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general / Civil Practice

Basic issues in business litigation

The objective of this article and self-study test is to familiarize readers with basic issues that often arise in business litigation. Readers will learn about vicarious liability/respondeat superior, piercing the corporate veil and alter ego liability, sealing records, the requirement that corporations be represented by counsel, the qualification of domestic (that is, California) corporations, taking depositions of persons most knowledgeable or qualified (PMK, PMQ), and conflicts of laws issues.

Vicarious Liability/Respondeat Superior

Corporations act through their employees and officers, and by the same token, corporations are liable for the acts of those people when done within the course and scope of their work. See generally 9 B. Wiktin, Summary of Cal. Law, Corporations (10th ed. 2005), Section 1, p. 775. Interesting issues arise when it is not clear whether the tort or other ground giving rise to liability was done within that scope.

For example, courts have developed the "coming and going rule" which holds that the employer is not liable for the acts of the employee coming and going to work, unless the car used is of some benefit to the employer. Halliburton Energy Servs. Inc. v. Dep't of Transp., 220 Cal. App. 4th 87 (2013). This rule could support liability if, for instance, the employer told the employee to have a car ready at the office in case she might be sent out on an errand. See generally Lobo v. Tamco, 230 Cal. App. 4th 438 (2014); Lantz v. Workers' Comp. Appeals Bd., 226 Cal. App. 4th 298 (2014). Office parties, and what happens just after the party on the way home, sometimes present issues of course and scope. See, e.g., Harris v. Trojan Fireworks Co., 120 Cal. App. 3d 157 (1981). The same goes for actions by employees arguably for the benefit of the employer but which were never specifically requested by the employer (Halliburton Energy, 220 Cal. App. 4th at 95 (if employee engaged in ordinary duties, there may be respondeat superior liability "even if [employee's actions are] wholly unauthorized and without benefit to the employer").

Regarding assaults which have some connection to employment, but perhaps were not foreseeable or otherwise inherent in the working environment, liability will depend on several factors. "Although an employee's willful, malicious, and even criminal torts may fall within the scope of employment, 'an employer is not strictly liable for all actions of its employees during working hours.' For the employer to be liable for an intentional tort, the employee's act must have a 'causal nexus to the employee's work.' Courts have used various terms to describe this causal nexus: the incident leading to the injury must be an 'outgrowth' of the employment; the risk of tortious injury must be 'inherent in the working environment'; the risk must be 'typical' or 'broadly incidental' to the employer's business; the tort was 'a generally foreseeable consequence' of the employer's business." Montague v. AMN Healthcare Inc., 223 Cal. App. 4th 1515 (2014) (internal citations omitted). A defendant's general control over the bad actor is a crucial aspect of imposing respondeat superior liability. Patterson v. Domino's Pizza LLC, 60 Cal. 4th 474 (2014).

Piercing the Corporate Veil

Corporations are designed to limit liability of the owners, but the limits do not always hold, and plaintiffs generally wish to pierce the corporate veil to reach assets held by owners, whether the owner be a parent company or wealthy individual owners. The issue is sometimes phrased as "alter ego liability," but that doctrine encompasses grounds far broader than simply piercing the corporate veil to get to the corporation's owners. See Mesler v. Bragg Mgmt. Co., 39 Cal. 3d 290 (1985).

It is possible, under some circumstances, to add an alter ego to a case at any time, even after judgment, for example, if the alter ego controlled the lawsuit. Wells Fargo Bank, National Assn. v. Weinberg, 227 Cal. App. 4th 1 (2014); Relentless Air Racing LLC v. Airborne Turbine Ltd. Partnership, 222 Cal. App. 4th 811 (2013) (procedure to add defendants post-judgment as additional judgment debtors; inability to collect judgment was an inequitable result which allowed addition of judgment debtors). The usual factors for piercing the corporate veil are "undercapitalization of the business, commingling of corporate and personal funds, and failure to observe the corporate formalities." Toho-Towa Co. v. Morgan Creek Prods. Inc., 217 Cal. App. 4th 1096 (2013); see also Greenspan v. LADT LLC, 191 Cal. App. 4th 486 (2010) (listing 14 factors).

Sealing

Business litigation often includes requests to seal papers submitted to the court. In California, this is an issue of constitutional dimension, because it involves open access to the courts, and it is governed by California Rules of Court, Rule 2.550. Lawyers often try to modify the procedures of the state rule by way of stipulated protective orders, and judges need to be wary not to sign anything that conflicts with the rules. Overstock.Com Inc. v. Goldman Sachs Grp. Inc., 231 Cal. App. 4th 471 (2014), is essential reading for judges and lawyers, especially on how to avoid getting swamped by over-designation of documents and useless demands for sealing, as well as dealing with media requests to participate in the decision on what to seal or unseal. Also, keep in mind judges often do not actually need to see the secret data that so concerns the parties, and those papers can be redacted and publicly filed without more.

Representation by Counsel

It is a misdemeanor to practice law without a license. Bus. & Prof. Code Section 6126. Outside of small claims court (see Code Civ. Proc. Section 116.130(e)), corporations must have an attorney, and may not be represented by, for example, a corporate officer. See generally Caressa Camille Inc. v. Alcoholic Beverage Control Appeals Bd., 99 Cal. App. 4th 1094 (2002). But, when a company violates this rule by filing a complaint without an attorney signature, this is a problem that trial judges should allow to be corrected without dismissing the case. CLD Const. Inc. v. City of San Ramon, 120 Cal. App. 4th 1141 (2004) (treating "a corporation's failure to be represented by an attorney as a defect that may be corrected, on such terms as are just in the sound discretion of the court"). "[I]t is the duty of the trial judge to advise the representative of the corporation of the necessity to be represented by an attorney." Gamet v. Blanchard, 91 Cal. App. 4th 1276 (2001). The judge should so inform the corporation representative, continue the matter for a reasonable time, or stay proceedings, until a lawyer appears. But if the company refuses, or is unable to obtain counsel, at trial the court may need to note the company's non-appearance, and take a default. Van Gundy v. Camelot Resorts Inc., 152 Cal. App. 3d Supp. 29 (1983).

Qualification, Licenses & Certification

Corporations must not only have a lawyer, they must also be qualified to do business in the state, either as a domestic or 'foreign' company. Regarding domestic corporations, they may neither sue, nor defend themselves, unless they are in good standing with the secretary of state - which means they have not been suspended for nonpayment of franchise taxes. Weil & Brown, et al., California Practice Guide: Civil Procedure Before Trial (2014) ("Rutter"), Section 2:90, p. 2-28.10. Serious sanctions may be imposed on lawyers who represent suspended corporations. Rutter Section 2:90.1, p. 2-28.11. Non-California companies can certainly be sued in this state without qualifying to do business here, but they may not instigate litigation unless they are qualified with the secretary of state. Rutter Section 2:105, p. 2-29. There is a further general requirement: A business which must have a license to do a certain kind of work may not sue unless it has that license. Examples are architects, professional engineers, land surveyors, pest control operators and registered geologists. See 10 Miller & Star California Real Estate 3d (2014), Section 27:113.

Discovery

There is a type of discovery which is unique to organizations, including corporations, and that is the PMK or PMQ, person most knowledgeable, or person most qualified, for a deposition. Code Civ. Proc. Sections 2020.310(e), 2025.230; Maldonado v. Superior Court, 94 Cal. App. 4th 1390 (2002). Under this procedure, the demanding party simply specifies the topics of interest, for example, the company's employment policies, or perhaps, the source of its raw materials, or its marketing practices. Then the responding company decides which, and how many, deponents will appear. See Code Civ. Proc. Section 2025.230. Those deponents are obligated to educate themselves so they can answer questions related to the topics set by the other side. They are the "most knowledgeable" not necessarily because they originally knew everything related to the topics, but because they educate themselves in preparation for the deposition. Their testimony then binds the organization. In this way, the other side does not have to figure out "who in the corporate hierarchy has the information the examiner is seeking. E.g., in a product liability suit, who in the engineering department designed the defective part?" Rutter Section 8:474, p. 8E-21.

Conflicts of Laws

Conflicts of laws issues arise often in business litigation because companies often do business in many places, and so their actions have effects in many places. They may have their headquarters in one state, be incorporated in another, have a principal place of business in one state but have most of their employees somewhere else. And maybe their "domicile" is yet a different place. They may have subsidiaries and corporate parents in various locations, and they may have relevant contracts with different parties with different choice of law provisions, some of which may be enforceable, and some which are not. And because this is not complicated enough, different jurisdictions have different rules for resolving conflicts of laws, so one first must decide which state's laws - or perhaps which nation's laws - will be used to resolve the substantive conflicts of law problem. Even better: In a given case, you will have to determine, on a claim-by-claim basis, what the controlling law is. It may be different for different claims.

Typically, courts will honor a contractual choice of law provision in a contract case. See Nedlloyd Lines B.V. v. Superior Court, 3 Cal. 4th 459 (1992). Courts will often look to the law of the state where injury occurred in a tort claim (but certainly not always). Scott v. Ford Motor Co., 224 Cal. App. 4th 1492 (2014), held California, not Michigan, law applied on applicability of punitive damages in an asbestos case where Ford's failure to warn plaintiff about the risk of cancer was committed in Michigan and the company resided in that state. Courts will look to the law of the state of incorporation when internal governance issues are litigated (see, e.g., Patrick v. Alacer Corp., 167 Cal. App. 4th 995 (2008)), and because about half of publicly traded companies are registered in Delaware, that means Delaware law. Internal governance includes suits between shareholders and the company. See id. So, California state courts are routinely asked to apply Delaware law, such as on the issue of what sort of pre-litigation demands must be made on a board of directors before a stockholder derivative action can be filed.

#198

Ben Armistead


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