Recent Developments Regarding Noncompete Agreements
There is no question that noncompete agreements in California employment contracts are generally unenforceable. Many other states, however, may enforce such agreements if they are “reasonable” in duration and geographic scope. So, what is a California employer to do if a prospective employee signed a noncompete agreement with a forum selection and choice of law provision for a state which favors noncompete agreements? Recent developments reinforce that the answer depends on various factors, including the residence of the employee at the time the agreement was signed.
Labor Code Section 925
If the employee signed the agreement after January 1, 2017 and while a resident of California, the answer is clear. Under Labor Code section 925, the employee will not be required to adjudicate, either in court or arbitration, any claim outside of California or under any law that would deny the employee the protections provided by California law. In fact, any such offending provisions may be rendered void by the employee. If rendered void, the matter will be adjudicated in California and California law will govern the dispute.
Two Recent U.S. District Court Decisions – Freeman and Badger
If the employee was a resident of another state at the time he or she signed the agreement, the answer is less clear, as two California District Court decisions applying California law recently came to two very different conclusions.
In Freeman Expositions, Inc. v. Global Experience Specialists, Inc., No. SACV 17-00364, 2017 WL 1488269 (C.D. Cal. Apr. 24, 2017), Landon Shores, then a Nevada resident, was hired by Global Experience Specialists (“GES”). In connection with his hire, Shores signed a noncompete agreement with GES. The agreement prevented Shores from competing with GES for twelve months following his separation from the company. The agreement also contained a forum selection clause, specifying that Nevada courts had exclusive jurisdiction over any dispute arising out of the agreement, as well as a choice of law provision in favor of Nevada law. In early 2017, Shores resigned from GES, moved to California, and began working for a competitor, Freeman Enterprises, Inc. (“Freeman”), in California. GES promptly filed a complaint in Nevada state court, seeking to enjoin Shores from: (1) soliciting or doing business with any clients of GES, and (2) performing any work which would be in competition with GES. Freeman then filed a case against GES in a California state court seeking, among other things, declaratory judgment that the choice of forum and law provisions in the agreement between GES and Shores were not enforceable. After the case was successfully removed, Freeman moved for summary judgment on this cause of action.
In granting Freeman’s motion for summary judgment, the court noted that “[e]nforcing the forum selection clause would contravene California’s strong public policy against noncompete agreements” because “[e]nforcement of the forum selection clause w[ould] result in enforcement of the noncompete clause.” The court then ruled that the forum selection clause would not be enforced because “California has a materially greater interest than Nevada in resolving the issue presented in the case.” Specifically, California had an interest in Freeman’s ability to hire a California resident to work in California.”
Just a few weeks later, the Eastern District decided Scales v. Badger Daylighting Corp., No. 1:17-CV-00222, 2017 WL 2379933 (E.D. Cal. Jun. 1, 2017) and went a different way on the enforcement of the forum selection clause. In Badger, Badger Daylighting Corporation (“Badger”), a Nevada corporation with its principal place of business in Indiana, hired Daniel Scales, a California resident, to work out of its Taft, California office. As part of his employment with Badger, Scales signed a noncompete agreement providing that, for a period of two years following his separation from Badger, he would not, “within the geographical area of the State(s) of California, Oregon, and Washington, compete in any manner with [Badger].” The agreement further provided that it would be “governed by and construed in accordance with the laws of the State of Indiana and any disputes arising hereunder shall be brought and heard in the state or federal courts sitting in Marion County, Indiana.” Two years later, Scales resigned from Badger and accepted a position with a competitor. Badger filed suit against Scales in an Indiana state court, alleging that Scales had breached the parties’ noncompete agreement. Scales, along with some other former Badger employees, then filed suit in California, seeking a determination that the noncompete agreement was unenforceable. After the case was removed to federal court, Badger filed a motion to dismiss for forum non conveniens.
In deciding Badger’s motion, Scales argued (much like Shores in Freeman) that enforcement of the forum selection clause would violate California’s public policy against noncompete clauses, as the court in Indiana would enforce the noncompete. Unlike Freeman, the court in Badger declined the invitation to focus on the potential effect of enforcing the forum selection clause. It reasoned that “[f]ocusing on the effect, rather than the reasonableness, of a forum selection clause would require the court to make a determination of the potential outcome of the litigation on the merits in the transferee forum and to consider whether that outcome would conflict with a strong public policy of the transferor forum.” The court then noted that “attempting to determine what law an Indiana court would apply would be entirely speculative and irrelevant to a determination of whether the forum selection clause of the parties’ Agreement is enforceable.” Ultimately, the court granted Badger’s motion to dismiss the case, holding that the forum selection clause in the parties’ agreement was valid and that the case should proceed in Indiana.
With Freeman and Badger coming to two different results, the question remains – what are California employers looking to hire out of state employees subject to noncompete agreements to do? Because the analysis will turn on the specific facts and circumstances of the agreement at issue, employers should consider having counsel review the prospective employee’s noncompete agreement and underlying facts to determine if the agreement is enforceable and under what law.
 Freeman is currently on appeal before the Ninth Circuit.
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California’s Second District Court of Appeal Reaffirms the State’s Long-Standing Public Policy to Allow Robust Discovery When Seeking Assets Which Might Be Used to Satisfy a Judgment
What is the scope of discovery that a judgment creditor can obtain from a third party in a judgment debtor examination? Extensive, according to the court in Yolanda’s, Inc. v. Kahl & Goveia Commercial Real Estate, 11 Cal. App. 5th 509 (2017), a recent decision by the Second District Court of Appeal concerning post-judgment discovery efforts which reaffirms the State of California’s long-standing public policy to “leave no stone unturned in the search for assets which might be used to satisfy the judgment.”
Yolanda’s involves a dispute between a restaurant tenant in a shopping center and its landlord concerning a gym tenant’s monopolization of parking spaces in a common area lot. The restaurant tenant brought an action against the landlords of the shopping center for breach of a commercial lease and related claims. Also named in the lawsuit was the landlord’s associated shopping center management company who shared at least one principal member. Following trial, the trial court awarded approximately $1.9 million in damages to the tenant and against all of the defendants. On appeal, the judgment against the landlord defendants was affirmed, but the judgment against the management company was reversed since it was not a party to the lease agreement. Gietzen v. Goveia, No. 2D CIVIL B255925, 2016 WL 1254386 (Cal. Ct. App. Mar. 30, 2016).
After the case was remanded to the trial court, the tenant, as the judgment creditor, obtained an order which required the person most knowledgeable for the former defendant management company to appear as a third party witness at a debtor examination and issued a subpoena for the company to produce documents concerning the judgment debtor’s assets. In response to the subpoena, the management company produced a document showing a transfer of a vehicle to one of its principals and his wife for the forgiveness of an alleged debt. The management company also produced two bills of sale transferring four vehicles and other items including three leases and all goods, furniture, and equipment from the management company to the other principal of the company (the same individual who also served as the principal of the judgment debtor). But while the management company produced responsive documents, it refused to answer the tenant’s questions about the location of the assets because the examination was “beyond the scope of a third party judgment debtor’s examination.”
The trial court overruled the management company’s objection, and ordered it to respond to the tenant’s questions concerning: (1) the ultimate disposition of assets transferred by the management company to its principals; (2) the interrelationship between the management company and the judgment debtors and related parties for purposes of establishing possible alter ego liability; and (3) any other questions that may assist the tenant in determining the judgment debtor’s true financial condition and the nature and location of the judgment debtor’s assets and sources of income. The management company appealed.
The Court of Appeal’s Decision
The Court of Appeal rejected the management company’s arguments and reliance on the limited scope of Code of Civil Procedure section 708.120. While, under section 708.120, a third party may be ordered to appear for examination upon the judgment creditor’s application showing to the court’s satisfaction that the third party is in possession or control of property in which the judgment debtor has an interest or is indebted to the debtor, the court specifically noted that section 708.120 is not the only procedure available for examining a third party. While the purpose of section 708.120 is to provide a tool that allows a judgment creditor to find property or money that is owed to the judgment debtor, Code of Civil Procedure section 708.130 (a much broader statute) permits the examination of any person with information which may lead to the enforcement of a judgment in the same manner as if the third party was a trial witness. This would not limit the examination to questions concerning assets that are in the third party’s possession or questions determining whether the third party is indebted to the judgment debtor.
Broader Impact and Practical Implications of Yolanda’s Decision
The broader impact of the court’s decision may be in its upholding of the trial court’s inherent power under Code of Civil Procedure section 187 to adopt any suitable method of practice if the procedure is not specified by statute or the Rules of Court. Accordingly, since nothing in section 708.120 states that it is the only procedure available for examining a third party, the Court of Appeal found that the trial court had inherent power under section 187 to fashion an appropriate procedure for the tenant to examine the third party management company.
The immediate effect of Yolanda’sdecision will be on prevailing plaintiffs who are faced with enforcing judgments against corporate defendants who create complex business structures and agency relationships in order to shelter their assets. In such cases, the door may be open for the examination of each of the judgment debtor’s affiliates and agents to determine if there was any attempt to conceal assets from the judgment creditor. In practice, the information the judgment creditor in Yolanda’s obtained concerning the transfer of assets from the management company to the judgment debtor’s principal once again shows the vital importance of leaving no stone unturned in the search for assets which might be used to satisfy a judgment.
Key California Employment Law Cases: June 2017
This month’s key California employment law cases involve civil procedure (class and representative actions) and wage and hour (retaliation) issues.
Civil Procedure – Class and Representative Actions- Microsoft Corp. v. Baker, 137 S. Ct. 1702 (2017)
Wage & Hour - Retaliation - Arias v. Raimondo, Case No. 15-16120, 2017 WL 2676771 (9th Cir. June 22, 2017)
Key California Employment Law Cases: May 2017
May's key California employment law cases involve “on call” meal and rest periods, and employees working seven days a week.
Wage & Hour - Meal and Rest Periods - Bartoni v. Am. Med. Response W., 11 Cal. App. 5th 1084 (2017)
Wage & Hour - Workplace Conditions - Mendoza v. Nordstrom, Inc., 2 Cal. 5th 1074, 216 Cal. Rptr. 3d 889 (2017)
Key California Employment Law Cases: April 2017
This month’s key California employment law cases involve wage and hour and discrimination issues.
Wage & Hour - Batze v. Safeway, Inc., 10 Cal. App. 5th 440, 216 Cal. Rptr. 3d 390 (2017)
Summary: While determination of exempt or nonexempt status should be made on weekly basis, factfinder may use evidence from weeks in which evidence is available to make reasonable inferences for weeks in which evidence is not available.
Facts: Plaintiffs, grocery store assistant managers, brought individual claims for unpaid overtime against defendant grocery store after class certification was denied. Plaintiffs argued they were misclassified as exempt because a majority of their time was not spent performing managerial duties. After a bench trial, the trial court found in favor of defendants, finding that plaintiffs spent more than fifty percent of their time performing managerial tasks, and met all other qualifications for exempt status. Plaintiffs appealed, arguing that because defendants bore the burden of proof, and because the ratio of nonexempt to exempt activities must be determined on weekly basis, no inferences could be made regarding weeks in which defendants produced no testimonial evidence regarding plaintiffs’ activities.
Court’s Decision: The California Court of Appeal affirmed, finding that substantial evidence supported the trial court’s decision. Although an employee’s exempt or nonexempt status may vary each week, the trier of fact can make reasonable inferences about an employee’s activities in earlier or later periods, especially when an employee’s duties have not changed significantly over time. Defendants produced sufficient evidence to enable the trial court to make reasonable inferences about those periods during which evidence was not available.
Practical Implications: Since an employer bears the burden of proof to establish exempt status, an employer should ideally have weekly evidence of an employee’s activities. When this is not practicable, this decision allows a factfinder to make reasonable inferences to fill in gaps in this evidence.
Discrimination - Santillan v. USA Waste of Cal., Inc., 853 F.3d 1035 (9th Cir. 2017)
Summary: Incorrect interpretation of law contrary to public policy is not legitimate business reason to satisfy employer’s burden of proof to show action is not discriminatory or retaliatory.
Facts: Plaintiff drove a garbage truck driver for defendant. Although he was rarely disciplined during his thirty-year tenure, defendant terminated plaintiff in 2011 for allegedly causing, or being involved in, four accidents in a twelve-month period. Plaintiff, who was fifty-three at the time, was replaced by a driver thirteen years younger with substantially less experience. After his termination, plaintiff filed a grievance under defendant’s collective bargaining agreement. During the grievance process, defendant received hundreds of letters from local homeowners in support of plaintiff. In 2012, plaintiff and defendant reached a settlement whereby plaintiff would be reinstated if he passed a drug test and criminal background check, and provided documentation of his right to work in the United States. While plaintiff passed the drug test and background check, he was unable to provide proper documentation of his work eligibility. Defendant then notified him that because he had failed to provide proof of his right to work in the United States, in violation of the Immigration Control and Reform Act (“IRCA”) and the settlement agreement, he was again being terminated. After his second termination, plaintiff filed suit in state court alleging age discrimination and retaliation, which was removed to federal court. The federal district court granted defendant’s motion for summary judgment, holding that plaintiff had failed to present a prima facie case of discrimination, and that defendant’s termination of his employment for failure to provide proof of work authorization was legitimate and not retaliatory.
Court’s Decision: The Court of Appeals for the Ninth Circuit reversed, holding that defendant failed to provide a legitimate business reason to rebut plaintiff’s prima facie showing of discrimination and retaliation. First, plaintiff’s testimony that he was one of five older employees to be terminated, along with evidence of the age and experience gap between plaintiff and his replacement, were sufficient to establish a prima facie case. Second, plaintiff was exempt from IRCA’s requirements, and making plaintiff’s reinstatement contingent on his immigration status was against public policy. Defendant could not rely on an incorrect view of the law or a violation of public policy as a legitimate reason for terminating plaintiff’s employment.
Practical Implications: An employer must carefully consider its reasons for termination, especially if based on its interpretation of a particular law. Under this decision, a misreading of the law, even if inadvertent, will bar an employer from relying upon it as a legitimate business reason for the termination.
In Landmark Decision, the Supreme Court Strikes Down Key Provision of the Lanham Act that Prohibits Registration of Disparaging Trademarks
On Monday, June 19, 2017, the U.S. Supreme Court in Matal v. Tam, 582 U.S._ (2017), unanimously struck down the disparagement clause of the Lanham Act, 15 U.S.C.A. § 1052(a), on grounds that it violates the Free Speech Clause of the First Amendment. The disparagement clause – in force for over 70 years – is found in section 2(a) of the Act and prohibits the registration of trademarks that “may disparage . . . persons, living or dead, institutions, beliefs, or national symbols, or bring them into contempt, or disrepute.” 15 U.S.C.A. § 1052(a). Justice Alito, writing for the Court, opined that the provision “offends a bedrock First Amendment principle: Speech may not be banned on the ground that it expresses ideas that offend.”
The disparagement clause has been the subject of much debate since 2014 when the Patent and Trademark Office (PTO) cited the clause in revoking six federal trademark registrations belonging to the Washington Redskins, a result which was affirmed by a district court in Virginia. The Supreme Court’s holding in Tam is no doubt music to the ears of Redskins’ owner Dan Snyder, whose appeal of the district court’s ruling is currently pending before the U.S. Court of Appeals for the Fourth Circuit. Given the Supreme Court’s invalidation of Section 2(a), a victory for the Redskins in the Fourth Circuit appears all but guaranteed.
Of course, the ruling is also a victory for the trademark applicant in Tam – the front-man of the Asian-American band THE SLANTS – whose application to trademark the band name was rejected by the PTO pursuant to section 2(a). Although the band sought to “reclaim the stereotype [of Asians having slanted eyes] and take ownership of the term,” the Trademark and Trial Appeal Board affirmed the PTO Examiner’s finding that the name “THE SLANTS” is disparaging to people of Asian descent.
In its petition, the Government argued that trademarks are “government speech” and thus outside the purview of the Free Speech Clause of the First Amendment. The Court disagreed, noting that the Government “does not dream up these marks, and it does not edit marks submitted for registration.” Justice Alito mused that the Government is hardly advancing a particular message or viewpoint in registering marks and, if it is, “the federal government is babbling prodigiously and incoherently.” The PTO has made clear that registration of a mark does not constitute approval of it. And unlike, for example, advertisements promoting beef products, license plates, or landmarks in public parks, trademarks have never been traditionally used to convey a government message.
The Court also rejected the argument that the Government is permitted to regulate speech in connection with offering benefits under government programs. The Government argued that it is not required to subsidize activities it does not wish to promote. But the Court drew a key distinction between cases in which the Government actually pays cash subsidies or their equivalent to promote certain activities (e.g., cash grants to artists or funds to private parties for family planning services) and the federal registration of trademarks, in which applicants and trademark holders actually pay the Government fees.
Finally, the Court declined to adopt a new doctrine providing for a limited public forum for private speech, with content-, or speaker-based restrictions. The Court explained that the disparagement clause does not provide a limited public forum for private speech; rather, it “discriminates on the bases of ‘viewpoint’” by denying federal registration to viewpoints deemed offensive by certain groups.
Accordingly, the Supreme Court held that the disparagement clause of the Lanham Act regulates private speech and fails to meet even the relaxed scrutiny of Central Hudson Gas & Elec. Corp. v. Public Serv. Comm’n of N.Y., 447 U.S. 557 (1980) because the provision is “not 'narrowly drawn' to drive out trademarks that support invidious discrimination.”
The result is that the PTO can no longer deny the registration of any mark that meets the Lanham Act’s other viewpoint-neutral requirements. The ruling, of course, is likely to result in a marked increase in trademark applications for offensive or hateful marks that the PTO now has no choice but to register. Nonetheless, free speech advocates claim that the result is a major win for freedom of expression. The decision certainly confirms that the Court is loath to carve out exceptions to free speech protections. Indeed, as Justice Kennedy wrote in a concurrence, “To permit viewpoint discrimination in this context is to permit government censorship."
U.S. Department of Labor Withdraws Independent Contractor and Joint Employment Guidance
In a positive development for employers, the United States Department of Labor (DOL) announced on Wednesday, June 7, 2017, that it is withdrawing two Interpretations issued during the Obama Administration.
Interpretation No. 2015-1 addressed the classification of independent contractors under the Fair Labor Standards Act (FLSA), and took the expansive view that most workers qualify as employees and are thus entitled to minimum wages and overtime pay. Interpretation No. 2016-01 expanded the definition of "joint employment" under the FLSA and the Migrant and Seasonal Agriculture Protection Act (MSPA), allowing more workers to claim they were due wages by more than one company.
While these Interpretations were viewed by the Obama Administration as an effort to crack down on employee misclassification and tighten standards for determining joint employment, they created more legal risks for companies by calling into question longstanding work arrangements. The Interpretations were not law, but they served as a guide for the DOL's Wage & Hour Division in its enforcement efforts. Withdrawal of the Interpretations signals that the Trump Administration DOL will be less aggressive in its enforcement efforts in these two areas; however, state laws may differ from federal laws with regard to independent contractor and joint employment status.
For example, Nevada and Arizona have adopted laws that allow for greater certainty for businesses.
In 2015, Nevada enacted NRS 608.0155, which creates a presumption that a person is an independent contractor if he or she (1) possesses or has applied for an employer identification number or social security number, or has filed a tax return for a business or earnings from self-employment with the IRS in the previous year, (2) is required by the contract with the principal to hold any necessary state business registration, licenses, insurance or bonding, and (3) satisfies three or more of the following criteria:
In 2016, Arizona enacted A.R.S. § 23-1601, which creates a rebuttable presumption that an independent contractor relationship exists if the contractor signs a declaration acknowledging that (1) the contractor operates its own business, (2) the contractor is not an employee of the employing entity, (3) the employing entity does not restrict the contractor's ability to perform services for other parties and expects that the contractor will provide services for other parties, (4) the contractor will be paid based on the work to be performed, not on a salary or hourly basis, and (5) the contractor is not covered by the employing entity's health or workers compensation insurance.
California law has principally relied on a multi-factor common law test to determine contractor vs. employee status. However, the California Supreme Court is currently considering an expansive definition of the word "employ." In Dynamex Operations West v. Superior Court, 179 Cal. Rptr. 3d 69, the Second Appellate District rejected the traditional common law test based on whether the employer has the right to control the manner and means of accomplishing the result desired, in favor of defining the word "employ" to mean "to engage, suffer, or permit to work." If upheld, Dynamex will result in the reclassification of many independent service providers as employees, entitling them to California's wage and hour protections.
In light of these developments, employers should seek legal counsel when considering whether to engage someone as a contractor or employee, and to evaluate existing contractor arrangements to determine whether they satisfy these legal tests.
14 Payne & Fears LLP Attorneys Recognized in Southern California Super Lawyers and Rising Stars Lists
Irvine, Calif. – Payne & Fears LLP is pleased to announce that nine partners, Jeffrey K. Brown, Daniel F. Fears, Daniel M. Livingston, James R. Moss, Jr., Benjamin A. Nix, James L. Payne, Eric C. Sohlgren, Scott S. Thomas, and Thomas L. Vincent, have been selected for inclusion in the 2017 Southern California Super Lawyers. Among the nine, Daniel F. Fears has been named in the Top 50: 2017 Orange County Super Lawyers.
In addition, Andrew K. Haeffele, Rhianna S. Hughes, Robert T. Matsuishi, Alejandro G. Ruiz, and Scott O. Luskin were named to the Southern California Rising Stars 2017 list.
Super Lawyers and Southern California Rising Stars conduct a thorough multi-phase process that includes nominations, independent research evaluations of candidates, and peer reviews by practice area.
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California Court of Appeal Clarifies the Limits of the Attorney-Client Privilege for Communications with an Attorney and a Third Party Consultant
A recent decision by the California Court of Appeal in Behunin v. Superior Court, 9 Cal. App. 5th 833 (2017), is a reminder that a party’s communications with an attorney and a third party consultant must be reasonably necessary for the attorney’s representation of the client for the attorney-client privilege to apply.
Behunin concerned a dispute over an unsuccessful Indonesian real estate deal involving Nicholas Behunin and Michael Schwab (the son of Charles Schwab, the founder of his namesake brokerage firm). As part of their business, the parties allegedly cultivated a relationship with the family of former Indonesian president Muhammad Suharto. When the investment failed, Behunin sued the Schwabs based on their alleged promises to fund the venture.
Once the lawsuit was filed, Behunin’s attorney hired a PR consultant to engage in a social media campaign against the Schwabs to generate negative publicity in order to create leverage for a settlement. This included creating a website (www.chuck-you.com) which allegedly used the same design as the Schwabs’ investment website, and linked the Schwabs to Suharto and the crimes committed by his regime. The Schwabs in turn sued Behunin and his attorney for defamation and related claims.
In discovery, Behunin and his attorney argued that their communications with the PR firm were protected by the attorney-client privilege. After the trial court ordered the production of the communications, Behunin filed a writ petition with the Court of Appeal which requested an immediate stay of the order.
The Court of Appeal denied Behunin’s petition. In a case of first impression in California, the court relied on analogous federal cases to determine that the attorney-client privilege can be waived for communications that are disclosed to PR consultants. Behunin failed to show that the communications with his attorney in which the PR firm participated were “reasonably necessary” to accomplish the purpose for which his attorney was retained, i.e., to provide legal advice to Behunin and to represent him in the lawsuit. It was immaterial that Behunin and his attorney intended for the communications with the PR firm to be privileged. Also important was the fact that the only involvement Behunin’s attorney had was to hire the PR firm and to act as a liaison between it and Behunin. While the court acknowledged that hiring a PR firm may sometimes be necessary to accomplish the purpose of an attorney’s representation and may be a legitimate litigation strategy, the court explained that it would go too far to extend the attorney-client privilege to all communications with the PR firm.
Although the Behunin court did not explicitly state when communications with a PR firm may be “reasonably necessary” for an attorney to provide legal advice and representation, comparable federal cases provide some guidance. For example, when a PR consultant is necessary to clarify or to improve comprehension of communications between an attorney and a client, or when a PR consultant is the “functional equivalent” of an employee since he or she regularly works with the party and its attorneys to prepare press releases. We encourage our clients who hire a PR firm, or any other consultant not directly connected to the litigation, to be cautious and assume that all communications with their attorney and the consultant are discoverable.