Labor Code § 925 Does Not Eat the Internal Affairs Doctrine.

Grove v. Juul Labs, Inc., No. A162276 (D1d3 Apr. 27, 2022)

 A former employee and current Stockholder sued a Company, simultaneously bringing direct and derivative claims as well as a demand for inspection of the Company’s books and records under Corporations Code § 1601, which purports to give California residents the right to inspect the books and records of companies incorporated elsewhere. On the books and records piece, the Company beat him to the punch by filing a declaratory relief action in the Delaware Court of Chancery. Stockholder dropped his substantive claims and the Court stayed his book and record claims based on a forum selection clause in the exercise agreement under which his stock was granted.

The Company prevailed in the Delaware case. The Vice Chancellor found that although Stockholder hadn’t waived his inspection rights under § 1601 in his exercise agreement, the internal affairs doctrine precluded the application of § 1601 to a Delaware corporation. But to the extent that Stockholder sought to enforce his rights, forum selection provisions in the Company’s articles and bylaws required him to do it in Delaware.

Back in California, the company moved to lift the stay and demurred to the § 1601 under res judiciata. Stockholder amended the complaint to add back the direct and derivative claims. Company responded to that with a motion to stay on forum non-conveniens grounds. The trial court granted a stay, finding that the claims on the merits had to be litigated in Delaware and the § 1601 claim had already been litigated to judgment. Stockholder appealed. 

On the substantive claims the Court finds it was reasonable to enforce the various Delaware forum selection clauses in the Company’s foundational documents that to require a Delaware forum. Stockholder’s key counterpoint is to invoke Labor Code § 925. Section 925 is a relatively new law that says you can’t deprive a California employee of a California forum or the protections of California law as a condition of his or her employment. Stockholder says that since he got his stock as a form of compensation while employed by the Company,  § 925 requires the application of California law and a California forum for his claims.

In a ruling that should make every VC fund in the Valley breathe a little easier, the Court of Appeal says no. Stockholder isn’t bringing employment claims in his capacity as a former employee. He’s bringing fiduciary duty claims in his capacity as a Stockholder. The mere fact that Stockholder got his stock incidentally to his employment is not enough to drag his rights as a stockholder under the ambit of California law. As the Court explains, to say otherwise would create an exception to the internal affairs doctrine for California employee/stockholders. That would be a disaster. 

So far as the § 1601 claim goes, that was fully litigated in Delaware. Employee tries to retreat the substance of that claim with the Court here, but it’s not having any of it. The California Court of Appeal isn’t the proper venue from which to take an appeal from a judgment of the Delaware Court of Chancery. And there are no good reasons in this case not to respect the finality of the Delaware ruling, even if it was wrong about § 1601, particularly since Stockholder didn’t appeal it to the Delaware Supreme Court.

Affirmed.