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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.

Protect Your Business: What You Need to Know About the New Defend Trade Secrets Act

Businesses at every level – from Fortune 500 companies to solo-inventor enterprises – rely on trade secret protections to safeguard their intellectual property trade secrets. American companies and innovators now have additional protections for their valuable intellectual property assets in the newly enacted federal Defend Trade Secrets Act (DTSA). This legislation represents the most significant trade secret reform legislation in years.

Essentially, the DTSA extends the current Economic Espionage Act of 1996, which criminalizes certain trade secret misappropriations, and allows trade secret owners the opportunity to pursue claims in federal court under federal law, in addition to traditional state court claims. The new federal trade secrets law also presents some very important practical considerations for businesses.

First, the DTSA has a broad reach, and it will likely affect every aspect of a company’s operations. Trade secret issues arise every time a company hires or fires an employee; every time a company enters into a contract containing a non-disclosure or confidentiality clause; and every time an employee discusses the company’s business with a business partner, the public, or friends. All of these activities are now governed by the DTSA.

Second, the DTSA will potentially increase the legal costs associated with protecting a company’s trade secrets. Because of the overlap between the DTSA and state law, companies will need to incur additional costs in order to understand and conform their practices to accommodate both sets of laws. When dealing with trade secret litigation, companies will now have to prosecute or defend against both state and federal claims, adding to the already expensive cost of litigation.

Finally, for better or for worse, the DTSA may create greater opportunities for trade secret owners to win more cases, and to file more lawsuits. By providing plaintiffs with another set of laws and another venue in which to litigate, the DTSA creates more strategic avenues to success. The increased odds of success could spur more litigation, some of which may be for illegitimate or anti-competitive reasons. This, again, could increase litigation costs.

For these reasons, companies would be wise to educate themselves on the DTSA in order to take advantage of, and protect themselves from, the important legal and business consequences of this new federal trade secret law.

IF YOU SUE FACEBOOK, WHAT’S THE LIKELIHOOD YOU’LL BE ALLOWED TO DEPOSE MARK ZUCKERBERG?

Companies are no strangers to litigation. In California, it is a cost of doing business. Unfortunately, it is not uncommon for litigants to try to gain leverage in a dispute with a corporate party by attempting to depose its high-level executives to harass and embarrass them, and force the company into a quick and aberrant settlement. The strategy employed by a litigant may go like this: (1) put pressure on a company by noticing the deposition of an officer or director, (2) make clear the intent to delve not only into the high-level executive’s alleged wrongdoing, but also other points of potential embarrassment, and (3) the company will capitulate and pay a significant settlement to avoid the pain of the deposition. Some refer to this (and similar tactics) as judicial extortion. What, then, can a company and its counsel do to prevent an abusive deposition of a high-level executive?

California federal and state courts apply the “apex” doctrine to protect high-level executives, also referred to as apex executives, from harassing depositions.  In considering whether to allow the deposition of a high-level executive, courts focus on two primary factors: (1) whether the high level executive has unique first-hand, non-repetitive knowledge of facts at issue in the case, and (2) whether the party seeking the deposition has exhausted other less intrusive discovery methods. Apple Inc. v. Samsung Electronics Co., Ltd., 282 F.R.D. 259, 263 (N.D.Cal. 2012); Mutual Ins. Co. v. Superior Court, 10 Cal.App.4th 1282, 1289 (1992).

Courts understand that where an opportunity exists to game the system and harass a party it will likely be exploited, and, thus, are carful to protect against it. This was observed in one of the first cases to apply the “apex” doctrine. In 1985, a class of plaintiffs sued for personal injuries from an alleged defective design in the fuel system of the 1975 Dodge van. Plaintiffs’ counsel noticed the deposition of Lee Iacocca, then Chairman of the Board of Chrysler Corporation, claiming that statements Iacoccoa made in his recently published biography demonstrated that he had knowledge relevant to Chrysler’s alleged liability and the plaintiffs should be allowed to depose him to explore such knowledge. The court granted Iacoccoa’s motion for protective order preventing his deposition, noting: “the fact remains [Iacoccoa] is a singularly unique and important individual who can be easily subjected to unwarranted harassment and abuse. He has a right to be protected, and the courts have a duty to recognize his vulnerability.” Mulvey v. Chrsyler Corp., 106 F.R.D. 364, 366 (D.R.I. 1985).

Some chairman and officers are obvious “apex” executives – such as Iacoccoa or, say, the late Steve Jobs. See Affinity Labs of Texas v. Apple, Inc., 2011 U.S. Dist. LEXIS 53649 (N.D. Cal. 2011) (court denied plaintiff’s attempt to depose Steve Jobs). However, most high level executives are not celebrities. They are not regularly quoted and their companies are not featured in the media. Yet, these less recognizable high-level executives responsible for running smaller to mid-size business are just as important to their companies as their high-profile counterparts, and equally vulnerable to harassment. Unfortunately, there is no clear definition of who qualifies for protection as an “apex” executive. Some factors that have been considered are job duties and the potential for business disruption, where the executive falls within the company’s executive hierarchy (e.g., how many people report to the executive), and the likelihood of harassment.

The most important factor considered by courts in applying the “apex” doctrine is whether the high-level executive has personal knowledge of relevant facts. Equally important is whether the information can be obtained through other less burdensome means, such as from a lower level executive or employee. When a CEO or other high-level executive lacks such personal knowledge, courts are inclined to deny their depositions.

However, the “apex” doctrine exists in tension with the otherwise broad allowance for discovery in litigation. Apple Inc., supra., 282 F.R.D. at 263. Although a deposition notice directed at a high-level executive with no personal knowledge of the facts involved should result in the issuance of a protective order denying that executive’s deposition – courts are likely to allow some manner of discovery. Now, in the case involving Apple, the court simply denied the deposition of Steve Jobs outright. But, in the matter involving Chrysler, although the court denied the deposition of Iacoccoa it allowed plaintiffs to propound written interrogatories to him. This is a less intrusive means of discovery of a high-level executive courts have allowed. See, e.g., Retail Brand Alliance, Inc. v. Factory Mut. Ins. Co., 2008 WL 622810, at *6 (SD NY 2008). Likewise, rather than  completely deny the deposition of a high-level executive, a court may limit the length or scope of the deposition to avoid harassment or undue burden. Apple Inc. v. Samsung Electronics Co., Ltd., 282 F.R.D. 259, 265-67 (ND CA 2012) (allowing depositions of high-level officers, but limiting them to 2-3 hours each); Scott v. Chipotle Mexican Grill, Inc., 306 F.R.D. 120, 124 (SD NY 2015) (limiting apex depositions to 4 hours).

From the outset of litigation or potential litigation, a company’s counsel must be mindful that higher-level executives are vulnerable to a deposition – particularly as a form of harassment and to gain leverage. Counsel should investigate alternative means for providing an opposing party with potentially relevant information that a high-level executive may possess, and develop a record early on establishing the limits of the high-level executive’s involvement, if any, and that such executive has no unique, personal knowledge of the relevant facts. It is important to be prepared to utilize the “apex” doctrine in order to protect against potential abuse or harassment of high-level executives.

Self-Help Discovery May Be Protected Activity

As a matter of first impression, the Massachusetts Supreme Judicial Court recently held that self-help discovery may constitute “protected activity” under Massachusetts’ anti-retaliation statute. The decision is contrary to other jurisdictions which do not expressly authorize such self-help discovery.

To read the full blog, please visit: http://blog.hrusa.com/blog/self-help-discovery-may-be-protected-activity/

California’s New Equal Pay Laws Promise to Bring More Litigation

Equal pay claims just got a lot tougher to defend in California.  Last month, Governor Jerry Brown signed SB 358, a new law which aims to curb a statewide pay disparity between men and women.  The law, dubbed the California Fair Pay Act, goes into effect on January 1, 2016 and requires immediate, affirmative assessment by most California employers. 

Overview of the California Fair Pay Act. 

Current law already requires California employers to pay men and women the same wage for performing equal work in the same establishment.  The new law broadens that requirement.  It removes the term “equal work” and replaces it with “substantially similar work.”  This means work that is substantially similar when viewed as “a composite of skill, effort, and responsibility, and performed under similar working conditions.”  The new law also removes the “same establishment” requirement, meaning that employees can now bring equal pay claims by showing the employer paid an opposite sex employee at a different location higher wages for substantially similar work.

Once the employee makes the required showing, the new law now shifts the burden to the employer to demonstrate that the wage differential is based on valid reasons.  This means an employer can justify pay disparities only if they arise from:

  • a seniority system;
  • a merit system;
  • a system that measures earnings by quantity or quality of production; or
  • a bona fide factor other than sex, such as education, training, or experience.

While prior law already allowed employers to assert a bona fide factor defense to equal pay claims, the new law substantially limits that defense.  Now, employers can only rely on bona fide factors that are not based on sex, are job related, and are consistent with a business necessity.  In addition, the bona fide factor defense does not apply if the employee can show that an alternative business practice would serve the same purpose without resulting in a pay disparity.

Attorneys’ Fees For “Bad Faith” Trade Secret Claims: How Pre-Discovery Disclosures Can Help

A central issue in all trade secret litigation is the adequacy of a plaintiff’s pre-discovery disclosure of the alleged trade secrets required by California Code of Civil Procedure section 2019.210. Section 2019.210 provides that a plaintiff suing for misappropriation of trade secrets must identify the alleged trade secrets with “reasonable particularity” before commencing discovery. The disclosure requirements of section 2019.210 can also be a valuable tool for a successful defendant seeking attorneys’ fees under the California Uniform Trade Secrets Act (“CUTSA”) for trade secret misappropriation claims brought in “bad faith.” California Civil Code section 3426.4 authorizes the trial court to award attorneys’ fees as a deterrent to specious trade secret claims. (FLIR Systems, Inc. v. Parrish (2009) 174 Cal.App.4th 1270, 1275.) Compelling a plaintiff to disclose the alleged trade secrets with “reasonable particularity” can be the first step in proving “bad faith.”

The purpose of section 2019.210 has been outlined in Advanced Modular Sputtering, Inc. v. Superior Court (2005) 132 Cal.App.4th 826. (See also, Perlan Therapeutics v. Superior Court (2009) 178 Cal.App.4th 1333.) These four purposes include: (1) promoting well-investigated claims and discouraging the filing of meritless trade secret complaints; (2) preventing plaintiffs from abusing the discovery process to learn about defendants’ trade secrets; (3) framing the issues in order to place reasonable limitations on discovery from defendants; and (4) allowing defendants to formulate well-reasoned defenses and not have to wait until the eve of trial. (Advanced Modular, supra, 132 Cal.App.4th at 833-34.

The Perlan court analyzed what has been described as the “’ubiquitous’ problems of litigating the appropriate scope and timing of trade secret identification.” (Id. at 1344.) Plaintiffs rarely provide detailed descriptions of the alleged trade secrets without a court order. They do so for numerous reasons, some more legitimate than others. Plaintiffs do not want to be tied down early in the litigation in the hope of amending or refining their contentions as the litigation and discovery progress. Plaintiffs also have the legitimate concern that, in the event defendants did not successfully misappropriate all their trade secrets, a detailed description in the section 2019.210 statement might somehow be leaked to the public, thereby depriving plaintiffs of the economic value of the trade secret. Conversely, defendants are legitimately interested in tying a plaintiff down early in the litigation for numerous reasons – the first of which was acknowledged by the Court in Advanced Sputtering: “[to promote] well-investigated claims and discourage the filing of meritless trade secret complaints.” (Id. at 833-34.)

A defendant must establish that a plaintiff brought a trade secret misappropriation claim in “bad faith” to obtain an award of attorneys’ fees. The courts have determined that “bad faith” consists of both “objective speciousness of the plaintiff’s claim . . . and . . . subjective bad faith in bringing or maintaining the claim.” (Gemini Aluminum Corp. v California Custom Shapes, Inc. (2002) 95 Cal.App.4th 1249, 1262; see, also, FLIR Systems, supra, 174 Cal.App.4th at 1275.)

The disclosure requirements of section 2019.210 help define whether there was any merit to the claim. “Objective speciousness exists where the action superficially appears to have merit but there is a complete lack of evidence to support the claim.” (FLIR Systems, supra, 174 Cal.App.4th at 1276.) The standards of Code of Civil Procedure section 128.7, subdivision (b) do not apply. Section 128.7, subdivision (b) does not allow sanctions if the plaintiff can establish that, at the time of filing the complaint, there was a belief the allegations would have evidentiary support after a reasonable opportunity to conduct discovery. That is not the definition of “bad faith” under CUTSA.

Accordingly, the plaintiff, to avoid a finding of “bad faith” under CUTSA, must point to some evidence of trade secret misappropriation. It is simply not sufficient to show that the plaintiff believed that, at the time of filing the complaint, discovery would uncover some evidence of misappropriation. The initial disclosures under section 2019.210 help define the alleged secrets to which evidence of misappropriation must pertain.

Supreme Court Rules DOMA Section 3 Unconstitutional

Today the United States Supreme Court ruled that Section 3 of the federal Defense of Marriage Act (DOMA) is unconstitutional. The case, United States v. Windsor, 570 U.S. ____ (2013), involved the portion of DOMA that stated that the federal government will only recognize marriages between opposite-sex spouses for purposes of federal law. There are over 1,000 federal laws that address marital status, and DOMA’s Section 3 denied validly married same-sex couples myriad protections and responsibilities under federal law. Because of the Windsor decision, same-sex spouses who are validly married under state law will now also be treated as married under federal law.

Edith Windsor married Thea Spyer, her partner of 46 years, in Ontario, Canada, in 2007. At the time, their state of residency, New York, did not allow same-sex marriage, but it did recognize the validity of their Canadian marriage. When Ms. Spyer died in 2009, she left her entire estate to Ms. Windsor. Ms. Windsor filed Ms. Spyer’s federal estate tax return and claimed that she was owed a refund of $363,053 as the surviving spouse. Under federal tax law, property passing from a deceased spouse to a surviving spouse is not subject to estate tax. However, DOMA prevented the IRS from recognizing Ms. Windsor and Ms. Spyer’s marriage, and the refund claim was denied. The federal District Court and the Second Circuit Court of Appeals ruled in favor of Ms. Windsor, holding that the applicable provisions of DOMA were unconstitutional and ordering that the Treasury refund the estate tax paid to Ms. Windsor with interest. The government appealed that decision to the U.S. Supreme Court.

In today’s U.S. Supreme Court decision, Justice Kennedy, writing for the majority, stated Section 3 of DOMA violates the due process and equal protection principles of the Fifth Amendment to the U.S. Constitution because it was principally designed to impose an unequal status on otherwise validly married same-sex couples. Specifically, Section 3 tells these couples that “their otherwise valid marriages are unworthy of federal recognition . . . plac[ing] same-sex couples in an unstable position of being in a second-tier marriage.” Slip op. at 23. To the extent that a state has chosen to allow same-sex marriage, the U.S. Constitution prohibits the federal government from imposing “a disability on the class [of same-sex spouses] by refusing to acknowledge a status the State finds to be dignified and proper.” Slip op. at 25.

Although the decision takes effect immediately, I would caution same-sex spouses to expect some glitches along the way. Because of the number of federal laws that are tied to marital status, it will likely take weeks and months for various state and federal agencies to fully adjust to this change, educate their employees, and issue the appropriate regulations.

For same-sex couples doing their estate planning, this decision may have a major effect on the structure of their estate plan. For example, same-sex spouses are now eligible for the federal estate tax marital deduction (and so may use “QTIP” trusts and make portability elections); they may now make unlimited lifetime gifts to their spouses; and they are now eligible for spousal status on retirement accounts. For same-sex spouses with estate plans currently in place, I would strongly recommend contacting your lawyer to discuss whether the Windsor decision will affect you.

It is important to note that this ruling only applies to lawful same-sex marriages. Currently, 13 states, the District of Columbia, and a number of Native American tribes currently allow same-sex marriage or have laws legalizing same-sex marriage set to go into effect this year. Because of the Supreme Court’s decision in Hollingsworth v. Perry this morning (see Marriage Equality Returns to California), California is included among those states. Additionally, Windsor does not affect Section 2 of DOMA, which permits states to refuse to recognize same-sex marriages performed in other states.

For those who wish to read the case in full, Windsor has somewhat of an unusual procedural history, as the Executive Branch (which enforces DOMA) asserted that it believed that DOMA was unconstitutional and declined to defend it in court, but it continued to enforce DOMA and denied Ms. Windsor’s estate tax refund. The U.S. House of Representatives, through the Bipartisan Legal Advisory Group (BLAG), defended the law instead. After a significant amount of debate as to whether the U.S. Supreme Court had jurisdiction to hear the case and BLAG had standing to defend DOMA, the Supreme Court determined that it had jurisdiction and reached the merits of the case. A substantial portion of the majority opinion and the dissenting opinions focuses on this issue.

Marriage Equality Returns to California

The United States Supreme Court issued its opinion in Hollingsworth v. Perry, 570 U.S. ___ (2013), this morning, regarding the validity of Proposition 8. The outcome is that same-sex marriage is once again legal in California. The Supreme Court did not rule on a specific right to same-sex marriage, but rather it stated that neither it nor the federal Court of Appeals for the Ninth Circuit (which includes California) had the power to hear the case. Hollingsworth is largely a procedural case, and it requires some background to fully understand.

In 2008, the California Supreme Court held that the California Constitution’s equal protection clause prohibited limiting marriage to opposite-sex couples. Shortly thereafter, California voters passed Proposition 8, which amended the state constitution to restrict marriage to opposite-sex couples. The Respondents in Hollingsworth, two same-sex couples, filed suit against various California state and local officials in federal District Court asserting that Proposition 8 was invalid under the Fourteenth Amendment of the U.S. Constitution. California state officials declined to defend Proposition 8, and the District Court allowed the Proponents (the parties who put Proposition 8 on the ballot) to defend it. The District Court then declared Proposition 8 unconstitutional, and state officials declined to appeal. The Proponents then appealed to the Ninth Circuit Court of Appeals. The Ninth Circuit ultimately held that Proposition 8 was unconstitutional, and the Proponents appealed to the U.S. Supreme Court. Even though the Ninth Circuit found Proposition 8 to be unconstitutional, it put a “stay” in place, meaning that same-sex marriages were put on hold while the appeal to the Supreme Court was pending.

In order for a case to be heard in federal court, the U.S. Constitution requires that there must be an “actual controversy” and parties must have standing; that is, there must be a concrete and personal injury to the parties that can be remedied. Generalized injuries are typically not sufficient to confer standing, nor is being a “citizen” or a “taxpayer.” In Hollingsworth, the Respondents had standing to sue in the District Court because they had an actual injury – California’s refusal to permit them to marry. Once they won and the state declined to appeal, their injury had been fully redressed. The Proponents of Proposition 8 contended that they had standing to appeal the decision to the Ninth Circuit (and subsequently the Supreme Court) because of their special role in the ballot initiative process. The Ninth Circuit eventually concluded that the Proponents had standing, but Proposition 8 was unconstitutional.

However, the U.S. Supreme Court today has reversed the Ninth Circuit and stated that the Proponents lacked standing because they failed to show a particularized harm. Even though they were the driving force behind putting Proposition 8 on the ballot, once it passed, the Proponents’ interest in defending the law became indistinguishable from the general interest of every other Californian. Further, the Proponents did not qualify as “agents” of the state or the people of California, and thus had no special status that might confer standing.

Because standing is a threshold question in federal court, the U.S. Supreme Court did not reach the merits of the Hollingsworth case. This means they did not rule on whether Proposition 8 is unconstitutional. The Supreme Court vacated the Ninth Circuit’s judgment that Proposition 8 is unconstitutional and sent the case back to the Ninth Circuit with instructions to dismiss it because the Proponents lack standing to bring their case in federal court.

The next step will be for the Ninth Circuit Court of Appeals to officially dismiss the case and lift the stay. Once the stay is lifted, the District Court’s decision that Proposition 8 is unconstitutional under the U.S. Constitution will go into effect. Governor Jerry Brown has already ordered the California County Clerks’ offices to begin issuing marriage licenses to same-sex couples at that time. The Proponents have stated that they will continue to pursue legal action to enforce Proposition 8, but for the time being, same-sex marriage will once again be legal in California as soon as the Ninth Circuit acts.