In yesterday’s post, I wrote about the amicus curiae brief filed by 19 law school professors in Friedrichs v. California Teachers Ass’n, a case now pending before the United States Supreme Court.  Being a California corporate lawyer, I was interested in the following description of a California Court of Appeal case:

A rare example, in which the court held the business judgment rule was a valid defense to an attack on a corporate contribution to a political action committee, is Finley v. Superior Court, 96 Cal. Rptr. 2d 128 (Cal. Ct. App. 2000).

But was that really the holding in Finley?

The plaintiffs in Finley were members of homeowners associations organized as nonprofit mutual benefit corporations and they were indeed upset by political contributions made by those associations.  Their lawsuit claimed that those contributions were ultra vires, illegal and in violation of their constitutional rights of free speech and association.  After the plaintiffs filed their suit, each association formed a special litigation committee (SLC).  All of the SLCs concluded that the prosecution of the action was not in their best interests.  The associations then raised the business judgment rule as a defense to the SLCs’ decisions not to pursue litigation.  In response, the plaintiffs argued that the business judgment rule did not apply to ultra vires actions.

The Court of Appeal in an unpublished portion of the opinion found that the contributions were neither ultra vires nor illegal.  In the published portion of the opinion, the Court of Appeal did consider whether the business judgment rule would protect the decisions of the SLCs not to pursue the action.

Thus, the 19 law professors seem to have fallen into the same confusion as the plaintiffs.  As the Court of Appeal clearly explained in its opinion:

But more to the point, plaintiffs appear to be confusing two distinct exercises of business judgment.  First, defendants invoke the business judgment rule to protect their decision to make the contributions.  We may assume, without deciding, the business judgment rule would not apply to this decision if the contributions were ultra vires or illegal.  Second, defendants invoke the business judgment rule to protect the special litigation committees’ decision that this derivative action is not in the best interest of the Associations.  Even assuming the underlying contributions were ultra vires or illegal, the decision not to pursue a derivative action regarding them was not ultra vires, illegal, or unconstitutional; thus, this decision was entitled to the protection of the business judgment rule.

96 Cal. Rptr. 2d at 135.

Note to readers:  The Friedrichs appeal involves a challenge to “agency shop” provisions in California.  My spouse is a California public school teacher.