Jones v. Martinez: Delaware Demand Rules Supersede California Discovery Rules

In Jones v. Martinez, 230 Cal. App. 4th 1248 (App. 2d Dist. 2014), the court held that Delaware discovery rules applied to cases in other states involving Delaware corporations.

On August 27, 2012, Jones, a shareholder in Deckers Outdoor Corporation (“Deckers” or “Company”), a Delaware corporation based in California, sent Deckers a “First Request for Production of Documents.” Deckers objected to the discovery request contending that Jones lacked standing to bring the shareholders derivative action.  Jones then filed a “Consolidated Shareholder Derivative Complaint” against Deckers’ current and former officers and board members (collectively, “respondents”).  The court dismissed the claim, finding that the complaint  “was internally inconsistent and that its allegations of false or misleading statements were disproved by required regulatory filings and that the complaint failed to allege particularized facts showing that a pre-filing demand on the board for action would have been futile.”  The court also found that Jones had not established demand futility and therefore denied a motion to compel discovery. 

Jones appealed.  He did not challenge the basis for the demur but did challenge the denial of discovery.  Jones asserted that the trial court erred by applying Delaware law to the procedural aspects of the case and should have, instead, applied California’s policy of “broad access to discovery.”

In a derivative suit, demand requirements are “determined by the law of the state of incorporation.” Because directors are presumed to manage a corporation, a plaintiff must “establish [his] right to bring a derivative action on behalf of the corporation” before issuing discovery requests. In order to establish the right to bring suit, a putative plaintiff must make a demand for relief from a board of directors or demonstrate that such demand was futile. Putative plaintiffs are not allowed to use discovery to demonstrate the futility of a demand.

Jones sought to establish demand futility through discovery. The court, however, reasoned that discovery served to unveil “additional facts” about well pleaded claims, “not to find out whether such a claim exists.”  As a result, Jones was “not entitled to discovery to assist his compliance with the particularized pleading requirement of Rule 23.1.” 

The primary materials for this post can be found on the DU Corporate Governance website.

Austin Chambers