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LAW ALERT: FTC Extends Deadline To Comply With The “Red Flags” ID Theft Prevention Rule

Published: May 6, 2009

by Lizbeth (Beth) V. West
The Labor & Employment Law Blog

The Federal Trade Commission (FTC) has just announced that it will delay enforcement of the identity theft “Red Flags Rule” (Rule) until August 1, 2009. The Rule was discussed previously in Weintraub Genshlea Chediak’s Law Alert Article: Deadline to Have Identity Theft Prevention program Prepared and Implemented is May 1, dated April 15, 2009.

The Rule was adopted by the FTC after the Fair and Accurate Credit Transactions Act of 2003 (FACTA) directed financial regulatory agencies, including the FTC, to promulgate rules requiring “creditors” and “financial institutions” with covered accounts to implement programs to identify, detect, and respond to patterns, practices, or specific activities that could indicate identity theft. FACTA’s definition of “creditor” applies to any entity that regularly extends or renews credit – or arranges for others to do so – and includes all entities that regularly permit deferred payments for goods or services. Accepting credit cards as a form of payment does not, by itself, make an entity a creditor. According to the FTC, some examples of creditors are finance companies; automobile dealers that provide or arrange financing; mortgage brokers; utility companies; telecommunications companies; non-profit and government entities that defer payment for goods or services; and businesses that provide services and bill later, including many lawyers, doctors, and other professionals. “Financial institutions” include entities that offer accounts that enable consumers to write checks or make payments to third parties through other means, such as other negotiable instruments or telephone transfers.

The express purpose of the extension is to provide more time to entities that may be covered by the Rule to create and implement written identity theft prevention programs. The FTC’s announcement of the extension also indicates that it plans to publish a template to help entitles with a low risk of identity theft to comply with the Rule.

The FTC’s announcement can be found at: http://ftc.gov/opa/2009/04/redflagsrule.shtm.

Lizbeth “Beth” West is a shareholder in the Labor and Employment Law Section and Disputes, Trials & Appeals Section at Weintraub Genshlea Chediak. Beth’s practice focuses on counseling employers in all areas of employment law, and defending employers in state and federal court, as well as before administrative agencies. She has extensive experience in defending wage and hour claims, and complex whistle-blowing and retaliation claims. She also provides training services on various employment issues, such as sexual harassment and violence in the workplace. If you have any questions about this Legal Alert or other employment law related questions, please feel free to contact Beth West at (916) 558-6082. For additional articles on employment law issues, please visit Weintraub’s law blog at www.thelelawblog.com.

LAW ALERT: DOL Issues Opinion Letter Clarifying Employer’s Right To Enforce Call-In Policies

Published: May 6, 2009

by Lizbeth (Beth) V. West
The Labor & Employment Law Blog

On January 6, 2009 the Department of Labor (DOL) issued Opinion Letter FMLA2009-1-A to respond to a request for clarification regarding employee notification procedures under the Family and Medical Leave Act (FMLA) as discussed in the DOL’s previous Wage and Hour Opinion Letter FMLA-101 (January 15, 1999). The DOL indicated that it was brought to its attention that some employers had interpreted Opinion Letter FMLA-101 to stand for the proposition that under the FMLA, employers were not permitted to apply their internal call-in policies or discipline employees under their no call/no show policies, provided the employees provide notice within two (2) business days that the leave was FMLA-qualifying, regardless of whether the employee could have practicably provided notice sooner.

The FMLA requires employees to provide notice of the need for leave due to the birth or placement of a child, or for their own serious health condition, or to care for a covered family member with a serious health condition, 30 days before the leave is to begin where possible. (See 29 U.S.C. § 2612(e).) Where it is not possible to provide 30 days notice of the need for such leave, employees must provide “such notice as is practicable.” (Id.)

On January 16, 2009, the DOL’s final updated FMLA regulations (Final Rule) went into effect. (73 Fed. Reg. 67934 (11/17/08).) In the Final Rule, the DOL adopted the proposed revisions regarding the timing of employee notice of the need for FMLA leave with some minor modifications. The DOL noted that the “one to two business days” time frame set forth in the 1995 regulations had been misinterpreted as permitting “employees two business days from learning of their need for leave to provide notice to their employers regardless of whether it would have been practicable to provide notice more quickly.” (73 Fed. Reg. 68003.) In discussing the proposed changes to § 825.302, the DOL stressed that

“both current and proposed § 825.302(b) defined ‘as soon as practicable’ as ‘as soon as both possible and practical, taking into account all the facts and circumstances of the individual case.’ The deletion of the ‘two-day rule’ does not change the fact that whether notice is given as soon as practicable will be determined based upon the particular facts and circumstances of the employee’s situation.” (73 Fed. Reg. 68003.)

Thus, the final § 825.302(b) states that

“[w]hen an employee becomes aware of a need for FMLA leave less than 30 days in advance, it should be practicable for the employee to provide notice of the need for leave either the same day or the next business day. In all cases, however, the determination of when an employee could practicably provide notice must take into account the individual facts and circumstances.” (73 Fed. Reg. 68098.)

Also, the final § 825.303(a), which addresses the timing of notice for unforeseeable FMLA leave, similarly states that an employee must provide notice to the employer as soon as practicable under the facts and circumstances of the particular case. Specifically, “[i]t generally should be practicable for the employee to provide notice of leave that is unforeseeable within the time prescribed by the employer’s usual and customary notice requirements applicable to such leave.” (73 Fed. Reg. 68099.) According to the DOL’s Opinion Letter FMLA2009-1-A, in both situations, employees must comply with their employer’s usual and customary notice and procedural requirements for requesting leave, absent unusual circumstances. (See 73 Fed. Reg. 68099 (setting forth § 825.302(d) (“Complying with employer policy”) of the Final Rule); 73 Fed. Reg. 68100 (setting forth section § 825.303(c) (“Complying with employer policy”) of the Final Rule).)

The Final Rule replaces the statement that employees will be expected to give notice to their employers “promptly” with the statement that “it generally should be practicable for the employee to provide notice of leave that is unforeseeable within the time prescribed by the employer’s usual and customary notice requirements applicable to such leave.” Therefore, according to the DOL, where an employer’s usual and customary notice and procedural requirements for requesting leave are consistent with what is practicable given the particular circumstances of the employee’s need for leave, the employer’s notice requirements can be enforced. The DOL concluded that to the extent that Opinion Letter FMLA-101 has been interpreted to create a flat “two-day rule,” the Department is hereby rescinding it.

To clarify its interpretation of the Final Rule, the DOL applied it to the following example: if an employer has a policy requiring employees to call in one hour prior to their shift to report absences and an employee who is absent on Tuesday and Wednesday, but does not call in on either day and instead provides notice of his need for FMLA leave when he returns to work on Thursday, it is the DOL’s opinion that unless unusual circumstances prevented the employee from providing notice consistent with the employer’s policy, the employer may deny FMLA leave for the absence.

The DOL’s FMLA2009-1-1 Opinion Letter can be obtained at: www.dol.gov/esa/WHD/opinion/opinion.htm.

A Dream Case: Statutory Damages for Infringement of Illegal Bingo Gambling

Published: April 24, 2009

The IP Law Blog

Most everyone knows that federal copyright laws protect an author’s expression of an idea. When someone infringes a protected work, either by copying or distributing it without permission, the copyright owner is generally entitled to damages. In Dream Games of Arizona v. PC Onsite, — F.3d — (April 2, 2009), the Ninth Circuit addressed a question of first impression in the circuit: Whether illegal use or operation of a work by the copyright owner precludes the award of actual or statutory damages for copyright infringement.

Dream Games of Arizona is a company that creates, designs, develops, and sells electronic video bingo games, including a game called Fast Action Bingo. In March 2002, Dream Games entered into negotiations with PC Onsite for a software upgrade to Fast Action Bingo. The parties signed a nondisclosure agreement in which it was clear that Dream Games retained all intellectual property in the game.

PC Onsite created a new version of Dream Game’s Fast Action Bingo, and cleverly called it Fast Action Bingo II. When PC Onsite presented it to Dream Games, however, negotiations for an agreement to go forward with the new game broke down. Immediately thereafter, PC Onsite created Quick Play Bingo I, a game remarkably similar to, and in fact based upon, Fast Action Bingo II. PC Onsite registered the copyright of the source code for its new game, and marketed it through City Entertainment. PC Onsite and City Entertainment agreed to install and operate Quick Play Bingo I in bingo parlors in Utah and Wyoming. Several of the bingo parlors with the Quick Play games already had Fast Action Bingo games, and the two games competed directly.

Dream Games discovered the Quick Play Bingo I games, and not surprisingly, filed suit for copyright infringement, breach of contract, and unjust enrichment. A complicating factor in the case was the fact that gambling is illegal in both Utah and Wyoming. In fact, the Wyoming Supreme Court specifically found that Fast Action Bingo machines were illegal in its state, and several machines had been seized in Utah. During the ensuing jury trial, the district court ruled that Dream Games could not recover actual damages for Fast Action Bingo’s lost profits because the game was offered illegally in Utah and Wyoming. The court did not preclude statutory damages, however, and the jury eventually awarded Dream Games $25,000 in statutory damages. PC Onsite appealed. Dream Games filed a cross-appeal, but apparently did not challenge the ruling that it was not entitled to actual damages.

On appeal PC Onsite first argued that the district court erred when it allowed evidence that included the unprotected elements of the Fast Action Bingo game along with the four elements that were protected by the copyright. The Ninth Circuit had no problem dispensing with this argument, citing case law that held copyright infringement can be based on infringement of a combination of unprotected elements. The court pointed out that in combination, the jury might find these elements protectable, and to allow the possibility of such a finding, the jury must be allowed to see the complete work. It is necessary for the unprotectable elements to be identified to the jury, and the district court did that in its jury instructions. Contrary to PC Onsite’s argument, the Ninth Circuit held that the district judge is not also required to specify the elements which are protectable.

The court then turned to the question of damages. PC Onsite argued, logically, that Dream Games should not be entitled to damages for copyright infringement because the use that it was infringing, bingo parlors in Utah and Wyoming, was illegal. The argument has some initial appeal. If the use by the copyright owner was illegal, then awarding damages for infringement allows the owner to be compensated because the infringer cut into its illegal revenue. This can’t be right, can it?

As it turns out, although it had never addressed the issue before, the Ninth Circuit held that it is right. With a closer look, perhaps that makes sense after all.

The court started by exploring the broad basis for copyright protection, and prior cases holding that fraudulent content of a work was not a basis for denying copyright protection. The court quoted Nimmer on Copyright for “the prevailing view [ ] that no works are excluded from copyright by reason of their content.” It went on to say that “there is nothing in the Copyright Act to suggest that the courts are to pass upon the truth or falsity, the soundness or unsoundness, of the views embodied in a copyrighted work.” Indeed, as the court noted, “the gravity and immensity of the problems, theological, philosophical, economic, and scientific, that would confront a court if this view were adopted are staggering to contemplate.”

The court also pointed out that the Fast Action Bingo machine, while illegal in Wyoming or Utah, was not illegal in other geographical areas. In the court’s view, “it would be absurd to deny a work the protection of a federal copyright because it is capable of illegal use in one or more states, but capable of perfectly legal use in other states.” One of the purposes of copyright protection is to deter infringement. To preclude damages based on the content of the work would be contrary to this goal, and provide no incentive to avoid copying another’s work.

The court held that “an award of either type of damages available under the Copyright Act – actual or statutory – is not precluded by evidence of illegal operation of the copyrighted work, at least where the illegality did not injure the infringer.” With this holding, it is interesting that Dream Games did not appeal the denial of actual damages. Had it done so, it is likely that a new trial on damages would be necessary given the ruling. Assuming more than $25,000 in actual damages was at issue, this seems like a costly mistake for Dream Games.

Finally, during the trial the court did not allow PC Onsite to present evidence of illegality to the jury. It ruled that the jury should focus on PC Onsite, and that any possible illegal activity by Dream Games was irrelevant to the willfulness or innocence of PC Onsite’s conduct. PC Onsite objected to the district court’s exclusion of evidence of the illegality of Dream Games’ activity in determining the amount of statutory damages to award, and appealed that ruling as well. The Ninth Circuit seemed to have little trouble dismissing this argument, also, holding that the evidence was properly excluded under Rule 403 due to the possibility of unfair prejudice. “Here, because of the district court’s familiarity with the details of the case and its greater experience in evidentiary matters, it was not an abuse of discretion to exclude evidence of illegal operations.”

LAW ALERT: Deadline to Have Identity Theft Prevention Program Prepared and Implemented is May 1

Published: April 15, 2009

by Lizbeth (Beth) V. West
The Labor & Employment Law Blog

Download: Legal Alert.pdf

Pursuant to the Federal Trade Commission’s (“FTC”) Identity Theft Prevention Red Flags Rule (16 .C.F.R. § 681.2) which went into effect on January 1, 2008, all financial institutions and creditors must prepare and implement a written “Red Flags” Program by May 1, 2009. The determination of whether a business or organization is covered by the Red Flags Rule is not based on a particular industry or sector, but rather on whether the activities of the business or organization fall within the relevant definitions.

What Businesses are Covered?

“Financial institutions” are defined as a state or national bank, a state or federal savings and loan association, a mutual savings bank, a state or federal credit union, or any other person that, directly or indirectly, holds a transaction account belonging to a consumer.

The definition of “creditor” under the Red Flags Rule is broad and includes businesses or organizations that regularly defer payment for goods or services or provide goods or services and bill customers later. According to the FTC, this can include a wide variety of businesses from utility companies to health care providers.

Only financial institutions and creditors with “covered accounts” must implement a Red Flags Program. There are two types of “covered accounts”:

“Consumer accounts” which are those offered to customers primarily for personal, family, or household purposes that involves or is designed to permit multiple payments or transactions (e.g. credit card accounts, mortgage loans, automobile loans, cell phone accounts, and checking accounts); and
Any other account that a financial institution or creditor offers or maintains for which there is a reasonably foreseeable risk to customers or to the safety and soundness of the financial institution or creditor from identity theft, including financial, operational, compliance, reputation, or litigation risks. The FTC advises that in determining if accounts are covered under this second category, businesses should consider how they are opened and accessed. For example, there may be a reasonably foreseeable risk of identity theft in connection with business accounts that can be accessed remotely (e.g. through the Internet or by telephone).

Requirements for an Effective “Red Flags” Program.

Financial institutions and creditors must develop, implement, and administer an Identity Theft Prevention Program, which must include four basic elements.

Identification of Red Flags. The Program must include reasonable policies and procedures to identity the “red flags” of identity theft they are likely to come across in their business. “Red flags” are potential patterns, practices, or specific activities indicating the possibility of identity theft. Some examples are alerts or notices from credit reporting agencies, certain suspicious documents, suspicious personal identification information, and suspicious account activity. Some red flags may also be relevant to the particular business or organization.
Detect Red Flags. The Program must be designed to detect the “red flags” that have been identified. The financial institution or creditor must lay out procedures for detecting them in the day-to-day operation of the business. In creating the procedures, the business needs to consider how detection may differ depending on whether an identity verification is taking place in person or at a distance (e.g. by telephone, mail, Internet, etc.).
Prevention and Mitigation. The Program must spell out appropriate actions the financial institution or creditor will take when it detects “red flags.” The procedures for responding to a “red flag” will depend upon the degree of risk posed. A business must be mindful to accommodate and/or comply with other legal obligations (e.g. privacy laws and other laws impacting the medical profession) when taking action.
Continued Evaluation. The Program must be re-evaluated and updated periodically due to the ever-changing threats associated with identity theft. According to the FTC, as technology changes or identity thieves change their tactics, financial institutions and creditors will need to update their Programs to ensure they keep current with the risks.

Administering Your “Red Flags” Program.

Approval. Pursuant to the FTC, if a financial institution or creditor is a corporation, its Red Flags Programs must be approved by the Board of Directors or a committee of the Board. If the business is not a corporation, the Program must be approved by someone in a senior management position.
Administration. The financial institution or creditor must appoint a designated individual(s) to serve as the Administrator of the Program. The Administrator will be responsible for implementing the Program, training personnel on the Program, reviewing documents and information for compliance with the Program, re-evaluating and updating the Program, and reporting to the Board or senior management annually regarding the Program.
Training. The Rule requires that financial institutions and creditors train relevant staff on the policies and procedures under the Red Flags Program.
Third-Party Providers. If a financial institution or creditor contracts with other service providers and any activity by the service providers implicates the Red Flags Rule, they should seek confirmation that the service providers have an appropriate Red Flags Program in place.

Conclusion.

Compliance with the Red Flags Rule is mandatory for all financial institutions and creditors with “covered accounts.” There is no one-size-fits-all Program and each business or organization should evaluate its “covered accounts” and the various activities or transactions related to those accounts that could give rise to identity theft.

Weintraub Genshlea Chediak can provide assistance not only with the preparation of written Identity Theft Prevention (Red Flags) Programs, but also with training your employees under the Program. For more information or assistance please contact Lizbeth V. West, Esq. at (916) 558-6082.

LAW ALERT: The IRS Provides Guidance On The New 65% COBRA Subsidy Obligation

Published: April 14, 2009

by Lizbeth (Beth) V. West
The Labor & Employment Law Blog

Download: Legal Alert and Notice 2009-27.pdf

The IRS has issued Notice 2009-27 which provides a thorough interpretation of Section 2001 of the American Recovery and Reinvestment Act of 2009 (“ARRA”) relating to premium assistance for COBRA continuation coverage.

Notice 2009-27 provides information in a question and answer format regarding various parts of the ARRA like:

What does “involuntary termination” mean?
Who is an “assistance eligible” individual?
How are premium reductions (or subsidies) calculated?
What plans are subject to the COBRA subsidy?
When does the premium reduction/subsidy apply?
How does the “extended” (or “second chance”) election opportunity work?

While lengthy, Notice 2009-27 provides helpful guidance and examples for employers trying to understand and comply with this new COBRA subsidy obligation. We are attaching a copy of the Notice and recommend that employers read it and contact their legal counsel with any questions.

Six Weintraub Genshlea Chediak attorneys named in Best Lawyers in America for Sacramento

Published: April 3, 2009

Weintraub Genshlea Chediak congratulates all of the attorneys who were included in the distinguished list of 2009 “The Best Lawyers in America®” for Sacramento:

Christopher Chediak – Corporate Law (also named Lawyer of the Year);
Malcolm S. Weintraub – Trusts and Estates;
Joseph S. Genshlea – Commercial Litigation;
Dale C. Campbell – Commercial Litigation;
David C. Adams – Corporate Governance and Compliance Law;
Christopher Chediak – Intellectual Property;
David C. Adams – Leveraged Buyouts and Private Equity Law;
Charles L. Post – Labor & Employment.

Based on peer reviews, this list is widely regarded as the definitive guide to legal excellence in the U.S. by both the legal profession and the public.

LAW ALERT: The DOL Issues Its Model COBRA Subsidy Notices

Published: March 20, 2009

by Lizbeth (Beth) V. West
The Labor & Employment Law Blog

Download: Law Alert – DOL Model COBRA Subsidy Notices (1111263).PDF

On March 19, 2009, the DOL released the following model notices in connection with the COBRA subsidy outlined in the American Recovery and Reinvestment Act of 2009 (“ARRA”):

1. General Notice (Full Version). This General Notice is to be sent to all qualified beneficiaries who experienced a qualifying event at any time from September 1, 2008 through December 31, 2009, regardless of the type of qualifying event. This full version includes information on the COBRA subsidy (or premium reduction) as well as information required in a standard COBRA election form.

2. General Notice (Abbreviated Form). The abbreviated version of the General Notice includes the same information as the full version regarding the availability of the COBRA subsidy (or premium reduction) and other rights under the ARRA, but does not include the COBRA coverage election information. Pursuant to the DOL, it may be sent in lieu of the full version of the General Notice to individuals who experienced a qualifying event during, on, or after September 1, 2008, who have already elected COBRA coverage and still have it.

3. Alternative Notice. Insurers that provide group health insurance coverage must send the Alternative Notice to persons who became eligible for continuation coverage under a State law. As the DOL indicates, continuation coverage requirements vary among States and insurers should modify the model Alternative Notice as necessary to conform their notice to the applicable State law.

4. Notice in Connection with Extended Election Periods. This Notice must be sent to any assistance eligible individual (or any individual who would be an assistance eligible individual if a COBRA continuation election was in effect) who:

a. had a qualifying event at any time from September 1, 2008 through February 16, 2009; and

b. either did not elect COBRA continuation coverage, or who elected it but subsequently discontinued COBRA.

This Notice includes information on ARRA’s additional election opportunity, as well as information regarding the COBRA subsidy (premium reduction). This Notice must be provided by April 18, 2009.

More information and the model notices listed above can be found at the DOL’s website at: www.dol.gov/ebsa/COBRAmodelnotice.html.

Lizbeth “Beth” West is a shareholder in the Disputes, Trials & Appeals Section, and the Labor and Employment Law Section at Weintraub Genshlea Chediak. Beth’s practice focuses on counseling employers in all areas of employment law, and defending employers in state and federal court, as well as before administrative agencies. She has extensive experience in defending wage and hour claims, and complex whistle-blowing and retaliation claims. She also provides training services on various employment issues, such as sexual harassment and violence in the workplace. If you have any questions about this Legal Alert or other employment law related questions, please feel free to contact Beth West at (916) 558-6082. For additional articles on employment law issues, please visit Weintraub’s law blog at www.thelelawblog.com.

LAW ALERT: The American Recovery and Reinvestment Act of 2009 and Its Impact on the Workplace

Published: March 12, 2009

by Lizbeth (Beth) V. West
The Labor & Employment Law Blog

Download: March 12, 2009 Legal Alert (1106739).PDF

On February 17, 2009 President Obama signed the American Recovery and Reinvestment Act of 2009 (“ARRA” or “Recovery Act”) which contains a number of entitlements and obligations affecting the workplace. In order to comply with their new obligations and understand the benefits available to employees or former employees, employers should familiarize themselves with the ARRA promptly. Below is a summary of some of the various employment-related provisions from the ARRA.

1. COBRA Subsidy.

a. What is it?

The ARRA provides for a 65% COBRA premium subsidy for certain “assistance eligible individuals.” An “assistance eligible individual” is a COBRA “qualified beneficiary” who meets all of the following requirements:

a. Is eligible for COBRA continuation coverage at any time during the period between September 1, 2008 and December 31, 2009;

b. Elects COBRA coverage (when first offered or during the additional election period provided for under the ARRA); and

c. Has a qualifying event for COBRA coverage that is the employee’s involuntary termination during the period of September 1, 2008 and December 31, 2009.

The premium subsidy (or premium reduction) applies to periods of health coverage beginning on or after February 17, 2009 and lasts for up to 9 months. Individuals who are eligible for other group health coverage (e.g. under a spouse’s plan) or Medicare are not eligible for the premium subsidy. The subsidy also is not available to employees (or their dependents) who have an adjusted gross income of more than $125,000 ($250,000 for joint filers) in the year in which they would receive a subsidy.

As a result of the subsidy, eligible individuals pay only 35% of their COBRA premiums and the remaining 65% is paid by the former employer who then has the right to seek reimbursement through a tax credit.

b. What if a previously terminated employee didn’t elect COBRA?

The ARRA provides for a special 60-day election period for those eligible individuals who previously lost coverage and did not elect COBRA. The 60-day period begins on the date that notice is provided to the eligible individual about the special election period. The special election period does not extend the period of COBRA continuation coverage beyond the original maximum required period and, in most cases, COBRA continuation coverage elected pursuant to the special election period begins on the first period of coverage following the date the ARRA was enacted (i.e. March 1, 2009).

c. How are eligible individuals notified?

Employers have 60 days from the date the ARRA passed to notify affected former employees and their eligible dependents that they have a right to elect COBRA and receive the subsidy. In addition to a regular COBRA notice, a supplemental notice is required to be given to affected employees to provide information about the subsidy. The DOL is preparing a model of such supplemental notice.

d. How do employers get reimbursed for the subsidy?

Employers are permitted to claim the COBRA subsidy on line 12a of their IRS Form 941 (the quarterly employment tax return). Employers are not required to file any other documents or information with the Form 941 but must maintain separate supporting documents to justify the claimed credit (e.g. information regarding receipt of the assistance eligible individual’s 35% share of the premium, copies of invoices from the insurance carrier and proof of timely payment of the full premium, attestation of involuntary termination, including the date of such termination for each covered employee whose involuntary termination is the basis for eligibility of the subsidy, proof of eligibility for COBRA coverage during the 9/1/08 – 12/31/09 period, records of the SSN’s of all covered employees and the amount of the subsidy reimbursed for each, and any other relevant documents). The IRS has issued information notices to explain how employers can seek reimbursement and such notices can be obtained on the IRS website.

2. Unemployment Benefits.

The ARRA extends the Emergency Unemployment Compensation Act of 2008 (EUC) which was set to expire on March 31, 2009. The EUC will now be in place through December 31, 2009. The EUC went into effect last June and provided for an additional 13 weeks of federally-funded unemployment benefits to eligible unemployed individuals nationwide who had already collected all regular state benefits for which they were eligible. In November 2008, the EUC was expanded to 20 weeks of benefits, and was also amended to provide for a second tier of 13 additional weeks of benefits for individuals in states with high unemployment rates. Additionally, benefit payments are increased by $25 per week through December 31, 2009 for individuals receiving regular unemployment compensation, extended benefits, or benefits under the EUC. The ARRA also provides for a temporary suspension of taxation on the first $2,400 of unemployment benefits in 2009.

Finally, the ARRA contains a number of provisions to assist states in administering their unemployment programs. It provides that: (1) the extended unemployment benefits will be 100% federally funded through January 1, 2010; (2) states can get a waiver of interest due on loans received by state unemployment trust funds through December 31, 2010; and (3) that states can obtain federal funds to help them administer their unemployment programs and reform such programs to provide greater coverage (e.g. to cover part-time employees).

3. Work Opportunity Tax Credit (WOTC).

The WOTC is a program designed to help move people from welfare into gainful employment and obtain on-the-job experience. It provides a tax credit to employers who hire members of targeted groups. The ARRA added unemployed veterans and disconnected youth who begin work in 2009 and 2010 to the targeted groups covered under the WOTC. Other targeted groups already recognized under the WOTC include: long-term TANF (Temporary Assistance and Needy Families) recipients; qualified food stamp recipients; residents of a federally designated empowerment zone, enterprise community, or renewal community, vocational rehabilitation referrals, a qualified ex-felon, and an SSI recipient.

In order to obtain a tax credit under the WOTC program, employers must obtain a certification that a new employee qualifies the employer for the tax credit. Certain IRS forms must be completed at the time the job offer is made and after the individual is hired. The forms and guidelines on their completion can be obtained from the IRS website.

4. Other Funding for Various Programs Administered by the DOL.

The ARRA also provides almost $4 billion dollars for various programs administered by the DOL, including adult employment and training activities, youth activities including summer jobs, dislocated worker activities, grant programs for worker training and placement in high growth and emerging industry sectors, employment opportunities for low income seniors, and employment service grants to states.

5. Whistleblower Protections Under the ARRA.

The ARRA contains whistleblower protections that apply to non-federal employers (“Covered Entities”) who receive funds under the ARRA. The provision appears to also cover private employers if they contract with entities receiving funds under the ARRA. Also, supervisors, managers, and agents of an employer appear to be at risk of individual liability under the language of the provision.

The whistleblower protections prohibit a Covered Entity from discharging, demoting, or otherwise discriminating against an employee for his or her disclosure to the Recovery Act Accountability and Transparency Board (RAAT Board), an inspector general at the Interior Department, another governmental agency, a grand jury, or a court, any of the following which the employee reasonably believes has or is taking place:

a. Gross mismanagement of any agency contract or grant relating to covered funds;

b. A gross waste of covered funds;

c. A substantial and specific danger to public health or safety related to the implementation or use of covered funds;

d. An abuse of authority related to the implementation or use of covered funds; or

e. A violation of law, rule or regulation related to an agency contract (including the competition for or negotiation of a contract) or grant awarded or issued relating to covered funds.

Employers who receive covered funds are required to post notices in the workplace to apprise employees of their rights under the new law.

An employee who believes he/she has been retaliated against may submit a complaint to the appropriate inspector general at the RAAT Board. There is no statute of limitations in the ARRA for making such complaint and the employee’s burden of proof is relatively low. The employee must only show that the protected activity he/she engaged in was a “contributing factor” (not the “motivating factor”) for the employer’s retaliation. The inspector general shall investigate within 180 days from receipt of the complaint (unless extended) and either: 1) issue a report of his/her findings to the complainant, the employer, and the head of the appropriate agency; or 2) make a determination that the complaint is frivolous and/or does not relate to covered funds. The agency head will determine whether there is a sufficient basis to conclude that the employer has violated the Act by retaliating against the employee. If there is a sufficient basis, the head of the agency can take one or more of the following actions: 1) order the employer to take affirmative action to abate the reprisal; 2) order the employer to reinstate the employee to the position that he/she held before the reprisal (along with back pay, compensatory damages, and employment benefits); or 3) order the employer to pay the complainant an amount equal to the aggregate amount of all costs and expenses (including attorneys fee and witness fees) that were incurred by the complainant for bringing the complaint.

Upon exhausting his/her administrative remedies, an employee also has the right to bring a civil action against a Covered Entity.

Finally, the ARRA expressly provides that waivers and releases of the rights and remedies provided for by the whistleblowing provisions are not permitted in any agreement, including pre-dispute arbitration agreements (unless contained in a collective bargaining agreement). The language of the provision also suggests that an employer may not be able to obtain such a waiver or release in a separation or settlement agreement. However, it is unknown whether the language would prohibit a voluntary agreement to arbitrate a whistleblower claim under the ARRA if both parties agree to do so after the claim has been made and a dispute exists.

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Lizbeth “Beth” West is a shareholder in the Disputes, Trials & Appeals Section, and the Labor and Employment Law Section at Weintraub Genshlea Chediak. Beth’s practice focuses on counseling employers in all areas of employment law, and defending employers in state and federal court, as well as before administrative agencies. She has extensive experience in defending wage and hour claims, and complex whistle-blowing and retaliation claims. She also provides training services on various employment issues, such as sexual harassment and violence in the workplace. If you have any questions about this Legal Alert or other employment law related questions, please feel free to contact Beth West at (916) 558-6082. For additional articles on employment law issues, please visit Weintraub’s law blog at www.thelelawblog.com.

“Transformative” or Not?

Published: February 13, 2009

The IP Law Blog

Recent news reports tell of an impending legal battle between the artist of the painting at left and the Associated Press who owns the photograph upon which the painting was based. The legal battle will determine whether the ubiquitous painting of the 44th President is an original piece of artwork, or one that improperly misappropriated a photograph protected by copyright laws.

But what of President Obama’s rights in his own likeness? Can any artist commandeer the President’s likeness for his/her own commercial purposes without fear of legal repercussions? Could President Obama stop such commercial use of his likeness if he was so inclined? The answer depends on how “transformative” of President Obama’s likeness the work of art is.

The California Supreme Court case Comedy III Productions, Inc. v. Gary Saderup, Inc. (2001) 25 Cal.4th 387 speaks directly to this issue. In Comedy III Productions, the registered owner of all publicity rights in The Three Stooges filed a lawsuit for damages and injunctive relief against an artist who sold lithographs and t-shirts that reproduced a charcoal drawing by the same artist that depicted the deceased members of The Three Stooges. The depiction in question appeared as follows:

Without securing the owner’s consent, the artist sold lithographs and t-shirts bearing the above likeness of the Three Stooges. The lithographs and t-shirts did not constitute an advertisement, endorsement, or sponsorship of any other product. The image of the Three Stooges merely appeared on the lithographs and t-shirts being sold.

The Comedy III Productions Court resolved an inherent conflict between the right of publicity under California Civil Code Section 3344.1 and free speech rights under the First Amendment of the United States Constitution. To do so, the Court formulated “what is essentially a balancing test between the First Amendment and the right of publicity based on whether the work in question adds significant creative elements so as to be transformed into something more than a mere celebrity likeness or imitation.” Id. at 391.

According to the Comedy III Productions Court, “(1) state law may validly safeguard forms of intellectual property not covered under federal copyright and patent law as a means of protecting the fruits of a performing artist’s labor; and (2) the state’s interest in preventing the outright misappropriation of such intellectual property by others is not automatically trumped by the interest in free expression or dissemination of information; rather, as in the case of defamation, the state law interest and the interest in free expression must be balanced, according to the interests at stake.” Id. at 401.

The balancing test adopted by the Comedy III Productions Court hinged on “whether a work is ‘transformative.’” Id. at 404. “When a work contains significant transformative elements, it is not only especially worthy of First Amendment protection, but it is also less likely to interfere with the economic interest protected by the right of publicity.” Id. at 405. To determine whether the work is “transformative” the Court stated: “We ask, in other words, whether a product containing a celebrity’s likeness is so transformed that it has become primarily the defendant’s own expression rather than the celebrity’s likeness. And when we use the word ‘expression,’ we mean expression of something other than the likeness of the celebrity.” Id. at 406. “Furthermore, in determining whether a work is sufficiently transformative, courts may find useful a subsidiary inquiry, particularly in close cases: does the marketability and economic value of the challenged work derive primarily from the fame of the celebrity depicted? If this question is answered in the negative, then there would generally be no actionable right of publicity. When the value of the work comes principally from some source other than the fame of the celebrity – from the creativity, skill, and reputation of the artist – it may be presumed that sufficient transformative elements are present to warrant First Amendment protection.” Id. at 407.

Cases subsequent to Comedy III Productions have reiterated this “transformative” test. In Winter v. DC Comics (2003) 30 Cal.4th 881, the California Supreme Court stated that “an artist depicting a celebrity must contribute something more than a merely trivial variation [but must create] something recognizably his own in order to qualify for legal protection.” Id. at 889 (in the context of comic book depictions of half-worm, half-human characters based on musicians Edgar and Johnny Winter). The comic book characters were “fanciful, creative characters, not pictures of the Winter brothers” and therefore, sufficiently transformative to qualify for First Amendment protection. Id. at 892. Likewise, in Kirby v. Sega of America, Inc. (2006) 144 Cal.App.4th 47 the Second District Court of Appeal recited the “transformative” standards set forth in Comedy III Productions and Winter, and found that a video game character based upon a celebrity was more than a mere likeness or literal depiction of the celebrity, and therefore, sufficiently transformative to qualify for First Amendment protection.

Under the facts of the Comedy III Productions case, the Court found that the artistic work in question was not sufficiently “transformative” to be protected under the First Amendment. In sum, the Court felt the artist’s drawing of The Three Stooges, although skillful, contributed nothing other than a trivial variation of the likenesses of The Three Stooges. As such, the artist was not permitted to continue selling the lithographs and t-shirts with his depiction of The Three Stooges, absent a license from the right of publicity holder.

The question remains whether the President Obama painting is sufficiently “transformative” so as to protect the artist from any potential liability. Does the painting primarily represent the President’s likeness, or the unique transformative expression of the President’s likeness by the artist? This question is difficult to answer, with strong arguments to be made on both sides. However, the marketability and economic value of the painting appear to derive primarily, if not solely, from the fame of the individual depicted. According to the Comedy III Productions Court, this tends to indicate that an actionable right of publicity exists in favor of President Obama. Thankfully for the artist, this legal theory was never tested, and instead the painting was readily embraced throughout the Obama campaign.

10 Things to Know When a Competitor Hires Your Employees or You Hire Theirs

Published: February 5, 2009

by Charles L. Post, James Kachmar

You Lose A Key Employee; And Then Another And Another …

One of the company’s highest paid employees has decided to look for greener pastures or even start her own company. She is an “at will” employee without a specific written agreement for a set term. She knows your customers and how to handle and manage operations.

She offers to stay for a couple of weeks to help with the transition. You thank her, but make Friday her last day. You leave work slightly depressed, but no one is indispensable.

The next morning, she packs her personal belongings and returns the company laptop, cell phone and keys. You hand the employee her final paychecks and accompany her on a bittersweet farewell.

Then, things change for the worse. Your key employee’s second-in-command resigns, effective that afternoon. Three profitable sales people and their support staff submit resignations, effective that day. You check your email and discover six more employees have also resigned, effective immediately. Over the next four days, ten more employees give notice.

You call your lawyer.

A. 5 Things to Do When Your Competitor Hires Your Employees.

1. Move Fast. Unless a contract states otherwise, employers are not required to let a departing employee work out a notice period. When an employee has announced an intention to compete, there may be little advantage to having them stay for the duration of the notice period. Use caution to insure you are not “financing” the employee’s transition to a competitor.

2. Conduct an Exit Interview. If you have reason to believe the employee will compete, an exit interview may be even more important then usual.

– Remind the employee of post-employment obligations concerning confidential or trade secret information. Provide copies of any signed non-solicitation or confidentiality agreements. In the case of former owners or those falling within Business & Professions Code section 16601 (Sale of Good Will), discuss and confirm in writing the details of any non-compete obligations.

– Inventory all returned company information and property, including copies of any original documents. Advise the departing employee not to download, copy, transfer, forward, or manipulate company information or data on any computer or other electronic device. Document an averment to that effect.

Determine a mechanism for the deletion of “duplicate” confidential information on home computers, laptops, cell phones and PDAs.

– As for a description of the employee’s new position, job duties, nature of business, and address and phone number of the new employer. Be polite, the departing employee may not be obligated to give you this information.

3. Investigate.

– If a high value employee who poses a significant threat to the operation of the company leaves, conduct an investigation to determine what information the employee may have taken or copied prior to departing.

Conduct the investigation within the confines of the company’s policies and procedures. Most companies have polices that make clear that an employee does not have a right to privacy in any company information, including emails, computer files, computer usage histories, voice mails, and the like.

– Consider immediately limiting or terminating the departing employee’s access to company offices and information networks and equipment.

Absent a valid contractual provision preventing it, employees have a right to work for the competition. While it is fair and appropriate for the company to protect its business’ confidential and proprietary information, it should not unnecessarily offend a departing employee.

4. Be Careful What You Say, But Say a Lot. Be sure your customers know that service will not decline as a result of the employee’s departure. Waiting to contact customers may compound the effect of a departure. Don’t bad mouth the departing employee but immediately notify customers that the employee no longer has authority to act on behalf of your company. If you hear from customers or prospects about an employee violating an employment obligation, take action quickly.

5. Prompt Legal Action.

If you determine that a former employee has acted wrongfully you have several options, including:

• Send a Cease and Desist Demand Letter

• File a Lawsuit

• Seek a Temporary Restraining Order/Preliminary Injunction

A single employee taking customer lists or other information related to his former employer’s business is a common cause for litigation. California law protects the rights of employees to sell their services in a free marketplace, and protects employers against unfair competition and the misuse of proprietary, confidential or trade secret information by competitors or former employees. While California law makes clear that employees can lawfully “prepare to compete” against their current employer, it is less clear when those lawful preparations cross over into a breach of the employee’s duty to his/her current employer.

Claims against a former employee (and possibly their new employer) for misappropriation of trade secrets must be brought within three years of the date a plaintiff has reason to suspect the factual basis of a claim of misappropriation of trade secrets.

You Hire A Top Performing Employee From Your Competitor And Then She Brings Along “Her Team.”

You’ve been working for months to recruit a competitor’s star employee. She arrives at your office telling you that she resisted counteroffers and is now on board.

Almost immediately, her cell phone begins to ring. Subordinates and co-workers from her former employer (your competitor) want to know if there is a place for them at your company. She explains that she can do the most for your company if she’s got her “team.”

You start making deals.

You make hurried estimates as to the cash flow that might be realized from this sudden acquisition of 20 skilled employees with established customer relationships. You do not consider the effect this exodus will have on your competitor, nor whether it would have been better if the new employees had given advanced notice.

The new employees bring files and equipment and get their offices set up – everyone seems to be operating as a team.

Then you receive a cease and desist letter from your competitor’s lawyer. The lawyer notifies you that your competitor will be appearing in court Monday morning to seek an injunction against your alleged unfair business practices and to enjoin any further hiring of his/her employees or solicitation of customers.

You call your lawyer.

B. 5 Things to Know and Do When Hiring Your Competitor’s Employees.

1. Beware of “team.” When a manager, officer or employee of another company speaks on behalf of other employees of that company, i.e., “my team,” “my group,” “my office,” he/she may be breaching a fiduciary or other duty to their current employer. An officer breaches a fiduciary duty to his current employer if he solicits his current employer’s employees to go to work for a competitor. In most cases, these duties end when the employment ends. Barring the most unusual circumstances, an employee does not breach any duty to his employer in discussing his or her own future plans for employment.

2. Determine whether employees-to-be are “at-will” or have a contract with their existing employer. Make sure you understand any limitations on the employee’s ability to work for a competitor. Enforceable restrictions can include a contract for a specified term. A company that interferes with another company’s employment contracts with its employees can be exposed to civil liability. Sellers of “good will” or an equity interest in a company may also be prohibited from working for competitors. California courts will also act to prevent a former employee from utilizing a former employer’s trade secrets to the disadvantage of the former employer.

3. Make employment offers in writing. The offer should include a statement that the employee bring nothing with them from any former employer and that everything they need to perform their job will be provided by the new employer. Require the employee to represent and warrant that he or she is free to accept the employment with your company and that he/she has not taken anything from his/her former employer.

4. Employees who wish to “follow.” Recruit for open positions from multiple sources. Avoid “targeting” only employees of a competitor. Advertise positions, get applications and resumes, interview and conduct salary negotiations directly with individual applicants. Document all of these steps.

5. Announce the news. California law permits former employees of a company to announce that they are no longer with their former company and are with a new place of business. In some circumstances, however, an employee may be prohibited from soliciting customers of his former employer. Announcements of employee acquisitions should bear this legal distinction in mind and should be reviewed by legal counsel prior to making such arrangements.

SIDEBAR: What to Do Before Your Employees Give Notice.

• Make clear to your employees what information belongs to the company and specifically, what information you consider to be confidential, proprietary or trade secret. California law protects employers who designate and take reasonable steps to secure their business information as trade secret, confidential and/or proprietary.

• Establish a system of reasonable practices to protect this information. Those practices can include proprietary information agreements and other policies that make clear to employees that customer information, customer preferences and indeed the customer relationship itself is the property of the employer. These policies must be carefully drafted so as to not run afoul of California laws protecting employees. You should also take additional security steps such as computer passwords and limiting access, labeling restricted access, utilizing locked file cabinets, etc.

This article first appeared in the January/February 2009 issue of Sacramento Lawyer, the bimonthly publication of the Sacramento County Bar Association. Weintraub Genshlea Chediak thanks Sacramento Lawyer for the right to publish the article, in its entirety, on our website. The article is the copyrighted property of the Sacramento County Bar Association.

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