Blog: The Litigation Law Blog

Can an employee sue the employer’s payroll service for failure to correctly process and report payroll?  According to the California Supreme Court recent decision in Goonewardene v. ADP, LLC (2019) 6 Cal.5th 817, the answer is no.

In examining the claim, the Court held that when an employer hires a payroll company, providing a benefit to employees with regard to the wages they receive is ordinarily not a motivating purpose of the transaction.  Instead, the relevant motivating purpose is to provide a benefit to the employer, with regard to the cost and efficiency of the tasks performed and the avoidance of potential penalties.  Next, the Court held that there was no need to permit a third party employee to sue in order to enforce an alleged breach by ADP of its obligations under the contract, because the employer was fully capable of pursuing a breach of contract action against ADP on its own.  Finally, the Court held that allowing employees to sue payroll service providers for alleged wage violations clearly imposes substantial additional costs on the payroll company in light of the significant legal expense that would be entailed in defending such claims, which regularly arise between employees and employers.  Accordingly, such an expansive interpretation of the third-party beneficiary doctrine would likely lead a payroll company to pass these additional litigation costs on to the employer through a higher price for payroll services.

The takeaway for employers utilizing payroll companies is to ensure that any payroll services agreement contains clear provisions setting forth the relationship between the employer and the payroll company.  For example, contractual language should clearly set forth the payroll company’s responsibility to assist the employer by calculating the amount of wages owed to each employee in light of applicable laws as well as provide the ministerial services of making out paychecks and delivering the required pay information to each employee.  In addition to including indemnification provisions, such payroll services agreements should emphasize the obligation of the payroll company to act with due care in ensuring the employer fulfills its obligations to its employees under the labor statutes and wage orders.  Such provisions will both insulate the payroll company from potential third-party employee claims and strengthen the employer’s rights to enforce the agreement.

Landlords will soon face new Prop 65 warning requirements for rental properties.  Physical Prop 65 warning signs will no longer be required as a general rule once the new rules take effect on July 1, 2019.  Instead, warnings must be provided directly to the building’s tenants and occupants via one of three methods:  1) a letter addressed to each known adult occupant and delivered to the property; 2) an email sent to all known occupants; or 3) notice in the rental contract.  If the warning is provided in the rental contract, only those tenants named in the lease are covered, and the landlord must use one of the two other methods to provide the requisite warning to other known occupants.  Additionally, yearly warnings must be provided to all occupants following the initial notice.  If the rental contract, or any other notices are provided to the occupants in a language other than English, the revised Prop 65 warning must be provided in that language as well.  Though the new rules provide some relief for landlords, physical signs will still be required at enclosed parking garages and in designated smoking areas.

Landlords should work with their legal counsel to begin implementing these changes and ensure compliance by July 1.

On February 12, 2018, Stone Brewing, arguably the most well-known craft brewer, filed a complaint against MillerCoors LLC, the multinational beer conglomerate, for trademark infringement. Specifically, Stone Brewing alleges that, in April 2017, when MillerCoors rebranded its line of sub-premium beers known as KEYSTONE, separating KEY and STONE onto separate lines, with an emphasis on STONE, it infringed Stone Brewing’s famous STONE trademark. The cans in question appear as follows:

And the branding on the boxes and in-store advertising material is similar in appearance. Without giving the matter too much thought, one can understand Stone’s frustration with MillerCoors’s rebranding.

Adding insult to injury, since the rebranding, Keystone Light has gone from MillerCoors’s worst selling line of KEYSTONE beer, to the best. Concurrently, Stone noticed a discernable drop in its sales, which it attributes to current and potential consumers being consumed by Keystone’s new can and packaging. For example, in December 2017, a consumer reached out to Stone to inquire about its “new STONE LITE” product – a non-existent beer that appears only in MillerCoors’ advertising.

In an attempt to halt MillerCoors’ use of the allegedly infringing mark and related marketing materials, on May 31, 2018, Stone filed a motion for preliminary injunction. MillerCoors opposed the motion on July 30, 2018, and the Court determined the motion was suitable for determination without hearing. On March 26, 2019, the Court issued its ruling.

Acknowledging that a preliminary injunction is an extraordinary and drastic remedy, the Court walked through the applicable Winter analysis, which includes: (1) likelihood of success on the merits; (2) likelihood of irreparable harm; (3) balancing of the equities; and (4) the public interest. The Court analyzed the first two factors in detail, and briefly touched on the last two.

Analyzing the likelihood of success on the merits, the Court walked through each of the eight Sleekcraft factors to determine whether a likelihood of confusion exists. The Court acknowledged that the three most important factors, known as the “troika,” are: (1) the similarity of the mark, (2) the proximity of the goods, and (3) marketing channels used. The Court ultimately concluded that two of these three factors weighed in favor of Stone, although in doing so, it erroneously discussed strength of the mark rather than similarity of the mark, the latter of which favored MillerCoors.

As to the strength of the mark, the Court held that Stone’s mark is commercially strong and recognizable. The Court also held that STONE, as a trademark, may be suggestive or possibly arbitrary, but the Court was unconvinced of its arbitrary nature at this time, finding that the mark is suggestive for purposes of this motion. Ultimately, the Court concluded, especially considering the mark’s incontestability, STONE is entitled to the strong protection afforded suggestive marks.

As to the proximity of the goods, the Court found that Stone and MillerCoors are nationally known beer producers. Both companies have national distribution, and their products are often located within close proximity of one another in stores. As such, the Court found this factor weighs in favor of Stone.

As to marketing channels, the Court found that the products are “literally found on the same aisle.” But where both parties utilize the Internet, or some other less obscure channel to market their respective products, the Ninth Circuit has found that this factor carries little weight. Ultimately, the Court concluded that this factor didn’t favor either party over the other.

Taking all of the factors into account, the Court held that the Sleekcraft factors favor Stone, and as such, Stone’s trademark infringement claim against MillerCoors is moderately strong.

But despite finding Stone likely to succeed on the merits, the Court found that Stone had not shown a likelihood of suffering irreparable harm; a mandatory showing for a preliminary injunction. Although the Court recognized that “evidence of threatened loss of prospective customers or goodwill certainly supports a finding of the possibility of irreparable harm[,]” it held that Stone fell short of establishing its likelihood of suffering such harm.

To argue irreparable harm, Stone relied upon an alleged loss of goodwill. However, the Court found that Stone’s argument relating to irreparable harm “overlap[s] with its allegations that the Court found insufficient about the existence of actual confusion.” It’s unclear why Stone’s argument about irreparable harm would have completely overlapped with its claim of actual confusion, as Stone just as easily could have, and perhaps may have, relied upon potential consumer confusion under the likelihood of confusion test. The simplified version of the argument would be that the Sleekcraft factors weigh in favor of Stone, establishing a likelihood of confusion, and if consumers mistakenly purchase and consume the substantially lower quality Keystone Light believing it to be a Stone product, Stone will suffer a loss of goodwill since the consumer will now think that Stone is putting out low-quality beer. The Court’s analysis of this factor lacks detail and as such, it’s unclear exactly what Stone argued. Regardless, the Court held Stone “falls far short of demonstrating that it would suffer irreparable harm in the absence of the Court granting a preliminary injunction.”

In closing, the Court stated that “Stone has demonstrated that it has a moderately strong infringement claim against Miller, but not that it would suffer irreparable harm absent a preliminary injunction.” And because the “second finding alone is enough to deny Stone’s request for a preliminary injunction[,]” the Court denied the motion.

Commenting on the outcome of the motion, Stone Brewing executive chairman and co-founder Greg Koch stated, “This is a very big deal.” “The Court’s order confirms what we knew: that MillerCoors should be ashamed of what they have been doing. All along this has been a clear-cut infringement case, and now we can focus our resources on proving the significant damages done to the good name of Stone Brewing.” Koch was alluding to the Court’s finding that Stone has a moderately strong claim for trademark infringement, which is undoubtedly an encouraging finding for the country’s leading independent craft brewer. For that reason, among others, Koch remarked that, “The Court’s holding is a win for Stone and we look forward to presenting these issues to a jury in San Diego.”

As we struggle to come to grips with the recent tragedy at Marjory Stoneman Douglas High School, many have bemoaned the lack of response by law enforcement prior to the attack. News outlets state that the shooter was reported to the FBI twice in the months prior to the attack, and that his mother, teachers, and fellow students had discussed or reported unnerving incidents in the months leading up to the shooting. The failures of law enforcement remain to be investigated, but many have argued that passing a “red flag” law in Florida may have prevented the attack entirely by allowing citizens to take matters into their own hands.

A “red flag” law gives family members a right to seek a temporary restraining order if they believe a person poses a danger to themselves or others. California’s “red flag” law was passed in response to the 2014 deaths of six people at the hands of Elliot Rodger near U.C. Santa Barbara. Rodger’s parents had contacted police with concerns about his behavior, which unfortunately went ignored.

California therefore established a Gun Violence Restraining Order, which is specifically tailored to allow family members to ask a judge to take away a person’s firearms. If granted, it forbids the individual from obtaining any firearms, and compels the individual to immediately surrender all firearms and ammunition in their custody, and file a receipt proving their surrender to the Court. Any law enforcement officer can enforce the order, and any violation of the order means that the person may not possess firearms or ammunition for five years, even after the restraining order’s expiration.

Crucially, there is no requirement that the perpetrator commit any act in order for the victim to obtain a restraining order. The court can remove their access to weapons based on the threat of violence alone.
Further, the restraining order is entirely free to the person filing it, and the Sheriff’s department will handle any service required, also for free.

The forms are easy to use, and California courts provide free legal assistance for those seeking a restraining order. The forms, instructions, and information about legal assistance can be found here:
http://www.courts.ca.gov/33961.htm

Initially, the courts will issue a temporary restraining order. These are given top priority in courthouses and are usually granted within a day of filing the forms. The temporary restraining order includes the firearms and ammunitions prohibition, meaning that there is an immediate impact.

The court will also set a date for a hearing for a full restraining order. These usually take place 2-4 weeks from the date the temporary restraining order is issued. The court will hear from both sides and make a determination as to whether the individual should be prevented from having access to firearms and ammunition. Once the full restraining order is issued, it will last up to one year, and can be extended upon its expiration. It will prohibit the individual from possessing any firearms or ammunition while it is in effect.

It is important to remember that the possession of firearms and ammunition is the only effect of the Gun Violence Restraining Order. It does not require the individual to stay away from any person or area, and it does not prevent them from contacting anyone. Its only purpose is to remove their access to weapons.

This may have prevented the Stoneman Douglas shooting, the U.C. Santa Barbara shooting, and countless others. If these had happened today in California, the perpetrator’s parents would have been able to take away their child’s firearms and ammunition, and lives could have been saved.

California also has other restraining orders which can similarly prohibit individuals from possessing weapons in certain circumstances.
Domestic Violence Restraining Orders can be found here:
http://www.courts.ca.gov/selfhelp-domesticviolence.html

These protect family members, romantic partners (past or present), and those living together from abuse – both physical and emotional abuse, whether actual or threatened. These are more flexible, but can include stay-away orders, orders not to contact the victim, and can also prevent the abuser from possessing any firearms.
Workplace Violence Restraining Orders can be found here:
http://www.courts.ca.gov/1045.htm

These protect coworkers and employers from threats and harassment on the job. These can protect the coworkers or bosses individually, their families, or the whole business. It is also flexible, and can also include stay-away orders, orders not to contact all or some of the employees of a business, and can also prevent the possession of firearms.

General Civil Harassment Restraining Orders can be found here:
http://www.courts.ca.gov/1044.htm

These are catch-all restraining orders that cover circumstances where the person threatened is not a family member, romantic partner, coworker or employer. Like the above, these can include stay-away orders, orders not to contact all or some of the employees of a business, and can also prevent the possession of firearms.

This would have applied to the students and teachers at Stoneman Douglas, who would have had the right to file for a Civil Harassment Restraining Order, had they been in California.

The procedure for all of the different restraining orders is similar – first a temporary restraining order, then a hearing, then a permanent restraining order. All of the steps are laid out in the websites listed above.
Of course, in the best-case scenario, law enforcement would respond to every threat and act to block those with mental health issues, domestic abusers, and harassers of any kind from access to firearms. Unfortunately, law enforcement is not always willing or able to do so.

California law now provides a way for family members, loved ones, coworkers, and anyone else who feels threatened to receive protection from the courts. It gives victims rapid protection, even where the perpetrator has not yet committed any crime.

If you feel threatened, call 911 first. If law enforcement can’t make you or your loved ones completely safe, please know that you have other legal options at your disposal.

It happens all the time.  A hard fought lawsuit results in a satisfying judgment.  Then it comes time to collect and it turns out the judgment is worth no more than the paper it’s written on.  For example, sometimes a party obtains a judgment against a company with little to no assets to satisfy the judgment.  And since, legally speaking, companies exist separate and apart from the individuals who run them, the individual owners are usually shielded from liability when the company ends up on the wrong end of a judgment.

Except for when they won’t be.  Sometimes, courts decide that the idea of a separate corporate entity is baloney.  When that happens, they utilize one of the more dramatic sounding legal terms and “pierce the corporate veil,” adding the individuals as defendants on the judgment.  But can the reverse ever occur?  Let’s say a plaintiff obtains a judgment against an individual and wants to collect against that person’s company.  Can courts engage in “reverse veil piercing”?  Until last month, the answer under California law had been no.  But the times they are a changing.  In Curci Investments, LLC v. James Baldwin, a California Court of Appeal held that a judgment against an individual defendant could in fact become a judgment against his company under the right circumstances.

The Case

The plaintiff was James Baldwin, a prominent real estate developer.  Back in 2004, he formed JPBI, LLC for the exclusive purpose of holding and investing Baldwin and his wife’s cash balances.  The only two members were Baldwin, with a 99% interest, and his wife, who had the remaining 1%.  Baldwin was both the manager and CEO of the company and determined when, if at all, the company made distributions to him and his wife.

A couple years later, Baldwin borrowed $5.5 million in his individual capacity.  Baldwin failed to pay back the money when the note came due.  The plaintiff, Curci Investments LLC, sued and ultimately recovered a $7.2 million judgment against Baldwin.  That judgment proved incredibly difficult to collect because Baldwin held almost no assets individually.  In 2014, Curci obtained a charging order against JPBI requiring JPBI to pay Curci any distributions that it was otherwise going to make to Baldwin.  There was just one problem with that.  Baldwin controlled when, if at all, JPBI made any distributions to him.  Shockingly, JPBI ceased making distributions to Baldwin, notwithstanding that it had made $178 million in distributions during the prior 8 years.  Yeah, this guy clearly had the resources to satisfy the “meager” $5.5 million judgment.

Curci then asked the trial court to add JPBI to the judgment directly (the aforementioned reverse veil piercing).  Baldwin and JPBI argued that such brazen tactics were not allowed in California.  The trial court agreed and denied the motion, relying on past California precedent disallowing reverse veil piercing.  Curci asked the Court of Appeal to reverse that decision and, surprisingly, the court obliged.

In disallowing reverse veil piercing in prior cases, California courts have expressed concern that it would allow judgment creditors to bypass normal collection procedures while also harming innocent shareholders and corporate creditors.  In disregarding those concerns, the Curci court held that there were no innocent shareholders here because JPBI’s only two members were Baldwin and his wife (who was also individually liable for the judgment under California’s Family Code).  The court also held that this case had already proven that “normal judgment collection procedures” were ineffective. Normally, the way to go after an individual’s interest in an LLC is to obtain a charging order against his or her distributions.  Curci had already done that and Baldwin, as JPBI’s manager, simply stopped making any distributions.  Given that, the court held that reverse veil piercing may be allowed on these facts and remanded the case back to the trial court to determine whether it should do so.

Takeaway

The facts in this case are pretty extreme.  When structured correctly, corporate entities will continue to exist separately from the individuals who form them.  That said, litigants on both sides of a lawsuit should take note of this case, as should individuals when setting up corporate entities that are controlled largely by a single individual.  Where, as here, it is pretty evident that an individual has near absolute ownership of and control over a company, courts may utilize reverse veil piercing to prevent that individual from controlling the company in a manner that prevents creditors from collecting judgments.

It is not uncommon in this day of social media influence for an attorney to seek out the assistance of a public relations consultant to play a role in connection with a high profile lawsuit. Such media experts can help assess and mitigate risks, alleviate the public’s concern, manage public perception, and create leverage for settlement. The question is whether communications between a public relations consultant, an attorney, and a client are protected from disclosure.

Courts have long acknowledged the importance of encouraging full and open communication between attorneys and their clients to promote the broader public policy of the effective administration of justice.  Thus, where a client seeks legal advice from and attorney, any communication relating to that advice is protected from disclosure by the attorney-client privilege. The privilege is often extended to the attorney’s third-party agents. But, this is not always the case.

In a case of first impression, the California Court of Appeal in Behunin v. Superior Court (2017) 9 Cal.App.5^th 833 declined to extend the privilege to shield communications between a public relation consultant, the attorney, and the client. In that case, the third-party consultant was hired to create a website and disseminate damaging information about the opposing party, Charles Schwab and son, in order to generate bad publicity and encourage the Schwabs to settle the lawsuit. Instead, the Schwabs sued for defamation and sought the disclosure of all communications with the consultant. The trial court held that the communications were not privileged, and the Court of Appeal agreed. It held that the determination of whether communications among a client, his attorney, and a public relations consultant are protected by the attorney-client privilege will depend on whether the communications were confidential, and whether disclosing them to the consultant was reasonably necessary to accomplish the purpose for which the client consulted with the attorney – to provide legal advice to Behunin and represent him in the lawsuit.

Importantly, Behunin presented no evidence showing why his or his attorney’s communications with the consultant were reasonable necessary to develop a litigation strategy or to induce the Schwabs to settle.  There was nothing put before the Court to demonstrate the consultant’s involvement with the attorney in developing, discussing, or assisting in executing a legal strategy. To the contrary, Behunin and his attorney insisted that the attorney had little involvement with the consultant, thereby establishing that the attorney acted as a mere liaison in hiring the public relations firm. Although Behunin and his attorney testified that they engaged the consultant to “develop and deploy” strategy, they intended their communications to be confidential, and the goal of the agreement with the consultant was to develop and deploy strategy and tactics of Behunin’s complaint, the Court found these statements to be just conclusions. Behunin failed to present any evidentiary facts showing or explaining how the consultant was actively assisting the attorney in developing litigation strategy to protect the client’s interests or provide legal advice.

The Court, however, did provide a roadmap as how the privilege may be recognized in other circumstances when communicating with public relations consultants: “There may be situations in which an attorney’s use of a public relations consultant to develop a litigation strategy or a plan for maneuvering a lawsuit into optimal position for settlement would make communications between the attorney, the client, and the consultant reasonably necessary for the accomplishment of the purpose for which the attorney was consulted.”  Behunin v. Superior Court, supra, 9 Call.App.5^th at pp. 849-850. The key is that the parties must be able to introduce evidence establishing that the communications were treated as confidential, and that they were reasonable necessary to the attorney’s legal representation of the client, and to the accomplishment of the overall litigation goals sought.

Attorneys who wish to employ the services of a media expert in connection with litigation can maximize their ability to argue that the communications with the consultant are privileged by following a few simple strategies:

1. The attorney should engage the consultant directly;
2. The engagement letter should make clear that the reason for the engagement is different than the reason for hiring a media firm for everyday public relations work; i.e., the purpose must be to assist the attorney in representing and advising the client in the lawsuit, including to help strategize and implement a plan to assess and mitigate risks, alleviate any public concern regarding the litigation, manage public perception, and create an optimal environment to leverage the early resolution of the lawsuit;
3. The media firm should be different that the media firm normally used by the client;
4. The attorney, the client, and the media firm should prepare and follow a strict protocol to ensure the confidentiality of the communications, including:

• Having the media consultant sign an agreement that outlines the confidentiality obligations;
• Ensuring that the attorney is involved in the drafting of all documents and communications with the consultant;
• Marking all communications “Privileged and Confidential – Attorney-Client Privilege;”
• Advising all recipients of the communications to limit dissemination;
• Including an explanation on every communication of how the document pertains to the provision of legal advice; and
• Having the media firm submits its bills directly to the attorney.

Remember, even if these strategies are deployed, there is still precedent for the Court to find that the privilege does not apply to communications with the media firm. Therefore, it is important to exercise caution when deciding what information to share with the consultant, and how to best transmit the communication.

By Darrell White

Prosecuting Online Trolls Part 1: What To Do When Faced With Anonymous Online Postings

It happens all too often. You work tirelessly to promote your business by doing good work, delivering good products and services. Then you find an online posting with demonstrably false information about your business. The posting is anonymous, or even better, posted with a common name such as “John Smith.” If you are lucky enough to locate an e-mail address, the so-called online “troll” is unlikely to respond to any direct correspondence. The host of the website is unlikely to take down the post for any number of reasons. So what can you do?

One strategy is to evaluate whether you have a claim for defamation. The elements of a defamation claim need to be reviewed carefully, and, to no surprise to anyone reading this article, it’s best to consult an attorney. Assuming you have a valid claim, filing a defamation lawsuit is one way to bring the discovery powers of the court process to bare. Once a lawsuit is on file with the Court, a litigant acting within the parameters authorized by the California Code of Civil Procedure may issue subpoenas to Internet Service Providers to “un mask” the identity of anonymous posters online. This simple step can uncover the true identity of the poster. But what happens if the ISP opposes the subpoena (not uncommon)? How can you resolve the matter once you’ve unmasked someone? Stay tuned to the next blog post.

The California Court of Appeal decision in LSREF2 Clover Property 4, LLC v. Festival Retail Fund 1, LP (2016) 3 Cal.App.5th 1067, struck another blow to California’s “sham guaranty” defense – highlighting a recent string of decisions seeking to limit the defense. The sham guaranty defense has long provided guarantors of loans with a defense to lenders looking to obtain a deficiency judgment – often giving a guarantor at least a basis to defeat a lender’s attempt to obtain summary judgment and forcing the case to trial.

A guaranty is an unenforceable “sham” when a lender actually looked to the guarantor at the time the loan was made as the primary obligor, structuring the loan to avoid anti-deficiency protections. See River Bank America v. Diller (1995) 38 Cal.App.4th 1400, 1420. While California courts have not established a specific test for determining what constitutes a sham guaranty, there are certain factors considered in the analysis, including: (1) whether the language of the guaranty imports an obligation on the purported guarantor, making him a primary obligor for the loan and not secondarily liable (First Security Co. v. Storey (1935) 9 Cal.App.2d 270, 273); (2) whether the named borrower was a “dummy” or shell entity created for the sole purpose of entering into the underlying loan (Paradise Land & Cattle Co. v. McWilliams Enters. Inc., 959 F.2d 1463, 1467 (9th Cir. 1992)); and, (3) whether the lender actually relied on the financial information and condition of the guarantor rather than the named borrower. River Bank, 38 Cal.App.4th at 1423.

Recently, in LSREF, the California Court of Appeal held that “where the lender neither structures the transaction nor knows, at the time of making the loan, of a borrower’s (or an affiliate’s) failure to follow corporate formalities, there generally will be no basis to apply the sham guaranty defense.” Id. at 1082. LSREF makes clear that a lender can likely defeat the sham guaranty defense by not selecting the borrowing entity or its form which, in many real estate transactions, is a single purpose entity created concurrent with the loan for a specific development. Being mindful of the creation of the borrowing entity, and giving-up control over its formation, can significantly bolster a lender’s ability to effectively enforce a personal guaranty given as security for a loan.