New California Pay Transparency Law 2023
California employers should be aware that starting January 1, 2023, employers with 15 or more employees must include a pay scale in job postings. The Labor Commissioner recently posted FAQs about the new law, which include the following guidance:
• In determining whether a business has 15 or more employees, all employees are included, regardless of the number of hours worked or location. This means that employees outside the state of California count toward the 15-employee threshold. The Labor Commissioner appears to take the position that employees obtained from staffing agencies should be included along with direct hires in an employer’s employee count.
• The pay scale is defined as “the salary or hourly wage range that the employer reasonably expects to pay for the position.” If the employer intends to pay a set hourly rate or set piece rate, the employer may list that set rate, rather than a pay range. If an employee will be paid on a commission basis, the commission rate must be included in the posting.
• The pay scale is not required to include bonuses, tips, or other benefits (although such information may make recruiting efforts more competitive).
• The Labor Commissioner takes the position that the pay scale must be posted for any position that “may ever be filled in California, either in person or remotely.”
• The Labor Commissioner takes the position that the pay scale must be included within the job posting; the employer cannot provide a QR code or link that will take an applicant to the salary information.
Employers should be aware of and abide by the posting requirements (and other Equal Pay Act provisions) in order to avoid claims filed by employees with the Labor Commissioner’s office or in court.
The Employment Attorneys at Call & Jensen are available to assist you with questions about the new pay scale law or any other employment questions you may have.
The foregoing is intended as general information only. For legal advice specific to your situation, please consult employment counsel.
What Happens When Gig-economy Workers Become EmployeesDrivers For Cannabis Companies In California Now Have To Be Classified As Employees, Rather Than Independent Contractors. But Has That Been A Good Thing?
Ever since the emergence of companies like Uber and Lyft, businesses and labor advocates have engaged in an endless, largely theoretical debate about whether classifying workers as independent contractors—responsible for setting their own hours and paying for their own insurance, mileage, and other expenses—helps or hurts them.
On one side are gig-economy employers, who say workers like the flexibility of being an independent contractor, and prefer working when and if they please. On the other are labor advocates, who argue that gig-economy companies push much of the cost of their business onto workers, who don’t receive worker protections that were once standard, such as minimum wage and overtime protections.
The debate intensified in California in late April, when a state Supreme Court ruling found that employers must use a narrow test to determine how to classify employees, raising the likelihood that more companies will have to categorize gig workers as employees. Gig-economy companies lobbied the state to override the ruling, claiming that workers would lose their jobs, while labor advocates predicted that it would ensure that fewer people would have to rely on the state safety net. As usual, many of the people engaged in the debate about what’s best for workers were not the workers themselves.
But while the policy debate rages on, a real-world experiment has been testing what, exactly, would happen if companies had to switch a large swath of their workers from independent contractors to employees. As of January 1 of this year, cannabis-delivery workers are mandated by state law to be classified as employees. These rules, adopted after Californians voted to legalize marijuana in 2016, are a way for law enforcement to ensure that dispensaries take responsibility for their product, and that it is being handled by trained employees. Since they were enacted, dispensaries around California have started the process of switching delivery drivers, and in some cases other workers as well, from independent contractors to employees. Their experience highlights, more than any hypothetical debate, how there is no one easy answer for how to best structure the gig economy.
The decision to require delivery workers to be employees was very deliberate, according to Barry Broad, a Sacramento lobbyist who represents labor clients including the Teamsters and who was involved in the negotiations. Government officials thought that for the industry to be stable and accountable, independent contractors shouldn’t be carrying around marijuana, especially given that they could also be simultaneously driving for another gig-economy company. Law enforcement also needed to know, if they stopped a driver with a car full of cannabis, who was responsible for that cannabis, and so preferred that the drivers be employees of licensed dispensaries. There was another reason, too, Broad told me. “We wanted to make sure there is not a situation where there’s just gross exploitation of workers,” he told me.
Cannabis companies got on board, too, a marked contrast to other gig-economy companies. Jerred Kiloh, the president of the United Cannabis Business Association (UCBA) Trade Association, which represents legal dispensaries in Los Angeles, said that his organization wasn’t initially sure whether to support the rules or fight them. But unlicensed dispensaries were pushing back against any regulation, and licensed dispensaries worried that the proliferation of independent contractors would lead to the creation of a “gray area” in which customers didn’t know who was actually selling the product, and if they were buying from a licensed dispensary, he said, so they came around to regulation.
Workers are split on whether they like the changes. Sky Siegel, the general manager for the Perennial Holistic Center in Los Angeles, said about half of his drivers preferred being independent contractors, and quit before the change went into effect so they could find other gig jobs. Some left because Siegel can’t yet afford to offer them benefits, so he is limiting employees to 30 hours a week so as not to trigger IRS provisions that would categorize employees as full-time. Though they received minimum-wage protections under the new rules, many workers decided that 30 hours a week, even as an employee, was not enough.
But for the half who stayed, some parts of the job are easier. Rather than using their own cars to make deliveries, they use vehicles provided by the dispensary. The dispensary withholds their taxes, so they get to avoid the April panic that’s become a rite of passage for gig-economy workers. Because of California labor laws, if they work shifts that last more than eight hours a day, 40 hours a week, they receive overtime pay. Their shifts follow a regular schedule now, replacing the free-for-all that would happen in the past when new shifts were posted (Mondays at 4:20 p.m., of course).
Matthew Johnson, 24, is one of the employees who stayed on after the transition. He’d been driving for companies like DoorDash and Grubhub before he started working for Perennial, so he was accustomed to being an independent contractor. But he likes the predictability, job security, and guaranteed hours of being an employee. He has even moved up the job ladder: As an employee keyed in to what was happening around the office, he started doing some events with Eaze, the start-up that works with Perennial and other dispensaries to manage deliveries. He showed his bosses that he was a hard and dedicated worker, and was able to suggest some tweaks to the platform that made it run more smoothly. He got a promotion, and now, in addition to driving, he also manages customer-support service and operations for Perennial.
Johnson now thinks all gig companies should switch to the employee model. “I think that with the amount of hours people work, and the type of hard work they put in for these companies, they deserve to be employees,” he told me. “Sometimes the companies just throw them away, like they’re disposable.”
Diligence In Building Or Buying A BrandOriginally Published In Ocbj By Deborah Gubernick & Lisa Sandoval
On any given day, you will find Southern Californians donning their favorite local brands. Whether eating In-N-Out Burger®, sporting Vans® shoes, Stance® socks, and a favorite SoCal surf-brand, or even dressing up in a St. John Knits® ensemble while scheduling Botox® treatments before going home to watch a Vizio® television, SoCal brands are undeniably woven into our lifestyle. We are accustomed to witnessing countless brands grow in our own stomping grounds. We have also seen brands grow to the point where they are bought by large companies – resulting in our favorites becoming international sensations. Whether building or buying a brand, diligence in both cases is imperative to the brandʼs continued success.
Building a new brand can be exciting. Indeed, many have been inspired by the success of what we have seen locally. Consider 12-year-old San Clemente entrepreneur, Carson Kropfl, who recently developed the brand, Locker Board, for a small skateboard. Kropfl reportedly recently attracted investment interest from business legend, Richard Branson. Armed with the same can-do attitude and creativity of countless SoCal brand builders before him, he is already showing what brand building (and possibly brand buying/brand investing) is all about.
Having a small brand become global powerhouses is the epitome of the American dream. Being involved in a multi-million or even billion dollar deal and turning large profits sounds glamorous. But, taking the steps necessary to protect a brand, conduct brand audits and engage in appropriate due diligence is far less appealing. Some take shortcuts in this area, only to realize doing so is a costly mistake.
Consider the 1998 due diligence missteps of German carmaker Volkswagen, as it purchased the assets of Rolls Royce and Bentley automobile for around $900 million. The heads of the heavyweights flew in on private jets, meeting at an exclusive Bavarian country club to carve out the deal. In an odd twist, however, the deal did not afford Volkswagen the right to use the Rolls Royce name. Rather, the Rolls Royce trademark would be BMWʼs property. Volkswagen was left owning the manufacturing facilities and rights to make the Rolls Royce cars without use of the Rolls Royce name. Volkswagen had to then secure a separate deal with BMW to have the right to use the Rolls Royce trademark.
Appropriate diligence and legal advice is imperative to avoid the snares of a potentially problematic IP portfolio and inadvertent oversights in a business deal.
Advice for Brand Builders
A startup aiming to eventually sell its brand must first take steps necessary to secure the brand. This means proper trademark searching, clearance and filing to protect the asset. The brand owner should also consider filing copyright and patent protections, where applicable. Secure key domain names and social media accounts to market the brand. Adopt a brand-policing system to monitor third party trademark filings and infringing use to prevent dilution of rights. Develop brand- usage guidelines to foster brand recognition among consumers. Frequently audit existing trademarks to determine if more filings are warranted.
Keep good records of trademark use, sales histories, advertising figures and advertising samples. This information is often critical to demonstrate not only ownership of the brand, but the brandʼs strength and associated goodwill. When taking the brand to international markets, manufacturing or distributing abroad, devise a strategic trademark filing plan that addresses both offensive and defensive considerations. Indeed, in some countries, the first to file a trademark/brand name automatically gets the rights – exposing brand owners to international vulnerabilities.
The brand will likely become the most valuable asset of the business. Failing to properly protect, maintain and enforce it will diminish its value—making it harder to demand top dollar when selling the brand (or when attempting to attract investment capital).
Advice for Brand Buyers
A potential brand buyer or investor should conduct thorough IP diligence before any transaction. Doing so will help the buyer assess the monetary value and risks associated with the transaction. The buyer should request, and the seller should provide, lists identifying U.S and international trademarks, copyrights, patents, domain names, trade secrets, social media accounts and any other information proprietary to the business. As a potential acquirer of the IP (or investor), it is not enough to simply rely on the information the brand builder provides. Verify the information by cross-checking it against publicly available trademark, copyright and patent records. Double check the title-holder of each IP asset and look for any recorded security interests. Confirm the IP is not the subject of active litigation. If the IP was involved in prior litigation, what was the result? Have there been any cease and desist letters or threats of litigation regarding the IP? Have all deadlines been met to ensure the IP is still valid and enforceable?
Request copies of any agreements involving the IP. In the event the brand has been licensed, carefully evaluate the license agreements, paying attention to territories to which the license applies, the license term, payment obligations, assignability, and whether the agreement is exclusive or non-exclusive. What are the grounds/consequences for terminating? Does that impact your interest in the IP and/or the value of it?
In the case of copyrighted works, confirm appropriate assignment documents and work for hire agreements have been executed to avoid any surprising claims regarding ownership post-closing. Verify that all domain names and social media accounts are in fact controlled by the business. Obtain the contact details for the administrators of each and ensure the accounts can be easily transferred post- closing.
Whether brand building or brand buying, diligence in both cases is imperative. As a brand builder, start in the right direction by protecting the brand through trademark searches, clearance and filing. Maintain and protect IP assets by adopting appropriate maintenance and enforcement protocols. As a brand buyer, be thorough in verifying the ownership, enforceability and risks associated with the IP assets. In both cases, utilizing an experienced attorney can prevent costly missteps and can help to position the brand for not only local, but global success.
Efforts To Provide Paid Family Leave On The RiseOriginally Published In The May 2017 Orange County Lawyer Magazine
It has been over twenty years since the Family and Medical Leave Act of 19931 went into effect, requiring certain large employers to provide job-protected and unpaid leave to employees for certain medical and family reasons, including bonding time with a new child. At the time of this article’s publication, however, there is still no federal mandate for paid parental leave, despite that dozens of other developed nations provide for such a benefit—to new mothers and fathers alike. In both 2013 and 2015, federal legislation to provide paid family leave was introduced, but never made its way through the legislative process.2
In the meantime, many companies have stepped in to try to keep pace with the recent rising trend to provide paid family leave to employees. At least one company has publicly stated their intent in doing so was to stay competitive in a global market and to serve the American workplace. In conjunction with the birth of Mark Zuckerburg’s daughter, Facebook announced in late 2015 that it was extending its parental leave policy for full-time employees to cover four months of paid leave for all new parents.3 This news came after an announcement by Netflix in August of that year to provide unlimited paid leave to its salaried employees—both new moms and dads—during the first year after a child’s birth or adoption.4 Microsoft followed suit, announcing twelve weeks of paid leave for new parents.5
Amazon also announced its paid parental leave policy in late 2015 offering six weeks of paid parental leave for all new parents employed at the company for one year or more.6 In November 2015, Spotify announced it would offer six months of fully paid parental leave to all full-time employees.7 In 2016, the trend continued. Netflix expanded its parental leave policy to include hourly workers, offering them between twelve and sixteen weeks paid leave depending on their job.8 Other major companies, such as Deloitte, Hilton, Nike, Coca-Cola, Ikea, and Etsy, announced generous paid family leave policies throughout the year as well. Even the Pentagon announced in 2016 that it would provide twelve weeks of paid maternity leave for all uniformed service members.9
During the contentious 2016 presidential campaigns, both candidates notably supported paid family leave, albeit in different forms. Then Republican presidential nominee Donald Trump announced a plan for six weeks of paid maternity leave, through unemployment insurance, for new mothers whose employers do not guarantee paid leave.10 Democratic rival Hillary Clinton proposed to ensure that employees taking up to twelve weeks of leave through the Family and Medical Leave Act would receive at least two-thirds of their wages, up to a ceiling.11
Earlier this year, federal lawmakers announced plans to reintroduce paid family leave legislation that would create a universal, gender-neutral, paid family and medical leave program.12 In particular, the new law would provide workers with at least two-thirds pay (up to a cap) for up to twelve weeks of time off for their own health conditions, including pregnancy and childbirth, or to care for others. It would do this by creating an independent trust fund within the Social Security Administration to collect fees and provide benefits. The trust would be funded by employee and employer contributions of two-tenths of a percent of wages each, creating a self-sufficient program that would not add to the federal budget. Lawmakers behind the bill assert leave would be made available to every individual regardless of the size of their current employer and regardless of whether such individual is currently employed by an employer, self-employed, or currently unemployed, as long as the person has sufficient earnings and work history. As such, the law would apply to young, part-time, and low-wage workers. Given that President Trump has expressed support for government-mandated paid leave, there is more than a glimmer of hope for such a bill, which has not made strides in the past.
California passed the nation’s first paid leave law in 2002.13 The wage replacement portion of the federal paid family leave bill is modeled after successful state programs in California and New Jersey. California’s paid family leave program is not really a leave program, but rather a partial wage replacement program administered through the state’s disability system and not by employers. It is fully funded by employees’ contributions. It applies to all parents who take off time from work to bond with a child within one year of birth, adoption, or placement as a foster child. It also provides payments to people who take time to care for seriously ill family members. Citing how globalization has put pressure on wages and benefits, Governor Brown signed legislation in April 2016 that will increase the wage replacement rate under California’s program from its current level of fifty-five percent to sixty or seventy percent (depending on the worker’s income).14 Notably, however, Governor Brown vetoed a bill which would have required small businesses not covered by the Family and Medical Leave Act to provide six weeks of unpaid, job-protected parental leave.
Some cities and states have taken paid parental leave a step further. In April 2016, San Francisco passed an ordinance requiring employers with twenty or more employees (with at least one working in the city) to offer supplemental compensation to all employees, including part-time and temporary employees, who use California paid family leave benefits for new child bonding.15 The amount of supplemental compensation an employer would need to pay is the difference between the employee’s current normal gross weekly wage and state benefits received. Employers with fifty or more employees are required to comply beginning on January 1, 2017; employers with thirty-five or more employees are required to comply beginning on July 1, 2017; and employers with twenty or more employees are required to comply beginning on January 1, 2018.
Luckily for city employees, Seattle recently expanded paid leave for city employees who are new parents from four to twelve weeks and created a new four-week family leave policy for city employees who need to care for sick family members.16 Similarly, in Boston, city employees have been entitled to up to six weeks of paid parental leave since 2015.17 Boston’s ordinance applies to men and women, as well as same-sex couples. It also applies to each instance of eligible employees’ birth of newborns, adoption, surrogacy or other methods, and stillbirths.
In April 2016, New York state passed a paid family law that, when fully phased-in, will allow employees to be eligible for twelve weeks of paid leave when caring for an infant, a family member with a serious health condition, or to relieve family pressures when a family member, including a spouse, domestic partner, child or parent, is called to active military service.18 Paid leave to care for a new child will be available to both men and women, and will include leave to care for an adoptive or foster child. Implementation of New York’s paid leave law will be gradual. Beginning January 1, 2018, employees will be eligible for eight weeks of paid leave, earning fifty percent of their weekly pay (up to a cap). The number of weeks of leave and amount of pay increases annually until, by 2021, employees will be eligible for the full twelve weeks of paid leave, earning sixty-seven percent of their weekly pay (up to a cap). New York’s paid family leave will be funded by a weekly payroll tax of about $1 per employee, deducted from employees’ paychecks. As a result, employers will not have to bear the financial burden of funding the paid leave benefits provided under the new state law.
In December 2016, Washington, D.C. passed a universal paid leave ordinance which gives full- and part-time workers in the city eight weeks of leave at up to ninety percent of their full weekly wages for birth, adoption or fostering.19 The bill also provides for six weeks of family leave to look after a sick relative and two weeks for a personal medical emergency. The paid leave program will be funded by a new business tax that would raise $250 million a year to cover costs. Washington, D.C.’s ordinance covers only private-sector workers, excluding those on city or federal payroll. To qualify, a worker need only be employed in D.C.; residents of other cities and states with jobs in the capital are eligible. Non-profit workers and the self-employed are also covered.
Amidst the flurry of recent paid family leave activity at federal, state, and local levels, as well as from the business sector, many companies hoping to stay competitive, boost morale, and gain positive media attention, may find themselves wondering how they can get in on the action before they miss the boat. Before announcing any future paid parental leave policy, however, employers should consider and prepare for the implementation process of such a policy, as well as possible ramifications. For instance, employers should set up appropriate forms and acknowledgments in advance, and devise a protocol for management to follow in distributing and using these documents. Management and human resources should be trained on how to roll out the new policy, and understand what not to say when employees request to use leave.
Employers will want to consider whether they want to provide paid leave on a gender-neutral basis, for how long, and for how much pay. Employers are each uniquely situated and can come up with paid family leave plans tailored to meet their needs. Employers should also consider what eligibility criteria they want their employees to meet before taking leave, and whether the leave should be job-protected. They may also want to consider whether the paid family leave should run concurrent with other available leaves, and whether a third-party vendor, human resources, or managers will have the discretion to grant or deny leaves.
Sticky situations should also be contemplated and addressed. For instance, should the paid family leave policy be retroactive and apply to an employee whose baby was born before the policy was implemented? Is an employee permitted to use the leave intermittently? If so, what level of incremental use would the employer deem to be appropriate? What if an employee gives birth to twins? What if two employees have a child together? Again, each business may have its own reasons for coming out one way versus the other on these issues. The point is, it is better to deal with the tough questions before they become employee relations problems.
Last but not least, it is always critical to review a company’s proposed paid family leave policy with an eye towards litigation—both single-plaintiff and class action cases. More often than not, classes get certified based on written policies alone. It is also possible that employees could make discrimination claims with respect to the implementation of the policy. In defense of those claims, the requisite forms and acknowledgments should be helpful to minimize risk in that area.
(1) Family Medical Leave Act (FMLA) of 1993, 29 U.S.C. § 2601 (2012).
(2) Family and Medical Insurance Leave Act of 2013, H.R. 3712, 113th Cong. (2013); Family and Medical Insurance Leave Act, S. 786, 114th Cong. (2015).
(3) Kristy Woudstra, Facebook Parental Leave: the Company Expands Its Policy, Huffington Post (Nov. 30, 2015), http://www.huffingtonpost.com/2015/11/30/facebook-parental-leave_n_8683198.html.
(4) Heather Kelly, Netflix Employees Can Now Take Unlimited Paid Parental Leave, the Company Announced Tuesday, CNN (Aug. 5, 2015), http://money.cnn.com/2015/08/04/technology/netflix-parental-leave.
(5) Julia Greenberg, Microsoft Offers Big Upgrade to Paid Leave for New Parents, Wired (Aug. 5, 2015), https://www.wired.com/2015/08/microsoft-offers-big-upgrade-paid-leave-new-parents.
(6) Martin Berman-Gorvine, Amazon Expands Parental Leave Offerings, Bloomberg (Nov. 16, 2015), https://www.bna.com/amazon-expands-parental-n57982063587.
(7) Emily Peck, Spotify’s New Parental Leave Policy is Pretty Amazing, Huffington Post (Nov. 19, 2015), http://www.huffingtonpost.com/entry/spotify-parental-leave_us_564de6c7e4b08c74b73483fe.
(8) Shane Ferro, Netflix Just Made Another Huge Stride on Parental Leave, Huffington Post (Dec. 9, 2015), http://www.huffingtonpost.com/entry/netflix-paid-parental-leave-hourly-workers_us_56685ae1e4b009377b233a79.
(9) The Editorial Board, The Pentagon’s New Parental Leave, N.Y. Times (Feb. 2, 2016), https://www.nytimes.com/2016/02/02/opinion/the-pentagons-new-parental-leave.html.
(10) Heather Long, Many Women Voted for Trump. Will He Keep His Promises to Them?, CNN Money (Dec. 6, 2016), http://money.cnn.com/2016/12/06/news/economy/donald-trump-childcare-maternity-leave/.
(11) Megan A. Sholar, Donald Trump and Hilary Clinton Both Support Paid Family Leave. That’s a Breakthrough, The Washington Post (Sept. 22, 2016), https://www.washingtonpost.com/news/monkey-cage/wp/2016/09/22/donald-trump-and-hillary-clinton-both-support-paid-family-leave-thats-a-breakthrough/?utm_term=.0c8de2f5ab23.
(12) Family and Medical Insurance Leave Act, S. 337, 115th Cong. (2017); FAMILY Act, H.R. 947, 115th Cong. (2017).
(13) Cal. Unemp. Ins. Code §§ 2601, et. seq. (2004).
(14) Patrick McGreevy, Brown Signs California Law Boosting Paid Family-Leave Benefits, Los Angeles Times (Apr. 11, 2016), http://www.latimes.com/politics/la-pol-sac-paid-family-leave-california-20160411-story.html.
(15) San Francisco, Cal., Police Code §§ 330H.1, et. seq. (2016).
(16) Office of the Mayor, Mayor Murray, Council Enact Twelve-Week Paid Parental Leave, Increased Wage Transparency for City Employees, Office of the Mayor (Feb. 13, 2017), http://murray.seattle.gov/mayor-murray-council-enact-12-week-paid-parental-leave-increased-wage-transparency-city-employees/.
(17) Andrew Ryan, City Council Approves Paid Parental Leave Measure, The Boston Globe (Apr. 29, 2015), https://www.bostonglobe.com/metro/2015/04/29/city-council-approves-paid-parental-leave-for-municipal-employees/6JZ4eVovEtrX7CKDWgWKhP/story.html.
(18) Emily Peck, New York Just Passed America’s Best Paid Family Leave Law, The Huffington Post (Apr. 4, 2016), http://www.huffingtonpost.com/entry/new-york-paid-family-leave_us_5702ae75e4b0daf53af042b7.
(19) Clare O’Connor, Washington, D.C. Passes Eight Week Paid Parental Leave Bill, Forbes (Dec. 20, 2016), https://www.forbes.com/sites/clareoconnor/2016/12/20/washington-d-c-passes-8-week-paid-parental-leave-bill/#6f5402bf6bfa.
Proactivity And Problem Solving Are Keys To Avoiding Costly LitigationLitigation In California Is Booming.
Litigation in California is booming. More companies are being hit with lawsuits and many companies are moving their headquarters out of California. Therefore, it makes sense to consider ways to avoid costly
litigation in California.
Attorneys working in-house for California companies are often juggling a variety of tasks and the nature of the work can become reactive. To the extent that in-house counsel can be proactive in identifying potential legal issues and working with the business to resolve those issues, the companies will be in better shape to avoid costly litigation. Of course, the difficulty lies in the details. It is sometimes unclear where to focus efforts on being proactive and how to solve potential problems. The tips below are a helpful guide for in-house counsel.
If You Cannot Get The Smoking Gun . . . At Least Get The SmokeOriginally Published April 2006 In Trial Magazine
Unlike criminal cases, a defendant in a civil action is virtually certain to be afforded notice of his alleged misconduct long before he has to sit for a deposition, produce documents, or otherwise explain or justify his alleged misconduct.
What happens then, if the defendant has the mind of a criminal with no reservations about destroying evidence? Especially in today’s digital age, when evidence can be destroyed with a few keystrokes or clicks of a mouse, how can a plaintiff prove, for example, copyright infringement or the misappropriation of trade secrets if the evidence is gone before the defendant even files his responsive pleading?
Although courts are often reluctant to give plaintiffs the opportunity to enter a defendant’s premises without notice to search and seize evidence of wrongdoing, there are weapons found in and out of the Federal Rules of Civil Procedure, which the plaintiff’s practitioner must be aware of to uncover, if not the smoking gun, at least the smoke.
A RULE 65(b) SEARCH AND SEIZURE
In copyright infringement cases, for example, it is often the case that the plaintiff becomes aware of a defendant’s infringement from an “insider” who has knowledge of the infringement without evidence of the infringement. An ex-employee or customer may have heard defendants discussing the fact that they purchased a single software package with one license to install in several different offices. This insider may possess evidence of defendants admitting to owning counterfeit or “cracked” versions of the plaintiff’s software. While this testimony may be persuasive, without direct evidence of wrongdoing, the trial will be nothing more than a battle of contradicting testimony.
Ideally, the plaintiff will want an opportunity to search the defendant’s offices and computers for evidence of infringement before the defendant is afforded an opportunity to engage in Arthur Andersen type “housekeeping.” In some cases, the plaintiff will able to utilize Rule 65(b) of the Federal Rules of Civil Procedure, which authorizes the court to issue a temporary restraining order without notice to the adverse party.
In practice, the plaintiff will file the complaint and its ex parte application for an emergency temporary restraining order under seal and not serve or provide any notice of the lawsuit to the defendant. The application will request that the plaintiff, with the assistance of the United States Marshals, be afforded the opportunity to search for and seize any evidence of infringement.
The relief provided by Rule 65(b) is the exception to the general rule. As explained by the Supreme Court, “our entire jurisprudence runs counter to the notion of court action taken before reasonable notice and an opportunity to be heard has been granted both sides of a dispute.”1 As a result, restraining order applications sought ex parte require the court to serve as the absent party’s advocate, triggering intense judicial scrutiny of a plaintiff’s claims, the relief it seeks, and most importantly, its proffered justification for proceeding ex parte2. Especially when a defendant is unaware that a lawsuit has been filed, such relief also implicates the restrictions imposed by the Fourth and Fifth Amendments of the Constitution.
Accordingly, ex parte relief under Rule 65(b) applies in two situations. First, such relief may be granted when the plaintiff does not know the party’s identity or location. Second, such relief may be granted when “it clearly appears . . . that immediate and irreparable injury, loss, or damage will result to the application before the adverse party or that party’s attorney can be heard in opposition.”3 The former situation is rarely at issue and the latter is rarely provable.
To illustrate, the opportunity to erase computer disks, burn, shred, or hide documents, and coach potential witnesses is present in every civil case. Therefore, a plaintiff must do more than assert that the defendant could or would dispose of evidence if given notice. Instead, a plaintiff must show that the adverse party has a history of disposing of evidence or violating court orders or that persons similar to the defendant have such a history.4
Often, the plaintiff has not had any direct dealings with the defendant and can therefore not present anything beyond intuition, suspicion, or supposition. Without more, the Court will invariably conclude that the plaintiff has not come forth with adequate justification for failing to give notice to the defendant. If the plaintiff wishes to seek injunctive relief, the Court will instruct the plaintiff to bring a fully noticed motion for a preliminary injunction.
Because providing the defendant with notice of the action is tantamount to affording the sinister defendant an opportunity to cover up its tracks of wrongdoing, the plaintiff’s practitioner must be prepared to handle this hurdle dealt by the Court.
THE NEXT BEST THING
No one in America witnessed the murders of Nicole Brown Simpson or Ronald Goldman on June 12, 1994. However, by June 17, 1994, millions of Americans concluded that O.J. Simpson, by then a fugitive from justice in his White Ford Bronco, was the one and only suspect in the double murders on Bundy Drive. Indeed, observing the attempted escape was sufficient for many to conclude that this popular Hall of Famer was a cold blooded killer. Both logically and legally, evidence of flight by a defendant is a silent admission by the defendant that he is unwilling or unable to face the charges against him from which guilt may be inferred.5
The plaintiff’s practitioner must realize that a civil lawsuit is no different. When a plaintiff is denied the rare but essential opportunity to search and seize a defendant’s premises, the plaintiff must do the next best thing: informal and clandestine discovery.
When adhering to the Court’s suggestion of bringing a fully noticed motion for a preliminary injunction, the plaintiff should simultaneously have a strategy in place designed to expose any efforts to eliminate evidence. While it is unlikely that the defendant will pack up his SUV and head for Mexico, defendants in civil lawsuits are rarely suspicious that their conduct following service of a lawsuit could be at issue or even observed. Accordingly, what a defendant does immediately following service can sometimes produce a cornucopia of evidence that would normally be lost forever.
Rather than hire a process server to simply serve the lawsuit and wait to hear from the defendant or his counsel, a plaintiff would be well-advised to hire a reputable private investigator to have a team of individuals conduct surveillance of the defendant and all relevant locations where evidence of wrongdoing could be found (e.g., the defendant’s place of business, residence, etc.). When the team is in place and are conducting surveillance from a public location, the defendant should be formally served with the complaint. From there, the defendant and all relevant locations must be observed and taped. A videotape showing the defendant loading computers and documents into a car or truck immediately after being served with the lawsuit can be very persuasive evidence for a judge or jury.
Dumpster diving (i.e., searching through another’s trash) is not illegal. In 1988, the Supreme Court of the United States concluded in California v. Greenwood that the legality of a warrantless search of a suspect’s trash turned on whether the manifested subjective expectation of privacy in the garbage left on a curb would be accepted by society as objectively reasonable. The Court concluded that, by exposing the garbage to the public and placing it on the side of the street for the express purpose of conveying it to the trash collector, there was no reasonable expectation in the privacy of the discarded items.6
Since Greenwood, dumpster diving has become commonplace among both law enforcement and, perhaps ironically, identity thieves. It has become so prevalent, in fact, that the Federal Trade Commission’s (“FTC”) new “Disposal Rule” provides that businesses must take reasonable measures to protect against unauthorized access to consumer information when the business disposes such information.7
In addition to conducting surveillance, a plaintiff looking for evidence of copyright infringement, trade secret misappropriation, or tortious interference, for example, should also have its private investigators engage in dumpster diving to see whether the defendant has carelessly embarked in a campaign of evidentiary destruction.
A WORD OF CAUTION: INSTRUCT AND SUPERVISE THE INVESTIGATOR
It is imperative that practitioners be aware of the legal limitations of these methods of discovery. As illustrated in Stephen Slesinger, Inc. v. The Walt Disney Co., misconduct in the quest for evidence of misconduct can devastate a party’s case.8
In the early 1990s, plaintiff Stephen Slesinger, Inc. (“SSI”) sued defendant The Walt Disney Corporation (“Disney”) for Disney’s alleged failure to pay the plaintiff royalties in connection with its Winnie the Pooh productions. When SSI commenced litigation, it hired an investigator to surreptitiously procure Disney’s documents outside of the regular discovery process. On some occasions, the investigator discussed his planned activities with SSI. In most instances, he did not.
The lawsuit was litigated for more than ten years before the conduct of SSI’s investigator would be fully addressed by the Court; however, when the conduct was addressed, it cost SSI dearly. To illustrate, the Court first took issue with the fact that neither SSI nor its investigator maintained any logs or records showing what documents were received from the investigator. Next, the Court found that the investigator was not credible when he testified that he only conducted dumpster diving at one Disney location. Even if he did conduct dumpster diving at only one location, the Court noted that the dumpsters at the location “were located on private property, not on a street curb as occurs on trash collection days in residential neighborhoods.” Put another way, “[t]he contents of the . . . dumpsters were not, in this Court’s view, made available to the public so as to give SSI a right to treat Disney’s documents as abandoned and use them for private advantage.”9
Practitioners must be extremely cautious about who they hire to conduct surveillance and dumpster diving. There is no privilege or immunity for breaking the law to obtain evidence.10As the plaintiff’s agent, it is the plaintiff’s responsibility to adequately supervise the investigator’s activities. Pragmatically speaking, the responsibility lies with the plaintiff’s counsel.
In Slesinger, the Court found that the culpability of SSI’s investigator’s shenanigans would be borne by SSI – even if the investigator’s actions conflicted with SSI’s instructions: “SSI claims it instructed [the investigator] to only obtain Disney documents by lawful means, but SSI remains fully responsible for [the investigator’s] misconduct, even if his acts, as SSI’s agents, were contrary to SSI’s explicit instructions.”11
It should be further noted that what SSI’s investigator uncovered was not evidence of Disney’s wrongdoing. Rather, SSI’s investigator recovered privileged documents prepared by Disney’s counsel that, for example, analyzed the risk and potential outcome of the case. SSI’s sole shareholder faxed the document to SSI’s attorneys who in turn circulated and reviewed it in detail. The Court found SSI’s misconduct “willful, tactical, egregious, and inexcusable.”12
When analyzing the appropriate sanction for SSI, the Court explained that neither disqualification of SSI’s counsel nor monetary sanctions were sufficient. SSI’s principals had reviewed the documents and, accordingly, neither disqualification nor monetary sanctions could purge the improperly obtained information from their minds.13
Ultimately, the Court concluded that terminating sanctions were the proper remedy to restore the integrity of the judicial process and fully protect the institution from further SSI abuse.
After more than ten years of litigation, SSI’s complaint against Disney was dismissed.
A RENEWED REQUEST: RULE 65(b) SEARCH AND SEIZURE
So long as the plaintiff’s investigator understands that surveillance and dumpster diving does not entitle him to unfettered access everywhere, the evidence uncovered following service of a lawsuit can often be powerful weapons for liability. In addition, the evidence recovered should also be used to renew the request that the Court grant a Rule 65(b) search and seizure without notice to the defendant. While the defendant will have had some opportunity to conceal evidence of his wrongdoing, he is also under the belief that there will be no discovery until at least the Court holds the formally noticed hearing for a preliminary injunction.
Thus, the plaintiff should go back to Court and explain that as soon as the defendant was served with the complaint, he threw away dozens of pieces of critical evidence showing that he had, for example, pirated the plaintiff’s software. The renewed request will explain that without a Court order the plaintiff will likely never know the extent of defendant’s culpability. It is also worth reminding the Court that irreparable damage may already have been done. Nonetheless, since the initial application was denied on the ground that the plaintiff could not identify specific instances where the defendant has destroyed evidence, it must now grant the motion given that the plaintiff has met its burden with the requisite evidence.
Our legal system generally does not deal effectively with parties who are prepared to lie, destroy, fabricate, or destroy evidence. Courts are suspicious of such charges and often assume that they are made for strategic or tactical reasons. Even when true, charges of misconduct can end up hurting the litigant making them as opposed to the litigant or party actually guilty of the misconduct.
Knowing the limitations of Rule 65 and our justice system in general, it is imperative that a plaintiff understand that there are additional weapons available to prove a defendant’s liability. Conducting surveillance and dumpster diving can sometimes uncover actions that implicate liability better than a White Ford Bronco headed for Mexico.
1 Granny Goose Foods, Inc. v. Brotherhood of Teamsters, 415 U.S. 423, 438-39 (1974).
2 Adobe Systems, Inc. v. South Sun Products, Inc., 187 F. R. D. 636, 639 (S.D. Cal. 1999)citing American Can Co. v. Mansukhani, 742 F. 2d 314, 324 (7th Cir. 1984).
3 Fed. R. Civ. P. 65(b).
4 First Tech. Safety Sys., Inc. v. Depinet, 11 F. 3d 641, 650-51 (6th Cir. 1993).
5 Starr v. U.S., 164 U.S. 627, 632 (1897).
6 California v. Greenwood, 486 U.S. 35 (1988).
7 16 C.F.R. § 682.3 (2005).
8 Stephen Slesinger, Inc. v. The Walt Disney Company, 2004 WL 612818 (Cal. Superior) (Not published).
9 Id. at *5.
10 Pullin v. Superior Court, 81 Cal. App. 4th 1161, 1164-65 (2000).
11 Id. at *5 citing Martin v. Leathman, 22 Cal. App. 2d 442, 445 (1937).
12 Id. at * 13.
A Sword, Not A Shield: Section 2019.210Originally Published May 2006 In Orange County Lawyer
Conventional wisdom instructs defense counsel, when dealing with “hide-the-ball” plaintiffs, to file all necessary motions to compel compliance with the area of law or discovery that is not being fearfully obeyed. The theory, of course, is that diligent defense counsel must not leave a stone unturned and must also bring its adversary’s improper tactics to the court’s attention at each and every instance.
In trade secret litigation, the conventional wisdom is no different. California Code of Civil Procedure section 2019.210 requires that “before commencing discovery . . . the party alleging the misappropriation [of trade secrets] shall identify the trade secret with reasonable particularity.” (Emphasis added). Accordingly, diligent defense counsel will refuse to move forward with discovery until the plaintiff has fully complied with this requirement. In the event defense counsel is not satisfied with the plaintiff’s description, it will bring a motion to compel so that the Court will issue an order that the plaintiff provide the requisite particularity of the trade secret’s description.
This strategy makes sense. After all, one of the purposes behind Section 2019.210 is to “enable defendants to form complete and well-reasoned defenses, ensuring that they need not wait until the eve of trial to effectively defend against charges of trade secret misappropriation.” Computer Economics, Inc. v. Gartner Group, Inc., 50 F. Supp. 2d 980, 985 (S.D. Cal. 1999).
Of course, employing the above strategies generally results in nothing more than compliance with Section 2019.210. In some fortunate cases, monetary sanctions may be awarded. Meanwhile, the plaintiff’s counsel has been given a primer as to what must be alleged and proven once discovery actually commences to prevail in its claims that a trade secret actually exists and was misappropriated.
One alternative strategy that strays from the conventional wisdom can do much more damage to a plaintiff’s trade secret case. As explained in greater detail below, Section 2019.210 can be used as a weapon to devastate a plaintiff’s case. However, as with all powerful weapons, patience and deliberation must be used before it is employed. As explained below, in the litigation context, it must be briefly showcased at the outset of the case and then kept hidden until it is time for summary judgment.
STEP ONE: LAY THE FOUNDATION
In order to set the case up for summary judgment, it is imperative that defense counsel put the plaintiff on notice of its obligations according to Section 2019.210. Rather than bring a motion, or even threaten to bring a motion, a non-threatening letter advising opposing counsel of Section 2019.210’s requirements is sufficient. For example, a letter that innocuously states the following is effective: “I wanted to highlight your attention to California Code of Civil Procedure Section 2019.210, which requires that in any action alleging the misappropriation of a trade secret, the party alleging the misappropriation shall identify the trade secret with reasonable particularity before commencing discovery. While Plaintiff’s Complaint describes in general some information relating to trade secrets, this description is insufficient. Therefore, before next week’s depositions begin, please forward to me Plaintiff’s Section 2019.210 statement.” Plaintiff’s counsel will either comply or, more likely, rely on its “hide-the-ball” tactics and respond with the argument that its description in the complaint was sufficient.
In the latter scenario, it is tempting for defense counsel to file a motion and have the Court admonish the plaintiff’s counsel for its shenanigans. Since admonitions do not win lawsuits, wise counsel must exercise one of the most underutilized skills in modern advocacy: patience.
STEP TWO: BUILD THE TRAP
Without mentioning the plaintiff’s counsel’s failure to comply with Section 2019.210, the next step is to move forward with discovery. Specifically, taking the depositions of various plaintiff witnesses is necessary to have each witness describe “in their own words,” the information that the plaintiff contends is a protected trade secret. Even the most prepared witnesses will be inconsistent in their descriptions of the allegedly proprietary information. Inconsistent testimony is especially common when the plaintiff’s counsel has already failed to describe the trade secret with reasonable particularity because the witnesses will have nothing to read andmemorize.
STEP THREE: WIELD THE SWORD
Once the depositions are complete, the plaintiff’s case is extremely vulnerable to summary judgment on the grounds that the plaintiff failed to comply with Section 2019.210. Specifically, the defendant can argue that the plaintiff, not only failed to describe the alleged trade secret with any particularity, but that the plaintiff also (per the deposition testimony) failed to describe the alleged trade secret with any consistency.
As recent case law makes clear, a plaintiff’s failure to adequately designate an alleged trade secret constitutes a failure to carry their burden on this necessary element of their claim and is grounds for summary judgment. See Imax Corp. v. Cinema Technologies, Inc., 152 F.3d 1161, 1164-65 (9th Cir. 1998) (affirming summary judgment against plaintiff who failed to identify its alleged trade secrets with particularity); Universal Analytics, Inc. v. MacNeal-Schwendler Corp., 707 F.Supp. 1170, 1177 (C.D. Cal. 1989) (granting summary judgment in trade secrets case where defendant established that plaintiff failed to describe allegedly misappropriated trade secrets).
Recently, in Advanced Modular Sputtering, Inc. v. Superior Court, the Court of Appeal “h[e]ld that Code of Civil Procedure section 2019.210. . . is not limited in its application to a cause of action under the Uniform Trade Secrets Act (UTSA)) . . . for misappropriation of the trade secret, but extends to any cause of action which relates to the trade secret.” 132 Cal. App. 4th 826, 830 (2005)(emphasis added). Put another way, exposing a plaintiff’s failure to comply with Section 2019.210 at the right time can be devastating the plaintiff’s case.
Opposing the motion for summary judgment is equally problematic for the plaintiff. As an initial matter, there are little (if any) factual disputes in the motion because the defendant will be relying exclusively on the plaintiff’s allegations and admissions. Moreover, the plaintiff cannot defeat summary judgment by providing further details not included in its section 2109.210 statement. See Pixion, Inc. v. Placeware, Inc., 2005 WL 88968, at *7, *11 (N.D. Cal. 2005)(granting summary judgment, in part, based on plaintiff’s failure to describe alleged web conferencing technology trade secrets with reasonable particularity in its section 2019(d) statement which identified six features of its invention).
Section 2019.210 is an available weapon that becomes even more powerful the longer defense counsel can wait before using it to expose the plaintiff’s failed compliance. Instead of using it to win a discovery battle, defendants would be well advised to wait and use it to achieve full victory.
Going Gray? How Businesses Can Put An End To The Unwanted And Illegal Gray Marketing Of Its ProductsOriginally Published September 6, 2007 In Ip Law 360
Coming out of the box, it looks like a brand new computer in perfect condition. When the buyer has some questions and calls the manufacturer for technical support, however, he is frustrated to learn that the manufacturer will not support the product because it was sold without its knowledge or authorization. The customer is certain that there must be some mistake. After all, the computer was not bought from some covert computer peddler doing business out of his van in a dark alley; the customer bought it from a retail establishment that was openly advertising and selling all types of computers and hardware for the whole world to see. How can the manufacturer possibly claim that this computer was sold without its knowledge or permission?
After some further investigation, it turns out that the computer was indeed sold without the manufacturer’s authorization.
The computer was sold on the “gray market.”
WHAT IS THE GRAY MARKET?
A large part of many businesses’ success today is their ability to distribute products all over the world through authorized distribution channels. The price at which products are sold to distributors often depends on the location of the distributor and intended end user. For example, prices for products in developing countries are invariably less expensive than developed countries. Unfortunately, a destructive market exists where products are diverted from the authorized channels and imported into the United States without a business’ knowledge or consent. These “gray market” products end up being sold at lower prices than those offered by domestic distributors. Unsuspecting customers purchase these branded products at greatly discounted prices. Meanwhile, authorized domestic distributors have difficulty legitimately competing with these “gray marketers” because of the dramatic price disparity.
When manufacturers learn that domestic customers purchased products intended for developing countries, they face a difficult dilemma when asked for warranty support. On the one hand, they can provide support for a product that did not generate one penny’s worth of domestic revenue. On the other hand, they can refuse to provide support and suffer the intangible consequences of a disgruntled customer.
HOW TO STOP THE GRAY MARKET?
One school of thought naively instructs businesses to eliminate the gray market by simply selling its products for the same price all over the world. See e.g., NEC Electronics v. CAL Circuit Abco, 810 F. 2d 1506 (9th Cir. 1987) (“If [the plaintiff] chooses to sell abroad at lower prices than those it could obtain for the identical product here, that is its business. In doing so, however, it cannot look to the United States trademark law to insulate the American market or to vitiate the effects of international trade. This country’s trademark law does not offer [the plaintiff] a vehicle for establishing a worldwide discriminatory pricing scheme . . ..”).
Axiomatically, the economic realities of the global marketplace will not sustain a manufacturer selling its laptop computers to retailers for the same price in Manhattan as Macau. A company ambitious to have an international presence understands it is imperative to price its products in relevant relation to the geographic region. If this same company wants to stop its products returning to the United States through the gray market, therefore, it must take action.
Too often, companies mistakenly believe the gray market is sufficiently addressed by dedicating its sales and marketing group to enforce the problem. Since they are the “boots on the ground,” the theory goes, they are best suited for identifying and reporting suspected gray market activity. The problem with this ostensible solution lies with how most sales and marketing employees are compensated. The vast majority of companies pay their sales employees a base salary with added commissions for sales made. With no economic incentive for catching gray marketers, time spent policing the gray market is time that could otherwise be spent making a sale and making more money. Gray market enforcement becomes a low priority or no priority at all.
Instead, companies that are serious about protecting the integrity of their brand should designate a group of employees to be dedicated to gray market prevention. Unlike a company’s sales force, the income and incentives for this group must be aligned with the goal of stopping gray market transactions.
Authorized distributors must likewise be encouraged to (1) avoid the temptation of participating in the gray market, and (2) report those suspected of gray market activity. With respect to the first item, the authorized distributorship agreement should clearly articulate the manufacturer’s right to periodically inspect and audit the distributor’s inventory to ensure that all products are legitimate. In the event that gray market products are discovered, the penalties should be severe and strictly enforced. Encouraging authorized distributors to report suspected gray market activity through economic incentives will give a company an added weapon in the fight against the gray market.
When suspicious products are examined, the manufacturer must also be able to trace the product backwards through the distribution chain and identify with precision where the gray market leak occurred. For example, product codes that are not easy to remove or deface can identify that a product was manufactured for sale in China and shipped to an authorized distributor in Beijing. If this product was instead discovered in a retail store in Boston, the manufacturer can contact the distributor in Beijing; unless the distributor can accurately account for the product’s sale to a bona fide end user in China, that distributor has violated its distributorship agreement and should be appropriately sanctioned.
Finally, manufacturers should publicize their efforts and enforcement of gray market activity. “Cease and desist” letters should be sent to those suspected of gray market transactions. When litigation becomes necessary, the lawsuit and its subsequent settlement or trial victory should be circulated within the appropriate industry. Gray marketers invade industries and companies where they believe their activities can proceed without consequence. By making public a company’s efforts to stop and punish those who engage in this unlawful activity, gray marketers will be deterred from engaging in transactions with respect to that particular company and prey on others easier targets.
The gray market is a significant problem that is growing worse at an alarming rate. Companies committed to selling their products in the global marketplace will inevitably face the gray market challenge. In order to maintain profitability, brand integrity, and legitimate competition, companies must take adequate measures to discourage gray market activity and punish those who are unjustly enriching themselves doing so.
Just Or Unjust Compensation? Effective Strategies To Maximize Recovery In The Intellectual Property TrialOriginally Published December 2007 In Intellectual Property Today
In today’s world of music “sharing,” “open source” software, and YouTube, intellectual property owners face increasing challenges when they endeavor to persuade a jury that a defendant’s misappropriation or infringement warrants a large damages award:
- Why does this large company that is already earning millions deserve or need more money just because a smaller competitor has a copy of its software or customer list?
- Why should this company merely selling products outside of a manufacturer’s normal distribution channel be liable for trademark infringement?
- Is this another example of a large company using the “justice” system to bully its smaller competition?
These are the questions many jurors ask themselves as they hear the statement of the case prior to voir dire. Especially when the plaintiff is a recognizable name suing a smaller unrecognizable defendant, suspicions of underlying motivations and merits exist.
There are two possible explanations, among others, for such juror preconception. First, personal experience; omnipresent in the digital age is the ability to download software, music, and video without payment or consequence. Such downloads are sometimes illegal, sometimes not. The attendant result is a sense of entitlement with respect to the acquisition of intellectual property. As a result, jurors are less likely to impugn culpability on a defendant when they can empathize with the defendant’s conduct – albeit on a smaller scale.
A second explanation is the intangible nature of intellectual property. When someone steals or destroys real or personal property, jurors have little hesitation when asked to quantify the property’s value. By looking at comparable properties or products, jurors deliberate by going through a relatively familiar process and examine a relatively familiar set of factors. When asked to quantify the value a source code, customer list, or song, however, jurors are left to consider a multitude of unfamiliar and often esoteric factors to a deliberated conclusion.
As explained in greater detail below, there are strategies available that intellectual property owners and their counsel should be mindful of at trial in order to surmount these challenges and obtain adequate relief.
STEP ONE: INTRODUCE THE VICTIM.
Common in wrongful death or personal injury trials is time devoted to introducing the victim to the jury. Before even addressing issues of liability or damages, the jury learns about the victim’s personality, family, interests, and hobbies. Such evidence is admissible because, as a matter of law, it may be relevant to the measure of emotional harm suffered by the victim or the victim’s loved ones. The motivation behind introducing such evidence is, however, only partially legal. Pragmatism is equally motivating: showing the appeal of the victim increases the likelihood that the jury will actually like him or her.
When the plaintiff is a corporate entity, presenting these likeability factors is equally important. To avoid the perception that a faceless entity is seeking monetary damages, it is imperative to introduce facts that will provide a positive impression to the jury. Examples of such facts are: (1) the number of years a company has been in business and, if applicable, a company’s humble beginnings; (2) the number of jobs a company provides in the jurisdiction where the case is being tried; and (3) examples of charitable donations or activities in which a company participates. Just like an individual plaintiff, it is important that the jury like the corporate plaintiff.
STEP TWO: INTRODUCE THE INTELLECTUAL PROPERTY AND ITS VALUE.
When an invention, trademark, or copyright product is illegally duplicated or distributed, the enjoyment of the product by the duplicator does not necessarily impair the enjoyment of the inventor or owner. Unlike conversion of tangible property like a car, crop, or computer hardware, duplication of computer software or fabric designs does not deprive the creator of possession or use. Instead, the harm is purely economical. This results in two principal dangers:
First, there is the danger that the inventor will not recoup its “cost of expression,” the time and effort devoted to creating and marketing the product, because the inventor is undercut by an infringer only needing to recoup his “cost of production.” The second danger pertains to the inventor or creator’s reputation. Especially in the context of trademark infringement, consumers mistakenly associating an imitation product with that of the creator’s product can cause injury to a business reputation; while a business reputation takes years to earn, it can be lost in an instant.
When trying to prove infringement of various intellectual property rights, it is not uncommon for the mundane facts such as trademark validity or copyright registration to be among the case’s “stipulated facts.” In a time saving endeavor, most courts require the parties to identify various “stipulated facts” prior to trial that need not be disputed. Defendants will typically freely stipulate to the registration of a copyright or the validity of a trademark.
While it is good practice to have such stipulated facts memorialized, it is unwise for a plaintiff to give short attention to these seemingly banal facts in order to fast track its presentation. The jury is well served learning about the time, effort, and money that was spent creating the protected property. In addition, because opening statements will already have foreshadowed the assertion that the defendant infringed or misappropriated the property, spending time proving the value of the product will heighten the jury’s anticipation of learning how and what the defendant did to warrant the lawsuit.
When discussing the efforts to create the property at issue, the plaintiff must be equipped with verifiable facts showing with particularity what was done. Ubiquitous in complaints alleging the infringement or misappropriation of intellectual property is the boiler plate paragraph describing generically the value of the product. In trade secret cases, for example, myriad complaints contain language such as the following: “Plaintiff has invested substantial money and effort in developing proprietary [the alleged trade secret]. As a result of its investment of substantial effort and expense, Plaintiff has developed and maintains extensive confidential information. Such information is subject of efforts that are reasonable under the circumstances to maintain its secrecy.”
While such vanilla allegations may be sufficient to get a complaint beyond the pleading stage of litigation, a scrutinizing and suspicious jury will require much more information. And much more detail. For example, in the context of trade secrets, it is important to provide with painstaking particularity how the trade secret was created, how it is valuable, and how it was kept secret.
For example, if the trade secret at issue is a formula or recipe, the plaintiff should present witnesses who are competent to testify about the time, effort, and money that was incurred to prepare the final creation. Such testimony should include specific details regarding the number of people, hours, months, or years involved in the trade secret’s creation. When possible, such testimony should be supported with documents that were prepared long before litigation was ever contemplated. These documents will give the plaintiff added credibility because it will show that proof of the efforts to create the trade secret existed before the plaintiff had an incentive to bolster these figures to prove its damages.
STEP THREE: INTRODUCE THE DEFENDANT – AND HIS MOTIVATIONS.
It is insufficient to show merely what the defendant did to give rise to liability; the jury will want to know why the defendant did what he did. If liability is too difficult to dispute with reasonable credibility, a defendant will almost always argue that his illegal conduct was an innocent mistake. To debunk the merits of this defense, intellectual property owners will want to present all available facts that show the defendant acted with the intent and knowledge to violate the law.
Such facts are obviously case specific. However, in all cases, the plaintiff will have the opportunity to show the economic incentives to copy or steal intellectual property. In addition to showing the value of the property, as described in Step Two, a jury will be interested in learning how the defendant unjustly enriched himself by copying or stealing the intellectual property. For example, the plaintiff can show that the defendant did not need to spend any time or money developing or inventing the property. Moreover, once he had the property, the jury would be interested in learning that the defendant was, for example, able to enjoy revenues with unrealistically high profit margins.
STEP FOUR: SHOW THE HARM.
Sometimes the simplicity of how intellectual property is stolen implies that the offense is nothing more than a peccadillo. After all, the argument will go, how harmful can something really be when it was accomplished with a few key strokes or clicks on a mouse? To combat these themes and arguments, plaintiffs must be prepared to present competent evidence to show the fair market value of the intellectual property that was taken.
Even if recovery of the fair market value is not an available remedy, it will help the jury understand that what was taken or copied is extremely valuable. Such testimony must be offered by witnesses, perhaps retained experts, who are qualified to articulate how the value of the property was quantified. In addition to showing the analysis, the witnesses should also be prepared to provide analogies that the jury can relate to in order to understand or at least appreciate the assertion that the property is very valuable.
For example, in pseudo cross-examination of its expert, the plaintiff’s counsel may ask, “Dr. Smith, are you really contending that this algorithm is worth ten million dollars? It is a just a short math equation with numbers and symbols.” The expert, prepped for the faux challenge, can respond by saying, “That’s exactly what I’m saying. The Mona Lisa is just a bunch of colors on a canvas. What makes the Mona Lisa valuable is its unique arrangement of colors. The algorithm created by XYZ , Inc. is valuable for the same reason.”
When the jury has an understanding of the property’s value, it can better appreciate the harm to the plaintiff and unjust enrichment enjoyed by the defendant. Accordingly, the jury will have more comfort awarding compensatory and punitive damages that appropriately compensate the plaintiff for its loss and punish the defendant for its unjust gain.
Acknowledging and addressing the impediments to recovering adequate remedies is the most effective way to obtain them in intellectual property cases. Adhering to the steps above will provide the best chance at a valuable victory.FOR MORE INFO CONTACT DAVID R. SUGDEN
California Case Law PotpourriAge Discrimination, Text Message Privacy, No-match Letter, Meal Period Decision, And Cost Of Training Reimbursement
Over the last few months, federal and state courts have issued a number of important new employment law decisions. Some, but not all, of these cases place additional burdens on employers defending claims at trial. Other cases bring needed clarification to previously ambiguous issues and should be helpful for employers.
UNITED STATES SUPREME COURT DECISION
EMPLOYERS DEFENDING AGE DISCRIMINATION CLAIMS BEAR BURDEN ON “REASONABLE FACTORS OTHER THAN AGE” DEFENSE
In Meacham v. Knolls Atomic Power Lab., No. 06-1505 (U.S. June 19, 2008), the United States Supreme Court held in a 7-1 decision that an employer defending a disparate-impact claim under the Age Discrimination in Employment Act (ADEA) bears both the burden of production and the burden of persuasion in defending on the basis that the decision was made for “reasonable factors other than age” (the RFOA defense).
FACTUAL AND PROCEDURAL BACKGROUND
In 1996, the U.S. government ordered its contractor, Knolls Atomic Power Laboratory, Inc., to reduce its naval nuclear reactor operational workforce as a result of the post–Cold War reduction in need. Knolls instituted a buyout offer which reduced the workforce by 100 jobs, but still needed to cut 30 more. Accordingly, Knolls instructed its managers to rate subordinates based on three scores—performance, flexibility, and critical skills. Along with consideration for years of service, the score totals were used to determine layoffs. Of the 31 salaried employees laid off, 30 were at least 40 years of age. Twenty-eight of them sued for both disparate-treatment (discriminatory intent) and disparate impact (discriminatory result) under the ADEA and state law. A jury awarded the plaintiffs $6 million, and the Second Circuit Court of Appeals affirmed the finding of disparate impact but reversed the disparate-treatment claim, pursuant to the employer’s defense that the workforce reduction decisions were made on the basis of reasonable factors other than age (RFOA). The plaintiff appealed on the basis of conflicting appellate precedents as to whether the RFOA defense must be proven reasonable by the employer, or proven unreasonable by the employee.
The Supreme Court reviewed the text of the Act, finding that because the ADEA exempted decisions made for reasonable factors other than age as activity “otherwise prohibited” by the Act, it was an affirmative defense to be raised by an employer, and “entirely the responsibility of the person raising it.” Accordingly, the Court held that the employer bears both the burden of proof (by introducing evidence of other reasonable factors) and of persuasion (by arguing that such evidence shows that the employment action was made for reasons other than age). The Supreme Court also confirmed its prior decision in Smith v. City of Jackson, 544 U.S. 228 (2005), that the application of the RFOA defense does not examine whether there are alternative methods for the employer to reach its goals, as does the separate “business necessity test” under discrimination law. Rather, the Court clarified, the main inquiry in assessing an RFOA defense to a disparate-impact claim is not whether the employment action was taken on account of “factors other than age,” but whether those factors were “reasonable.”
APPLICATION FOR CALIFORNIA EMPLOYERS
This decision has little impact on California employers, who have been held to the burden of production on the RFOA defense since a Ninth Circuit decision in 1983. (Criswell v. Western Airlines, Inc., 709 F. 2d 544, 552 (1983).) However, for the rest of the country’s employers, the Supreme Court’s decision makes it easier for employees to bring age discrimination lawsuits, and more costly for employers to defend on the basis of reasonable factors other than age. California employers should continue to carefully assess legal exposure prior to making reductions in the workforce, including an assessment of the statistical impact of the layoff with respect to age. Employers should develop objective factors that can be articulated for the layoff decision, and ensure that the objective criteria are applied consistently.
NINTH CIRCUIT DECISIONS
EMPLOYEES HAVE A REASONABLE EXPECTATION OF PRIVACY IN TEXT MESSAGES ON EMPLOYER-ISSUED PAGERS PURSUANT TO INFORMAL POLICY OF NOT MONITORING CONTENTS
In Quon v. Arch Wireless Operating Co. Inc., 529 F.3d 892 (9th Cir. 2008), the Ninth Circuit Court of Appeals sharpened limits on an employer’s ability to conduct electronic monitoring of employees’ text messages.
FACTUAL AND PROCEDURAL BACKGROUND
The City of Ontario Police Department contracted with Arch Wireless to provide its employees with two-way alphanumeric text-messaging pagers and wireless text message service. The City had a general employee “Computer Usage, Internet and E-mail Policy,” which provided that the City-owned computers and associated services were to be used for City-related business only, that access to the Internet and e-mail systems was not confidential, that users had no expectation of privacy in the use of these systems, and that use of obscene or harassing language on the systems was prohibited. The City did not have a policy expressly governing the use of the pagers or text messages sent and received via the pagers. However, the City did have an informal policy governing their use: the Arch Wireless contract allotted the City 25,000 characters per pager per month, and the City paid fees to Arch Wireless for overage charges. Jeffery Quon went beyond the overage limit three or four times. The lieutenant responsible for the contract and for collecting money to pay overage charges told Quon that if he simply reimbursed the full overage charge, then there would be no need to do an audit to determine how many messages were work-related and how many were personal. Each time, Quon paid the overage charges. The lieutenant also told Quon that the use of the pagers was considered e-mail and public records, and could be audited at any time.
After Quon and another employee went over the message limit on multiple occasions, the City police chief ordered an internal affairs investigation to determine whether the character limits should be increased because overages were being incurred for City business. The contents of the text messages was stored on the Arch Wireless server, and Arch Wireless turned over the contents to the City upon e-mail request. No notice was provided to the employees that the City was obtaining the transcripts. The transcripts disclosed that many of the text messages sent by Quon included sexually explicit messages to other employees and his wife.
Quon, his wife, and two other police employees involved in the exchange brought suit against the City, Arch Wireless, and Department individuals. They claimed, among other things, that the City and the Department had violated their rights under the federal and California constitutions by procuring and reading the stored text messages. The court agreed that the employees had a reasonable expectation of privacy in the text message, but held a jury trial on the issue of the Police Chief’s intent in the investigation; the jury determined that the search was reasonable. The district court held for defendants. Plaintiffs appealed.
EMPLOYEE RIGHT TO PRIVACY
The Ninth Circuit agreed with the trial court that the employees had a reasonable expectation of privacy under the Fourth Amendment and the right to privacy under the California Constitution. Despite the City’s general computer use policy disclaiming employees’ expectation of privacy in computer resources, the Ninth Circuit affirmed that such was not the “operational reality” at the department. The City’s informal policy that the text messages would not be audited if Quon paid the overage charges rendered Quon’s expectation of privacy reasonable. Moreover, evidence showed that the City followed its informal policy by not auditing Quon after he incurred and paid overage charges three or four times. The Ninth Circuit rejected the trial court’s finding on the reasonableness of the search overall, however, stating that, while the purpose of the search was to verify the efficacy of the 25,000 character limit, the purpose of the investigation could have been achieved by less-intrusive means, including means authorized by Quon’s consent, and therefore the search was not reasonable as a matter of law.
APPLICATION FOR CALIFORNIA EMPLOYERS
The decision clarified that an employees’ reasonable expectation of privacy in the content of electronic messages can be bolstered by informal verbal policies, particularly when those informal policies are followed in practice. Although this case involved the Fourth Amendment because it involved a public-sector employee, it also has implications for private employers on the “reasonable expectation of privacy” element under the California Constitution and common law. Employers should review their workplace surveillance practices to ensure compliance with state and federal law. More importantly, employers should review whether their practice of surveillance accords with their written technology use policy, and consider revising the written policy to provide for the contingency of a failure to enforce monitoring rights.
SOCIAL SECURITY ADMINISTRATION “NO-MATCH” LETTERS DO NOT PUT AN EMPLOYER ON CONSTRUCTIVE NOTICE OF HIRING UNDOCUMENTD WORKERS SUFFICIENT TO TERMINATE EMPLOYMENT QUICKLY WIHTOUT CONFIRMATION
In Aramark Facility Services v. Service Employees International, 530 F.3d 817 (9th Cir. 2008), the Ninth Circuit recently held that an employer may be forced to reinstate employees with full backpay if the employer does not give the employees enough time to respond to a no-match letter from the Social Security Administration. At the same time, the employer may be exposed to potential civil and criminal penalties under federal immigration law if the employer continues to employ the no-match employee for too long of a period.
FACTUAL AND PROCEDURAL BACKGROUND
The Social Security Administration uses information from an employee’s W-2 form in determining entitlement to social security benefits, and routinely sends “no-match” letters when there is a discrepancy between the employer’s W-2 records and the SSA database. While the main purpose is benefits-related, the SSA believes that one reason for discrepancies is unauthorized work performed by non-citizens or persons not authorized to work under immigration laws. The no-match letters do not trigger automatic employee penalties or immigration enforcement procedures. However, in August 2007, the Department of Homeland Security (DHS) amended 8 C.F.R. § 247a.1(l) to incorporate receipt of no-match letters as an example of an employer’s knowing employment of a person without appropriate authorization to work in the United States. The DHS regulations are currently subject to a preliminary injunction in federal district court, pending review of revised regulations issued by DHS.
The Aramark case arises out of events occurring in 2003, prior to the DHS’s revised regulations, when Aramark received no-match letters for 3,300 employees nationwide. With respect to the 48 employees at the Staples Center in Los Angeles for whom no-match letters were issued, Aramark managers responded by notifying the employees of the mismatch and instructing them to bring either a new social security card or verification that a new card was being processed, within three working days from the postmarked date of the Aramark letter, or be terminated. The employees were represented by the Service Employees International Union (SEIU), which requested extension of the three-day deadline. Aramark rejected SEIU’s request, and only 15 employees were able to provide proper documentation within the three-day window. Aramark promptly terminated the employment of the 33 remaining employees and notified them that they would be rehired upon providing the correct documentation. Pursuant to arbitration under a collective bargaining agreement, an arbitrator found the firings to be without cause because there was no convincing evidence that the employees were undocumented, and awarded reinstatement and backpay. Aramark filed a complaint with the United States District Court to vacate the award on grounds of public policy, and the district court agreed with Aramark that the arbitration award violated public policy against knowing employment of undocumented workers. SEIU appealed the district court’s decision to the Ninth Circuit.
The Immigration Reform and Control Act of 1986 (IRCA) subjects employers to civil and criminal penalties if they knowingly employ undocumented workers or have “constructive knowledge” of a worker’s undocumented status. Aramark argued that the arbitration award violated public policy because it essentially required Aramark to ignore “constructive notice” of the employee’s undocumented status. The Ninth Circuit sided with the employees, holding that receipt of a no-match letter, without more, does not put an employer on constructive notice that it is employing undocumented workers and is thereby violating federal law. Looking to the immigration regulations prior to the recent DHS revision, the Court held that, for the purposes of the IRCA, constructive notice was narrowly interpreted. Citing the fact that the no-match letters do not create sanctions for employees under immigration law, the court held that a social security number discrepancy does not, by itself, automatically mean that a worker is undocumented; such a discrepancy could arise for a number of non-immigration related reasons. Even the DHS revisions to the regulations made after the firings, which find that no-match letters are an example of constructive notice, punish an employer only for “failing to take reasonable steps” upon such notice within a 90-day “safe harbor provision.” 8 C.F.R. § 247a.1(l)(2)(i)(B). The Ninth Circuit found that the time period of less than three days was too short a period of time to allow workers to respond, and that no negative inference could be drawn from the fact that some workers failed to respond and correct the discrepancy within the three days, particularly given the fact that a no-match letter, alone, does not provide convincing proof of immigration violations. The Ninth Circuit reversed the district court and ordered it to reinstate the arbitration award of reinstatement with full backpay.
APPLICATION FOR CALIFORNIA EMPLOYERS
The Ninth Circuit did not provide guidance as to what steps an employer can take to balance the employees’ rights with the employer’s potential exposure to civil and criminal penalties for employing unauthorized workers. Although enforcement of the DHS regulations is currently stayed, employers should use the DHS “safe harbor” as guidance and not terminate an employee based solely upon receipt of a no-match letter. Under those circumstances, employers should allow an employee a reasonable period of time of at least 90 days to respond to the no-match letter and correct the mismatch. Where no-match letters are a recurring issue, employers should institute policies and procedures for responding. The DHS has set up a free, online E-Verify system, which allows enrolled employers within seconds to verify an employee’s eligibility to work and validity of social security number. Federal contractors are required to use E-Verify under a new executive order issued in June. In any case, employers should seek legal advice before firing an employee upon suspicion that the employee is undocumented, in order to avoid the potential for substantial back pay penalties.
CALIFORNIA APPELL ATE COURT DECISIONS
“PROVIDING” MEAL AND REST PERIODS TO HOURLY EMPLOYEES REQUIRES INDIVIDUAL ANALYSIS
The California Court of Appeal issued a favorable ruling for employers regarding class certification in meal and rest break cases, confirming in Brinker Restaurant Corporation, et al. v. Superior Court, (Hohnbaum) et al., No. D049331 (Cal. Ct. App. July 22, 2008), that California employers satisfy legal requirements for “providing” meal and rest periods by making them available to employees, and need not ensure that they are taken. The court also held that individual issues predominated on both the meal and rest break issue and the off-the-clock work.
Brinker Restaurant Corporation operates 137 restaurants in California, including well-known concepts Chili’s Grill & Bar, Romano’s Macaroni Grill, and Maggiano’s Little Italy. In 2002, the California Division of Labor Standards Enforcements (DLSE) investigated Brinker’s alleged failure to provide meal and rest breaks as required by law, and to pay premium wages to employees not provided with such meal and rest breaks. Brinker settled the subsequent DLSE complaint before any findings could be made. Even so, employees filed a class action complaint alleging rest break violations, meal break and early lunching violations, unpaid off-the-clock work during intended breaks, and time-shaving violations. Plaintiffs moved for certification of a class of more than 63,000 hourly restaurant employees working for Brinker since 2000. The trial court entered a class certification order, which was vacated by the Court of Appeal in October 2007. Following a remand from the California Supreme Court, the Court of Appeal recently issued a new opinion confirming its original analysis and resolving the issues in favor of the employer.
The Court of Appeal stated that a trial court “cannot reach an informed decision” on whether class certification is proper without first determining what laws apply to plaintiffs’ claims. Subsequently, the Court of Appeal analyzed each claim alleged by plaintiffs. In all cases, the court held that the legal standard the employer was held to necessarily involved individual factual issues and therefore the class could not be certified.
REST PERIOD CLAIMS
Plaintiffs alleged that Brinker violated Labor Code section 226.7 by violating IWC Wage Order 5-2001. Wage Order 5-2001 states that an employer must give an hourly employee a paid rest period of ten minutes “per four (4) hours or major fraction thereof” worked. The Court of Appeal disagreed with plaintiffs’ interpretation, and held that the Wage Order does not mean that an employee must be given a rest break for every three and a half hours of work, but only on days where the employee is scheduled to work only between three and a half and four hours of work. The court further interpreted the regulations to state that rest breaks must be afforded in the exact middle of a four-hour period only when “practicable,” and that “early lunching” (before the first half of an employee’s shift ends) is not unlawful insofar as the regulations do not require rest breaks to be taken before meal breaks in a given shift. More importantly for class certification law, the court held that the issue of whether rest periods are prohibited by the employer or voluntarily waived by the employee is “by its nature an individual inquiry,” interpreting the regulations to provide that employees may waive rest periods and employers are not required to force employees to take them. As a result, the court held, because the breaks need only be made available and not ensured, individual factual issues would predominate, and therefore the case was not amenable to class action treatment.
MEAL PERIOD AND OFF-THE-CLOCK CLAIMS
For the meal break violations, the plaintiffs similarly alleged that Labor Code section 226.7 was violated by early lunching practices, by failing to give employees a meal break for every five consecutive hours worked if a meal break is taken early in the shift, and by Brinker’s alleged failure to ensure that employees took meal periods. As with the rest period claim, the court held that early lunching practices are valid, and that the regulations do not provide for a “rolling” five-hour period whereby the five-hour time period requiring a meal break restarts each time an employee takes a meal break on his or her shift. As for the plaintiffs’ claim that employers must ensure, and not merely provide, meal breaks, the Court of Appeal again held that California law requires that employers need only provide meal periods. Again, the Court denied class certification due to the presence of individual issues in determining why each plaintiff missed a meal break. With respect to plaintiffs’ claims of working off the clock during meal periods, the court made similar rulings.
APPLICATION FOR CALIFORNIA EMPLOYERS
The Brinker decision is a major victory for employers in defeating class actions alleging meal and rest break violations. The decision affirms the current weight of authority that California employers are required only to provide, i.e., make available, meal and rest breaks to employees, and need not ensure that employees take these breaks, and that these types of actions are not amenable to class treatment. In the aftermath of Brinker, the California Labor Commissioner issued a memorandum to all Division of Labor Standards Enforcement staff regarding the decision, instructing that the decision must be followed effective immediately, including the holding that employers must provide meal and rest breaks, but need not ensure that they are taken.
AGREEMENT TO REIMBURSE TRAINING COSTS IS VALID UNDER FAIR LABOR STANDARDS ACT, BUT WITHHOLDING OF FINAL PAYCHECK TO COVER DEBT IS UNLAWFUL
A California Court of Appeal recently concluded, in City of Oakland v. Hassey, Case No. A116360 (Cal. Ct. App. June 18, 2008), that an agreement for reimbursement of training costs was lawful under the Fair Labor Standards Act (FLSA), but that the FLSA prevents an employer from withholding an employee’s final paycheck to cover the training costs owed.
FACTUAL AND PROCEDURAL BACKGROUND
In an effort to encourage its police officers to stay with the department longer, the City of Oakland, in 1996, entered into a memorandum of understanding with the Oakland Police Officers’ Association, whereby the City could require its police officers to reimburse the City for training costs at the Oakland Police Academy if they left the department before five years of service, and the City could collect these expenses from their final paycheck. The amount was staged to decrease over time such that an officer would pay the full $8,000 cost of training for leaving prior to one year of service, the amount would decrease by 20 percent for each year the officer stayed with the department, up to five years. The officers would not have to repay any wages earned during training. When the City hired Kenny Hassey as a police officer in March 1998, Hassey signed an agreement for “reimbursement of training expenses” setting forth the reimbursement conditions. Hassey attended and graduated from the Oakland Police Academy, but soon after was told that he was not performing up to standard and should consider resigning in lieu of termination. Hassey resigned, and upon his resignation signed a “training costs repayment agreement” confirming that he owed repayment of $8,000 in training costs to be paid in installments. The City withheld Hassey’s final paycheck in February 1999, as well as a check to cash out Hassey’s retirement balance, to cover some of the money owed. After Oakland sent a series of collection letters to Hassey and he did not respond, Oakland sued Hassey for breach of contract for the remaining amount of $6,619. In his answer and cross-complaint, Hassey alleged that the contract and paycheck withholding breached the Fair Labor Standards Act and state law, including unfair competition. The trial court held for the City and granted summary judgment on the complaint and cross-complaint.
Hassey argued on appeal that the reimbursement agreement violated the minimum wage and overtime provisions of the FLSA because the agreement was a condition on his wages in violation of federal regulations. The Court of Appeal held that the training costs could not be considered wages incurred “primarily for the benefit of the employer,” noting that a repayment agreement was similar to other valid incentives to offer to workers to stay with the employer. The court also noted that Hassey did not stay with the Police Department long enough for the Department to get the benefit of training Hassey. In any case, Hassey did not prove that deduction of the training costs drove his salary below the minimum wage, and therefore there was no violation of the FLSA or the Labor Code.
The second issue addressed was whether the Department’s withholding of Hassey’s final paycheck to cover part of the training costs was unlawful. The Court of Appeal held in this case that the Department’s withholding did drive Hassey’s wages below minimum wage for the final pay period he worked, violating the FLSA. Citing Barnhill v. Robert Saunders & Co., 125 Cal. App. 3d 1 (1981), the court also confirmed the broader and longstanding California rule that prohibits an employer from deducting any wages from an employee’s paycheck to collect a debt owed to the employer.
APPLICATION FOR CALIFORNIA EMPLOYERS
This case highlights for employers the importance of carefully preparing training and other reimbursement agreements and determining the process for collecting employee debts. Employers should not take payroll deductions from employees’ paychecks unless it is done under the limited circumstances set forth in Labor Code section 224 and with the assistance of legal counsel. Payroll managers and administrators should be trained regarding these laws to ensure compliance with federal and state law.