Grove v. Juul Labs, Inc.

• Decision Date: 27 April 2022
• Docket Number: A162276
• Citation: 77 Cal.App.5th 1081,293 Cal.Rptr.3d 202
• Parties: Daniel GROVE, Plaintiff and Appellant, v. JUUL LABS, INC., Defendant and Respondent.
• Court: California Court of Appeals Court of Appeals

77 Cal.App.5th 1081

293 Cal.Rptr.3d 202

Daniel GROVE, Plaintiff and Appellant,

v.JUUL LABS, INC., Defendant and Respondent.

A162276

Court of Appeal, First District, Division 3, California.

Filed April 27, 2022

Bottini & Bottini Inc, Francis A. Bottini, Jr., Albert Y. Chang, and Yury A. Kolesnikov for Plaintiff and Appellant

Pillsbury Winthrop Shaw Pittman LLP, Bruce A. Ericson, San Francisco, Colin T. Kemp, and Lee Brand, San Francisco, for Defendant and Respondent

Reed Smith LLP, Raymond A. Cardozo, San Francisco, and Elizabeth S. Bowman for Professor Joseph Grundfest as Amicus Curiae on behalf of Defendant and Respondent

TUCHER, P.J.

Daniel Grove appeals from an order staying his shareholder lawsuit against Juul Labs, Inc. pursuant to the doctrine of forum non conveniens. ( Code Civ. Proc., § 410.30 ( section 410.30 ).) Grove contends the trial court erred by enforcing a forum selection clause in Juul's corporate charter that requires Grove to pursue his claims in Delaware. Considering first the class and derivative claims Grove brings, we disagree that it was unreasonable to enforce this forum selection clause. Considering next Grove's claim to inspect the company's books and records, we conclude this dispute has already been adjudicated in the Delaware Court of Chancery, whose decision is entitled to full faith and credit here. We accordingly affirm the stay order.

BACKGROUND

Juul is a Delaware corporation that, during the period relevant to this case, was headquartered in San Francisco. Grove is a former employee of Juul who during his employment received options to acquire shares in the company. In accepting these options, Grove acknowledged they were being granted under a standard-form stock option agreement and could only be exercised under another standard-form agreement (the Exercise Agreement). Grove stopped working for Juul in late 2017, and the following year he exercised options to acquire 5,000 shares of Juul stock.

I. Grove's Demand To Inspect Company Records

On December 27, 2019, Grove sent Juul a demand to inspect the company's books and records pursuant to California Corporations Code section 1601 ( section 1601 ).

Section 1601 states in part: "The accounting books, records, and minutes of proceedings of the shareholders and the board and committees of the board of any domestic corporation, and of any foreign corporation keeping any records in this state or having its principal executive office in this state, ... shall be open to inspection ... upon the written demand on the corporation of any shareholder ... at any reasonable time during usual business hours, for a purpose reasonably related to the holder's interests as a shareholder or as the holder of a voting trust certificate." ( Corp. Code, § 1601, subd. (a)(1).)

In his demand letter, Grove stated that the purpose of his inspection was to determine the value of his stock and to investigate potential breaches of fiduciary duty by officers and directors. Grove requested a response within five business days and advised that if Juul refused to comply with his demand, he might seek an order from the San Francisco Superior Court.

II. The Lawsuits

The company got to the courthouse first. On January 6, 2020, Juul filed an action for declaratory and injunctive relief in Delaware (the Delaware action). Juul sought a judgment establishing that: Grove's inspection rights are governed by Delaware law; Grove waived by contract his rights to inspect company books and records; Juul is not obligated to make its books and records available to Grove; and Grove is prohibited from asserting an inspection right under California law.

The following day, on January 7, 2020, Grove filed this case, a shareholder class action and derivative complaint for damages and injunctive relief (the California action). Grove's original complaint named officers and majority shareholders as defendants and Juul as a defendant and nominal defendant. Grove purported to allege seven distinct causes of action based on allegations that individual defendants breached their fiduciary duties to minority shareholders by failing to hold annual meetings, failing to disseminate annual reports, self-dealing, and acting in bad faith. One of Grove's claims was framed as a direct, individual cause of action against Juul for violating his inspection rights under section 1601. Grove alleged that, as a shareholder of record, he made a lawful request to inspect Juul's books and records for the purpose of determining the value of his stock and investigating breaches of fiduciary duty, and that he is entitled to an order of mandamus requiring Juul "to comply with its obligations" under section 1601.

Several weeks later, Grove requested leave to amend his original complaint in the California action, explaining that Juul had notified him of its view that a forum selection clause required the derivative and class claims to proceed in Delaware. Grove "desire[d] to avoid motion practice over" a forum selection clause, and so, on March 4, 2020, filed a first amended complaint naming Juul as the sole defendant and alleging just a single cause of action for violating section 1601. Grove's complaint repeated allegations that he made a proper demand to inspect company books and records, adding that Juul "wrongfully" rejected the demand and refused to produce any documents. Grove prayed for an order of mandamus requiring Juul to comply with his inspection demand and an award of costs and attorney fees.

III. The First Stay of the California Action

In June 2020, Juul filed a motion to stay the California action under section 410.30, which states in part: "When a court ... finds that in the interest of substantial justice an action should be heard in a forum outside this state, the court shall stay or dismiss the action in whole or in part on any conditions that may be just." ( Code Civ. Proc., § 410.30, subd. (a).)

On July 1, 2020, the trial court held a hearing on and granted Juul's motion. Largely accepting the arguments Juul made, the court observed that the Exercise Agreement Grove signed contains a provision stating that courts sitting in Delaware have exclusive jurisdiction to enforce the agreement's terms,¹ and also a provision "that [Juul] contends unconditionally and irrevocably waives [Grove's] rights to inspect Juul's books and records." The court found that Grove failed to show that enforcing the forum selection clause in this agreement would be unfair or unreasonable, particularly since Juul is a Delaware corporation, the parties’ agreements are governed by Delaware law, the parties had already engaged in litigation in Delaware concerning the same issues, "and neither ha[d] contested jurisdiction in Delaware."

Grove did not appeal the July 2020 stay order.

IV. The Delaware Judgment

On August 13, 2020, the Court of Chancery of Delaware granted Juul judgment on the pleadings in its declaratory relief action. The 27-page opinion, which was subsequently admitted into evidence in the California action, is part of the record on appeal. (See also Juul Labs , Inc. v. Grove (Del.Ch. 2020) 238 A.3d 904.)

In that decision, the Delaware court first addressed and refuted Juul's argument that Grove had surrendered by contract his right to inspect documents under California law. The court found that the parties’ agreements addressing inspection rights pertain specifically and exclusively to inspection rights under Delaware law. As Grove did not waive inspection rights afforded by California law, he was not contractually barred from invoking section 1601.

The Delaware court next addressed the internal affairs doctrine, which it concluded did bar Grove from invoking inspection rights afforded by California law. "The internal affairs doctrine is a conflict of laws principle which recognizes that only one State should have the authority to regulate a corporation's internal affairs—matters peculiar to the relationships among or between the corporation and its current officers, directors, and shareholders—because otherwise a corporation could be faced with conflicting demands." ( Edgar v. MITE Corp . (1982) 457 U.S. 624, 645, 102 S.Ct. 2629, 73 L.Ed.2d 269.) The court found that "[s]tockholder inspection rights are a core matter of internal corporate affairs," so Grove's rights as a stockholder are governed by Delaware law; Delaware, as the state of incorporation, governs Juul's internal affairs. The court compared the "suite of provisions in the California Corporations Code addressing information rights" with the right to inspect books and records under the Delaware General Corporation Law (DGCL) and concluded that, although the two regimes are not "radically different," they are "not the same either." Thus, the internal affairs doctrine precludes Grove from asserting inspection rights under California Corporations Code section 1601, the court concluded.

Next, the Delaware decision addresses whether Grove must pursue his inspection rights only in a Delaware court. Central to this claim is the language of Juul's amended and restated certificate of incorporation. This corporate charter contains a forum selection clause making "the Court of Chancery in the State of Delaware ... the sole and exclusive forum for any stockholder" to bring the following actions: "(i) any derivative action or proceeding brought on behalf of the Corporation, (ii) any action asserting a claim of breach of fiduciary duty owed by any director, officer or other employee of the Corporation to the Corporation or the Corporation's stockholders, (iii) any action asserting a claim against the Corporation, its directors, officers, employees or stockholders arising pursuant to any provision of the DGCL or this Certificate of Incorporation or the Bylaws or (iv) any action asserting a claim against the Corporation, its directors, officers, employees or stockholders governed by the internal affairs doctrine." The court found that an action to inspect Juul's company books...