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By Trusts & Estates

Last Thursday, the United States Supreme Court ruled in Clark v. Rameker that funds held in inherited individual retirement accounts (IRAs) are not “retirement funds” for bankruptcy purposes.

In October 2010, the Clarks filed for bankruptcy and claimed that Heidi Clark’s $300,000 inherited IRA was exempt from their bankruptcy estate under Section 522 of the Bankruptcy Code (which provides that tax-exempt retirement funds are exempt from a bankruptcy estate). The bankruptcy trustee and creditors objected to this, taking the position that the funds were not “retirement funds” within the meaning of Section 522. The Bankruptcy Court agreed with the trustee and creditors.

The district court ruled that inherited IRAs are exempt because they retain their character as retirement funds, but the US Court of Appeals for the Seventh Circuit reversed that ruling. The Supreme Court agreed with the Seventh Circuit, holding that the funds in an inherited IRA are not set aside for the debtor’s retirement and, thus, are not “retirement funds” under the exemption in Section 522.

Driving the Court’s decision is the fact that “[i]nherited IRAs do not operate like ordinary IRAs.” First, in contrast to traditional IRAs, which impose a ten percent penalty on funds withdrawn before age 59 ½, individuals may withdraw funds from an inherited IRA at any time without paying a penalty. What is more, the owner of an inherited IRA must either withdraw the entire account balance within five years of the original owner’s death or take annual minimum distributions. Finally, unlike a traditional or Roth IRA—where the whole purpose of the account is to provide tax incentives to the owner for making contributions—the owner of an inherited IRA may never add funds to an inherited IRA.

Justice Sonia Sotomayor, writing the opinion, noted that “the possibility that some investors may use their inherited IRAs for retirement purposes does not mean that inherited IRAs bear the defining legal characteristics of retirement funds. Were it any other way, money in an ordinary checking account (or, for that matter, an envelope of $20 bills) would also amount to “retirement funds” because it is possible for an owner to use those funds for retirement.”

The Clark decision highlights an important estate planning tool that many individuals and attorneys often overlook: the IRA trust. Briefly, an IRA trust (sometimes referred to as a “conduit trust”) is a trust that has special—very technical—provisions that allow the trustee of the trust to manage the IRA for the benefit of the beneficiary, while at the same time preserve the ability to “stretch” the tax-deferred growth of the IRA over the life expectancy of the individual beneficiary. In this regard, the tax advantages associated with naming an individual directly as the beneficiary of the IRA are combined with the advantages of leaving a gift in trust, which includes (among other things) the ability to shield the assets of the trust from a beneficiary’s creditors—even in bankruptcy.

If you would like to discuss how your retirement benefits fit into your estate plan, or see whether your existing trust qualifies as a conduit trust, please contact one of the experienced estate planning attorneys at Weintraub Tobin.

“People rarely appreciate a ‘how can you do this to me?’ scene when they first give their notice,” added Chuck Post, Shareholder of Weintraub Tobin.

Find out What to Do When Your Best Employee Quits.

What do yoga instructors, event planners and exterminators have in common?  These are fields that are reportedly witnessing an increase in the use of noncompete provisions in employment agreements.  Details of this increase in the use of noncompete provisions were reported in a New York Times article this Sunday.  Click here to view article.

While the article makes clear that such provisions are generally illegal in California, it observes that there is a large variation between other states’ laws, from states having some restrictions on the use of noncompetes to Texas and Florida which place relatively few limits on them.  These variations can raise significant issues for California employers who are in the process of hiring or recruiting employees who either work outside California or work for non-California based companies.  In making such decisions, employers are advised to determine whether potential employees are subject to a noncompete provision and obtain legal advice as to the enforceability of such provision under the applicable state law.

In the one corner, Paula Petrella, the daughter of Frank Petrella, co-author of the 1963 Raging Bull screenplays and book.  In the other corner, MGM, the owner of the copyright in the critically acclaimed motion picture Raging Bull, based on the life of boxing champion Jake LaMotta.   At issue, a 2009 copyright infringement suit against MGM in which Petrella alleged that MGM violated and continued to violate her copyright in the 1963 screenplay by using, producing, and distributing the Raging Bull motion picture.  MGM, landed two very solid blows in both the District Court of the Central District of California and at the 9th Circuit;  MGM was able to have Petrella’s case dismissed on the equitable doctrine of laches.  However, the Supreme Court decided that Petrella could go another round.

After retiring from boxing, Jake LaMotta worked with Frank Petrella to tell his life story.  Their efforts resulted in two screenplays, one registered in 1963, the other in 1973, and a book, registered in 1970.  In 1976, Frank Petrella and LaMotta assigned their rights in the three works, including renewal rights, to Chartoff-Winkler Productions, Inc. Two years later, an MGM subsidiary, United Artists, acquired the motion picture rights to the book and both screenplays.  In 1980, MGM released the film Raging Bull.

A year after the release of the film, Frank Petrella died.  Works registered under the pre-1978 regime (such as the 1963 screenplay) enjoyed an initial 28-year period of protection followed by a renewal period of up to 67 years.  Congress provided that the author’s heirs inherit the renewal rights.  Since Frank’s death occurred during the initial terms of the copyrights in the screenplays and book, his renewal rights reverted to his daughter, who could renew the copyrights unburdened by Frank’s assignment of the renewal right to Chartoff-Winkler.  Paula Petrella renewed the copyright in the 1963 screenplay in 1991.  (The copyrights in the other screenplay and book were not timely renewed.)  In 1998, Petrella’s attorney informed MGM that Petrella was the owner of the copyright in the 1963 screenplay and that MGM’s exploitation of any derivative work, including the Raging Bull motion picture,  infringed her copyright.  For two years, Petrella and MGM took jabs at each other by exchanging letters in which MGM denied the validity of the infringement claims and Petrella repeatedly threatened to take legal action.

On January 6, 2009, Petrella filed a copyright infringement suit in which she alleged that MGM violated and continued to violate her copyright in the 1963 screenplay by distributing the Raging Bull motion picture.  Petrella sought relief only for acts of infringement occurring on or after January 6, 2006.  MGM moved for summary judgment on, among other grounds, the equitable doctrine of laches.   MGM argued that Petrella’s delay of 18-years from the time she renewed the copyright until the time she sued, was unreasonable and prejudicial.  The District Court agreed and granted MGM’s motion, stating  “[i]f any part of the alleged wrongful conduct occurred outside of the limitations period, courts presume that the plaintiff ’s claims are barred by laches.”  Since Petrella became aware of her potential claims more than three years before she filed suit, her claims were barred under the doctrine of laches.  Petrella appealed to the Ninth Circuit which affirmed the District Court’s decision.  The Supreme Court granted certiorari.

At issue before the supreme Court was whether the doctrine of laches may bar claims for infringement when the infringing activity is one in a series of continuing similar acts and the copyright owner was aware of such acts well prior to the three-year limitation term.  MGM contended that the doctrine of laches is an independent affirmative defense, discrete and separate from the statute of limitations.  As such, MGM argued, the doctrine of laches could apply to a claim brought within the statute of limitations period.  MGM argued that laches must be available as a defense to prevent a copyright owner from waiting to see what the outcome of an alleged infringer’s activities will be. MGM made issue of the fact that Petrella conceded that she waited to file the complaint because the film was deeply in debt and would probably never recoup.

The Supreme Court was not convinced. The Court noted that copyright owners are not required to challenge each and every actionable infringement, and there is nothing wrong with waiting to see what effect the infringer’s work has on the copyrighted work.  “Even if an infringement is harmful, the harm may be too small to justify the cost of litigation” the Court stated.  Further, under the separate accrual rule, each time a defendant commits an act of infringement, a separate cause of action arises with its own limitation period.  If the Court adopted MGM’s position,  copyright owners would have to file a federal lawsuit for each and every act of infringement, regardless how innocuous they may seem.  The Act’s three-year limitations period and the separate-accrual rule, avoids these this unwanted result; a copyright owner may defer suit until she can estimate whether litigation is worth the effort.

The Supreme Court noted that when a defendant has engaged in a series of independent acts of copyright infringement, if the copyright holder brings suit it will be timely under the Act’s three year statute of limitations with respect to acts of infringement that occurred within the three-year window, but untimely with respect to prior acts of the same or similar kind.  Only by disregarding the Copyright Act’s statute of limitations provision and the separate-accrual rule the Supreme Court determined could the Court of Appeals presume that infringing acts occurring before January 6, 2006 bar all relief.  The Court determined that “Congress’  time provisions secured to authors a copyright term of long duration, and a right to sue for infringement occurring no more than three years back from the time of suit. That regime leaves “little place” for a doctrine that would further limit the timeliness of a copyright owner’s suit.”

By: Labor & Employment

On May 29, 2014, the California Supreme Court in Duran v. U.S. Bank National Association clarified employers’ rights in defending against employee misclassification class action cases. The Court held that in defending against such claims, employers must be permitted to present relevant defenses, even if such defenses involve individual issues. The Court’s analysis should have a sweeping effect on trial courts by requiring a more thorough analysis at the time of class certification. Trial courts can no longer leave the issue of a trial plan in the queue and wait to see if the case proceeds to trial, which is exceedingly rare in class actions. Rather, trial courts will need to consider and define a manageable and fair trial plan at the outset that will permit employers to litigate individual liability defenses.

Duran arose from a class action brought by 260 current and former loan officers of U.S. Bank. The employees claimed they had been misclassified as exempt employees under the outside salesperson exemption and, therefore, had been denied overtime pay.

The class was certified and a trial management plan was created that allowed a random sampling of 21 employees to testify at trial. Although the Bank tried to introduce numerous declarations from absent class members who claimed they met the exemption standard, the court refused to admit the declarations. The employer was only permitted to present evidence related to the 21 class members in the sample.

In the court’s words, Duran was “an exceeding rare beast, a wage and hour class action that proceeded through trial to verdict.” Based on the testimony of the random sampling of class members, the trial court awarded $15 million in restitution and $18 million in attorneys’ fees to all of the class members.

The Bank appealed. The California Court of Appeal reversed the trial court, decertified the class, and held that the trial plan was “fatally flawed” because it deprived the employer of its due process right to litigate affirmative defenses – the trial plan prevented the employer from defending against the individual claims of 90% of the class members. The employees appealed to the California Supreme Court.

In a decision that can be called a “win” for employers, the Supreme Court affirmed the appellate court’s decision that the trial plan was flawed and prevented the Bank from presenting evidence that some of the class members were not misclassified. Although the court rejected the idea that an employer can present individual evidence for every class member, the court confirmed the right of an employer to present individualized evidence to challenge “common evidence” in a class action.

The court did not wholly reject the use of sampling, but emphasized that, at the class certification state, the litigation of individual issues, including those arising from affirmative defenses, must be managed fairly and efficiently. In the court’s words, “Trial courts must pay careful attention to manageability when deciding whether to certify a class action.” The court clarified that such statistical methods must not undermined a defendant’s right to present relevant evidence.

The court remanded the case to the lower court for a new trial and held that the trial court may hear a new motion for class certification.

Duran should be useful guidance for trial courts in determining whether employee wage class actions can be certified, and, if so, how individual issues must be managed through a trial plan. Much more time will likely be expended by both sides to argue the feasibility of any trial plan based on sampling and statistics. Trial courts may also be asked to review class certification decisions to determine if, in light of this recent clarification, a certified class action should, in fact, remain certified.

We periodically discuss California law regarding non-compete provisions in this Blog. The California Supreme Court has made clear that non-compete provisions are unenforceable unless they fall within one of the statutory exceptions set out in sections 16601 et seq. (i.e., in connection with the sale of a business, goodwill, etc.).  Over the years, courts have observed a so-called “trade secret exception” to the general rule that non-competes are unenforceable, holding that non-compete provisions may be enforced to the extent necessary to protect a company’s trade secret information.  The U.S. District Court for the Northern District of California recently revisited this issue in, Arthur J. Gallagher & Co. v. Lang.  Its ruling suggests that the “trade secret exception” is on shakier ground.

Arthur J. Gallagher & Co. (“Gallagher”) is an insurance brokerage firm headquartered in Illinois that acquired a California insurance broker in September 2008.  The employees of the California agency signed employment agreements in connection with the acquisition that contained various non-compete and non-solicitation provisions.  These provisions included: (1) a provision barring employees from soliciting any “insurance related business with any individual partnership, corporation, association or other entity … about which [the employee] received trade secrets of [Gallagher] or any of its affiliates;” and (2) a provision that the employees would not “directly solicit, induce or recruit any employee of [Gallagher] or its affiliates to leave the employ of [Gallagher] or its affiliates.”

Defendant Lang submitted his resignation in January 2014 so that he could start a new insurance brokerage firm with two of his former coworkers.  Shortly thereafter, Gallagher clients began taking their business to Lang’s new company.   Gallagher sued Lang and claimed he breached the non-competition and non-solicitation provisions of his employment agreement, among other claims. Long moved to dismiss the breach of contract claims.  Although the employment contract had a choice of law provision identifying Illinois law as applying, the Court agreed with Lang that California law would apply to the interpretation of the non-competition provisions because of California’s “strong interest in protecting its employees from non-competition agreements under [Business and Professions Code] section 16600.”

The Court next recognized the well-established rule that “[u]nder California law, to the extent that the provisions of the agreement preclude Lang from soliciting business from Gallagher’s clients, they are void,” citing the California Supreme Court’s decision in Edwards v. Arthur Andersen, LLP.  During argument on Lang’s motion to dismiss, Gallagher argued that the non-compete provision should be enforceable because it protected its trade secret information.  The court seemingly rejected this argument and noted that the so-called “trade secret exception” to section 16600 was of doubtful “continued viability.”  The Court concluded that even if the exception was viable, it would not save the provision at issue  because it was simply too broad because it barred Lang from soliciting Gallagher’s customers regardless of whether or not he used Gallagher’s trade secret information.

Although the Court concluded that the non-compete provision was unenforceable under section 16600, it held that the non-solicitation of former employee’s provision was enforceable.  The Court reasoned: “Although California courts recognize that an employer may not prohibit its former employee’s from hiring the employer’s current employees, an employer may lawfully prohibit its former employees from actively recruiting or soliciting its current employees.”

The Court granted Lang’s motion to dismiss in part but allowed Gallagher to file an amended complaint to see if it could allege facts that Lang breached the non-compete provision in a manner consistent with section 16600 [unlikely given the fact pattern] and assert a trade secret misappropriation claim if possible.

The Gallagher decision is a reminder to employers that non-compete provisions will be heavily scrutinized by courts and likely to be struck down unless they fall within the narrow confines of the statutory exceptions.  Although the Gallagher Court was leery of the so-called “trade secret exception” to section 16600, it is possible that had the employment agreement been more narrowly drafted to tie the solicitation to the actual use of Gallagher’s trade secrets, it is possible the Court could have been persuaded to reach a different conclusion.  Employers should consult with legal counsel to see whether a non-compete provision can be crafted in a manner to comply with California law.

Let me start with a disclaimer.  This column is not really about intellectual property.  It’s about the unexpected – what happens when people stick to their principles and challenge the way it’s always been done.  Actually, this column is about a horse.  (But I’ll say something about intellectual property along the way.)

I have a second disclaimer.  I do not like horseracing.  It is physically stressful on the horses (who are mostly two and three–year olds) and they frequently get injured.  It is also a sport that often treats horses as disposable commodities; many racehorses are sent to slaughter after failed careers, although that is changing.  But this is a story with so much goodness, it has to be told.

First, the horse.  He is California Chrome.  He’s a three-year-old thoroughbred racehorse.  He now has a large fan club of “chromies” on social media everywhere.  The press calls him the Cinderella horse and the Sacramento Bee’s cartoonist Tom Meyer even portrayed him as a commencement speaker in Tuesday’s paper.  The press didn’t call him anything until he won the Kentucky Derby, the first leg of the Triple Crown, on May 3.  He was definitely under the radar, born and raised in California and starting his racing career here, in a sport dominated by Kentucky-bred horses.  Then there were those who said he couldn’t win the Preakness Stakes, the second leg of the Triple Crown.  On May 17, he won that one too, against a field of mostly fresh horses (horses who had not raced in the Kentucky Derby two weeks earlier and had had longer times to recuperate).

California Chrome is a chestnut colt with a white blaze and four white stockings.  Chestnut is a color like a shiny new copper penny.  The white markings are called “chrome” in horseracing.  His name was picked by a waitress out of several choices provided by the owners.

California Chrome was born in 2011 in Coalinga, California.  California Chrome’s sire (father) was Lucky Pulpit, who won some races in California.  His dam (mother) was Love The Chase, who won one of the six races she ran.  California Chrome was her first foal.

Trainers of other horses have observed that California Chrome has an easy-going personality, doesn’t get overly anxious going into the starting gate, and knows how to control his speed.  I could go on and on about this horse (or any horse for that matter), but I’ll move on.

Next, the owners.  Two couples, the Martins from Yuba City and the Coburns from Topaz Lake, Nevada.  The Martins have a testing lab located at McClellan; Steve Coburn works for a small company that makes magnetic strips; and Carolyn Coburn recently retired.  The two couples were part of a group in Northern California who had purchased Love The Chase for $30,000.  Because she lost most of her races, the ownership group decided to sell her on the recommendation of the trainer.  The two couples, new to horseracing and never having met, saw something special in her, and bought Love The Chase for $8,000, thinking she might be a good broodmare.

The Martins and Coburns entered Love The Chase in two races, both of which she lost.  Then they decided to breed her.  Someone in racing circles apparently told them they were “dumb asses” for deciding to breed Love The Chase.  The Martins and Coburns later named their partnership “Dumb Ass Partners” and designed a logo of a jackass in purple and green, their chosen racing colors.

Before breeding her, the owners did their research.  They learned that Love The Chase was descended from some very successful racehorses, including Northern Dancer, who won the Kentucky Derby and the Preakness in 1964, and Swaps (called “the California Comet”) who won the Kentucky Derby in 1955 and was a descendent of Man O’War.  They bred Love The Chase to a 10-year-old stallion named Lucky Pulpit, who had won three of his 22 races, and was descended from Seattle Slew, the 1977 Triple Crown Winner.  The stud fee was $2000.  California Chrome was born a year later, in February 2011.  Since then, the Martins and the Coburns have bred the same pair of horses two more times, producing two fillies.

The owners were offered $6 million for a 51% interest in California Chrome before he won the Kentucky Derby.  The new owner would have moved the horse and changed trainers.  Their answer: “Hell, no.”  The owners were also offered $750,000 (plus $250,000 for each Triple Crown race that California Chrome won) for Love The Chase, the filly they had bought from the ownership group because the trainer thought she was worthless.  In fact, the offer came through the same trainer.  The answer: you guessed it – not a chance.

The trainer.  The couples chose Art Sherman in Southern California.  Sherman, 77 years old, had a small training stable in Los Alamitos and a reputation for being a patient trainer.  Sherman, a jockey for 21 years and then a trainer since 1976, had won over 3000 races as either a jockey or a trainer.  The couples asked Sherman to train their “Derby Horse.”  Sherman had no previous experience training a horse for the Kentucky Derby, but he had been there before.  In 1955, he was the exercise rider for none other than Swaps, and, at age 18, had ridden in a boxcar with Swaps from California back to Kentucky where Swaps won the Kentucky Derby.  The two couples thought Art Sherman and his son, Alan Sherman, were the right ones for California Chrome, a six-generation descendent of Swaps.

Then there is the jockey – Victor Espinoza.  He was born in Mexico and learned to ride on a donkey.  He became a jockey at the suggestion of his brothers, at least one of whom was also a jockey.  He put himself through the jockey training school driving a bus in Mexico City.  In 2002, Espinoza rode War Emblem to win the Kentucky Derby.  He had watched films of California Chrome and told his agent he liked the horse and wanted to ride him.  As it turned out, California Chrome had raced six times with another jockey and Art Sherman was making a switch.  Espinoza jumped at the chance and rode California Chrome to six straight wins in 2013 and 2014, including the Kentucky Derby and the Preakness.  The owners and trainers say that Espinoza and California Chrome are a perfect match – that they work together – and sometimes one makes a decision and sometimes the other does.  Espinoza is enthusiastic about California Chrome and graciously gives the horse all the credit.  And Espinoza is a generous man – he donates 10% of his earnings to the City of Hope in Los Angeles to help children fight cancer.

So, it couldn’t happen to a better team: the horse, the owners, the trainer, and the jockey.  To win both the Kentucky Derby (1 and ¼ miles) and the Preakness (1 and 3/16 miles) is an amazing accomplishment, especially for the horse.  It is a terrific strain to run these races, and to win three races in five weeks is extremely difficult.  I hope they win the Belmont on June 7, not because we haven’t had a Triple Crown winner since Affirmed in 1978, but because they deserve it.

For those who think horseracing is just a matter of a jockey climbing on board a horse and pushing them to run, consider this.  What other sport requires such a close connection between a person and an animal?  As with all of the equestrian sports, horseracing involves the horse – who has a mind of its own.  It’s not like driving a car or a motorcycle, where you turn on a switch, or swimming or skiing, where the laws of physics govern, or even like basketball or baseball, where the team members can speak to each other in the same language.  In horseracing, a jockey weighing about 115 lbs. sits atop a horse weighing about 1000-1300 lbs. for a distance of a mile or more at speeds up to 40 mph.  The risk to horse and jockey is great, and mental toughness is required because that top speed can only be maintained for about ¼ of a mile, so horse and jockey have to decide when to push and how hard to push..

Now where is the intellectual property in this story? When he races, California Chrome wears a breathing aid called a “Flair strip.”  The strip looks like a band-aid and fits across the horse’s nose.  (Chromies have now taken to wearing purple band-aids on their noses in honor of California Chrome’s racing colors.)  The Flair strip is a “nasal support device” – a non-drug adhesive strip that physically supports the nasal passages of a horse during exercise.  Because horses breathe through their nose and cannot breathe through their mouth, their nasal passages partially collapse during vigorous exercise.  This impedes air flow, which limits oxygen to the lungs.  The Flair strip prevents the partial collapse of the nasal passages, increasing air flow and oxygen.  The Flair strip also prevents the rupture of the small capillaries in the lungs, a dangerous bleeding condition that can occur during strenuous exercise.

“Flair” is a federally registered trademark.  A trademark covers a word, phrase, logo, or design that is used by its owner in interstate commerce to indicate the source of a product or service.  A trademark gives the owner certain rights against infringers and protects consumers from confusingly similar trademarks.

The Flair strip is also patented.  It was invented by two veterinarians, who hold a number of patents on the Flair strip, and has been in use since the late 1990s.  The patents cover the device and the method of using it.  A utility patent covers an invention, which can be a machine, article of manufacture (such as the Flair strip), a composition of matter, or a process (such as the method of using the Flair strip).  To be patentable, the invention has to be novel and nonobvious.  A patent gives its owner the right to exclude others from making, using, selling, offering to sell, or importing the patented invention in the United States.

California Chrome has worn the Flair strip since last fall, when owner Perry Martin suggested that he wear it.  The strip is legal in almost all jurisdictions, and other racehorses have worn it.  New York was one state that had not approved it, but they did so after California Chrome won the Preakness in response to the request of Art Sherman.

Will California Chrome win the Belmont and become the 12^th horse in history to win the Triple Crown? I don’t know, but a lot of people will be watching.  The owners of Affirmed and Secretariat, the Triple Crown winners in 1978 and 1973, respectively, will be there, as will jockeys who won the last three Triple Crowns, in 1978, 1977, and 1973.  I will be cheering for California Chrome, but mainly I hope for a safe ride, with no injuries to any horse or jockey, and a long, healthy life in retirement for California Chrome.  I may even wear a purple band-aid on June 7.

This column addressed the Ninth Circuit’s decision in the case Petrella v. Metro-Goldwyn-Mayer, Inc., et al., approximately 18 months ago.  The Ninth Circuit held that the equitable defense of laches could be asserted to bar a claim for copyright infringement even if it was filed within the three-year statute of limitations.  As the column pointed out at that time, Justice Fletcher concurred in the opinion only because that it was consistent with prior Ninth Circuit precedent but pointed out that there had been a split among the various circuits as to whether this was a proper result.  Earlier this week, the U.S. Supreme Court considered this circuit split and found that the Ninth Circuit erred in allowing the defense of laches to bar a claim for infringement that was brought within the three year statute of limitations.

A short recap of the facts of the case are as follows:  Jake LaMotta retired from boxing and with his friend, Frank Petrella, worked together to write a book and two screen plays concerning LaMotta’s life.  The works were registered with the U.S. Copyright Office.  One screen play in 1963, a book in 1970 and another screen play in 1973.  In 1976, Frank Petrella and LaMotta assigned their rights in the three works to a production company, which subsequently assigned the motion picture rights to MGM in 1978.   MGM released “Raging Bull” in 1980.

Mr. Petrella passed away in 1981 and his copyright renewal rights passed to his daughter Paula.  (Note: When an author dies prior to the beginning of a copyright renewal period, his successors get his or her renewal rights even if the author previously assigned the rights.)  Ms. Petrella filed a renewal application for the 1963 screen play in 1991.  She later retained an attorney who contacted MGM and others between 1998-2000 to notify them of Ms. Petrella’s copyright interest in the 1963 screen play and claiming that their exploitation of derivative works, including the motion picture Raging Bull, constituted infringement of her rights.  MGM responded by denying that it infringed on any of Ms. Petrella’s rights.  Ms. Petrella then waited almost a decade before filing suit against MGM and others in 2009.  Prior to trial, the district court granted summary judgment in the defendant’s favor on the basis of the doctrine of laches.  This was despite the fact that plaintiff had alleged that MGM had continued to infringe on her rights within the three year statute of limitation set forth in section 17 U.S.C. §507(b).  The Ninth Circuit affirmed the judgment based on laches in 2012 and plaintiff appealed that decision to the U.S. Supreme Court.

In a 6-3 decision, the U.S. Supreme Court decided to overturn the Ninth Circuit’s decision.  Both the majority and dissenting opinions contained a rare mix of both conservative and liberal justices.  Justice Ginsburg, writing for the majority of the court, began by examining four aspects of copyright law to support the Court’s decision.  First, she noted that the Copyright Act grants copyrights to works published before 1978 for an initial period of 28 years which may be extended for a renewal period of up to 67.  She then noted that copyright renewal rights may be inherited by the author’s heirs.  Third, she examined the various remedies available to a plaintiff for copyright infringement, including both equitable and legal relief.  Finally, she observed that it was not until 1957 that Congress enacted a statute of limitations for copyright infringement of three years.  The Court noted that: “The federal limitations prescription governing copyright suits serves two purposes: (1) to render uniform and certain the time within which copyright claims could be pursued; and (2) to prevent the forum shopping invited by disparate state limitation periods, which range from one to eight years.”  She also noted that a plaintiff’s claim for infringement did not accrue until “an infringing act occurs” and that there was also the “separate accrual rule” which provides that “when a defendant commits successive violations, the statute of limitations runs separately from each violation.  Each time an infringing work is reproduced or distributed, the infringer commits a new wrong.”

Justice Ginsburg then noted that although plaintiff was alleging infringement on the 1963 screen play, she was seeking relief “only for acts of infringement occurring on or after January 6, 2006,” which was the three year period prior to her filing the complaint.  She ruled that “the Ninth Circuit erred … in failing to recognize that the copyright statute of limitations, section 507(b), itself takes account of delay” in that “no recovery may be had for infringement” that occurred prior to the three year period.  Essentially, “profits made in those years remain the defendants to keep.”   She continued by recognizing that laches was an equitable remedy and that the Court must “adhere to the position that, in face of a statute of limitations enacted by Congress, laches cannot be invoked to bar legal relief.”

Justice Ginsburg then turned to each of the arguments raised by MGM and rejected each of them in turn.  MGM’s primary argument was that “the defense of laches must be available to prevent a copyright owner from sitting still, doing nothing, waiting to see what the outcome of an alleged infringer’s investment will be.”  In this case, plaintiff apparently admitted that she waited to see whether the Raging Bull movie would make any money since it was initially “deeply in debt.”  The Ninth Circuit had accepted this argument and “faulted Petrella for waiting to sue until the film Raging Bull ‘made money’.”  The Supreme Court held, however, that there was nothing wrong “about waiting to see whether an infringer’s exploitation undercuts the value of the copyrighted work, has no effect on the original work, or even compliments it.”  For instance, the Supreme Court observed that the act of infringement may be so minor that it would not “justify the cost of litigation.”  The Court was concerned that adopting MGM’s position would result in numerous copyright infringement cases being filed “fast to stop seemingly innocuous infringements.”

MGM also argued that the laches helped protect those instances where relevant evidence that would be needed to prosecute or defend the action would be lost by an unwarranted delay in prosecuting the infringement claim.  Justice Ginsburg noted that this danger cut both ways; if plaintiff delayed prosecuting a claim for copyright infringement, certain evidence may be lost that could support such a claim.

The Court finally noted that although the defense of laches may not be available to bar legal remedies in an action brought within the statute of limitations, a defendant had available the defense of estoppel.  The Court noted that “when a copyright owner engages in intentionally misleading representations concerning his abstention from suit, and the alleged infringer detrimentally relies on the copyright owner’s deception, the doctrine of estoppel may bar the copyright owner’s claims completely, eliminating all potential remedies.”

The Court held that because plaintiff had filed her claims within this three year statute of limitations, the Ninth Circuit erred in treating laches as a complete bar to her infringement suit.  The Court noted, however, that to the extent that plaintiff was seeking equitable relief, i.e., the disgorgement of unjust gains and an injunction against future infringement, “the District Court in determining appropriate injunctive relief and assessing profits, may take account of her delay in commencing suit.”  Furthermore, the lower court “should closely examine MGM’s alleged reliance on Petrella’s delay .… [including] MGM’s early knowledge of Petrella’s claims, the protection MGM might have achieved through pursuit of a declaratory judgment action, the extent to which MGM’s investment was protected by the separate – accrual rule, [and] the court’s authority to order injunctive relief.”  Thus, while the Supreme Court held that laches was not a complete bar to plaintiff’s infringement claims, its elements could come into play in determining the proper scope of remedies to be awarded to plaintiff.

Justice Breyer, Chief Justice Roberts and Justice Anthony Kennedy joined in dissenting to the opinion and held that the Ninth Circuit had correctly applied the doctrine of laches.  They began their dissent by a citation to an old decision by Judge Learned Hand, who reasoned that it may well be “inequitable for the owner of a copyright, with full notice of an intended infringement, to stand inactive while the proposed infringer spends large sums of money in its exploitation, and to intervene only when his speculation has proved a success.”

The U.S. Supreme Court’s decision brings some clarity to the conflict between various decisions of the Circuit Court of Appeals.  The doctrine of laches will no longer operate as a complete bar to infringement claims brought within the statute of limitations.  However, as the Court noted, elements of laches may bear on the Court’s determination of appropriate relief in such cases.

A California Court of Appeal decision issued on May 15, 2014 (Tiri v. Lucky Chances, Inc., Case No. A136675) decided that the parties to an arbitration agreement may, by agreement, deprive a civil court of jurisdiction to determine whether an arbitration agreement is enforceable.

Several years after she was hired, Lourdes Tiri signed an agreement with her employer, Lucky Chances, Inc. requiring disputes between them to be resolved by arbitration. In one of the provisions to that agreement, the parties agreed to delegate questions about the enforcement of the agreement to the arbitrator, instead of to a court. Tiri was subsequently fired and she filed a complaint in the Superior Court alleging wrongful discharge. The employer petitioned to compel arbitration but the trial court denied the petition on the grounds that the arbitration agreement was unconscionable and therefore unenforceable. Lucky Chances appealed the court’s order denying arbitration. The court held that the trial court lacked the authority to rule on the enforceability of the agreement because the parties’ assignment of this authority to the arbitrator was clear and was not revocable under state law.

This is great news for employers and a further incentive to use arbitration agreements that contain provisions of this kind. The chances that an agreement will be found to be unenforceable if it contains such “arbitrator decides” language is fairly remote. A full copy of the decision can be viewed at this link: Tiri v. Luck Chances.

Readers of this blog may recall our discussion of a “bad faith” attorney’s fees award made by the trial court in the Aerotek v. The Johnson Group case.   To view a copy of our previous post, click here.  As a refresher, Aerotek sued its former employee and that former employer’s new employer claiming misappropriation of trade secrets.  Aerotek lost.  The trial court awarded $735,781.27 in attorney’s fees to defendants under Cal. Civil Code section 3426.4.  That section provides attorney’s fees to a prevailing party in a Uniform Trade Secrets Action “if a claim of misappropriation is made in bad faith.”  Aerotek appealed, challenging the attorney’s fee award on the grounds that the action was neither (1) objectively specious nor brought in subjective bad faith as required for fees awarded under Cal. Civil Code section 3426.4; and (2) the lodestar multiplier used by the trial court was based on the misrepresentation by the law firm.

In a decision that contains lots of useful insights into how trial courts and courts of appeal view such “bad faith” attorney’s fees awards, the court of appeal affirmed the trial court.  The decision is unpublished.  That means that regardless of the value of the insights contained in the decision, it cannot be cited as precedent in future cases.   To read a fully copy of the decision, click on this link: Aerotek v The Johnson Group.