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Attorney’s Fees as Damages for Breach of Contract? A Jury Must Decide

Often times, contracts contain attorney’s fee provisions.  These terms allow the prevailing party in any action to enforce the contract to recover its attorney’s fees.  Under California Code of Civil Procedure section 1717, the prevailing party on these contract actions can simply file a motion and have the court award the fees as costs of suit.  But what happens when a party sues for breach of the contract and the only element of damages the party claims are the attorney’s fees it incurred as a result of the defendant’s breach?  Can that party still file a motion under section 1717 to have the Court award its fees?  Not according to a recent California appellate court opinion.  In Monster, LLC v. Superior Court of Los Angeles County, the court held that a jury must decide a claim for breach of contract alleging attorney’s fees as damages.  Confusing?  Let me explain.

The Case                                                 

Back in 2008, Monster, LLC (“Monster”) and its founder Noel Lee entered into a licensing agreement with music producer Jimmy Iovine and rapper Dr. Dre to manufacture and sell the duo’s “Beats By Dre”-branded headphones.  Dre and Iovine subsequently founded Beats Electronics (“Beats”), which entered into a new agreement with Monster superseding the 2008 agreement.  The new agreement gave Beats the right to terminate its licensing agreement with Monster should a third party acquire more than 50% of Beats.  As part of this subsequent agreement, Lee was given 5% equity in Beats.

In 2011, a third party, HTC, purchased 51% of Beats.  As a result, Beats exercised its termination rights on the licensing agreement with Monster.  Beats and Monster then entered into a termination agreement allowing the latter continued manufacturing rights through 2012 and royalty rights through 2013.  That termination agreement contained (1) a general waiver and release of all claims relating to the prior licensing agreements, expressly including fraud claims, and (2) a provision allowing the prevailing party to recover its attorney’s fees incurred in any action to enforce the contract.  Shortly thereafter, Lee entered into two agreements selling his 5% equity back to Beats.  Both of those agreements contained the same waiver/release and attorney’s fees provisions as set forth in the termination agreement between Monster and Beats.

Seven months after the parties executed the last of the above agreements, Apple acquired Beats for $3 billion.  Yes, billion.  Monster and Lee wanted a slice of that pie, so they sued Beats, alleging that Beats had engaged in fraudulent scheme to divest them of their business interests in the Beats by Dre line.  In defense, Beats argued that all of Monster’s and Lee’s claims were barred by the releases contained in the prior agreements.  Beats also filed a cross-complaint, alleging that Monster and Lee had breached those same agreements by even filing the lawsuit in the first place.  As damages on the cross-complaint, Beats cited only its attorney’s fees and costs incurred in defending Monster’s complaint.

The trial court entered summary judgment in favor of Beats on Monster’s complaint, agreeing that the fraud claims were released through the various agreements the parties had executed.  Beats then argued that the attorney’s fees it sought as damages on the cross-complaint should be awarded by motion under Code of Civil Procedure section 1717.  In contrast, Monster argued that, because Beats was pursuing a cross-complaint for breach of a contract, a jury must decide whether Beats was entitled to attorney’s fees as damages for the breach.  The trial court agreed with Beats and directed it to file a motion for fees under section 1717.  Before Beats could do so, Monster filed a writ of mandate asking the Court of Appeal to overturn the trial court’s ruling.

The Court of Appeal sided with Monster, directing the trial court to vacate its order and send Beats’ cross-complaint to a jury.  In doing so, the appellate court noted that “Beats did not seek to recover its attorney’s fees as the prevailing party on Monster’s fraud claims.  Instead, Beats sought to recover those fees as damages on its cross-claims for breach of contract.”  The court then recognized a long line of cases holding that, where attorney’s fees are sought as damages, the claim for attorney’s fees is part of the damage sought in the principal action.  Such claims, according to the court, are subject to California’s constitutional requirement that litigants be afforded the right to a jury on breach of contract actions.  The Court noted that Beats could have elected to wait until it was the prevailing party to pursue its attorney’s fees by way of a noticed motion.  Instead, Beats chose to seek those fees as damages by way of a cross-complaint.  Once it elected to do so, the fees became “part of the relief sought [and] must be pleaded and proved at trial … as any other item of damages.”

Takeaway

The Monster holding, while applicable in limited circumstances, is important.  Litigants should think carefully about how to recover attorney’s fees pursuant to contract.  Where the fees are sought by a prevailing party as an incident to the lawsuit, they will be recoverable via a post-judgment motion to the Court.  Where, however, the fees are sought as damages for breach of the contract, those damages will become part of the contract claim.  In the latter circumstance, a jury, rather than the court, will have to decide whether to award them.

First District Court of Appeal strikes small, but meaningful, victory for businesses combatting online libel.

Just last week, California’s First District Court of Appeal handed a small, but meaningful, victory to businesses that resort to litigation to defend their reputations against anonymous, online attacks.  In ZL Technologies, Inc. v. Does, the First District held that ZL Technologies (“ZL”) was entitled to discover the identities of persons who posted anonymous reviews of ZL on Glassdoor.com, after ZL made a prima facie showing that its libel c were factually and legally valid.  Following the Sixth District’s decision in Krinsky v. Doe 6, the First District refused to impose additional burdens on plaintiffs who apparently have been defamed by persons emboldened by the relative anonymity the internet provides.

In 2012, ZL sued a group of unknown persons for libel and online impersonation, based on anonymous reviews posted to Glassdoor.com—a website for job seekers, where current and former employees can post reviews.  In order to serve the defendants with the complaint and prosecute its lawsuit, ZL sought disclosure of the defendants’ identities through a subpoena to Glassdoor.  Glassdoor refused the comply with the subpoena and the trial court denied ZL’s motion to compel compliance and later dismissed ZL’s suit with prejudice for failure to serve the defendants.  The First District found that the trial court wrongfully denied ZL the opportunity to discover the identities of the anonymous reviewers and, as a result, also improperly dismissed the lawsuit.

ZL’s appeal raised a conflict that lacks a definitive standard for resolving—the conflict between an anonymous speaker’s First Amendment right to remain anonymous and a libel plaintiff’s right to prosecute its case.  Neither the U.S. nor California Supreme Court has established a standard for resolving this conflict.  In order to compel disclosure of an anonymous speaker’s identity, most courts agree that the plaintiff must make a prima facie showing that the elements of a libel claim are supported by some amount of evidence.  But courts differ as to what other requirements a plaintiff must meet.

One oft-followed standard was established by a New Jersey appellate court in Dendrite Intern. V. Doe No. 3.  Under Dendrite, a plaintiff is required to: (1) make an effort to notify the anonymous defendant that the plaintiff seeks disclosure of his or her identity, to provide the defendant an opportunity to oppose discovery; (2) identify the specific statements that were libelous; (3) produce sufficient evidence to state a prima facie cause of action; and (4) show that the strength of its prima facie claim outweighs the defendant’s First Amendment right to remain anonymous.

In ZL Techs. v. Does, amici curae Public Citizen Litigation Group and Twitter, Inc. encouraged the First District to wholly adopt the Dendrite test, which the Sixth District declined to do in Krinsky.  The First District followed Krinsky; however, by refusing to follow the fourth prong of the Dendrite test—balancing the strength of the plaintiff’s prima facie claim against the defendant’s First Amendment rights.  The First District found that the additional balancing test adds no protection beyond the requirement that the plaintiff make a prima facie showing of a valid claim, unduly complicates the analysis, and gives protection to conduct that, based on the plaintiff’s preliminary evidentiary showing, is not constitutionally protected.

The fourth prong of the Dendrite test is concerning because it creates an uncertain standard.  Once a plaintiff presents evidence that a specific statement was made, is provably false, and caused harm, what more must the plaintiff do to tip the balance?  Dendrite does not say.  Discovery was denied in Dendrite because the plaintiff did not make a prima facie showing of a valid claim—the balancing test was never reached, let alone applied.

Often, litigation is not the best approach to combatting criticism, negative reviews, and bad press, because libel claims are difficult to prove.  While false statements of fact may be actionable, statements of pure opinion or statements that cannot reasonably be interpreted as stating actual facts, i.e., obvious exaggeration, are not.  As a result, one’s business reputation usually is best protected through purposeful engagement, both with the market and, at times, with detractors.

For those times when litigation appears appropriate, one can hope ZL Techs. and Krinsky will be the foundation upon which California sets a consistent standard for determining whether a libel plaintiff is entitled to discover the identity of an anonymous speaker.

Personal Jurisdiction Update in Supreme Court’s Bristol-Myers Squibb Co. v. Superior Court

By Darrell P. White

Several weeks ago, the U.S. Supreme Court issued its opinion in Bristol-Myers Squibb Co. v. Superior Court of Cal., No. 16-466, 581 U.S. —, 2017 WL 2621322 (June 19, 2017) (“Bristol-Myers Squibb”). The more than 600 plaintiffs seeking redress for alleged harm suffered from using a pharmaceutical drug, presented the Supreme Court with the following question: could a California state court exercise personal jurisdiction over nonresident plaintiffs joining California plaintiffs? In an 8-1 decision authored by Justice Alito, the Supreme Court held that the nonresidents’ claims lacked personal jurisdiction. Although the claims at issue pertained to alleged harm from a pharmaceutical drug, this case has far reaching implications for companies who do business in more than one jurisdiction.

On appeal from the California Supreme Court, Bristol-Myers Squibb presented a detailed examination of specific jurisdiction. The Supreme Court disagreed with the California Supreme Court’s finding that nonresidents’ claims were subject to specific jurisdiction of the Court.  The Supreme Court remarked:

“The present case illustrates the danger of the California approach. The State Supreme Court found that specific jurisdiction was present without identifying any adequate link between the State and the nonresidents’ claims. As noted, the nonresidents were not prescribed Plavix in California, did not purchase Plavix in California, did not ingest Plavix in California, and were not injured by Plavix in California. The mere fact that other plaintiffs were prescribed, obtained, and ingested Plavix in California— and allegedly sustained the same injuries as did the nonresidents—does not allow the State to assert specific jurisdiction over the nonresidents’ claims. As we have explained, “a defendant’s relationship with a . . . third party, standing alone, is an insufficient basis for jurisdiction.” [Citation.] This remains true even when third parties (here, the plaintiffs who reside in California) can bring claims similar to those brought by the nonresidents. Nor is it sufficient—or even relevant—that BMS conducted research in California on matters unrelated to Plavix. What is needed—and what is missing here—is a connection between the forum and the specific claims at issue.”

In addressing the nonresident and resident plaintiffs’ arguments concerning consequences of an adverse ruling, the Supreme Court noted:

“Our straightforward application in this case of settled principles of personal jurisdiction will not result in the parade of horribles that respondents conjure up. [Citation.] Our decision does not prevent the California and out-of-state plaintiffs from joining together in a consolidated action in the States that have general jurisdiction over BMS. BMS concedes that such suits could be brought in either New York or Delaware. [Citation.] Alternatively, the plaintiffs who are residents of a particular State—for example, the 92 plaintiffs from Texas and the 71 from Ohio—could probably sue together in their home States. In addition, since our decision concerns the due process limits on the exercise of specific jurisdiction by a State, we leave open the question whether the Fifth Amendment imposes the same restrictions on the exercise of personal jurisdiction by a federal court. [Citation.].”

AN INADEQUATE PRIVILEGE LOG, OR EVEN THE FAILURE TO SERVE A PRIVILEGE LOG, WILL NOT RESULT IN THE WAIVER OF THE ATTORNEY-CLIENT PRIVILEGE OR WORK PRODUCT PROTECTION TIMELY ASSERTED IN DISCOVERY RESPONSES

In Catalina Island Yacht Club v. Superior Court (2015) 242 Cal.App.4th 1116, the California Court of Appeal (Fourth District, Division Three), squarely addressed the question: “May a trial court find a waiver of the attorney-client privilege and work product doctrine when the objecting party submits an inadequate privilege log that fails to provide sufficient information to evaluate the merits of the objections?” The answer, “No.” Id. at 1120.

In Catalina, Defendants in the underlying matter served responses to Plaintiff’s requests for production of documents that included boilerplate objections asserting the attorney-client privilege and work product protection. Two months later, Defendants served a deficient privilege log identifying 17 “communications.” The log simply provided the date of the communication and stated it was between “counsel for Defendants and Defendants.” A few months later, Defendants served a supplemental privilege log increasing the number of withheld documents from 17 to 36, and identifying the parties to the communications which were email. And, four months later Defendants served yet another supplemental privilege, this time significantly increasing the withheld communications from 17 to 167 log and purporting to identify the parties to each email and the date. Id. at 1122.

Plaintiff filed a motion to compel seeking the production of all 167 identified on Defendants’ production log, arguing that Defendants waived the attorney-client privilege and work production protection by failing to timely serve a privilege log that provided sufficient factual information to enable Plaintiff to evaluate the merits of Defendants’ objections. The trial court agreed, and ordered Defendants to produce the 167 email. In doing, it found that Defendants’ privilege was not untimely but failed to show that that email were privileged or protected. Id. at 1123.

On a writ of mandate filed by Defendants, the Court of Appeal vacated the trial court’s order compelling production of the email. The Court of Appeal explained that attorney-client privilege and work product protection objections are preserved by serving timely written discovery responses asserting such objections. It is irrelevant that the objections are asserted as part of boilerplate responses, or that responding party fails to serve a timely or sufficient privilege log. Once timely asserted, a trial court may not deem the objections waived based on any deficiency in the response or privilege log. Id. at 1129.

When a party submits a deficient privilege log, a trial court may order that party to provide a further privilege log that includes the necessary information to rule on an asserted attorney-client privilege and work product protection objection, and it may impose monetary sanctions and evidence, issue, and even terminating sanctions if a responding party persists in failing to provide the court with the requested information. However, a trial court may not order that privileges are waived because of a deficient privilege log, or for even failing to serve a privilege log. Id. at 1120.

USING DEMONSTRATIVES TO EFFECTIVELY COMMUNICATE COMPLEX BUSINESS CASES TO A JURY

Business attorneys understand that complex business litigation involves complex issues, usually encompassing voluminous amounts of complicated financial data in the form of balance sheets, income statements, and cash flow summaries.  It is certainly possible for jurors who own their own businesses or have accounting backgrounds to quickly synthesize financial information. However, most jurors are unfamiliar with this type of financial information and will find it difficult to comprehend, at best.  A juror who is not able to understand the story that the financial data tells will be a less likely ally to your client’s position in the jury room.  Thus, the biggest challenge for the business attorney is how to effectively present these complex matters to a jury.

The starting point of trial preparation in a complicated business case is to reframe the focus from how complex the case is to how you can go about simplifying the case for the jury.  Should you start your opening by acknowledging how difficult it will be to digest all the technical financial data? No. You never want to start out by telling the jury how complex the case is.  This will only cause them to be fearful of the case, be offended, or to simply tune out.  Instead, you want to tell them a story that is familiar and relatable.  Presenting your complex business case in terms of common themes will go a long way in making the matter more palatable and appealing to the jury.

Tell the jury a story.  How would you describe the case to someone if you were at a dinner party?  What happened between the parties that caused the conflict?  What are the motives of the lawsuit?  What is your client seeking?  If you are asking the jury to award your client damages, why should they want to find in favor of your client, and in what amount?  Telling your case in terms of a story makes your complex business dispute much more jury-friendly.

Once you have identified the appropriate theme or themes for your case, and have plotted out the story line, you will need to create the scenes by which you will tell the story.  The scenes will involve not only the actors (i.e., the witnesses), but also the script (i.e., the evidence), and the props (i.e., the trial graphics).  While the witnesses and the evidence of the case will be dictated by the particulars facts underlying the dispute, the creation of the trial graphics is where you, as the presenter of the story, will have an opportunity to showcase your creative genius.

The question is how do you creatively distill complex financial data into practical trial demonstratives to effectively communicate your client’s story to the jury?  The first thing to keep in mind is that a demonstrative display of any kind has more impact on a jury than simply an oral description of the matter.  Research supports the common sense belief that any mode of demonstrative display is superior to using no visual evidence to make specific points during expert testimony. See Weiss, H., McGrath, J.B. (1963), Technically Speaking: Oral Communication for Engineers, Scientists, and Technical Personnel, New York, McGraw-Hill; Binder, D.M., Bourgeois, M.J. (2004); Effects of the use of Power Point by expert witnesses, unpublished manuscript, University of Wyoming. This is especially true in today’s world of tech-savvy users, where most jurors have become accustomed to receiving information through digital media.  A 1992 McGraw-Hill study, commonly referred to as the Weiss-McGrath report, found “a one-hundred percent increase in juror retention of visual over oral presentations and a six-hundred percent increase in juror retention of combined visual and oral presentations over oral presentations alone.”  Thus, trial attorneys in all cases should start their trial preparation from the premise that today’s jurors have a greater capacity to understand more in-depth multi-media presentations and, in fact, may now demand trial graphics of greater quality and depth.  The fact is that the use of video and computer capabilities in the courtroom expands a trial attorney’s options for how to present evidence; can assist in delivering large amount of complex information in a format that is familiar and acceptable to today’s population; and helps to keep the jury engaged in your client’s story.

The question then for the complex business litigator is not if she will use trial demonstratives, but how she can most effectively use visual and other sensory aids at trial to successfully engage and educate the jury so that the client’s story will be understood and accepted.  Remember, the need to tell a compelling story to the jury does not disappear just because a case involves complex financial data.  In fact, the task of explaining to the jurors the meaning of the data in a clear and engaging manner that helps them understand the case themes and supports the case story becomes that much more important in cases involving complicated financial material.

The following 4 step process is one way to develop effective trial demonstratives:

  1. First, decide what message you wish to convey to the jury by the presentation. Perhaps you are trying to illustrate the fact that distributions of one partner were improperly being accounted for in the financial records as “management expense?”  Or maybe you want to show the jury that the financial transaction that the former partner now seeks to characterize as a “partner loan” was never identified or carried on the company’s books and records as such.  Whatever the message is, you should identify it before you start to assemble the relevant data you will need to make your point.
  2. Next, cull through the financial data with your expert to ascertain the best source of the financial data you seek to present. This may be contained in the general ledger, the bank records, or the cash flow summaries.  Wherever it is, you should identify it and understand it so that you can effectively use it to illustrate whatever point you are trying to convey. This point is worth stressing: in order to successfully tell the story, you must have command of the facts and information, regardless of its technical nature.
  3. After you have determined the message you want to deliver and have identified the financial records that best illustrate your point, you should start with the creation of a very basic chart of the financial information you have selected using minimal formatting of fonts and colors. Starting with a solid, yet simple, graphic will give you a strong foundation of data upon which to expand your trial graphic, if appropriate.
  4. Finally, you should refine and enhance the graphic as necessary to bring the case story to life. Remember that your goal is to tell a story, and that a story has a beginning, middle, and end.  What part of the story does the demonstrative represent?  Perhaps it is intended to reveal to the jurors the financial implications of the former partner’s alleged misconduct, or to evidence the consequences of the managing member’s mismanagement.  Understanding the role of each demonstrative will help to keep you focused on what data you need to highlight for the jury.  Remember that the goal of the demonstratives should be to help you explain the case story with little or no additional explanation.

The design of effective trial demonstratives can seem daunting in the face of years of financial records.  Once you have identified the case story, how do you decide what data best exemplifies your client’s contentions, and how do you reduce that data into meaningful graphic representations for the jury?  Consider the best mode of delivery for your exhibits: electronic, foam board, or hand-written on an easel.  A mix of electronic and print exhibits often works well to keep the jury’s attention.  If possible, you should collaborate with your financial expert and trial graphics vendor early on in the case to strategize about how to effectively utilize financial data to present the case story graphically to the jury.  Taking control of this task from the outset will help you to stay focused on the case story, and to move the case strategically towards trial.

There are several visual elements of the trial graphics you may want to consider to assist in keeping the financial information manageable while communicating the case story.  First, think about the volume of financial data you need to present, and choose the most powerful visual to represent that information. If your records are limited, a modest chart with just a few rows and columns may be the most effective method of delivering the information.  If you have more data, you may want to consider using color-coded pie charts or bar graphs to illustrate your data points.  Don’t over-explain.  Show only what is necessary to make your point.  An effective method of presentation is to introduce the entire spreadsheet, and then call out only the relevant columns or rows of information needed to illustrate the point in a separate graphic.  Use animation to gradually reveal the case story by calling up the relevant columns and rows on screen one by one.  This adds a dramatic flair to the presentation and serves to engage the jurors in the story-telling journey.  It can also be particularly effective when you need to refute the manner in which the opposing side has interpreted the data.  In addition, make use of colors and highlighting to emphasize your key data, and to help tell the story.  For example, use red to accentuate losses and green to show the positive income that should have been paid to your client.  Finally, add common-sense labels where appropriate to focus the jury on relevant beginning and ending data points or other important details.

Another similar method is present graphics in a lecture-style presentation. For example, walking through an accounting to explain how a party “double-dipped” by mischaracterizing certain entries as fees when they were really profit can be accomplished by physically writing out each line item on an easel or using power point. Hand writing each line, one at a time, helps break the information into easy-to-digest pieces, versus introducing the information to the jury all at once or in a single slide. Interactive presentations like these can also help engage jurors, who are otherwise being presented with slide after slide of information.

So, what do you tell the jury about the case when you know that the financial information you will need to present to them encompasses 10 years of general ledgers, bank records, and cash flow summaries?  Do you tell them that this is going to be a complicated business dispute that is going to require them to listen to weeks of dry testimony and comprehend thousands of pages of financial records?  No.  Instead, you tell them the story of how your client came to need their help, and how you are going to explore, together, the company’s own books and records to reveal the very misconduct that you have told them about.  Then, because you have been thoughtful and diligent in creating your trial graphics, you will be successful at trial in utilizing your demonstratives as compelling visuals to help you tell your client’s case story.

Arbitration Agreements Cannot Foreclose a Party’s Right to Seek Public Injunctive Relief under California’s Consumer Protection Laws

The California Supreme Court has struck back in its ongoing battle with the United States Supreme Court as to the enforceability of arbitration agreements in consumer contracts.  On April 7, 2017, in McGill v. Citibank, the California Supreme Court held that a contractual waiver of the right to seek public injunctive relief—i.e., relief that serves primarily to benefit the public at large rather than redress private wrongs—is contrary to public policy and thus unenforceable under California law.  The McGill court further held that the Federal Arbitration Act (FAA) does not preempt its holding.  Pending a very possible review by the United States Supreme Court, the McGill holding serves to further limit the rights that parties may waive in arbitration agreements.

The Case

In 2001, plaintiff Sharon McGill opened a credit card account with Citibank and purchased a “credit protector” plan.  The credit protector plan required Citibank to defer or credit certain amounts on McGill’s credit card account when a qualifying event such as a job loss or divorce occurred.  Shortly thereafter, Citibank sent McGill a Notice of Change in Terms Regarding Binding Arbitration to Your Citibank Card Agreement (the “Notice”).  The Notice amended McGill’s original agreement by adding an arbitration provision allowing either party to elect mandatory arbitration of any claims arising out of McGill’s account.  The arbitration provision required arbitration of all claims, “no matter what legal theory they are based on or what remedy (damages, or injunctive or declaratory relief) they seek.”  It further precluded McGill from pursuing any claim or obtaining any relief as part of a class action or on behalf of others, whether in arbitration or in any forum.  McGill did have the right to opt out of the agreement by a certain date, but never did so and continued using her card.

In 2011, McGill filed a class action against Citibank based on its marketing of the credit protector plan and the handling of a claim she made when she lost her job in 2008.  McGill alleged claims under California’s consumer protection statutes: the Consumer Legal Remedies Act (CLRA; Civ. Code, § 1750 et seq.); the unfair competition law (UCL; Bus. § Prof. Code, § 17200 et seq.); and the false advertising law (id., § 17500 et seq.).  Among the relief McGill sought was “an injunction prohibiting Citibank from continuing to engage in its allegedly illegal and deceptive practices.”  Citibank then petitioned to compel arbitration pursuant to the arbitration agreement.  The trial court granted the petition in part, but denied it as to the claims brought under the consumer protection statutes.  The trial court applied the Broughton-Cruz rule, which holds that agreements to arbitrate claims for public injunctive relief under the CLRA, UCL, or the false advertising law are not enforceable in California.  The Court of Appeal reversed, holding that the U.S. Supreme Court’s holding in AT&T Mobility LLC v. Concepcion (2011) 563 U.S. 333 (“Concepcion”) preempts the Broughton-Cruz rule.  In Concepcion, the court held that the FAA preempts state law that prohibits the enforcement of arbitration agreements containing class action waivers.

The California Supreme Court reversed the appellate court, but did not reach the issue of whether Broughton-Cruz rule survived Concepcion.  The Court first determined that the Broughton-Cruz rule was not even invoked by the Citibank arbitration agreement.   Specifically, the Citibank agreement did not purport to require arbitration of the consumer protection claims, but instead precluded McGill from seeking public injunctive relieve in any forum.   That provision functioned as an outright waiver, not a mandate to arbitrate.  According to the Court, such a waiver is invalidated by California Civil Code section 3513, which provides that “a law established for a public reason cannot be waived by a private agreement.”  The Court held that the consumer protection laws, insofar as they allowed McGill to seek an injunction precluding Citibank from engaging in deceptive advertising practices, existed for a public reason and could not be waived.  If allowed, the Court reasoned, pre-dispute arbitration agreements waiving the right to seek public injunctive relief “would seriously compromise the public purposes [the CLRA, UCL, and false advertising law] were intended to serve.”  The Court held that such a waiver was therefore contrary to public policy and unenforceable under California law.

The Court next held that the FAA did not preempt this rule.  In asserting preemption and citing to Concepcion, Citibank argued that the FAA requires courts to “place arbitration agreements on an equal footing with other contracts and to enforce them according to their terms.”  The Court rejected Citibank’s argument, holding that the FAA only precludes courts from invalidating arbitration agreements based on defenses that apply only to arbitration.  By contrast, the defense at issue—Civil Code section 1513’s mandate that a law established for public reason cannot be waived by contract—applied to contracts generally, not solely to arbitration agreements.  That is, “a provision in any contract—even a contract that has no arbitration provision—that purports to waive” the right to public injunctive relief under the consumer protection laws is unenforceable.  According to the Court, the FAA does not require enforcement of such a provision.

The Court also distinguished the issue at hand from arbitration agreements waiving parties’ right to pursue class actions, which were addressed and allowed in Concepcion.  Whereas class action waivers only waive procedural rights—i.e., the mechanism by which substantive rights are pursued—a waiver of the right to seek public injunctive relief in any forum waived the substantive right to bring the claim at all.  That waiver went too far according to the Court.

Takeaway from McGill

For now, the McGill holding means that arbitration agreements purporting to waive a party’s right to pursue public injunctive relief in any forum are void.  But while the McGill court did not see the FAA as preempting this rule, the U.S. Supreme Court may disagree.  Also, because the McGill court concluded that the Broughton-Cruz rule was not invoked, it did not reach the issue of whether that rule was preempted by the FAA in light of Concepcion.  Unless and until the Supreme Court weighs in on these issues, businesses are advised to craft arbitration agreements carefully to ensure the desired provisions will be enforceable.  This includes provisions that address how to treat claims for injunctive relief under the CLRA, UCL, and false advertising laws.

Non-Compete Provisions and Forum Non Conveniens Considerations

Under California law, non-complete provisions are generally unenforceable.  But what happens when the non-compete provision appears in an employment contract that is governed by another state’s law with a forum selection clause limiting any dispute to that particular state?  All California courts in the past have refused to enforce a choice of law provision (absent a forum selection clause) that requires a California court to apply the law of a state that may be more favorable to non-competes on grounds that it violates California’s public policy concerning such restrictions.  Courts in California, however, have been more tolerant of forum selection clauses that will send a dispute over a non-compete provision to a forum that views them more favorably.  This dichotomy was recently on display in the case, Scales v. Badger Daylighting Corp.

Badger, a Nevada corporation with its principle place of business in Indiana, provides hydrovac excavation services.  Daniel Scales, who lives in California, was employed by Badger between 2014 and 2016.  Upon his gaining employment with Badger, he signed a confidentiality and non-competition agreement that provided certain restrictions on his ability to work for a competitor following the termination of his employment with Badger.  It also contained both a choice of law provision (i.e., that the laws of Indiana would apply) and a forum selection clause (i.e., any lawsuit would be filed in Marion County, Indiana).

In 2016, Mr. Scales left his employment with Badger and joined a competitor in the same field.  Badger filed a lawsuit for breach of contract in Marion County, Indiana. Shortly thereafter, Mr. Scales and others files a lawsuit in Kern County, California, alleging, among other things, a claim for declaratory relief that the non-compete provision he entered into was unenforceable as being contrary to California public policy.  Badger removed the lawsuit to federal court and then filed a motion to dismiss Mr. Scales’ declaratory relief claim on the grounds of forum non conveniens.

The U.S. District Court began its inquiry by determining whether there was a valid forum selection clause at issue in the agreement.  It noted that the U.S. Supreme Court has recognized that forum selection clauses “are presumptively valid and should be honored `absent some compelling and countervailing reason’.”  Furthermore, the Court would not give any consideration to the fact that Mr. Scales filed in California as the plaintiff’s choice of forum should not be given consideration in the analysis.

Plaintiff argued that the forum selection clause was invalid because it violated California’s public policy as set forth in California Labor Code section 925 and Business and Professions Code section 16600.  Section 925 of the Labor Code was recently enacted and makes any agreement by which a California employee is required to agree to an out-of-state choice of law/forum selection clause without the aid of counsel to be voidable.  However, this section only applies to contracts entered into after January 1, 2017.  Given that Mr. Scales entered into his agreement in 2014, the Court found that he could not take advantage of the recent change in law.

Turning its attention to California’s general prohibition on non-compete provisions in section 16600 of the Business and Professions Code, the Court held that enforcing the forum selection clause would not necessarily contravene the policy set forth by that section.  The primary focus was to determine whether the clause was reasonable and not to focus on the ultimate effect of enforcing such a clause.  In essence, unless Mr. Scales could show that granting the forum non conveniens motion would “foreclose all of [his] remedies,” the Court would uphold the validity of the forum selection clause.

To determine the validity of the forum selection clause, the Court was required to look at the “public interest” factors.  First, the Court was to look at the “localized interests,” i.e., the competing interests between the forum state and the state identified in the forum selection clause.  Badger argued that its headquarters were in Indiana and that Indiana had an interest in protecting its corporations from out-of-state competitors. The Court found this significant as well as the fact that Indiana was already handling litigation between the parties concerning Mr. Scales’ non-compete provision.

The next factor the Court was required to look at was familiarity with governing law.  Because the agreement also had an Indiana choice of law provision, the Court concluded that an Indiana court would be best positioned to apply its own laws especially since it was already considering litigation between the parties.

The final factor to be considered in the analysis is administrative difficulties.  Once again, the Court sided with Badger in its analysis.  The Court concluded that the fact that there was already pending litigation in Indiana warranted dismissal under the grounds of forum non conveniens to avoid duplicative or inconsistent results between the two lawsuits.  Thus, the Court granted Badger’s motion to dismiss Mr. Scales’ claim challenging the non-compete provision on the grounds of forum non conveniens.

Attorneys representing out-of-state employers in litigation involving the enforceability of a non-compete provision should consider whether there is a valid forum selection clause that will enable the defendant to litigate the dispute in a more favorable forum elsewhere. However, attorneys should be aware that if the contract at issue was entered into after January 1, 2017, it may implicate the provisions of section 925 of the California Labor Code and make such provisions voidable.

California Supreme Court adds to line of cases narrowly applying the right to recover attorneys’ fees under Civil Code section 1717.

Despite increasing sophistication amongst contracting parties and evermore common use of attorney fee clauses, the “American Rule” endures.  The American Rule is that each side pays its own attorney fees in litigation, win or lose.  In California, statutory exceptions to the American Rule are limited, leaving private parties to modify the American Rule, if they so desire, through contract.  For those contracting parties, the recent California Supreme Court decision in DisputeSuite.com, LLC v. Scoreinc.com, however, should temper expectations when seeking to recover attorneys’ fees under California Civil Code section 1717.

A long-standing criticism of the American Rule is that it encourages meritless lawsuits.  The American Rule creates somewhat of a Sophie’s choice for defendants to baseless actions: pay to settle a frivolous claim or potentially pay more in attorneys’ fees to defeat bogus claims.

In the absence of legislative will to abandon or modify the American Rule, private parties turned to contractual attorney fee provisions to discourage weak or baseless lawsuits between contracting parties.  Many early adopters, however, also used attorney fee provisions to discourage lawsuits based on good faith disputes.  For example, residential landlords began including one-sided provisions in leases, making the tenant liable for the landlord’s attorneys’ fees in any lawsuit related to the lease.

The Legislature responded by enacting section 1717, which generally entitles the prevailing party in any action on a contract to recover its attorneys’ fees where the contract contains an attorney fee clause, regardless of whether the clause is one-sided.  The case law interpreting and applying section 1717 shows time and again that section 1717 is a limited exception to the American Rule.  The principal effect of section 1717 is to protect weaker or unsophisticated contracting parties by nullifying the one-sidedness of attorney fee clauses.  Otherwise, courts will not construe a narrow attorney fee clause more broadly than the language used in the contract, much to the chagrin of many prevailing parties.

For example, section 1717 does not apply where the plaintiff asserts tort claims, even if the defendant prevails based on a provision in the contract.  Although “a defense to a tort action based on a provision in the contract may have the effect of enforcing the provisions of the contract[,]” “the assertion of a defense does not constitute the bringing of an action to accomplish that goal.”  Gil v. Mansano (2004) 121 Cal.App.4th 739, 743.  Broadly-phrased contractual language (i.e., “all claims between the parties, whether in tort or contract”), might entitle the defendant to recover its attorneys’ fees in that instance, but section 1717 will not imply the right where the action is not based on the contract.

In DisputeSuite.com (2017) 2 Cal.5th 968, the Court addressed a different limiting aspect of section 1717: when has a party “prevailed” such that section 1717 requires the court to award attorneys’ fees?  There, DisputeSuite sued Score, in California, for breach of contract.  The contract contained an attorney fee provision as well as a forum selection clause.  Score successfully moved to dismiss the action based on a forum selection clause in the agreement that specified Florida as the proper forum.  Score then moved to recover its attorneys’ fees as the prevailing party.  The trial court denied the motion because, although the action in California was dismissed, DisputeSuite had filed suit in Florida, so it remained an open question whether Score would ultimately prevail on the merits of the contract claims.  The Court of Appeals and the California Supreme Court affirmed the trial court’s ruling.

Score argued that a party could be a prevailing party, under section 1717, based on a procedural victory.  Supreme Court agreed, but held that a procedural victory must “finally dispose of the parties’ contractual dispute” to merit a prevailing party award under section 1717.  Score’s motion to dismiss did not finally dispose of the dispute.  As some consolation, the Court indicated that a party in Score’s position, having been sued in the wrong forum, was not wholly without recourse.  Such a “defendant may seek sanctions under Code of Civil Procedure section 128.7, which may include attorney fees incurred as a result of the improper filing.”  2 Cal.5th at 981.  Section 128.7 has its own shortcomings, however, which are not addressed here.

The DisputeSuite decision builds on a line of cases demonstrating the limited relief Civil Code section 1717 affords.  Parties negotiating a contract should be attentive to the language used in any attorney fee clause, to ensure its scope meets their expectations.  Otherwise, they should expect to bear their own legal expenses, win or lose.  At least for now, that’s the American way.

Government Employees Can’t Hide Behind Their Private Email Accounts: California Supreme Court Expands Public Records Definition to Include Emails Sent on Private Email Accounts

The use of private email servers and communications devices by government officials was a major issue in the 2016 election, from the investigation of Hillary Clinton’s email practices to the hacking of a private email account Mike Pence used for official Indiana state business.  The California Supreme Court has recently entered the fray, holding that government officials must search their private email accounts in connection with public records act requests.

The California Supreme Court held in City of San Jose v. Superior Court (Smith) that public employees’ personal accounts may be subject to disclosure under the California Public Records Act (“CPRA”).  In San Jose, petitioner Ted Smith requested the disclosure of records related to redevelopment efforts in downtown San Jose, including communications “sent or received on private electronic devices used by” City employees.  The City refused to disclose communications made on employees’ personal accounts, arguing that the personal accounts were not within the City’s custody or control.  Smith sued for declaratory relief, and the case made its way to the California Supreme Court.

The Court recognized that the CPRA was originally designed to cover paper documents, not the constantly-evolving means of electronic communication available to today’s workers.  The Court looked to the statutory intent of the CPRA, beginning with the definition of “public record,” – “(1) a writing, (2) with content relating to the conduct of the public’s business, which is (3) prepared by or (4) owned, used or retained by any state or local agency.”  “Writing” is defined in the CPRA as “any form of communication or representation… regardless of the manner in which the record has been stored.”  The Court noted that “writing” used to mean a typed or handwritten document, made in some tangible medium, while today “writing” could encompass a wide variety of communications.  “[T]he ease and immediacy of electronic communication has encouraged a commonplace tendency to share fleeting thoughts and random bits of information, with varying degrees of import, often to broad audiences. As a result, the line between an official communication and an electronic aside is now sometimes blurred.”

Thus, the issue becomes whether the record is a private communication, or whether it “relate[s] to the conduct of the public’s business.”

By way of example, the Court stated that an email to a spouse complaining “my coworker is an idiot” would not be a public record.  In comparison, an email to a superior reporting said coworker’s mismanagement of an agency project would be a public record.

This public versus private analysis is not always clear.  The Court noted that, without the records at issue before it, it could not make a determination as to whether the records “related to the conduct of the public’s business.  The analysis includes an examination of the context of the communication, the audience, and whether it was prepared by an employee acting within the scope of his employment.  While this standard is broad, “it is not so elastic as to include every piece of information the public may find interesting. Communications that are primarily personal, containing no more than incidental mentions of agency business, generally will not constitute public records.”

Lastly, the record must be “prepared, owned, used, or retained” by the government agency.  The City argued that “public records” included only those records in the agency’s possession or directly accessible by the agency, and that an employee’s personal account is therefore outside the definition of “public record.”  Under the City’s rule, only those communications physically located in City offices or on City-owned servers would qualify.

The Court rejected this argument, holding that records which would otherwise meet the definition of “public record” “do not lose this status because they are located in an employee’s personal account.”  The Court referred to the distinction between City offices or servers and an employee’s personal account as “arbitrary,” noting that such a rule would allow public employees to shield information from public disclosure simply by using a personal email account.  The Court further pointed out that there is no rule requiring public employees to communicate only through public accounts, and that permitting private accounts to be immune from the CPRA would lead to government officials “hid[ing] their most sensitive, and potentially damning, discussions in such accounts.”

In order to facilitate future search efforts, the Court gave some guidance on the method of searching private email accounts.  The Court cited with approval case law under the federal Freedom of Information Act which permitted individuals to search their own records, so long as they have been trained how to do so and provide an affidavit on the method of their search.  The Court also suggested that public agencies institute policies prohibiting the use of private accounts for public business.

Both public agencies and litigants seeking the records of public agencies should take note – a CPRA Request now triggers a search of not only the physical files and servers maintained by the public agency, but also the private accounts of its employees.  This could include a spectrum of communications, from private email accounts (services like Gmail, Yahoo, and AOL), to private chat programs (like Facebook Messenger or WhatsApp).  This gives the public (and litigants) access to real time communications by government employees regarding their public duties, as they are happening.

Reassessing Contractual Jury Waivers Under Rincon EV Realty LLC v. CP III Rincon Towers, Inc.

By Darrell P. White

Orange County is a hotbed for development and real estate. Lenders work hand-in-hand with real estate professional to make these deals happen. When using out-of-state financing, contractual jury waivers are commonplace. Under such terms, the parties essentially agree that any dispute will not be tried to a jury, but instead, the court (i.e. “bench” trial).  However, a recent decision from the California Court of Appeal may have far reaching implications regarding the enforceability of jury waiver provisions in California courts.

In Rincon EV Realty LLC v. CP III Rincon Towers, Inc. (2017) 8 Cal.App.4th 1, the First Appellate District, Division Four, reviewed a dispute surrounding a large commercial loan. In June 2007, plaintiffs Rincon purchased a commercial property in San Francisco for approximately $143 million. Plaintiffs financed the purchase with $110 million in financing. Ultimately, the subsequent purchaser of the loan, defendant CP III, foreclosed, and Plaintiffs filed suit.

When Plaintiffs asserted a jury demand in their fourth amended complaint, Defendant filed a motion to strike citing the express waiver set forth in the underlying loan documents.  Notably, the jury waiver set forth in all-capital letters, with bold font, “BORROWER AND LENDER HEREBY AGREE NOT TO ELECT A TRIAL BY JURY…” The trial court granted the motion to strike and applied the controlling case of Nedlloyd Lines B.V. v. Superior Court (1992) 3 Cal. 4th 459. That court concluded that when read in conjunction with the New York choice-of-law provision, the jury waiver was enforceable. Ultimately, the case was tried and a judgment was entered in favor of Defendants on all claims.

On Appeal, the First District Court of Appeal reversed the judgment. The Court went through the Nedlloyd test to determine whether to apply the choice-of-law provision. In doing so, the Court examined whether: (1) the chosen state has a substantial relationship to the parties or their transaction; (2) the chosen state’s law is contrary to a fundamental policy of California; and (3) California has a materially greater interest than the chose state in the determination of the particular issue. In finding that all three tests were met, the Court declined to enforce the choice of law as contrary to California’s right to jury is “fundamental,” “inviolate,” and “sacred in its character.” Rincon, supra, 8 Cal.App.4th at 12, 15-16. Interestingly, the Court noted that no “sophisticated parties exemption” existed even where, as there, each party was a large and complex business entity who had freely negotiated the contract at issue. Rincon, supra, 8 Cal.App.4th at 14-15.

Take away: California has a strong public policy favoring trial by jury. Since 2005, contractual pre-dispute jury trial waivers have been invalid under California law. Grafton Partners, L.P. v. Superior Court (2005) 36 Cal.4th 944. Rincon only further emboldened California’s policy favoring jury trials. Now, it appears California courts may not uphold pre-litigation jury waivers even where foreign choice-of-law provisions would otherwise permit. Any business with an existing out-of-state loan agreement would be smart to closely review this issue to ascertain their rights and safeguard against the large costs associated with trying a case to verdict before a judge, only to repeat the exercise before a jury.