the Howey test).  The court also held that Ripple’s other distributions of XRP to employees and third parties were not securities because there was no payment of money (the first prong of Howey), and there was no illegal underwriting of the tokens.  Further, XRP sales allegedly totaling $600 million by two officer-defendants did not meet the Howey test because they were Programmatic Sales on digital asset exchanges in "blind" bid/ask transactions where the buyers did not know who they were purchasing from, and therefore could not have expected profits derived from Ripple's efforts.  The court also held that a genuine dispute of material facts precluded summary judgment for the SEC on whether the officer-defendants aided and abetted the company's Section 5 violations.  The court rejected the defendants' argument that the SEC violated their due process rights because they lacked fair notice that XRP sales may violate the securities laws.

The court’s ruling in the SEC’s action against Ripple, filed in late 2020, was widely anticipated by the crypto community as a significant test of the SEC’s position that most sales of digital assets constitute securities transactions.  It will be interesting to see whether either side appeals the decision, given that both the SEC and Ripple can claim some measure of victory.

It may seem odd that the determination of whether an asset is a security depends on the nature of the transaction in the asset.  It would be as if GM stock were a security if purchased directly from GM, but not a security if purchased on the New York Stock Exchange.  In either case, the purchaser presumably would be relying on the managerial and entrepreneurial efforts of GM to make a profit.  But the Ripple court stated that the purchasers of XRP on crypto exchanges were less sophisticated than institutional investors; likely did not see the representations and statements of Ripple; may not even had known of Ripple's existence; and likely were expecting a profit based on cryptocurrency trends rather than any action by Ripple.  Therefore, the economic reality and the totality of the circumstances meant that the Programmatic Sales did not constitute the offer and sale of investment contracts.  While the court stated that a Programmatic Buyer stood in the same shoes as a secondary market purchaser, it also noted that it was not addressing whether secondary market sales of XRP constituted investment contracts, because the question was not properly before the court.

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

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

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

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

Supreme Court Holds that District Court Proceedings are Automatically Stayed Pending Appeal of the Denial of a Motion to Compel Arbitration

On June 23, 2023, the U.S. Supreme Court (the “Court”), in the case of Coinbase, Inc. v. Bielski, ruled that litigation in federal district court is automatically stayed when a party appeals the denial of a motion to compel arbitration. The Court reversed the U.S. Court of Appeals for the Ninth Circuit (the “Ninth Circuit”) and resolved a circuit split with a ruling that has important tactical consideration for litigants, as explained below.

The Underlying Case

In this case, Coinbase moved to compel arbitration in a class action filed against it, and the U.S. District Court denied the motion. Coinbase then filed an interlocutory appeal to the Ninth Circuit and moved to stay district court proceedings to allow the arbitrability issue to be addressed on appeal. The district court refused to stay the proceedings, as did the Ninth Circuit. The Ninth Circuit, along with the Second and Fifth Circuits, held the minority position that the denial of a motion to compel arbitration does not automatically stay district court proceedings.

The Supreme Court Ruling

In a 5-4 decision, the Court reversed the Ninth Circuit and held that appealing the denial of a motion to compel arbitration automatically stays district court proceedings pending resolution of the appeal.

Justice Kavanaugh, writing for the majority, noted that while the Federal Arbitration Act grants the losing party a statutory right to an interlocutory appeal when a district court denies a motion to compel arbitration, it does not address whether district court proceedings must be stayed. 9 U. S. C. §16(a). However, the Court explained that the Federal Arbitration Act was enacted “against a clear background principle prescribed by this Court’s precedents” set forth in the Court’s Griggs v. Provident Consumer Discount Co. decision: an appeal “divests the district court of its control over those aspects of the case involved in the appeal.”

In this case, “Because the question on appeal is whether the case belongs in arbitration or instead in the district court, the entire case is essentially ‘involved in the appeal.’” Therefore, district courts must stay proceedings while an interlocutory appeal on arbitrability is ongoing. This is a practice that, according to Justice Kavanaugh, “reflects common sense,” because proceeding with a case while issues of arbitrability are on appeal would reduce the benefits of arbitration, such as efficiency and cost-savings.

Implications

This decision is clearly a victory for defendants who appeal the denial of a motion to compel arbitration. But it also has important tactical considerations for plaintiffs who take a chance by filing in court when they know the dispute may be subject to arbitration.  Even if the plaintiff persuades the relevant court that it has jurisdiction over the dispute, it must now wait out an appeal, which could materially impact the underlying goals of the litigation.  This will impact a plaintiff’s cost/benefit analysis of the optimal forum for initiating a dispute in a case that involves multiple agreements with conflicting forum selection provisions. 

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

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

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

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

The Ninth Circuit Enforces Forum-Selection Clause, Dismisses Derivative Securities Claim

In an en banc decision in Lee v. Fisher, No. 21-15923, the U.S. Court of Appeals for the Ninth Circuit recently ruled that a shareholder derivative action against The Gap filed in federal court had to be dismissed because a forum-selection provision in the company's bylaws requires all derivative actions to be filed in Delaware Chancery Court. This ruling is notable, as it effectively precludes shareholders from asserting derivative claims on behalf of the company for alleged violations of the Securities and Exchange Act of 1934 (the “Exchange Act”).

The Ninth Circuit Decision

The lawsuit against Gap stemmed from allegations that the company's proxy statements contained materially false and misleading statements concerning the company’s commitment to diversity in nominating directors and hiring executives. Plaintiff brought a derivative action on behalf of the company against former and current directors that alleged the company’s proxy statements violated Section 14(a) of the Exchange Act and SEC Rule 14a-9. The Ninth Circuit’s ruling did not delve into the merits of the case. Instead, the focus was on the procedural question: Can this case be litigated in federal court or must it be removed to Delaware Chancery Court pursuant to the bylaws?

In its decision, the Ninth Circuit noted that the complaint was consistent with the “modern trend in which plaintiffs frame corporate mismanagement claims that normally arise under state law (including challenges to corporate policies relating to ‘ESG [environmental, social, and governance] issues … such as environmentalism, racial and gender equity, and economic inequality’) as proxy nondisclosure claims under § 14(a), in order to invoke exclusive federal jurisdiction and avoid any forum-selection.”

The plaintiff asserted that because the complaint alleged a claim under the Exchange Act, the forum-selection clause violated that antiwaiver provision in Section 29(a) of the Exchange Act. But in a 6-5 decision, the Ninth Circuit held that the antiwaiver provision was not violated because the plaintiff could still enforce the substantive obligations under Section 14(a) and Rule 14a-9 by bringing a direct stockholder claim in federal court. Indeed, the court indicated that the alleged claim should have been brought as a direct action under Delaware law. Further, citing recent Supreme Court jurisprudence, the court stated that the forum-selection clause did not violate a strong public policy of permitting a shareholder to bring a Section 14(a) derivative claim in federal court. The court also held that the forum-selection provision did not violate Delaware law. 

The dissent argued the forum-selection clause conflicts with the plain text of the Exchange Act and eliminates plaintiff's federal claims because Delaware did not have jurisdiction over them.

Conflict with the Seventh Circuit

The court acknowledged that it was disagreeing with a decision of the U.S. Court of Appeals for the Seventh Circuit that held that companies making claims under the federal securities laws could not use forum-selection clauses to avoid federal courts. In January 2022, the Seventh Circuit decided in favor of shareholders of The Boeing Company, allowing them to continue litigating derivative claims in federal court, despite Boeing’s forum-selection clause directing such cases to Delaware Chancery Court.

The circuit split may result in the U.S. Supreme Court weighing in on the enforceability of such forum-selection provisions.

Broader Implications 

This case highlights the importance of provisions in corporate bylaws and commercial contracts that address jurisdictional and choice-of-law issues, which can have a significant impact on the outcome of litigation. There are also strategic considerations related to jurisdiction that must be taken into account, such as whether a federal or state court would be a better forum for a particular case, and whether, in the absence of federal question jurisdiction, there is a basis for diversity jurisdiction to bring a case in federal court. 

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

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

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

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

Trade Secrecy – The Last Refuge for A.I. Creations?

The dramatic rise in artificial intelligence systems and software has led to an explosion in AI-generated information. Much of that information has commercial value, whether it be in the form of creative content or elaborate machine-learning algorithms and their resulting data streams. But how should that valuable information best be protected?

Traditional intellectual property regimes have been relatively inhospitable to AI-generated content. In the patent world, the Supreme Court’s seminal decision in Alice Corp. v. CLS Bank held that a mere instruction to a computer to implement an abstract idea (for example, an algorithm or prompt) could not be patented.¹ And the U.S. Copyright Office recently issued guidance confirming that AI-generated content without any element of human creative contribution is not copyrightable.²

Fortunately, federal and state trade secrecy laws provide a ready alternative for valuable AI-generated information by expressly recognizing that trade secret rights “protect items which would not be proper subjects for consideration for patent [or copyright] protection.”³ All that is required is that information be competitively valuable and secret. No application, registration, or disclosure is needed and there is no statutory expiration date for a trade secret. Furthermore, there is no requirement that the creator of a trade secret be a natural person (i.e., a human), as is required to secure a patent.

All of this is welcome news to the many companies founded on the promise of machine learning systems. Their algorithmic inputs, training data, neural network designs and implementation, and systems output data all must be protected as trade secrets if they are to be protected at all. But, in practice, maintaining secrecy can be challenging for companies that must partner with other business organizations or release their technology into the wild. Indeed, lawful reverse engineering as well as independent development can provide viable defenses to a trade secret misappropriation lawsuit. Therefore, companies would be wise to implement the following steps to protect their AI-generated data as trade secrets:

1. Ensure non-disclosure agreements are entered into with all partner companies, independent contractors, and employees/officers/directors;

2. When releasing software, ensure that it is designed and implemented in ways that cannot be reverse engineered; and

3. Maintain strict cyber-security and monitoring protocols that are designed to prevent and detect data theft.

By taking these steps, companies will be in a stronger position to bring a lawsuit, obtain a restraining order, and collect damages if a trade secret is misappropriated.

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

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

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

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

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1. Alice Corp. v. CLS Bank Int’l, 134 S.Ct. 2347, 2355 (2014). 
2.  Copyright Registration Guidance: Works Containing Material Generated By Artificial Intelligence, U.S. Copyright Office (Mar. 16, 2023), available at https://www.federalregister.gov/documents/2023/03/16/2023-05321/copyright-registration-guidance-works-containing-material-generated-by-artificial-intelligence
3. Kewanee Oil Co. v. Bicron Corp., 416 U.S. 470, 482-83 (1974).  

Bahram Seyedin-Noor is Once Again Ranked by Chambers and Partners

Alto Litigation Founder and CEO Bahram Seyedin-Noor has been recognized in the 2023 edition of Chambers USA, the third straight year he has been included in the rankings for his practice in securities litigation in California. 

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

Among the feedback provided in support of Bahram’s recognition is that, “He is the right mix of legal grounding, commercial awareness and assertiveness.” It was also noted that, “Bahram is extremely professional, knowledgeable and offers excellent advice.”

Responding to the recognition, Bahram stated “Litigation is a team sport. I am grateful to be surrounded by such a talented and dedicated legal team. This recognition is as much for their work as it is for my contribution to our client successes.”

Alto Partner Bahram Seyedin-Noor Contributes to New Edition of “Litigating and Judging California Business Entity Governance Disputes”

As the nature of business evolves, so does the law pertaining to business entity governance disputes. This week, LexisNexis released the latest edition of “Litigating and Judging California Business Entity Governance Disputes” – a seminal treatise that guides practitioners through a variety of complex business matters involving management, ownership and control of California corporations, LLCs, and general and limited partnerships.

Alto Litigation’s Bahram Seyedin-Noor is the author of Chapter 2 of “Litigating and Judging California Business Entity Governance Disputes,” covering disputes between and among a corporation’s shareholders and its managers relating to the management of the corporation itself.  Alto partners Bryan Ketroser and Josh Korr also contributed to the chapter which provides relevant citations to statutes and court decisions, together with insights, helpful tips and creative solutions for arbitrators, attorneys and judges, who are dealing with disputes regarding the management of a corporation. 

Bahram Seyedin-Noor is the Founder and Managing Partner of Alto Litigation. He is a graduate of Harvard Law School and is admitted to practice in California before all federal district courts and the Ninth Circuit Court of Appeals. He is a noted litigator in complex civil litigation, business litigation and counseling, SEC enforcement matters, and private securities. He is regularly recognized for his thoughtful strategy and adept litigation skills by The California Daily Journal, Benchmark Litigation, and Chambers USA. 

For more information and to purchase the new edition visit LexisNexis.

Retirement Accounts and Personal Liability in California

For lawyers who defend corporate directors and officers against breach of fiduciary duty or fraud claims, the specter of a client’s personal liability may loom large.  Insurance may not cover liability for a breach of fiduciary duty claim (often an intentional tort), and bankruptcy protection similarly may not apply.  Nonetheless, some solace may be found in California’s forgiving debtor exemption laws: judgment creditors are barred from reaching qualified retirement accounts.

These retirement account protections are grounded in California Code of Civil Procedure section 704.115.  The statute can fully exempt ERISA retirement assets from judgement creditors, regardless of the nature of the liability.  McMullen v. Haycock, 147 Cal. App. 4th 753, 755, (2007).  So long as the judgment debtor proves an actual intention to use the ERISA account for retirement purposes, the law will exempt the account from creditor reach.  O'Brien v. AMBS Diagnostics, LLC, 38 Cal. App. 5th 553, 561, (2019).  If, however, the debtor has shown an intention inconsistent with using the ERISA account for retirement purposes—for example, using some of the funds to finance a home long before retirement—then the exemption may be lost.  

Funds held in individual retirement accounts (“IRA”) also enjoy some, albeit lesser, protection.  McMullen, 147 Cal. App. at 755.  For IRA accounts, the protection extends “only to the extent necessary to provide for the support of the judgment debtor.”  To determine the extent of the exemption, the Court will examine how much is needed to satisfy the debtor’s “common necessaries of life” based on his or her personal financial situation.  J. J. MacIntyre Co. v. Duren, 118 Cal. App. 3d Supp. 16, 18, 173 Cal. Rptr. 715, 716 (App. Dep't Super Ct. 1981).  Recreation, music lessons, and insurance expenses may justify exemption in the appropriate context.  Importantly, the debtor may use tracing to claim the exemption over eligible ERISA funds transferred to another account type.  McMullen, 147 Cal. App. at 758.

What happens when an account holder rolls ERISA assets into an IRA account that otherwise would receive only limited protection?  Does the original source of the ERISA funds control to give full protection, or does the IRA roll-over destroy the fully-exempt status?

The caselaw is split on this issue.  The more debtor-friendly cases hold that the rolled-over funds should retain their former, fully-exempt status.  McMullen, 147 Cal. App. at 755.  In McMullen itself, the debtor claimed a full exemption over funds in his IRA account, which he had rolled over from his fully-exempt ERISA retirement plan.  No other assets were added to the rollover IRA.  Opposing the full exemption, the creditor argued that the IRA rollover extinguished the full exemption as IRAs are only partially exempt under the statute’s express language.  

Agreeing with the debtor, McMullen held that full exemption should apply.  In doing so, McMullen relied on Section 703.080, which expressly allows tracing of exempt funds that are distributed to deposit accounts or in the form of cash or its equivalent.  McMullen also noted California’s policy that exemption statutes should be construed (as far as practicable) to the judgment creditor’s benefit.  The liberal tracing application honored the policy goal of allowing a debtor to best protect his or her assets.  

McMullen expressly disagreed with a California bankruptcy court that came to the opposite conclusion.  In re Mooney held that an IRA rollover should extinguish the fully-exempt status.  248 B.R. 391, 397 (Bankr. C.D. Cal. 2000).  While the Mooney court did not dispute that tracing is sometimes appropriate, it used the express statutory language giving IRA accounts only partial protection to override the tracing allowance.  Noting that the legislature never expressly stated an intention to treat rolled-over IRAs different from other IRAs, the Mooney court refused to infer such an intention either.  The Mooney court also noted that pre-retirement access to an IRA is generally easier than for an ERISA employer-sponsored plan.  The Court thus declined to give the rolled-over IRA complete exemption from the judgment creditor.    

In the years since McMullen and Mooney were decided, a third opinion has agreed with McMullen.  O'Brien v. AMBS Diagnostics LLC, 38 Cal. App. 5th 553, 564, 251 Cal. Rptr. 3d 41, 49 (2019) (holding that Mooney was wrongfully decided and agreeing with McMullen that no policy reason existed to extinguish the full exemption simply because the assets are deposited in an IRA rather than “a safe deposit box” or “under a mattress.”).  

Defendants confronted with an adverse judgment that may push them into bankruptcy can take solace in the fact that these protections apply even if the claims include fraud and other torts otherwise not dischargeable in bankruptcy.  See In re Phillips, 206 B.R. 196, 203 (Bankr. N.D. Cal. 1997), as corrected (Mar. 17, 1997), aff'd, 218 B.R. 520 (N.D. Cal. 1998).  Clients and practitioners alike who face (or assert) fiduciary duty claims can benefit from being familiar with the foregoing rules and exceptions.

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

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

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

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

Delaware Choice-of-Law: Panacea or Puzzle?

Delaware law enjoys a well-earned reputation for certainty and predictability.  This reputation leads many contracting parties to choose Delaware law as governing should a dispute arise.  But interpreting these choice-of-law provisions often gives rise to tricky legal questions.  Does the choice-of-law provision only encompass contract claims, or does it cover tort claims as well?  How does the language of the provision affect the analysis?  And what happens when Delaware law conflicts with another state’s strong public policy?  Ironically, Delaware courts themselves often disagree on the answers to these fundamental questions, injecting the very type of uncertainty into the litigation that the parties sought to avoid by selecting the law of the “First State.” 

A common threshold question is whether a contract’s choice-of-law provision encompasses tort claims or just contract claims.  The seminal case of Abry Partners V, L.P. v. F & W Acquisition LLC, 891 A.2d 1032, 1048 (Del. Ch. 2006) (J. Strine) holds that choice-of-law provisions generally do encompass tort claims, at least where the tort implicates the contract itself, e.g., fraud or misrepresentation.  In so ruling, the Abry court declined to consider the breadth or narrowness of the provision.  Instead, the court endorsed a strong preference for applying a single body of law to a dispute, in the name of business certainty:

Parties operating in interstate and international commerce seek, by a choice of law provision, certainty as to the rules that govern their relationship. To hold that their choice is only effective as to the determination of contract claims, but not as to tort claims seeking to rescind the contract on grounds of misrepresentation, would create uncertainty of precisely the kind that the parties’ choice of law provision sought to avoid. 

Not all Delaware courts have agreed with the Abry court’s decision to look past the choice-of-law provision’s language in the name of certainty.  Some have drilled down on choice-of-law language in deciding whether tort claims should fall within such a clause’s scope.  For example, Delaware courts have sometimes drawn a distinction between provisions that simply govern the “agreement” on the one hand, and provisions that govern all claims “arising out of” or “relating to” the contract on the other hand.  In Huffington v. T.C. Group, LLC, the Delaware Superior Court found that a “choice of law provision, without language such as ‘arising out of or relates to,’ only requires the Court to apply Delaware law to claims challenging the terms and provisions of the agreement.”  2012 WL 1415930 at *1 (Del. Super.).   Similarly, Gloucester Holding Corp. v. U.S. Tape and Sticky Prods., LLC, found that a provision that “[did] not claim to cover litigation that arises out of or relates to the Asset Purchase Agreement” was “not sufficiently broad enough to cover tort claims such as fraud in the inducement.”  832 A.2d 116 (Del. Ch. 2003).  

Even where a choice of law provision encompasses some torts, Delaware courts may disagree on which torts it encompasses.  For example, one recent decision held that the Delaware choice-of-law provision allows only Delaware securities fraud claims, while barring securities law claims based on the laws of other states.  Anschutz Corp. v. Brown Robin Cap., LLC, No. CV 2019-0710-JRS, 2020 WL 3096744, at *7 (Del. Ch. June 11, 2020) (dismissing Colorado and Texas securities law claims).  In contrast, another case refused to dismiss sister-state securities law claims, noting that a Delaware choice of law provision is not “a mechanism for the wholesale importation of every provision of Delaware statutory law into the commercial relationship of contracting parties.” Wind Point Partners VII-A, L.P. v. Insight Equity A.P. X Co., LLC, No. CV-19C08260, 2020 WL 5054791, at *21 (Del. Super. Ct. Aug. 17, 2020).

Delaware courts may be particularly reluctant to apply a Delaware choice-of-law provision in a way that would frustrate another state’s strong public policy.   For example, the Court of Chancery in Swipe Acquisition Corp. v. Krauss refused to apply a Delaware choice-of-law provision to bar California “blue sky” protections, which offered more expansive protections than Delaware law.  No. CV 2019-0509-PAF, 2021 WL 282642, at *3 (Del. Ch. Jan. 28, 2021).  In doing so, the Court of Chancery relied on California’s strong public policy in applying the protections to the California-based transaction, involving both a California plaintiff and misrepresentations made in California.

Our takeaway from these cases is that a Delaware choice-of-law provision may not always offer the contracting parties the litigation certainty that they hope to achieve.  To lessen the chance of unbargained-for legal risk from other jurisdictions, parties would be wise to make any Delaware choice-of-law provision as concrete as possible.  This may include drafting the contract with the specific examples of the claim types (e.g., contract, fraud, securities, business torts, etc.) that Delaware law should control.  And parties should be aware that, even with the perfect Delaware choice-of-law provision, Delaware courts may decline to bar statutory protections that the laws of other states deem essential. 

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

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

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

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

Drawing the Line Between Harmless Puffing and Securities Fraud

There is sometimes a fine line between the Silicon Valley entrepreneur who “fakes it till they make it” by engaging in fraud, and the disruptive visionary taking on the established order with unwavering optimism.  Legally speaking, one of the fault lines separating the two is the difference between garden-variety optimism that no reasonable person would use to guide an investment—often called “puffery” in applicable case law – and knowingly false statements. But when do rosy statements cross the line from immaterial puffery to actionable securities fraud under the law?  

In the Ninth Circuit, staying onsides between “puffing” and “fraud” involves “expressing an opinion” that is not “capable of objective verification.”  Macomb Cnty. Employees' Ret. Sys. v. Align Tech., Inc., 39 F.4th 1092, 1097–99 (9th Cir. 2022).  Non-actionable puffery is usually found based on vague statements of optimism such as “good,” “well-regarded,” or other “feel good monikers;” professional (and often amateur) investors know how to devalue the optimism of corporate executives.  But when even generalized optimism overreaches by contradicting known facts, they may ripen from puffery to fraud.  

Two recent Ninth Circuit decisions stake out helpful guideposts.  The first case is Macomb County, where the Ninth Circuit agreed that misstatements about the growth potential in the Chinese market were non-actionable puffery.  Macomb County.  39 F.4th 1092, 1099 (9th Cir. 2022).  There, the defendant was accused of securities fraud for wrongly describing China as “a great growth market,” “a huge market opportunity,” “a market that’s growing significantly for us,” and possessing “really good” “dynamics,” and describing its performance as “tremendous” and “great.”  Since these characterizations were not “objectively verifiable,” the Ninth Circuit held that they were not the “kind of precise information on which investors rely when valuing corporations.”  Significantly, the company’s sales were still growing in China (albeit at a diminished rate), so the descriptions did not “affirmatively create an impression of a state of affairs that differed in a material way from the one that actually existed.”  

But our second case shows that even “general statements of optimism, when taken in context, may form a basis for a securities fraud claim.”  Glazer Cap. Mgmt., L.P. v. Forescout Techs., Inc., --- F.4th ----, 2023 WL 2532061 (9th Cir. 2023).   In Glazer Capital Management, a cybersecurity firm allegedly made false statements in response to sensitive questions about sales performance on an earnings call.  In particular, the cybersecurity firm said that (1) its sales representative numbers were “tracking very well against our sales productivity”; and (2) it had “a very large pipeline” of potential deals that would likely close by the end of the year.  While these statements may have been general, they contradicted the allegedly true facts that (1) the number of experienced sales representatives was shrinking below acceptable levels; and (2) the company pressured sales representatives to inflate the number of deals in the pipeline that were likely to close. The context of these statements also mattered: they were made on earning calls in response to specific questions by financial analysis about disappointing financial results.  These contradictions elevated the statements from harmless puffery to actionable fraud.

Illustrating that even federal judges may differ in distinguishing between securities fraud and puffery, Glazer Capital includes a dissenting opinion.  Disagreeing that the alleged puffery amounted to fraud, the dissenting judge saw the Complaint as rather reflecting “business judgments and opinions about the timing of deals and the underlying causes of missing second quarter forecasts.”  Id. at 25.  The complaint only “reflect[ed] a difference of opinion between the [witnesses] and upper management as to when to characterize a deal as a ‘tech win’ or ‘committed,’ and how much time to allot to closing such deals when including them in earnings forecasts.”  Id.  

One final lesson to take from both Macomb and Glazer Capital is that courts considering the puffery defense do not analyze the alleged statements in a vacuum.  Regardless of how anodyne a statement may seem on its face, courts may turn to the objective truth or falsity of the statement as framed in the complaint when dismissing or upholding the securities fraud claims.  This should put management notice to take extreme care when communicating with investors about business performance and other objectively verifiable metrics. 

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

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

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

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

Key Differences Between LLC Inspection Rights and Corporate Inspection Rights

Defendants in business disputes often wish to have their cases heard in federal rather than state court.  The Statutory inspection demands are one of the most potent tools available in prelitigation business disputes.  Such demands can result in the production of key board materials, financial records, and even emails in appropriate circumstances.  But there are important differences between the inspection rights available to corporate shareholders under 8 Del. C. § 220 on the one hand, and the inspection rights available to Limited Liability Company members and managers under 6 Del. C. § 18-305 on the other hand, that litigators should be aware of.  

1. Statutory Rights v. Contractual Rights: The biggest difference between shareholder inspection demands and LLC member demands is the source of law.  Whereas shareholders must avail themselves of the formal procedures of section 220, statutory LLC inspection rights may be expanded or circumscribed by the language of the LLC Agreement.  An LLC Agreement can impact the types of documents that may be accessed, as well as the manner and frequency in which they may be demanded and accessed.  Since it is common for LLC Agreements to expressly address information rights, in our experience, most LLC inspection demand suits are resolved based on contractual interpretation, rather than the default provisions of the LLC Act.   

2. Special Inspection Rights of LLC Managers: LLC managers have unique rights to inspect all books and records that are reasonably related to their duties as a manager.  That standard is broader than the default inspection rights of LLC members.  And, unlike the inspection rights of LLC members, the LLC Act does not expressly subject a manager’s inspection rights to limitations in an LLC Agreement.  Compare § 18-305(a) with § 18-305(b).  

3. Inclusion of Subsidiaries and Affiliates: Section 220 expressly provides that if a parent corporation has possession, custody, or control of the records of its subsidiary then they fall within the reach of the inspection statute.  The LLC Act does not have the same language, so it remains an open question whether, and under what circumstances, an LLC member would be permitted to inspect records held by an LLC’s subsidiary.  

4. Demand and Enforcement Procedures: In the context of a Section 220 demand, a corporation must respond within five days, at which point the shareholder may file proceedings to enforce compliance.  The court will evaluate the demand according to the guidelines of section 220, and will look to see if the shareholder has demonstrated a proper purpose and shown a need for the documents requested.   In the LLC context, the contractual demand procedures may be less formal, and a member or manager may bring a suit for breach of contract if they do not agree with the LLC’s response.  At that point, the judge will evaluate the contract to resolve the dispute, and will generally only turn to the statutory framework or analogous case law if the contract itself is ambiguous.  

5. Forum Considerations: LLC Agreements often have applicable arbitration provisions that require the demand to be resolved in AAA or JAMS.  In contrast, under Delaware law, section 220 enforcement actions must be brought in Delaware state court—specifically, the Delaware Court of Chancery.    

6. Attorneys’ Fees: Section 220 authorizes an award of fees to the prevailing party in a section 220 action.  By contrast, fees are only available in an LLC inspection demand suit if the LLC Agreement provides for them.

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

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

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

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