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
, 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).
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.
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,
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
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.