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California Supreme Court Holds that Payroll Services Provider ADP Cannot Be Sued for Breach of Contract, Negligence, and Negligent Misrepresentation by a Former Employee Seeking Unpaid Wages

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.

Changing Prop 65 Requirements at Residential Rentals

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.

TRUE STONE v. KEYSTONE: Stone Brewing’s Motion for Preliminary Injunction is Denied, but the Court’s Ruling Indicates a Finding of Infringement Against MillerCoors is Likely.

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.”

Three-Stripes and the Burden of Irreparable Injury

adidas and Skechers are athletic shoe and apparel manufacturers who have a long history of litigation between them arising out of claims that Skechers has repeatedly infringed upon adidas’ trademarks. In Adidas America, Inc. v. Skechers USA, Inc. (decided May 10, 2018), the Ninth Circuit once again had to weigh in on Skechers’ alleged infringement of adidas’ trademarks.

adidas is well known for its “three-stripe” mark, which it has featured on its shoes and clothes for decades as part of its branding strategy and for which it owns a federal trademark. adidas claims that the mark is worth millions of dollars in sales and that it invests heavily to advertise the three-stripe mark in various media. In past lawsuits with Skechers, Skechers has had to admit that adidas is “the exclusive owner” of the three-stripe mark and has agreed not to use it or any other protected mark, which may be “confusingly similar thereto.”

In September 2015, adidas sued Skechers once again for trademark infringement, among other claims, arising out of the adidas Stan Smith shoe and the competing Skechers Onyx shoe (which this article will not discuss) as well as Skechers Relaxed Fit Cross Court TR shoe, which utilized a three-stripe mark similar to adidas trademark. adidas successfully moved for a preliminary injunction in the trial court barring Skechers from manufacturing, distributing, advertising, selling or offering for sale the Cross Court shoe. Skechers appealed that decision to the Ninth Circuit.

The Ninth Circuit began by recognizing that it reviews the issuance of a preliminary injunction for abuse of discretion which means that the Court’s “decision is based on either an erroneous legal standard or clearly erroneous factual findings ….” To obtain an injunction, a plaintiff usually has to establish: (1) the likelihood of success on the merits of its claim(s); and (2) that it is likely to suffer irreparable harm in the absence of an injunction.

The Ninth Circuit, in reviewing the lower court’s issuance of the injunction as to Skechers’ Cross Court shoe, found that the trial court had properly determined that adidas had established a likelihood of success on the merits of its claims. To meet its burden of establishing trademark infringement, adidas had to show “among other things, ownership of its trademark and a likelihood of confusion between its and the defendant’s [Skechers] marks.” Given that Skechers had essentially conceded adidas ownership of the three strip mark, the only issue was whether adidas had met its confusion element.

The Ninth Circuit found that the district court had properly applied the Sleekcraft factors to find that they favored adidas in finding a likelihood of trademark infringement. The Court found the following significant in reaching this determination: (1) both the cross court and adidas designs have three-stripes; (2) although there may have been slight differences in the three-stripes marks, they were attached to closely related products and the court could overlook any minor differences between them; (3) there was significant strength in adidas three-stripe mark given that it was “more likely … to be remembered and associated in the public mind with the marks’ owners”; and (4) Skechers having previously admitted the three-stripe mark belonged to adidas, could be construed as having adapted the mark similar to adidas’ to deceive the public. Taken together, these factors weighed heavily in adidas favor and the Ninth Circuit found that the trial court had properly concluded that adidas had established the likelihood of success on the merits as to its trademark infringement claim.

Next, the Ninth Circuit turned to adidas’ trademark dilution claim. Trademark dilution is “the lessening of the capacity of a famous mark to identify and distinguish goods or services regardless of the presence of or absence of: (1) competition between the owner of the famous mark and other parties; or (2) likelihood of confusion, mistake or deception.” In order to establish dilution, a plaintiff must show several factors which are similar to the Sleekcraft factors. In opposing adidas’ trademark dilution claim, Skechers relied on many of the same objections regarding the trademark infringement claim which the Ninth Circuit concluded had properly been overruled. Skechers further argued that adidas failed to produce evidence of the degree of recognition of the three-stripe market, but the Court rejected this finding and concluded that there was significant evidence that “the three-stripe mark enjoyed a high degree of recognition.” Like the trademark infringement claim, the Ninth Circuit affirmed the trial court’s finding as to adidas’ trademark dilution claim in support of the granting of the motion for preliminary injunction.

However, the Court found that the trial court had erred in finding that there was a likelihood of irreparable harm. adidas had argued that Skechers, by selling the Cross Court shoe, had “harmed adidas’ ability to control its brand image because consumers who see others wearing Cross Court shoes, would associate the allegedly lesser quality Cross Courts with adidas and its three-stripes mark.” The Ninth Circuit concluded that there was no evidence in the record to support this loss of control theory.

First, the Ninth Circuit recognized that this claim relied on the assumption that adidas is viewed by consumers as a premium brand while Skechers is viewed as a lower quality discount brand. However, the only evidence offered by adidas in support of this position were statements made by adidas personnel. The Ninth Circuit concluded that “Skechers’ reputation among the ranks of adidas employees does not indicate how the general consumer views it.”

Second, the Ninth Circuit rejected this loss of control theory on the ground that this theory of harm was contradictory to adidas’ theory of consumer confusion to establish its likelihood of success on the merits. Essentially, adidas was arguing not that a Cross Court purchaser would believe that he or she was buying an adidas product, but that someone else seeing the wearer of a Cross Court shoe would somehow mistake it for an adidas. The Court found it inconsistent as to how a supposed consumer viewing the Cross Court shoe from afar would somehow (1) mistake it for an Adidas; and (2) somehow be able to determine that it was in fact a lower quality shoe. Drilling down a bit further, the Ninth Circuit said that if an observer was not close enough to be able to see the Skechers logos on the shoes that would distinguish from an adidas shoe, how could that observer reasonably assess the quality of the shoes? Further, how could that observer determine that the shoe was a “discount” brand without knowing the price of the shoe or being able to determine it was a Skecher shoe to begin with. The Court found that this failure of proof on the part of adidas meant that the trial court should have denied the motion for preliminary injunction as to the cross Court shoe.

Circuit Judge Clifton dissented from the opinion and found that the Court should have upheld the preliminary injunction in its entirety. Judge Clifton found that the Ninth Circuit should have been more deferential to the trial court’s factual findings and believed that there had been sufficient evidence under prior case law to establish irreparable injury.

Litigants in trademark infringement/dilution cases seeking injunctive relief need to remember that they bear the burden of establishing with admissible evidence both the likelihood of success on the merits and the danger of irreparable injury. Merely relying on internal employee statements may not be sufficient to meet this burden.

California’s “Red Flag” Laws Can Help Prevent Tragedies Like Stoneman Douglas

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:

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:

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:

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:

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.

UPDATE: California Supreme Court Says Settling Individual Labor Code Claims Does Not Kill PAGA Claims

Update as of March 12, 2020: The California Supreme Court reversed the court of appeal, meaning that settling individual claims no longer prevents an employee from having standing to bring a PAGA claim. Because the settlement agreement in Kim explicitly excluded PAGA claims, it remains unclear whether a plaintiff who settles an individual lawsuit would be precluded from later filing a PAGA making the same allegations. The Supreme Court refused to say whether the primary precedent on this point was correctly decided. So, at this point, if you want to be sure you have resolved PAGA liability, you need a court-approved settlement of a PAGA claim seeking the penalties you want absolved.

On December 29, 2017, in Kim v. Reins International California, Inc., the Second District Court of Appeal in Los Angeles ruled that a plaintiff no longer has standing to assert PAGA claims once the plaintiff has settled and dismissed his individual claims against his employer. This decision could have far-reaching implications in PAGA litigation, changing the way both plaintiff’s attorneys and defense attorneys approach PAGA lawsuits.

PAGA Background

PAGA, officially known as the Labor Code Private Attorneys General Act of 2004, allows an “aggrieved employee” to act as a private attorney general and sue her employer for violations of the California Labor Code. PAGA allows one aggrieved employee to act on behalf of all aggrieved employees, which can multiply the number of violations, and the associated penalties, an employer faces tens or hundreds of times over. If the employee wins the lawsuit, the aggrieved employees collect 25% of the penalty imposed by the court, and the rest goes to the State of California.

PAGA says that “‘aggrieved employee’ means any person who was employed by the alleged violator and against whom one or more of the alleged violations was committed.” The Second District’s decision turned on this statutory definition of “aggrieved employee.”

Factual Background

The plaintiff, Justin Kim, started out as an aggrieved employee by alleging that his employer, Reins, had misclassified training managers like himself as exempt from overtime requirements, and therefore had failed to pay overtime wages, to allow proper meal and rest periods, to provide adequate wage statements, and to pay for waiting time. Kim had signed an arbitration agreement when he began working for Reins, so the trial court granted Reins’s request to send Kim’s individual claims under the Labor Code to arbitration and put the PAGA claims on hold until the arbitration was complete. While waiting for the scheduled arbitration, Reins offered to settle the case with Kim, and Kim accepted.

After settling Kim’s individual claims, Reins asked the trial court to decide, as a matter of law, that Kim could not maintain his PAGA claims because he was no longer an “aggrieved employee” under the law. The trial court granted judgment in Reins favor on the PAGA claims, saying that once Kim dismissed his individual claims pursuant to the settlement agreement, he “was no longer suffering from an infringement or denial of his legal rights,” and therefore was no longer “aggrieved.”

Kim’s Appeal

Kim appealed, but the Second District agreed with the trial court’s reading of the statute, stating “PAGA was not intended to allow an action to be prosecuted by any person who did not have a grievance against his or her employer for Labor Code Violations.” Despite this broad statement of policy, the Court of Appeal, likely foreseeing the upheaval its decision could cause, attempted to confine its decision to the “specific circumstances at issue in this case: Kim asserted both individual Labor Code claims and a PAGA claim in the same lawsuit, and he voluntarily chose to settle and dismiss his individual Labor Code claims with prejudice.” The consequences of this decision will be left for future litigants to fight out.

What Comes Next

After the Court of Appeal handed down its decision, Kim’s attorney was paraphrased predicting how plaintiff’s attorneys will respond to the decision: “the decision essentially tells plaintiffs’ lawyers to either not bring individual claims, which would raise various ethical concerns if the plaintiffs have authorized such claims, or not settle such claims to protect a PAGA claim.”  Of course, clients, not attorneys, have the final say as to whether to settle lawsuits, so this decision does seem to give employers the ability to fight off PAGA liability by buying off aggrieved employees. Note, however, that this process could take some time, as any aggrieved employee can seek the full amount of PAGA penalties, and each settlement will only remove one potential plaintiff.

Looking further ahead, even if a plaintiff does not bring an individual claim or refuses to settle their individual claims, defense attorneys can seek to challenge the plaintiff’s standing by challenging whether the underlying Labor Code violations actually occurred. This could allow employers to essentially bifurcate the proceedings, challenging Labor Code violations without having the immediate threat of PAGA penalties hanging over them. Given that a different district of the Court of Appeal recently issued a decision allowing employees bringing PAGA claims to bypass defenses available to employers for the underlying Labor Code violations, the Kimdecision may offer employers a way to fight back by challenging the plaintiff’s standing.

Takeaways for Employers

It remains to be seen whether Kim will ask the California Supreme Court to review the Court of Appeal’s decision, but in the meantime, any employers facing PAGA lawsuits should consider challenging the employee’s standing. The Kim case also underlines the importance of arbitration agreements and of California’s “offer to compromise” law, which together can put some pressure on plaintiffs to accept settlement offers, even if plaintiff’s attorneys are pushing their clients not to settle to preserve the PAGA claims that are more valuable to the attorney. Talk to an employment lawyer to determine whether your employment agreement offers the sort of protection that Reins took advantage of in this case.

Reverse Veil Piercing: A Judgment Against You Can Become a Judgment Against Your Company

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.


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.

Taking his talents to the Southern District of New York: Are LeBron James’ tattoos subject to copyright?

With nearly 30% of Americans sporting at least one tattoo (up from 20% just four years ago), tattoos are becoming commonplace.  This is even clearer among younger Americans, with nearly half of Millennials sporting ink.  Today a majority of Americans report that they would feel comfortable seeing a person with visible tattoos in a range of industries and professions.  Per the Harris Poll, “comfort ranges from highs of 86% for athletes, 81% for IT technicians and 78% for chefs, to lower majorities of 59% each for primary school teachers and judges, and even 58% for presidential candidates.”  With growing acceptance, tattoos are also beginning to enter the world of fine art, with exhibitions and even TV shows displaying the breadth and talent of tattoo artists.

However, tattoo artists and patrons alike should be wary of the legal implications for their expressionistic choices.  What happens when images, especially copyrighted ones, are inked on the human body?  No US court has yet ruled that the copyright applies, despite several lawsuits resulting in settlements or dismissals.  However, we may be about to receive a major ruling on the copyright of tattoos, thanks to LeBron James.

James has several tattoos, which have been displayed prominently on the court, in interviews, as well as in his promotional photos and videos for sponsorships like Nike.  They are part of his “look” and the image he sells as part of the sponsorship.

They also appear in virtual representations of him, including in the video game NBA 2K16, which features lifelike simulations of NBA players, including many with clearly-visible tattoos.

But he has also sold the rights to some of his tattoos.  Solid Oak Sketches, LLC acquired the right to certain of James’ tattoos (along with other NBA players), apparently for the specific purpose of bringing a lawsuit against the makers of NBA 2K16, per NBA 2K16’s  recent Motion for Judgment on the Pleadings.

Solid Oak claims that James’ tattoos are protected by copyright law, which protects “original works of authorship fixed in any tangible medium of expression” that “is sufficiently permanent or stable to permit it to be perceived, reproduced, or otherwise communicated for a period of more than transitory duration.”  17 U.S.C. § 102.  Solid Oak argues that the tattoos are a “fixed medium” and that any party seeking to show James’ tattoos must obtain consent from the rights holder – i.e. Solid Oak.

The makers of NBA 2K16 argue, on the other hand, that its use of James’ tattoos were de minimis, as they appear only briefly in the video game and at a high angle, making them hard to see.  They further argue that any use of the tattoos is fair use, because the video game’s use is transformative and because James displays the tattoos regularly, including in televised games, sponsorship deals, and press events, without Solid Oak’s approval or acknowledgement of the copyright.

In a similar lawsuit involving Mike Tyson’s famous face tattoo, as displayed on one of the characters in the Hangover 2 movie, the well-known copyright legal scholar David Nimmer submitted a declaration arguing that tattoos are not subject to copyright.  He reasoned that, if tattoos were copyrightable, the copyright holder would be able to, among other things, prohibit the tattooed individual from ever destroying the tattoo:

The tattoo qualifies as an original “work of visual art” that may gain “recognized stature,” with the result that a court may enjoin its destruction. See 17 U.S.C. § 106A(a)(3)(B). After a court invokes that provision to bar him from removing his tattoo, Mr. Tyson literally may not show his own face to the world; that is, he will be required to keep Mr. Whitmill’s handiwork spread across his face, regardless of his own desires. Copyright law thereby becomes the instrument to impose, almost literally, a badge of involuntary servitude, akin to the mark with which ranchers brand the cattle they own.

Nimmer also predicted the NBA 2K16 litigation, stating that any article that features Mr. Tyson’s face, network that broadcast Mr. Tyson’s fights, or filmmakers recording Mr. Tyson would violate the artist’s copyright.  That lawsuit ended in settlement in 2011 however, leaving the issue unresolved.

The Court should rule on NBA 2K16 Motion for Judgment on the Pleadings shortly.  In the meantime (and just in case the lawsuit does not result in a final determination of this issue), tattoo artists may want to consider more creative options for protecting their artistry while also allowing the vibrant community of artists and tattoo enthusiasts.  Options include a tattoo registry, which would both protect against copycat tattoos and allow artists to protect their original works of art.  See, e.g., Matthew Beasley, Who Owns Your Skin: Intellectual Property Law and Norms Among Tattoo Artists, 85 S. Cal. L. Rev. 1137 (2012).  Per Beasley, this would comport with the established norms of the tattoo artist community, and would respect both the rights of the artist and the tattooed.

One thing is clear – in this unresolved area of law, both artists and those desiring a tattoo would be wise to consider these issues well in advance of walking into the tattoo shop.

No Privilege Extended to Communications With PR Consultant, But Court Provides Roadmap to Possible Application

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.5th 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.5th 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.

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

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.