Our Litigation Partner Dave Ross’s 2023 DC Appellate Victory Regarding Management of Trade Association

As the litigator in a six-year team effort, with nonprofit lawyer Benjamin Takis of Takis Nonprofit Law PLLC, we are pleased to report on our major win in the area of DC nonprofit law, under which many of our country’s national trade associations are organized.  We received a favorable ruling for our client from the District of Columbia Court of Appeals in OverDrive, Inc. v. The Open eBook Forum, Inc., 288 A.3d 305 (D.C. 2023), which represents not only a rare published opinion on the D.C. Nonprofit Corporation Act, but also a blueprint by which membership organizations and other nonprofits in D.C. could address future internal disputes.

Our client, The Open eBook Forum a/k/a International Digital Publishing Forum (“IDPF”), was a “501(c)(3)” trade association.  IDPF’s mission, in short, was to represent the common business interests of member companies from the digital publishing industry.  Faced with a changing economic landscape, IDPF sought to transfer its assets and members to the much larger World Wide Web Consortium (“W3C”). 

Under the D.C. Nonprofit Corporation Act, IDPF’s members were entitled to elect directors and officers, receive access to certain documents, and vote to approve certain corporate actions.  For our purposes, this meant that IDPF’s elected Board of Directors could recommend the asset transfer and so-called “membership exchange,” but only the members, collectively, were empowered to approve or reject it.   In this case, the transaction was approved by the Board and then by the membership, who, through their voting “Primary Representatives,” approved it in a landslide.

OverDrive, Inc. (“OverDrive”), one of the members, vigorously objected to the transaction. The company thus filed a suit pursuant to a D.C. statute that, it contended, entitled it to petition for court review of IDPF’s decision.  That statute, D.C. Code § 29-401.22(a) (“Subsection (a)”), empowers the D.C. Superior Court to “hear and determine the validity of [a] corporate action.”

Our argument, which succeeded first in the D.C. Superior Court and then at the appellate level, was that OverDrive’s claim under Subsection (a) was defeated by IDPF’s provision of an internal mechanism for challenging corporate decisions.  This multi-pronged argument was as follows:

1.     D.C. Code § 29-401.22(c) (“Subsection (c)”) states that Subsection (a) “shall not apply if a nonprofit corporation has provided in its articles of incorporation or bylaws for a means of resolving a challenge to a corporate action[.]”  In such a circumstance, the Superior Court’s role would be limited, as needed, to enforcing the articles or bylaws.

2.     IDPF’s Bylaws did, in fact, provide a means of challenging corporate actions.  If Primary Representatives in an amount equal to the number of Board members – 14 in this case – had signed a petition requesting a membership-wide vote on rescission, such a vote would have to be held.

3.     OverDrive, which did avail itself of the internal mechanism for challenging the decision, could not now assert that challenge in court.

Among OverDrive’s arguments was its contention that IDPF’s internal process was illusory.  The Board, OverDrive argued, foiled its ability to petition for a re-vote by refusing to give it the names and email addresses of the Primary Representatives.  Our successful counterargument was that (i) IDPF was not required, under statute or its governing documents, to provide requested information (as opposed to the mere names and addresses of member organizations); and (ii) OverDrive admittedly had devoted minimal time attempting to obtain “Primary Representative”-specific information by other means.

Similarly unavailing was OverDrive’s contention that the transaction itself violated the Articles of Incorporation’s directive supposedly permitting IDPF to transfer assets only to “organizations which are substantially similar” to IDPF.  W3C, OverDrive argued, was devoted generally to the World Wide Web (including html) and therefore was not substantially similar to an organization that focused specifically on digital publishing.  Our successful counterargument was as follows:  (i) OverDrive had misquoted the article, which referred not to “substantially similar organizations,” but instead to “organizations which engage in activities substantially similar to those of [IDPF]; (ii) W3C, while not a substantially similar “organization,” was engaged in – among many other things – the same digital publishing “activity” conducted by W3C. 

With few exceptions, corporate actions will not be invalidated under the D.C. Nonprofit Corporation Act if the organization’s articles or bylaws provide non-illusory “means of resolving a challenge to a corporate action.”  Accordingly, D.C. nonprofits should create such mechanisms and, like IDPF, give them real “teeth” to shield them from challenge.  Members, in turn, would be well advised to view Subsection (c) as a sort of “exhaustion of internal remedies” requirement.  By ignoring internal corporate challenge mechanisms, dissenting members might be dooming themselves.

Mr. Takis has also posted his reflections on the case here.

Please email me at dross@garrishorn.com to discuss the issues in this blog post, or DC nonprofit law generally.