California's Revised Uniform Limited Liability Company Act provides "The law of the state . . . under which a foreign limited liability company is formed governs all of the following: The organization of the limited liability company, its internal affairs, and the authority of its members and managers." Cal. Corp. Code § 17708.01(a). Notably, the statute does not define what constitutes an LLC's internal affairs.

In Gill v. Marsh USA, Inc., 2024 WL 3463351, a Delaware LLC filed a counterclaim against a former employee. As an initial matter, U.S. District Court Judge Richard Seeborg ruled that the viability of the counterclaim turned on the choice of law under which the claim arises, and the parties dispute whether Delaware or California law is applicable. The LLC contended that California law governs this claim because it does not arise out of a failure or breach related to the actual governance of the company. The employee countered that California's "internal affairs doctrine" dictates that a breach of fiduciary duty claim such as this one is subject to the laws of the state of incorporation.

Judge Seeborg ruled that 17708.01(a) does not limit the internal affairs of a company to matters related to its actual governance and that breach of fiduciary duty claims are typically considered within the ambit of a company's internal affairs. Accordingly, Judge Seeborg applied Delaware law. He then found that the LLC's claim failed under Delaware law because the LLC had failed to allege that the defendant was either a manager or controlling member of the LLC.

What if the Judge's ruling is flipped? If he first found that there had been no averment of fiduciary, then there would have been no occasion to consider whether breaches of fiduciary duty are the subject of an LLC's internal affairs.