Aaron Morris' Business Law Alert : Orange County Business Litigation Lawyer & Attorney : Morris & Stone Law Firm : Santa Ana, Tustin, Irvine, Newport Beach, Southern California, CA

Companies and their in-house attorneys were given an amazing gift by the California Court of Appeal this week.

The case in question arose from an innocent little wage claim. Maria Gutierrez was a cashier at a gas station owned by G&M Oil Company. She sued G&M, claiming that the company had failed to provide workers with meal breaks or to compensate them for the time they would spend counting out their registers at the end of a shift.

G&M was represented by Michael Gray, who was both the family-owned company's Vice President and General Counsel, as well as the son of the company's CFO. According to the court's opinion, the trial court entered a $4 million default judgment against G&M after Gray failed to defend the action. Not surprisingly, G&M removed Gray and brought in outside counsel to challenge the huge judgment with a motion to vacate.

The motion to vacate presented some interesting issues. Under Code of Civil Procedure § 473, a court "shall" grant a motion to vacate if the attorney screws up, and is willing to sign what is referred to as a "mea culpa" declaration, admitting his or her mistake, and begging that it not be imputed to the client. But here, since Gray was the Vice President of the company, he in essence was the client, so the mea culpa declaration was basically saying, "don't hold me responsible for what I chose to do." Unlike an innocent client who did not know that his attorney was dropping the ball, shouldn't a company be held to the decisions of its attorney when that attorney is part of the company? The trial court did not think so, and ruled that an attorney is an attorney, whether in-house or not. The trial court granted the motion to vacate, threw out the default judgment and put the matter back on the trial calendar.

Labor claims are typically handled on a contingency basis, often for one-third of any amount recovered, and the Labor Codes provide for recovery of all attorney fees, so you can imagine how crestfallen plaintiff's counsel was when the court threw out what may have been a more than $1.4 million pay day. The ruling on the motion to vacate was appealed.

The Court of Appeal sided with G&M, and upheld the trial court's decision to vacate the judgment. The court was willing to view Gray as wearing two hats. Yes, he was an officer of the company, but for purposes of the litigation he was acting as the company's general counsel, and not as an officer.

Was the ruling by the Court of Appeal correct? Often bad facts make bad law. The specter of a four million dollar default judgment, combined with the fact that, according to the decision, Gray had kept the action a secret from the rest of the company officers, meant that the trial court and then the court of appeal were both going to look for a way to provide relief. Further, there is a very strong public policy that matters should be decided on the merits, and not on technicalities. Therefore, the case was probably decided correctly, but there was a wrinkle that may have eluded the Court of Appeal.

I have defeated motions to vacate in the past by showing the court that the attorney in question is not providing a true mea culpa declaration. The attorney must ask for relief based on a mistake, not on a failed litigation strategy. In one case, I sued a company but the attorney for the company decided the matter was subject to an arbitration provision and simply refused to participate in the litigation. Just as in this case, after I obtained the substantial default judgment, the company brought in new counsel and filed a motion to vacate using the former attorney's mea culpa declaration. However, I defeated the motion by persuading the court that the attorney was not admitting to any mistake, but rather was continuing to argue that the matter had to be submitted to arbitration. The court agreed that an attorney cannot try one strategy, and if it fails, file a mea culpa declaration and go to plan B.

With this week's ruling by the Court of Appeal, companies with in-house counsel could try that approach. An individual defendant who knows about an action and simply decides to ignore it will not be granted relief on a motion to vacate, because there has been no mistake or inadvertence – the party just chose to ignore the action. Gray, the Vice President of G&M, attended two status conferences in the matter, and for whatever reason elected not to pursue a defense. Why is G&M getting a pass from that decision, when an individual defendant would not?

The mea culpa declaration approach of section 473 is self-policing in the sense that an attorney will not file a mea culpa declaration unless there has been a real mistake, because he or she is basically admitting to malpractice. With in-house counsel, especially where the counsel is an officer, the corporation could simply instruct the attorney to file the mea culpa declaration, whether or not the attorney agrees there was a mistake, since the attorney will know he is not exposing himself to a malpractice claim.

The Court of Appeal's ruling can be found here.

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Most clients want their attorneys to be jerks, at least to the other side. And, sadly, most attorneys are more than willing to oblige, because a good fight can really run up legal costs. But in many cases, perhaps even most cases, that is not the best strategy.

As your mother always told you, you can catch more flies with honey than with vinegar. What no one has ever been able to explain to me is why you would want to catch flies, but according to the American Heritage New Dictionary of Cultural Literacy, the idiom stands for the proposition that you can win people to your side more easily by gentle persuasion and flattery than by hostile confrontation. In the litigation context, this could not be more true.

Recently I was retained by a client that was being defamed. Years ago an article in a newspaper had made some false statements about him, and he had fought for a retraction, which was published. Now, years later, a service indexed the old articles in the newspaper, and the article reappeared when our client’s name was searched on the Internet.

Most attorneys would have sent a letter threatening fire and brimstone for this repeated wrong, but I used the conciliatory approach, acknowledging that his was probably just an oversight, and that I was certain they would want to take immediate action to correct the mistake. Because I didn’t threaten legal action, the paper turned the matter over to an editor instead of an attorney, and it was quickly resolved. The article was removed from the index.

Had my demand letter mentioned legal action, the newspaper would have "lawyered up" to respond.  That lawyer would have felt compelled to give me some legal theory as to why the paper had no legal obligation to remove the article. We would have sent letters back and forth, advancing our various legal positions. The matter would then have moved to litigation, or at the very least we would have fought over the language of some release the lawyer would have demanded. Instead, by using honey instead of vinegar, the matter was resolved with a single letter and very little cost to the client.

Lesson to all businesses: There are times when a threatening letter is appropriate, but don’t immediately assume that is the best way to go. Don’t think your attorney is being weak if he or she is friendly in the initial contact to the opposition and, similarly, if your attorney is being a jerk for no apparent reason, ask why.

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A call I received yesterday illustrated a common mistake made by business owners; one that I want to pass along so you can avoid making the same mistake.

First let me set the scene. When a client comes to an attorney to complain about something, it will always be the case that the attorney takes whatever first step he or she chooses to take based only on one side of the story. In this particular case, a client came to me complaining that someone had posted comments on a blog that defamed his company. I reviewed the blog and the comments certainly were defamatory, if they were false as my client assured me they were.

So, I sent a strongly worded cease and desist letter to the blogger, informing him that I had been instructed to bring an action for defamation, and suggesting that he take down the comments as a way to minimize his damages. But since I am aware that I have heard only one side of the story, I always end such letters with the following statement: "If I have in any way misstated the facts, or there are any other facts of which you think I should be aware, please call or write me immediately."

Within ten minutes of faxing the letter, the blogger called me. But instead of using the opportunity to explain why the statements did not amount to defamation or, if they did, to offer some way to undue the damage he had done, his first screamed statement was, "How could you send a letter like this when you have only heard one side of the story?"

Exactly, dear caller, and that is why the letter invited you to call me with your side. Instead, he immediately went to the usual posturing about how he was going to make sure I was disbarred, drawn and quartered for threatening such a frivolous action, but without ever telling me what made the action frivolous. I served him with the complaint the following day, and once again the action will ultimately end as I have explained here. (He did, however, take down the blog posting.)

Admittedly, a lot of attorneys won’t care what you have to say, and may not care if the action is without merit if they think they can make a buck off the representation. But don’t assume that going in, if you really do have facts to show that the attorney was misinformed.

In one case, for example, a client informed me that he was owed a large sum of money from a former employer for commissions on products sold prior to his termination. In response to my demand letter, the President of the company called to explain why the commissions were not owed, and then sent irrefutable documentation to support his claim. When I showed the documentation to the client, he acknowledged the facts and the terms of the agreement, but said he had hoped I would find someway around that reality as the action proceeded. I took the matter no further, and by spending a few minutes responding to me, the President saved his company a lot of unnecessary litigation.

You must proceed with caution when responding to a demand letter, because the attorney may later try to twist your words to claim you somehow admitted to the wrongdoing. For that reason, you might want to make your response through an attorney. We know the magic words that can keep the response from ever being used against you. But don’t immediately reject the thought of actually responding to an attorney’s letter, and if the facts are on your side, tell your attorney to provide a thoughtful, civil response so that the other attorney won’t feel compelled prove who is boss.

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It seems like every few weeks I have to rail against a lawsuit I read about, wherein the attorney representing the plaintiff brings an action that is clearly barred by the Communications Decency Act.  In this latest installment, we find a New York attorney who represents plaintiffs who appear to have a solid case against some individual defendants resulting from some truly horrific defamation on the Internet.

But the attorney could not leave it alone.  I can almost see his mind working.  He thinks to himself, “these individuals will never be able to pay the judgment, so I’d better look around for some deep pockets.”  So, in addition to the individual defendants he names ning.com, wordpress.com, twitter.com, and my personal favorite, godaddy.com. 

I sometimes use the analogy that naming a Internet Service Provider in an Internet defamation action is akin to naming Microsoft as a defendant because the defamer used Word to type the defamatory statements.  I never thought any attorney would actually go that far, but the attorney in this case surpasses even that far flung analogy.  I know it’s a foreign concept to some attorneys and their clients, but a defendant should only be held liable for damages if he, she or it has done something wrong.  Here, twitter.com is named because the defendants sent out “tweets” sending their followers to the defamatory content.  Godaddy.com is named because the defendants obtained the domain name there, and then set it to forward to their blog on wordpress.com.  How could these companies possibly be liable?  Well, according to plaintiffs and their attorney, they are liable because what the defendants did amounted to an “irresponsible use of technology.”

Apparently, in this attorney’s world, we have gone beyond even requiring that the website provider check the content of every web page posted on its server.  Now it is also the obligation of twitter.com to review and authorize every tweet that is sent, and godaddy.com must view with suspicion every account that sets a domain name to forward elsewhere.  Clearly there could be no Internet if such duty and liability could be imposed.

In (very slight) defense of the attorney, he does allege that these companies were informed of the nefarious use of their services, and did nothing to block the content.  Among the public there is an urban legend that an Internet company becomes liable once it is informed that it is being used to distribute the defamatory content, but an attorney should know better.

A copy of the complaint can be found here, and a detailed article about the case can be found here.

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Perhaps because the adrenaline and endorphins flow during a courtroom battle, I become very thoughtful in the calm that follows. I won a small but satisfying court victory today in an Internet defamation case, and it made me realize how much the process mirrors a scene from a movie I just saw.

The movie was Taken, which I thought was very good. Even if you haven’t seen the movie, you probably saw the scene to which I refer since it was shown in the trailers. The main character, who we come to learn is some sort of retired Über-spy, is on the phone with his teenage daughter when she is kidnaped. He hears the bad guy pick up the phone, and he calmly gives the following speech:

I don’t know who you are, and I don’t know what you want.
If you are looking for ransom, I can tell you I don’t have money.
But what I do have are a very particular set of skills;
skills I have acquired over a very long career.
Skills that make me a nightmare for people like you.
If you let my daughter go now, that will be the end of it.
But if you don’t, I will look for you, I will find you and I will kill you.

Most every Internet defamation case I handle starts with such a moment. Not nearly so dramatic, of course, and there are no deaths involved if the defendant doesn’t listen to me, but the concept of a choice is the same.

Most of my defamation clients aren’t seeking money initially; they just want the bad guy to stop defaming them. My marching orders are usually just to get the person to take down the comments. So I write to the bad guy, explaining that this does not need to go any further. He strayed from the path and said and did some things he shouldn’t have, but if he just takes down the posts and walks away, “that will be the end of it.”

That is the moment in time. I am affording the prospective defendant the opportunity to avoid sending his life, or at the very least his finances, in a bad direction. I am less of an advocate and more of a care giver, just trying to convince the patient to stop engaging in self-destructive behavior. But he makes the ultimate decision whether to accept that help, or to continue on his path.

In Taken, the kidnapper could not help himself and responded by saying, “good luck.” He did not take the skill set seriously enough, thinking he would be impossible to find. Today’s defendant also did not take the skill set seriously enough, thinking that since he had hidden his identity and lived across the country we would never find or pursue him. He was one of a few on-line competitors with my client, and had engaged in some trash-talking that escalated into defamatory comments about my client’s business practices. All he had to do was take down the false statements and walk away and that would have been the end of it. He refused, and today a judge ordered him to take down the false statements, and to pay my client over $200,000.  I suspect, if he had it to do over again, he'd take the walk-away.

Lesson for all businesses: Pick your battles. If you want to take on a plaintiff that you feel is trying to shake you down, then I’m with you one hundred percent. But don’t get into a court battle just to prove who has the bigger . . . lawyer.  The defendant in today’s case had no moral high ground.  He knew what he was saying about my client was untrue, so why on earth wouldn’t he take the opportunity to walk away?  As a famous philosopher once sang, “You’ve got to know when to hold them, know when to fold them, know when to walk away and know when to run.”

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After more than 20 years I can’t believe this sort of thing is still going on.

On-line legal research offered by Lexis and Westlaw used to be very expensive.  These services charged by the hour and according to the database being used.  Printing out what the research revealed was also expensive, with the services charging by the line.  An intensive research session for a major motion could cost thousands of dollars. 

The profits being realized by the research services were so high that at the first mega-firm I worked for they offered a free trip to Hawaii to the attorney at the firm that spent the most time using the service.  The firm gladly passed along word of the contest and the associates obliged by signing on and staying on for days at a time.  Only after I pointed out the conflict of interest in such an arrangement did the firm cancel the contest.

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For there to be a successful claim of disability discrimination against an employer, there must first be a determination that the employee is, in fact, disabled.  Under the Americans With Disabilities Act (ADA), a medical condition can be deemed a disability causes an impairment of a "major life activity."  Many disability claims therefore turn on the interpretation of what is a "major life activity."

Such was the issue in the 7th Circuit case of Winsley v. Cook County.  Plaintiff in that case was a nurse, and her position required that she drive to the homes of the patients.  For medical reasons, the plaintiff became unable to drive, accept to and from work.  The County could not continue to employer her with that restriction, and she claimed that was disability discrimination.

On a motion for summary judgment, the trial court concluded, and the District Court agreed, that driving is not a major life activity.  The court noted that activities recognized as major life activities by the Equal Employment Opportunity Commission (EEOC) "are so important to everyday life that almost anyone would consider himself limited in a material way if he could not perform them."  The court concluded, however, that "this is not the case with driving."  The court noted that the 2nd, 10th and 11th Circuits have all reached the same conclusion.

As you can see, the determination of what is a "major life activity" can be very nuanced.  Most of us would feel very limited if we could not drive, but the law looks more at the body than the activity.  For example, if a medical condition made it difficult to sit for periods of time, the court might find that to be a sufficient impairment.  But translating that inability to some external activity such as driving is less likely to pass muster.

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The Internet, through social websites and blogs, offers fertile ground for employers that want to run an informal background check on current and prospective employees. And, since everything eventually ends up in court, the actions taken when something unacceptable is found during such a background check provide new issues for lawyers who deal with free speech and defamation.

Take the case of Nina Yoder. She was expelled by the University of Louisville's nursing school because of her Internet postings. Yoder has now sued the university, alleging that the expulsion violated her First Amendment rights.

The nursing school expelled Nina Yoder on March 2, saying her MySpace postings "regarding patient activities and identification as a University of Louisville School of Nursing student violates the nursing honor code which you pledged to uphold," according to a copy of her dismissal letter, which was attached to the suit.

In her blog postings, copies of which she attached to her own complaint, Yoder makes caustic comments about Christians and blacks. I attempted to go to the website to make my own determination about the appropriateness of her comments, but she appears to have taken down her MySpace page.

According to an article posted at courier-journal.com, the nursing school is upset because some of Yoder’s postings are about specific patients (although they are not mentioned by name). In one of her postings, she wrote about a birth she witnessed: "Out came a wrinkly bluish creature, all Picasso-like and weird, ugly as hell ... screeching and waving its tentacles in the air." I’m not sure a patient would want the miracle of her child’s birth described in that way by someone who should, like any medical professional, respect her privacy, but I can also see that as a failed attempt to humorously describe what she had seen.

But there was far more. The school officials were probably equally unimpressed when Yoder wrote about how the nursing school is in downtown Louisville, adjoining an area "inhabited by humanoids who have an IQ of 10 and whose needs and actions are basically instinctive. As in, all they do is ––––, eat, –––– and kill each other." She did, however, graciously concede, "OK, maybe I am generalizing yet again."

As discussed in a prior blog posting, Yoder and her supporters are using the "there’s so much trash on the Internet you can’t hold my trash against me" defense. As Yoder wrote in her petition requesting reinstatement to the nursing program, "If profanity was grounds for dismissal for the School of Nursing, the nursing school would go bankrupt."  Her petition to the school for reinstatement can be seen here.

The court has not yet set a hearing date on Yoder’s request that the nursing school be ordered to reinstate her. We’ll know then if the trash defense worked.  The standards are different in the academic arena than in the employment context. Under California’s at-will presumption, an employer would generally be safe terminating an employee for something said on a blog, but California’s Constitution affords more free speech protections than even the First Amendment, so tread carefully. For a more detailed analysis of employees and blogs, see You Write What You’re Told.

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The EEOC recently identified the five most commonly filed employee suits, which are:

sex discrimination and harassment (30.1 percent);

retaliation (22.2 percent);

race discrimination (13.5 percent);

disability discrimination (12.8 percent); and

age discrimination (8.2 percent).

Sadly, many such cases are fomented by plaintiffs’ attorneys who don’t properly advise their clients. Never mind that in a huge number of cases there is not a scintilla of evidence that the termination was based on discrimination, it is enough that the employee belonged to a protected class. In most cases the employer ponies up some cost of defense settlement amount to avoid the uncertainty of trial.

Thus, no one can advise you how to keep your employees from pursuing legal action, but my first post on this site still remains solid advice on how to ultimately prevail if you decide to go the distance.

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Before getting to today’s topic, I’m going to once again shout into the wind as I have for years that employers providing health insurance for employees was never a good idea.  The conceptual flaw is apparent.  Providing health insurance as a benefit puts a third party between the two real parties to the contract.  The doctor is no longer in contract privity with his or her patient.  When a patient is spending real dollars for health care, they have an incentive to bargain down the price.  When uncle employer is paying, the sky’s the limit, and health care prices soar.  The result is what we see today.  Strikes are more often over health insurance than worker safety or pay, and when an employee is fired, the cost of maintaining the insurance under COBRA has grown too high.  Employers can still offer health benefits, but it should be in the form of a monthly payment.  “Here’s $500 a month for health insurance.  Whatever you don’t spend, you can keep.”  If that approach had been used, the push to offer health care at lower prices would have been far more intense than HMOs negotiating fees.

Which leads me to the issue at hand.  The latest stimulus plan includes a COBRA subsidy for employees laid off between September 1, 2008 and December 31, 2009.  If you have an employee that declined COBRA coverage after September 1, 2008, you must notify the employee of this subsidy.  There is a needs test, but it’s pretty high – a maximum of $125,000 annual income for singles, $250,000 for couples.  The employee can draw the subsidy for no more than nine months.

Incidentally, in line with what I said in my opening rant, many terminated employees call my office wanting to pursue wrongful termination actions, motivated most by the fear of losing their health insurance.  They rail against the ridiculous cost of the COBRA plan, unaware that was the price their employer was paying.  Often as not, they are unaware that they don’t need that COBRA coverage.  COBRA only makes sense if the terminated employee is going to be uninsurable due to a pre-existing condition.  Admittedly, something as simple as taking heartburn medication will constitute a pre-existing condition, but make certain your former employee knows that if they do not have such a condition, it will be far cheaper to get a bare bones bridge policy until they find another employer that is making the mistake of providing health insurance.

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At some point a scam becomes so old and tired that I assume no one would ever fall for it. Certainly one of my fellow attorneys could not be duped by, for example, the old "Nigerian trying to get money out of the country" scam, right?

Tell that to Houston attorney Richard Howell, Jr., a 23-year legal veteran and partner in the firm of Buckley, White, Castaneda & Howell. He fell for the oldest check fraud scam around. And he is not the only attorney victim of this variation on the Nigerian scam.

Here’s how it works. An attorney is contacted via e-mail from a foreign company ("FC"). FC did business with a company located near the lawyer’s office, and is looking for representation in collecting a huge unpaid account of, say, $900,000. The attorney is asked to handle the matter on a one-third contingency basis. The attorney is understandably intrigued by the possibility of collecting a $300,000 fee. But being wary of an email from a foreign company, he goes on line and confirms that there is in fact such a company located near his office, doing the sort of business discussed in the email.

Sometime later, perhaps even before the attorney has sent a fee agreement, FC sends another email stating that the local company has made a partial payment of, say, $300,000. FC still needs the attorney to collect the remaining $600,000, and it is honoring the contingency agreement. FC has instructed the local company to make the check payable to the attorney, and asks that the attorney please deposit the funds and wire $200,000 to FC’s account, keeping $100,000 for himself.

Sure enough, the check arrives a few days later, and the attorney deposits it in the firm’s account. But our savvy attorney is no fool. There is no way he is going to wire funds to FC until he is damn sure the check has cleared. He waits a full ten business days, and only after the bank confirms that the funds have cleared does he wire the money to FC. About six weeks later, the attorney gets a call from his bank stating the $300,000 deposit has been reversed. The attorney is now out $200,000.

But how is that possible if the check "cleared"? This scam only works because the vast majority of people, even attorneys, do not understand what it means when a bank says "the funds have cleared." In our scam, FC printed up some fraudulent checks from a company it knew would have lots of money in its account; let’s call the local company Humongo Steel. The account information is easy to come by, either by dumpster diving or just by getting a legitimate check from Humongo Steel, perhaps by way of a merchandise refund or being one of the company’s vendors.  Alternatively, Humongo Steel might be in on the scam.  Let’s assume Humongo Steel banks with Bank of America. FC writes a fraudulent check to the attorney on Humongo Steel’s Bank of America account, and the attorney deposits it into his Citibank account. Citibank’s computer asks Bank of America’s computer, "is there sufficient money in Humongo Steel’s account to cover a $300,000 check?" Bank of America’s computer answers "yes" and credits the money to Citibank. This all takes place the same day the check is deposited, but banking regulations date back to a time when the checks had to be physically transported around the country, so the Feds allow Citibank to hold those funds for ten days. Citibank takes the full ten days so it can play the float. After the ten days, Citibank happily reports to the attorney that the funds have cleared and shows the $300,000 in his account.

But there is another step in the process. The check written on Humongo Steel’s account sits in the bank until the next time statements are sent out. If the check hits the bank right after statements were mailed, that check could sit there 29 days. Assuming Humongo Steel has not opted for checkless statements, the check is eventually stuffed into Humongo Steel’s account statement and mailed. The mailroom gets the statement and passes it along to accounting. Accounting goes to reconcile the account and finds the fraudulent $300,000 check. Humongo Steel has up to 30 days to report that fraudulent check. When it does, the bank has Humongo Steel sign a statement swearing to the fraud, and Bank of America then gets its $300,000 back from Citibank, who gets is back from attorney.

Did you do the math? The bank told the attorney the funds had cleared after just ten days, but it can take 59 days or more to know if funds have really cleared. Richard Howell, Jr. is suing Citibank, claiming it was negligent in reporting the funds had cleared, but he is going to lose. By law an account holder has 30 days to report a discrepancy in an account statement. The attorney should have known better.

Lesson for all businesses:

I’m reminded of teaching my young son about stranger danger. I told him not to get in the car with a stranger. I told him the stranger might temp him with candy, or a toy, or ask for help finding a lost puppy. One day my wife and I both got delayed, so we sent a stranger (to him) to pick him up. I told our friend that if he was resistant, tell him to go talk to the people in the office, who I had put on notice of the situation. He got in our friend’s car without hesitation or question, and when I later asked him why he did that despite all my warnings about stranger danger, he said, "I knew it was okay because she didn’t offer me candy or a toy, or ask for help finding a missing puppy."

The scam might not take the precise form just discussed, but if it involves you cutting a check or wiring funds from a deposited check, it might be a variation. Don’t do it. You now know that it can take two months for a check to truly clear. Even a cashier’s check can be bogus.

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When will financial institutions get it? We spanked Bank of America for a quarter million dollars after it closed our client’s checking account without notice, causing a dozen checks to bounce. With no consideration of the ethics of such a move, Bank of America simply claimed (unsuccessfully) it had the right to do what it did. Now Chase Bank USA ("Chase") is being sued for doing something equally sleazy, and also claims it has the right to act as it did, customer relations be damned.

Plaintiff Timothy Hauk opened a Chase credit card account and received a Cardmember Agreement ("CMA"). After Hauk had maintained his Chase account for about sixteen months, Chase sent him a balance transfer offer ("BTO") in October. The BTO offered Hauk a promotional fixed annual percentage rate (APR) of 4.99% for any balances he transferred to his Chase account. It also incorporated the terms of the CMA and indicated that Chase could impose an increased rate ("Non-Preferred APR") in lieu of the promotional rate if Hauk made a late payment to Chase or any of his other creditors, the obvious implication being that Hauk would receive the low rate unless and until he made a late payment after accepting the offer. Hauk transferred a $10,200 balance with another creditor to his Chase account, thereby accepting the BTO. When Hauk received his October statement, he found that Chase had applied a Non-Preferred APR of 28.74% on the transferred balance. Why? Because Chase ran a credit check and found that Hauk’s mortgage company reported that a mortgage payment had been one day late three months before Hauk accepted the BTO. Hauk’s attorneys brought a class action for violations of California’s Unfair Competition Law ("UCL") and False Advertising Law ("FAL").

Counsel for Chase argued with a straight face that Chase had the right to do this, because if they had known of the late payment, they would have never extended the BTO to Hauk. Since he was not eligible under Chase’s own rules, Chase was free to stick it to him, Chase argued. Incredibly, the District Court Judge agreed, and granted Chase’s motion for summary judgment, claiming that Chase’s disclosure defeated those claims.

Fortunately, on appeal common sense prevailed. The Ninth Circuit Court of Appeals properly recognized that under the FAL, the standard is simply "whether the public is likely to be deceived." If the FAL was violated, then the UCL would follow. The appellate court reversed the summary judgment as to the FAL and UCL causes of action.

Lessons for all businesses:

Don’t do something just because you are convinced you have the legal right to do so, if it doesn’t pass the smell test. Some day you may find yourself in front of a jury, and jurors have a very keen sense of smell. And as a corollary, always remember that the biggest shortcoming of attorneys is that they think too much like attorneys and often lose sight of common sense. In our prior case against Bank of America and this case against Chase, I have no doubt that the attorneys told the bank officers, from the day they received the demand letter to the day their appeal was denied, that the law was on their side. But they should never have listened, because it was obvious that no jury would tolerate what the bank had done.

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I just scored a big victory on behalf of a client in Los Angeles Superior Court, and it reminded me to remind you of the importance of observing business formalities with your corporations and LLCs.

In the late 90s, my client had loaned about $200,000 to an acquaintance (we’ll call her Lauren), for use in a business Lauren was forming with a business partner. Lauren and her partner took the money and formed an LLC, but never paid back a dime of the loan. Of course, to keep the matter challenging for me, the loan agreement was entirely verbal. Thus, I not only had to prove an oral agreement, I had to deal with the statute of limitation problem from this decade old debt.

The LLC was defunct, so a judgment against that entity would have been worthless. In any event, it had always been my client’s understanding that these were personal loans to the individuals, not to the company.

I tried the case to a jury, and I called the defendants as my first witnesses, even before my own client, because I anticipated that they would acknowledge the debt (and thereby avoid all those problems of proving the oral agreement), but would try to push it off to the LLC. They testified as expected, and I was then able to show through the testimony of my client why the debts that they had just admitted to were in reality personal debts. The total judgment awarded by the jury and court exceeded a million dollars.

The Defendants, in their minds, may well have intended that the debts be company debts, but they did not observe the necessary formalities. They may have thought they hit the jackpot when they found someone willing to loan them $200,000 with no documentation, but that contributed to their own downfall. If these had been real company debts, then we would expect to see the usual formalities such as promissory notes issued by the company, and company minutes reflecting the terms of the loans. Most LLCs operate in a small business fashion and as a result run a high risk of inadvertently losing their liability shield under what is known as the Alter Ego Doctrine. The Alter Ego Doctrine is generally based on the idea that the member(s) of the LLC have acted as one and the same in a manner that works a fraud or injustice on another, and therefore should share the same liabilities. In determining whether the individual members are personally liable for the debts and obligations of the LLC under this doctrine the courts consider several factors, the most significant of which is failure to follow organizational formalities.

A failure to follow formalities has been seen to include improperly organizing an LLC, not timely filing required forms or paying required fees and taxes, not having a continuous presence in the home state, and not having a designated agent to receive legal documents. There are a few specific activities that commonly cause problems under the "failure to follow organizational formalities" factor: (1) Commingling of Assets; and (2) Failing to Keep Company Records.

A simple and common example of commingling and failing to keep records is where a member uses LLC funds or assets for personal use without documenting the transaction, and with no proof of authorization under the LLC’s articles. The lack of any formal procedure in the expenditure will make plain to any deciding judge that the LLC was no more than a name, and at all times the member and the business were one and the same entity.

These issues are of particular concern for the small business oriented LLC because they tend to operate on more limited budgets, have less management personnel, and, as a result of the primary focus being profits, generally have less time to ensure the LLC is complying with nuanced and complicated business laws. While the best answer to avoid the above mentioned pitfalls is of course what the small business person would most love to avoid, the high risk of inadvertently putting all personal assets at stake requires that they bite the bullet and consult with a business planning attorney. While doing so may serve a frustrating cost, it must be remembered that the above mentioned concerns are only a few of the many an LLC member must be wary of. In the end, the business person’s choice on whether to forgo professional consultation will most likely make the difference between walking away from any future financial disaster, or bringing it home.

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Yelp is based in San Francisco and is viewed there as a favored son for some reason. When someone dares to challenge Yelp or its postings, many of our Northern California neighbors get exercised. I received several calls from media outlets over the past couple of days, seeking comment on the case of Steven Biegel v. Christopher Norberg, an Internet defamation case involving Yelp.com.

The simple facts are these. Norberg was treated by Biegel, a Chiropractor. Norberg was told the treatment would cost a certain amount if he was paying for it out of his own pocket, but his insurance company was allegedly billed at a much higher rate. This apparently bothered Norberg, so he posted a review on Yelp.com, giving Biegel just one star and questioning the honesty of his billing practices. When Biegel complained about the review, Norberg replaced it with a new entry, accusing Biegel of attempting to harass him into silence. Biegel then responded by suing Norberg for defamation. The trial is set for March 2009.

Note that Yelp is not being sued, only the person that actually posted the allegedly defamatory statements. Nonetheless, many are bothered by such a lawsuit, concerned that it will have a chilling effect on the willingness of people to post their views on sites such as Yelp.com and Citysearch.com. Some have suggested to me that just as the website is immune from liability for anything said by visitors, that immunity should be extended to the visitors as well.

I fought at the forefront of cases involving the Communications Decency Act, which shields website operators from liability for the comments of others, because that make infinite sense. We would not have open forums and dialog on the Internet if the website operators had to fact check every comment posted.

But on the issue of whether those who post the comments should be protected, I find myself cast as the curmudgeon, seeking to stifle freedom of speech. Here is how the San Francisco Chronicle quoted me:

“Sites that are seemingly well intended are turning into wastelands of defamatory and unspecified allegations,” said Aaron Morris, a partner with Morris & Stone LLP in Orange County who is not involved in the case. “There needs to be some sort of blowback against unfettered speech. People should be able to go on and say, ‘That’s not a true statement about me, and I need to be able to attack this.’ “

If everyone played nice, review sites would not be a problem. But they don’t. Suits against those who post defamatory statements won’t chill free speech, but they will chill defamatory speech, and that’s a good thing. You see, those seemingly helpful reviews you are reading on line are being gamed big time, and there must be a means to fight back. I receive calls every day from businesses that are being falsely trashed by competitors. In one case it was discovered that a company had employed a full time defamer (my designation, not theirs), whose job was to spend all day every day, creating false identities in order to post false reviews, blogs and websites about competitors. I’d love to say that it will all come out in the wash; that a good business will receive enough good reviews to override the false statements, but that is not the case. Whereas a legitimate reviewer will post their remarks and go about their business, these professional defamers utilize SEO methods to move the defamatory blogs and websites to the top of the heap.  Honest reviews don’t stand a chance against the bogus ones.

So what about the Norbergs of the world, who just want to post their comments without fear of legal action? Yes, the target of the criticism can file an action, but he will pay a heavy price if the posting was not defamatory. The poster can first respond with a simple anti-SLAPP motion, which stops everything including discovery and allows the court to determine whether the speech was protected and whether the plaintiff has a chance of prevailing. If the motion is granted, the plaintiff pays all of the poster’s attorney fees. He’ll then come to me, and we’ll file a SLAPP BACK action, suing the prior plaintiff for malicious prosecution, winning the poster millions of dollars (individual results may vary). Now who is chilled?

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C.C.P. § 685.040¹ provides that when a judgment includes an award of attorney fees pursuant to a contract, then the "[a]ttorney’s fees incurred in enforcing [the] judgment are included as costs collectible." While most would assume that "enforcing" include measures taken to collect on the judgment, on October 28, 2008 the Third Division of the Fourth Appellate District of the California Court’s of Appeal elaborated on just how broadly the term "enforcing" is to be construed.²

Globalist v. Reda³ involved a failed settlement agreement stemming from a separate action,⁴ negotiated by the parties to the underlying action as well as by the defendants in the separate action. Albert Reda and Internet Business’s International, Inc., ("IBI") recognized that the amount they owed under the terms of the failed settlement ($75,000.00) was far more favorable than the amount due under the final judgment from the underlying case ($444,600.00), and accordingly initiated enforcement proceedings.⁵ After successfully defending the settlement enforcement action, Globalist requested the inclusion of the attorney fees incurred in that defense as fees incurred in enforcing the final judgment pursuant to C.C.P. § 685.040.⁶ The trial court denied this request on the grounds that the fees were incurred in a "different" action, however the Appellate Court found otherwise.⁷

"Neither section 685.040, nor the Enforcement of Judgments Law of which it is a part, ascribe any special meaning to the word "enforcing."⁸ "The plain meaning of the word necessarily suggests ‘enforcing a judgment’ would include defending the validity of the judgment against challenge in a separately filed attack."⁹

The Court went onto note that the sole purpose of Reda’s and IBI’s settlement enforcement action was to "significantly decrease their unsatisfied judgment debtor obligations in this action . . . [and had] Globalist not defended against the specific performance action, it would have lost substantial rights under the judgment in this case."¹⁰

Considering it was ultimately held that Globalist’s attorney fees incurred in defending the settlement enforcement action were fees incurred in "enforcing" the underlying judgment, Globalist serves as a lighthouse for all judgment debtors considering wading the waters of avoidance: tread carefully. Indeed, as the court in Jaffe v. Pacelli¹¹ made clear, even filing bankruptcy may not help. 

1.  California Code of Civil Procedure § 685.040.
2.  Globalist v. Reda, 2008 DJDAR 16325 (4^th Dist. 2008).
3.  Id.
4.  Id. at 16325-26.
5.  Id. at 16326 & 16328.
6.  Id. at 16326.
7.  Id. at 16326-27.
8.  Id. at 16327. 
9.  Id.
10.Id. at 16328.

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As you know, Megan's Law set up a website that lists registered sex offenders.  Before extending an offer of employment, one might think that checking that website would be a quick way to make sure a sex offender is not being hired, especially if the job involves contact with children.  One would be wrong.

California is an at-will employment state, meaning that employers can terminate employees for any reason or no reason at all. Although there are statutory exceptions prohibiting employers from taking adverse employment action on the basis of race, gender, and other protected groups, a loophole in Megan’s Law serves to make sex offenders a protected group giving them rights that other employees do not have.

Sex offenders are filing claims for wrongful termination, utilizing Megan’s Law as the legal grounds to secure and retain employment. The Megan’s Law Statute, set forth in California Penal Code Section 290.46, states that a person is authorized to use information disclosed pursuant to the statute -- that a person is a registered sex offender --  "only to protect a person at risk."  California Penal Code § 290.46(1).  The statute specifically "prohibits, except as authorized to protect a person at risk or pursuant to another provision of law, the use of any information that is disclosed through the statute for purposed related to any of the following:

(A) Health insurance.
(B) Insurance.
(C) Loans.
(D) Credit.
(E) Employment.
(F) Education, scholarships, or fellowships.
(G) Housing or accommodations.
(H) Benefits, privileges, or services provided by any business
establishment.  (California Penal Code § 290.46(2)(A-H).

In other words, California employers may not discriminate in employment of an employee on the basis of his or her status as a registered sex offender, if such status is discovered through the Megan’s Law website, unless it is to protect a person at risk or pursuant to some other provision of law.  One such provision of law is Labor Code section 432.7, which addresses what questions an employer can ask an employment applicant.  Labor Code section 432.7 allows an employer to ask and use the fact of a "conviction" in determining any condition of employment; however, legal practice guides have interpreted it to apply only to hiring.  As such, California employers may discriminate in "hiring" sex offenders if that information comes from a questions about convictions.  However, if the employer fails to ask whether the applicant has any convictions, and later discovers through the Megan’s law website that its employee is a registered sex offender, the employer is liable for wrongful termination if it terminates the sex offender employee based on that information.

This serves to put the employer in an unenviable position: it may be held liable for the sex offender employee’s negligent conduct (for instance, if the sex offender employee physically abuses a co-worker) or face a claim by the sex offender employee for wrongful termination if it fires said employee.

Further, it is nonsensical that an employer can learn this information through other sources (i.e. public records search) and legally terminate the employee on that basis, yet is liable if obtained on the Megan’s Law website.  I suppose an employment attorney could suggest to clients that they check the Megan website to see if the employee is listed as a sex offender, and if so, then find the same information from some other source so the termination or rejection would not be based on what was found on the Megan site.  But that would circumvent the absurd result intended by our fine Legislature that sex offenders receive special protections, and I would never suggest such a thing.

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A Strategic Lawsuit Against Public Participation ("SLAPP") is a lawsuit or a threat of lawsuit that is intended to intimidate and silence critics by burdening them with the cost of a legal defense until they abandon their criticism or opposition. Winning the lawsuit is not necessarily the intent of the person filing the SLAPP. The plaintiff's goals are accomplished if the defendant succumbs to fear, intimidation, mounting legal costs or simple exhaustion and abandons the criticism. A SLAPP may also intimidate others from participating in the debate.

To guard against the use of lawsuits designed to quash free speech, California passed an anti-SLAPP statute. Code of Civil Procedure Section 425.16 provides a quick procedure a defendant can use to stop a SLAPP suit. Rather than goes through a year of costly litigation, a defendant can bring a simple motion to strike the complaint. The court then decides whether the speech in question is protected free speech. Claims stemming from these acts are subject to a special motion to strike unless the trial court determines that the plaintiff has demonstrated a probability of prevailing on the merits. (§ 425.16, subd. (b)(1).)

Section 425.16 applies to causes of action "against a person arising from any act of that person in furtherance of the person's right of petition or free speech under the United States or California Constitution in connection with a public issue." (§ 425.16, subd. (b)(1).) Such acts include: "(1) any written or oral statement or writing made before a legislative, executive, or judicial proceeding, or any other official proceeding authorized by law; (2) any written or oral statement or writing made in connection with an issue under consideration or review by a legislative, executive, or judicial body, or any other official proceeding authorized by law; (3) any written or oral statement or writing made in a place open to the public or a public forum in connection with an issue of public interest; (4) or any other conduct in furtherance of the exercise of the constitutional right of petition or the constitutional right of free speech in connection with a public issue or an issue of public interest." ( Id., subd. (e).)

But note that the section requires a "public issue." Many parties and judges forget this element, as illustrated by the recent, unreported decision, European Spa, Inc. v. Kerber, decided by the First District Court of Appeal on August 28, 2008.

In European Spa, a Yahoo.com user posted a review of the Spa, which stated: "My first impression was its tacky décor. Then I encountered an extremely rude European gentlemen, I believe this is the owner. From what I could see, the employees are miserable and tired. When I went into the steam room I saw mildew and brown spots on the walls.... I could not even sit in there. I went for my massage, and that was ok. But the room had a strange smell and the blankets were dingy. It was also very cold. I guess the owner does not put on the heat. There is just too much to go on about. I will never go there again, and I will make sure I will tell as many people as I can about the horrible experience that I had."

Another review, posted on Yelp.com, stated: "One star is even too much for this place. First of all, when I walked in there it looked like selling a whole bunch of useless things you'll wind up selling at a garage sale. The service was horrible. I had this creepy old European man helping me and he was just outright rude. The guy was acting as if he was doing me a favor by letting me come to his spa.... And what was with the 18 percent service charge? ? ? It's questionable that the therapists or the providers ever receive it. My massage was ok and that was the only highlight of this.... And their sauna and steam room ... was really disgusting. Their lounge are was just full of tacky decorations as what I've heard they've been around for a long time, and I really don't understand why.... I would never come back and much would rather go to the spa at my gym."

The owners of the spa were convinced that these posts came from a former employee that had started her own competing spa, not from customers. (As it turned out they were right, but they suspected the wrong employee.) They sued the former employee, who brought an anti-SLAPP motion, claiming that whether or not she was the person who had made the posts, they were protected free speech.

Resolving the merits of an anti-SLAPP motion requires a two-part analysis, concentrating initially on whether the challenged cause of action arises from protected activity within the meaning of the statute and, if so, proceeding next to whether the plaintiff can establish a probability of prevailing on the merits. (Overstock.Com, Inc. v. Gradient Analytics, Inc. (2007) 151 Cal.App.4th 688, 699.)

Several years ago the court in Rivero v. American Federation of State, County and Municipal Employees, AFL-CIO (2003) 105 Cal.App.4th 913, 924 (Rivero) made inroads into articulating the boundaries of what constitutes a "public issue" or issue of "public interest" as those terms are used in section 425.16, subdivision (e). Surveying the pertinent case law, the Rivero court identified three categories of statements that fit the bill: (1) the subject of the statement concerned a person or entity in the public eye; (2) the statement or activity involved conduct that could directly affect large numbers of people beyond the direct participants; or (3) the statement or activity concerned a topic of widespread public interest.

The court in Weinberg v. Feisel (2003) 110 Cal.App.4th 1122, 1132 also addressed the issue, delineating some attributes of an issue which would render it one of public, rather than merely private, interest: "First, ‘public interest’ does not equate with mere curiosity. Second, a matter of public interest should be something of concern to a substantial number of people. Thus, a matter of concern to the speaker and a relative small, specific audience is not a matter of public interest. Third, there should be some degree of closeness between the challenged statements and the asserted public interest; the assertion of a broad and amorphous public interest is not sufficient. Fourth, the focus of the speaker's conduct should be the public interest rather than a mere effort ‘to gather ammunition for another round of [private] controversy....’ Finally, ... [a] person cannot turn otherwise private information into a matter of public interest simply by communicating it to a large number of persons."

In European Spa, the court concluded defendant was wrong in concluding that reviews posted on the Internet are subject to an anti-SLAPP motion, because they did not meet the"public interest" element. The reviews did not connect with or encourage any larger discussion or public debate of general societal or consumer issues related to the spa industry. For example in Gilbert v. Sykes (2007) 147 Cal.App.4th 13, a patient/consumer created a Web site that related the consumer's experiences with plastic surgery performed by a prominent, widely known plastic surgeon, as well as information and advice for those considering plastic surgery. As the reviewing court explained, these statements concerned a matter of public interest within the meaning of section 425.16. The assertions that a high profile surgeon produced nightmare results that prompted extensive revision surgery contributed toward public discussion about the risks and benefits of plastic surgery in general. Equally important, the Web site was not limited to attacking the plastic surgeon, but contained advice, information and other features, including tips on choosing a plastic surgeon, that contributed to the general debate over the pros and cons of undertaking cosmetic surgery. (Gilbert v. Sykes, supra, at pp. 23-24.) The (fraudulent) spa reviews did not rise to that level, and the trial court denied the anti-SLAPP motion on that basis.

The same week, the Second District Court of Appeal came to a different conclusion in the unpublished decision of Kim v. IAC/InterActive Corp. There, a review about a dentist was posted on Citysearch, which read:

"Don't go there-worse dentist in Glendale

I do not recommend Dr. Kim. I randomly selected him as my dentist but after my initial visit, I was very discouraged. He made it very clear that he did not like HMO patients (which I was). His attitude towards me was poor as if I was a second-class citizen. I waited 5 weeks to schedule an initial visit, and he made me wait another 6 weeks to schedule my first cleaning. "Because you're an HMO patient, we cannot schedule you at convenient times." He is also understaffed. His receptionist doubles as his dental assistant. She was quite unprofessional and made comments about my age and marital status when I turned in my patient information card. All in all, DO NOT use this dentist!"

The dentist filed a complaint and subpoenaed the records from Citysearch, and then filed an action against the poster, Citysearch.com and other defendants. The defendants filed an anti-SLAPP motion, which the trial court granted based entirely on the fact that the dentist was unlikely to prevail in his action.

The result was correct, but the reasoning was flawed. The statement did not cross the line into defamation or trade libel, and the action against Citysearch.com would never have survived under the Communications Decency Act, which shields Websites from liability for information posted by others. But the court never considered whether the post was a matter of public interest.

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By law, an employee has one year to file an action with the Department of Fair Employment and Housing (DFEH) if he is claiming discrimination.  But what if an employment agreement contains an arbitration provision, and that agreement also provides that the notice of arbitration must be served within one year?  Is that provision invalid since it could interfere with State law?

That was the issue presented in Pearson Dental Supplies, Inc. v Superior Court (Turcios). Plaintiff signed an arbitration agreement, but when he felt he was the victim of age discrimination, he filed a complaint with the DFEH.  After the DFEH closed the file and issued the "right-to-sue letter," the plaintiff filed an action in Superior Court.  Defendant employer argued that the case was barred by the arbitration provision, and since plaintiff had failed to make the arbitration claim within one year, he had waived any right to sue.

The Court of Appeal agreed, and ruled that under these specific facts the employee's age discrimination claim was barred for failing to make a demand for arbitration.

Moral of the story?  If your company has decided to utilize arbitration agreements, be sure to insert a deadline for filing such claims.  Your company is best served by speed in employment claims, as opposed to trying to justify an employment decision years later.  An employee has a year to file a claim with the DFEH, which typically takes nine months to investigate the claim and issue a right-to-sue letter (if the employee has not retained counsel and asked for the right-to-sue letter to be fast tracked).  Then, the employee has another year to file the action in court.  All told, almost three years can pass before the action is filed in court.  By inserting a time limitation in your arbitration  agreement, you can be assured such cases will present themselves for decision within one year.

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Most employers and human resource directors are familiar with the concept of at-will employment, but may not know the statutory basis. In California, at-will presumption comes from a short and simple Labor Code. Section 2922 provides:

“An employment, having no specified term, may be terminated at the will of either party on notice to the other. Employment for a specified term means an employment for a period greater than one month.”

A contract that is for a specific term is by definition not an at-will agreement. If you hire an employee under a one-year contract, then you have agreed to employ that person for one year. You thus need cause to fire the employee prior to the expiration of the contract. Terminating without cause would be a breach of the agreement.

Any employee that does not have a contract for a specified term is thus presumed to be at-will. An employer does not need a contract stating that the employee is at-will or even a document signed by the employee acknowledging he is at-will. At-will employment is the default, absent a contract to the contrary. The mistake employers make is to do something to defeat the at-will presumption, and employee handbooks are fertile ground for such mistakes.

The pendulum swings with judicial interpretations of employee handbooks. At one time, employee handbooks were the bread and butter of employment attorneys, who used them to create employment contracts that defeated the at-will presumption. If the handbook provided for a disciplinary process, and the employee relied on that representation, it was argued that an implied contract had been created by the handbook. So, if the handbook provided that no employee would be terminated without first receiving a written warning, then it was a breach of the agreement if the employee was fired with no warning. Businesses responded by printing on page one of their handbooks that the handbook was not an agreement, and that the company was not required to follow its own policies.

That approach is effective only to a point. The courts are mindful and open to the mixed message argument. A classic misstep involves creating a probationary period. If your handbook states that an employee is probationary for their first 90 days at the company, then what do they become on day 91? The classic meaning of “probation” is a test period, where the employee can be fired without cause. Be definition, then, after that 90 days, cause will be required.

It is not enough that your employee handbook states that all employees are at-will, and that it is not at agreement, if there are still internal inconsistencies. After all, if your handbook states that employees can be terminated without cause, and then goes on to set forth what constitutes cause for termination, why should the first statement be elevated over the latter? You and/or your attorney should review every clause and make certain they are all consistent and achieve the intended result.

Next time, a few more handbook provisions that have tripped-up employers.
 

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Three individual defendants owned three garment manufacturing companies that experienced financial difficulties, leaving them unable to meet payrolls.  During this period of time, the individual owners told employees to continue working until their company, Win Corporations, could meet payroll.  When employees complained of unpaid wages, the Dept. of Labor filed suit, closed Wins Corporations, and seized its assets.  The California Labor Commission then sought to hold the individual defendants personally liable for unpaid wages owed the employees. 

The Trial Court ruled in favor of Wins Corporations. The California Appeals Court affirmed, holding that while the Industrial Welfare Commission Wage Order relevant to the garment industry defines “employer” as the one who “exercises control” over employees’ wages, hours or working conditions, Reynolds v. Brement precluded application of the definition to Wins Corporations alleged Labor Code Violations because its failure to pay the employees wages must be interpreted under the common law definition of “employer.”  Under the common law definition of employer, defendants were not personally liable for the wages and penalties since defendants did not require that the employees work for them personally or take their money directly.
 

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Proposed legislation aims to curb mandatory arbitration clauses in contracts.  In mid July, 2008, the House of Representatives’ Judiciary Subcommittee on Commercial and Administrative Law approved three arbitration-related bills, including the Arbitration Fairness Act which, if passed, would ban pre-dispute arbitration clauses outright.  The other two bills would ban mandatory arbitration agreements in contracts involving automobile sales and nursing homes.  The Senate Judiciary Committee is considering its own legislation concerning nursing home arbitration.

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Recently, the 4th District Court of Appeal struck down class status for approximately 60,000 California restaurant workers who sued over rest and meal breaks.  This ruling is the first time an appeals court has defined the legal requirements for employee rest and meal breaks.  The Appellate Court concluded that while employers cannot discourage or keep employees from taking rest periods, “they need only provide, not ensure, that rest periods and meal breaks are taken;” employers must only authorize and permit rest breaks during a set time, but they do not have to occur in the middle of the work period; employers are not required to provide a meal break for every five consecutive hours worked (instead employees may take their first meal break right away, and the second meal period need not occur within five hours of the end of the first five hour period but is due only after 10 hours of total work, even if the first meal period occurs very early in the shift); and employers can be held liable for employees working off the clock only if the employer know or should have known the employees were doing so. The Appellate Court further concluded that “the off-the-clock claims are also not amendable to class treatment as individual issues predominate” on the issue of whether an employer forced employees to work off the clock, whether the employer changed the time records, and whether the employer knew or should have known that employees were working off the clock.  Brinker Restaurant Corp. v. Sup. Ct. of San Diego County, D049331.
 

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An unplanned tour of our judicial system can be financially devastating to a business. Upon being sued, the business becomes an unwilling participant in costly and often inescapable legal proceedings. The fact that the suit may be groundless is of little comfort. Long before any court looks at the relative merits of the plaintiff's claims, the business will be running up legal fees answering the complaint, responding to discovery requests, attending depositions, and having its attorney attend innumerable court appearances. Some businesses end up in bankruptcy from the process alone.

While law suits are seemingly unavoidable in our litigious society, a business need not wait helplessly for the process server to arrive. The best course of action for any business is to take affirmative steps now that will maximize the chances of avoiding a sustainable court action.

This week we look at your dealings with both prospective and current employees. And while no advice can protect you from your intentional acts, the following tips may keep your innocent acts from landing you in court.

Check your hiring procedure.

With no evil intent, many businesses adopt discriminatory hiring practices. Here is a common scenario:

You have decided that your business really needs a part-time "gofer" to run miscellaneous errands. Since the job does not pay very much and you are located near campus, you decide to run a classified ad asking for college students to apply.

Your innocent ad could lead to a suit for age discrimination. Since you have limited the possible applicants to college students, you may be creating the impression that you are discriminating against retirees, for example. You may be guilty of race discrimination as well, since the percentage of minority college students is probably not reflective of the population as a whole.

Ads that seek a "gal Friday" or "housewives looking for extra income" are equally unacceptable since they carry gender-bias overtones and thus may appear to discriminate on the basis of gender.

Just advertise the job description and let the candidates decide if they are interested. This will not only avoid claims of discrimination, it will expand your pool of qualified candidates.

Check your interviewing procedure.

Having written the perfect, nondiscriminatory job ad, don't undue your good work once you start interviewing.

Don't ask any question that isn't somehow job related. Even seemingly harmless small talk during the interview can get you in trouble. For example, asking a woman about her plans for marriage and children smacks of gender discrimination. These questions are frequently asked by interviewers who are afraid the candidate will take a maternity leave right after she is trained. Just as it is usually illegal to fire a woman because she is pregnant, hiring decisions cannot be based on a woman's intent to have children.

Even questions concerning education may be improper if the job does not require any special schooling.

To be safe, make a list of the questions you intend to ask, and then review your list to make certain all the questions are justifiable as being job related and neutral in tone.

Check your employment contracts.

Now that you've decided to hire someone, what are the conditions of their employment? Are they guaranteed employment for a specific period of time, or can you terminate them "at-will?" How much will they be paid? If an employee works for a commission, how are unpaid commissions handled if the employee leaves? Were any benefits promised?

If you don't have a contract specifying these points, you may end up litigating them. As the old saw goes, "oral contracts aren't worth the paper they're written on." If you're not using employment contracts, start. Keep the agreement simple, but make sure it covers the main points.

A very important issue is the grounds for termination. Unless industry standards or corporate philosophies mandate otherwise, your employees should be terminable at-will. Absent a bad economy, no rational employer is going to fire an employee that is doing a good job. But too many employers unnecessarily limit their options by promising to keep an employee "as long as they do a good job." That should go without saying, but having said it, at-will status may be defeated. If it later becomes necessary to fire the employee, he or she can bring an action for wrongful termination, claiming the termination was without good cause and therefore a breach of the promise not to fire.

For the same reason, don't use a probationary period for new employees. To do so implies that the employee will obtain "permanent" status once the probationary period is over. Keep your employees "at-will," and make sure that status is reflected in the employment contract.

Check your employee handbook.

If your company rules and policies are set forth in a handbook, they will be considered a part of your employment contracts. It is therefore essential to make certain that the wording of your handbook isn't negating the intent of your contracts.

Employee handbooks are fertile ground for finding that an employee cannot be terminated at-will. A recent court decision held that a basketball coach, hired on a one-year contract, could not be fired at the end of that year except for good cause. The court's decision was based on the school's handbook, which imposed such a condition.

If you have a handbook -- follow it.

Having reviewed your company's handbook, make sure it is followed. A common mistake is to discipline an employee without first following the review procedure contained in the employee handbook. Even if caught committing murder and mayhem, the employee is contractually entitled to whatever review process that has been established. While a snap disciplinary decision may later be vindicated, the point here is to stay out of court altogether. That can only be accomplished by following procedure, regardless of how egregious the employee's conduct may seem.

Document, document, document.

Document all employment matters, from hiring to termination. If the day comes that you need to justify a hiring, promotion or firing, you will want written documentation to support your decision.

When hiring, be prepared to justify why you hired one candidate over another. That will require keeping on file the applications and/or resumes of all the candidates. You will be at a serious disadvantage in court if you can't remember why you failed to hire a particular candidate.

Current employees should receive written evaluations at least every year, and any interim problems or kudos should also be documented. All evaluations should be signed by the employee, acknowledging receipt.

Supervisors understandably hate to give bad evaluations since it is confrontational and hurts morale. But such reluctance frequently results in a file with nothing but glowing evaluations. Supervisors should always give scrupulously honest reviews.

 

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