Avoid litigating claims against officers and directors by challenging personal jurisdiction

The fiduciary shield doctrine is an equitable doctrine that can protect individuals from litigation for actions they take on behalf of their employers.

It allows courts to decline to exercise personal jurisdiction over nonresident defendants sued for acts performed in their capacities as corporate agents. And absent personal jurisdiction, suits against nonresident, individual defendants can be quickly dismissed.

The rationale for the fiduciary shield doctrine is rooted in concepts of equity and fairness — whether it would be fair to sue a nonresident in Illinois for acts carried out on behalf of his or her employer.

Generally, agents are not personally liable for acts they carry out for their employers, but this doesn’t always protect employees as planned, as they can still be sued, says Andrew D. Campbell, a partner at Novack and Macey LLP.

“While the doctrine of limiting the personal liability of agents is alive and well, it still doesn’t stop litigants from naming officers or agents of a corporation as defendants,” says Campbell.

But a motion to dismiss asserting the fiduciary shield doctrine can quickly extract individual, nonresident defendants from a suit, says Campbell.

Smart Business spoke with Campbell about the fiduciary shield doctrine and how to protect your directors, officers and other agents from litigation.

Does the law generally protect directors, officers and other agents from liability for actions they take on behalf of their employers?

For the most part, yes, but exceptions apply to the rule of limited liability, and getting to a determination of nonliability can be time consuming and expensive.

While exceptional cases can sometimes have merit, corporate agents are often parties to suits because plaintiffs perceive tactical benefits in suing them. These perceived benefits can include increasing the settlement value of a case, intimidating the individual litigant or saddling the individual with the time-consuming and expensive tasks of litigation.

Also, naming directors and officers can trigger D&O insurance policies, thereby increasing the pool of funds available to settle the suit or pay a judgment. The fiduciary shield often can be raised in a motion to dismiss early on, thereby nullifying these perceived benefits.

How does personal jurisdiction affect the application of the fiduciary shield doctrine?

To have jurisdiction over a defendant, whether it’s a corporation or an individual, a plaintiff must show that the court can exercise its power over that defendant. So, for a court in Illinois to assert jurisdiction over someone from Wisconsin, for example, there must be an Illinois statute allowing for the exercise of jurisdiction, and constitutional requirements must be satisfied.

In Illinois, the ‘long arm’ statute provides that jurisdiction may be had over a person for any basis permitted by the U.S. Constitution and the Illinois Constitution. The U.S. Constitution allows for personal jurisdiction as long as that person has ‘minimum contacts’ with the state. And it is rather easy to establish these minimum contacts.

Assuming there are minimum contacts, a court must then consider whether exercising personal jurisdiction would be fair and just. The fiduciary shield doctrine is an outgrowth of this inquiry.