When a plaintiff invokes the federal courts' diversity jurisdiction, it must plead both the state of incorporation and the principal place of business of corporate parties. In 2010, the U.S. Supreme Court in Hertz Corp. v. Friend adopted the "nerve center" test for determining a corporation's principal place of business. Earlier this month, the Ninth Circuit held in Harris v. Rand that, while Hertz provided a uniform test for determining subject matter jurisdiction, it did not adopt a heightened pleading standard for the allegations supporting diversity jurisdiction. So it's sufficient for a complaint asserting diversity jurisdiction to state the location of a party's principal place of business; plaintiffs are not required to plead facts showing why that location is the "nerve center." But the Ninth Circuit warned that, if the allegations of a principal place of business are "implausible," then the District Court has the authority to require more specific pleading.
See our earlier coverage of Hertz here, and our coverage of Bell Atlantic Corp. v. Twombly and Ashcroft v. Iqbal, the Supreme Court's key opinions regarding federal court pleading standards, here and here.
In Kollman v. Cell Tech International, Inc., decided last month by the Oregon Court of Appeals, one of the issues before the court was whether the plaintiff shareholder's claim against another shareholder for breach of fiduciary duty was derivative or direct. In a derivative action, a shareholder brings a lawsuit on behalf of the corporation and all of the shareholders benefit from any recovery. In a direct action, a shareholder sues on his own behalf and recovers individually. In Kollman, the Court of Appeals, applying Delaware law, held that, under some circumstances, a plaintiff shareholder may have a direct action against a fellow shareholder, even if the defendant's alleged breach of fiduciary duty caused a pro rata dilution of their respective shares of the corporation.
The plaintiff in Kollman alleged that the defendant shareholder, who was his former spouse and a corporate director, deceived him into giving up his positions as an officer and director of the corporation; that, once he was ousted, he was excluded from all meaningful participation in the management of the corporation; that his employment with the corporation was terminated; and that his former spouse increased her salary from $140,000 to $290,000. The plaintiff also alleged that his former spouse entered into a transaction with a third party that resulted in substantial dilution to his and his former spouse's ownership of the corporation. This transaction with the third party reduced their combined ownership in the corporation from approximately 80% to less than 10%.
Citing Delaware law, the Court of Appeals noted a two-prong test to determine whether a claim is derivative or direct: (1) who suffered the alleged harm--the corporation or the plaintiff shareholder; and (2) who would receive the benefit of the recovery or other remedy. In the typical direct action lawsuit, the plaintiff suffers some harm that the other shareholders do not suffer. However, in Gatz v. Ponsoldt, the Delaware Supreme Court held that plaintiff shareholders can have a direct claim for breach of fiduciary duty if the fiduciary expropriates economic value and voting power from the shareholders, even if the fiduciary does not retain the direct benefit of the expropriation.
In this case, the Court of Appeals agreed with the trial court that plaintiff's fiduciary duty claim is direct and not derivative. First, the Court held that the plaintiff suffered a unique harm because he was excluded from any meaningful participation in corporate affairs. Second, any recovery on behalf of the corporation in a derivative action would benefit the third party who already was the main beneficiary of the defendants' breach of fiduciary duty.
Controlling shareholders must be wary of how they structure transactions that have the effect of extracting value from their corporations, even if they suffer a pro rata decrease in voting power and ownership.
Last week the Supreme Court affirmed a decision of the Ninth Circuit holding that pharmaceutical sales representatives are not entitled to overtime under the Fair Labor Standards Act because they are covered by the FLSA's "outside sales" exemption. In Christopher v. SmithKline, the Court issued a 5-4 decision, with the majority reasoning that "[the representatives were] hired for their sales experience. They were trained to close each sales call by obtaining the maximum commitment possible from the physician. They worked away from the office, with minimal supervision, and they were rewarded for their efforts with incentive compensation.”
The dissent agreed with the Obama administration that the "outside sales" exemption does not apply to pharmaceutical sales representatives because the representatives do not actually sell the drugs. Writing for the dissenters, Justice Stephen G. Breyer wrote, “At most [the sales representative] obtains from the doctor a ‘nonbinding commitment’ to advise his patient to take the drug (or perhaps a generic equivalent) as well as to write any necessary prescription.”
See our earlier coverage of Christoper v. SmithKline here.
An Oregon Supreme Court opinion that received signficant media attention this week has implications for the litigation of trade secret cases in the state. The opinion focused on the Open Courts provision of the Oregon Constitution, and the immediate issue addressed by the Court was whether decades' worth of internal Boy Scout sex abuse files would be made public.
The files had been produced in discovery by the Boy Scouts in a case in which plaintiffs claimed abuse by a scouting volunteer. The files were maintained as confidential during discovery pursuant to a protective order. The files were later admitted into evidence in a Multnomah County trial in which the Boy Scouts were found liable. After the trial, news organizations including The Oregonian, the Associated Press and The New York Times, sought to view the files, citing Article I, Section 10 of the state Constitution, which provides that "No court shall be secret, but justice shall be administered, openly and without purchase, completely and without delay." The trial court judge ordered the files released, but with the names of victims and the people who reported the abuse redacted.
Both the media parties and the Boy Scounts sought mandamus review by the Oregon Supreme Court, with the media parties advocating for an absolute right of the public to view evidence admitted at trial, in particular in this case without redactions.
The Court rejected the media parties' view, confirming that the Open Courts clause does not create an individual right to observe court proceedings, but rather dictates how the institution of the courts operate. The principle of open justice allows the public to attend and view the administration of justice by the courts. Justice Robert Durham, writing for the Court, concluded that limiting post-trial access to evidence admitted at trial is not in violation of that principle.
The Court nonetheless held that the trial court had the power to make public evidence admitted at trial, including evidence that had been produced subject to a protective order. In particular, a court may conclude that granting a request to inspect evidence after the completion of a trial will foster public understanding of the administration of justice. In this case the judge did not abuse his discretion in ordering the files released with names redacted.
The Court's rejection of an absolute right of access to trial evidence means that courts can continue to protect the interests of parties to trade secret litigation. The result is consistent with the position of TechAmerica, which filed an amicus brief in the case. TechAmerica, the leading trade association for the electronics industry, argued that trial courts must be allowed to limit access to trial evidence in appropriate cases in order, for example, to avoid public disclosure of trade secrets in appropriate cases. Ater Wynne attorney Lori Irish Bauman filed the brief on behalf of TechAmerica.