What Happens When Gig-Economy Workers Become Employees
Drivers for cannabis companies in California now have to be classified as employees, rather than independent contractors. But has that been a good thing?
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by ALANA SEMUELS
Ever since the emergence of companies like Uber and Lyft, businesses and labor advocates have engaged in an endless, largely theoretical debate about whether classifying workers as independent contractors—responsible for setting their own hours and paying for their own insurance, mileage, and other expenses—helps or hurts them.
On one side are gig-economy employers, who say workers like the flexibility of being an independent contractor, and prefer working when and if they please. On the other are labor advocates, who argue that gig-economy companies push much of the cost of their business onto workers, who don’t receive worker protections that were once standard, such as minimum wage and overtime protections.
The debate intensified in California in late April, when a state Supreme Court ruling found that employers must use a narrow test to determine how to classify employees, raising the likelihood that more companies will have to categorize gig workers as employees. Gig-economy companies lobbied the state to override the ruling, claiming that workers would lose their jobs, while labor advocates predicted that it would ensure that fewer people would have to rely on the state safety net. As usual, many of the people engaged in the debate about what’s best for workers were not the workers themselves.
But while the policy debate rages on, a real-world experiment has been testing what, exactly, would happen if companies had to switch a large swath of their workers from independent contractors to employees. As of January 1 of this year, cannabis-delivery workers are mandated by state law to be classified as employees. These rules, adopted after Californians voted to legalize marijuana in 2016, are a way for law enforcement to ensure that dispensaries take responsibility for their product, and that it is being handled by trained employees. Since they were enacted, dispensaries around California have started the process of switching delivery drivers, and in some cases other workers as well, from independent contractors to employees. Their experience highlights, more than any hypothetical debate, how there is no one easy answer for how to best structure the gig economy.
The decision to require delivery workers to be employees was very deliberate, according to Barry Broad, a Sacramento lobbyist who represents labor clients including the Teamsters and who was involved in the negotiations. Government officials thought that for the industry to be stable and accountable, independent contractors shouldn’t be carrying around marijuana, especially given that they could also be simultaneously driving for another gig-economy company. Law enforcement also needed to know, if they stopped a driver with a car full of cannabis, who was responsible for that cannabis, and so preferred that the drivers be employees of licensed dispensaries. There was another reason, too, Broad told me. “We wanted to make sure there is not a situation where there’s just gross exploitation of workers,” he told me.
Cannabis companies got on board, too, a marked contrast to other gig-economy companies. Jerred Kiloh, the president of the United Cannabis Business Association (UCBA) Trade Association, which represents legal dispensaries in Los Angeles, said that his organization wasn’t initially sure whether to support the rules or fight them. But unlicensed dispensaries were pushing back against any regulation, and licensed dispensaries worried that the proliferation of independent contractors would lead to the creation of a “gray area” in which customers didn’t know who was actually selling the product, and if they were buying from a licensed dispensary, he said, so they came around to regulation.
Workers are split on whether they like the changes. Sky Siegel, the general manager for the Perennial Holistic Center in Los Angeles, said about half of his drivers preferred being independent contractors, and quit before the change went into effect so they could find other gig jobs. Some left because Siegel can’t yet afford to offer them benefits, so he is limiting employees to 30 hours a week so as not to trigger IRS provisions that would categorize employees as full-time. Though they received minimum-wage protections under the new rules, many workers decided that 30 hours a week, even as an employee, was not enough.
But for the half who stayed, some parts of the job are easier. Rather than using their own cars to make deliveries, they use vehicles provided by the dispensary. The dispensary withholds their taxes, so they get to avoid the April panic that’s become a rite of passage for gig-economy workers. Because of California labor laws, if they work shifts that last more than eight hours a day, 40 hours a week, they receive overtime pay. Their shifts follow a regular schedule now, replacing the free-for-all that would happen in the past when new shifts were posted (Mondays at 4:20 p.m., of course).
Matthew Johnson, 24, is one of the employees who stayed on after the transition. He’d been driving for companies like DoorDash and Grubhub before he started working for Perennial, so he was accustomed to being an independent contractor. But he likes the predictability, job security, and guaranteed hours of being an employee. He has even moved up the job ladder: As an employee keyed in to what was happening around the office, he started doing some events with Eaze, the start-up that works with Perennial and other dispensaries to manage deliveries. He showed his bosses that he was a hard and dedicated worker, and was able to suggest some tweaks to the platform that made it run more smoothly. He got a promotion, and now, in addition to driving, he also manages customer-support service and operations for Perennial.
Johnson now thinks all gig companies should switch to the employee model. “I think that with the amount of hours people work, and the type of hard work they put in for these companies, they deserve to be employees,” he told me. “Sometimes the companies just throw them away, like they’re disposable.”
But Earl Kim, who started at Perennial as a driver and now also works in operations and management, is less sure that the change has been positive. Some workers don’t like that there are fewer hours available, and that shifts are more regimented, he said. Before, if you finished your shift early, you could leave; now you are getting paid by the hour, rather than by how much work you complete in a period of time.Employers are divided on the change, too, largely because categorizing workers as employees has a much higher up-front cost to companies. Having employees means more meetings, more tracking of people’s progress, more coaching workers who might need improvement, more hoops to jump through when you want to fire someone.Kiloh, the UCBA president who also owns the Higher Path cannabis collective in Los Angeles, told me the switch increased his costs by 12 to 15 percent—a huge amount in a competitive industry. But he’s targeting older customers, and he’s found they like interacting with trained employees who know the product well and take on responsibility for any questions they might have. “Customers are saying, ‘I like this more, these people represent your brand, they represent your product better,’” he told me. Kiloh, who has a master’s degree in economics, actually thinks it’s more cost-effective to classify workers as employees than independent contractors, because they become more invested in doing a good job. Still, he says he’d prefer to be able to have mostly employees and a few independent contractors during busy periods.
Diligence in Building or Buying a Brand
Originally published in OCBJ by Deborah Gubernick & Lisa Sandoval
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On any given day, you will find Southern Californians donning their favorite local brands. Whether eating In-N-Out Burger®, sporting Vans® shoes, Stance® socks, and a favorite SoCal surf-brand, or even dressing up in a St. John Knits® ensemble while scheduling Botox® treatments before going home to watch a Vizio® television, SoCal brands are undeniably woven into our lifestyle. We are accustomed to witnessing countless brands grow in our own stomping grounds. We have also seen brands grow to the point where they are bought by large companies – resulting in our favorites becoming international sensations. Whether building or buying a brand, diligence in both cases is imperative to the brandʼs continued success.
Building a new brand can be exciting. Indeed, many have been inspired by the success of what we have seen locally. Consider 12-year-old San Clemente entrepreneur, Carson Kropfl, who recently developed the brand, Locker Board, for a small skateboard. Kropfl reportedly recently attracted investment interest from business legend, Richard Branson. Armed with the same can-do attitude and creativity of countless SoCal brand builders before him, he is already showing what brand building (and possibly brand buying/brand investing) is all about.
Having a small brand become global powerhouses is the epitome of the American dream. Being involved in a multi-million or even billion dollar deal and turning large profits sounds glamorous. But, taking the steps necessary to protect a brand, conduct brand audits and engage in appropriate due diligence is far less appealing. Some take shortcuts in this area, only to realize doing so is a costly mistake.
Consider the 1998 due diligence missteps of German carmaker Volkswagen, as it purchased the assets of Rolls Royce and Bentley automobile for around $900 million. The heads of the heavyweights flew in on private jets, meeting at an exclusive Bavarian country club to carve out the deal. In an odd twist, however, the deal did not afford Volkswagen the right to use the Rolls Royce name. Rather, the Rolls Royce trademark would be BMWʼs property. Volkswagen was left owning the manufacturing facilities and rights to make the Rolls Royce cars without use of the Rolls Royce name. Volkswagen had to then secure a separate deal with BMW to have the right to use the Rolls Royce trademark.
Appropriate diligence and legal advice is imperative to avoid the snares of a potentially problematic IP portfolio and inadvertent oversights in a business deal.
Advice for Brand Builders
A startup aiming to eventually sell its brand must first take steps necessary to secure the brand. This means proper trademark searching, clearance and filing to protect the asset. The brand owner should also consider filing copyright and patent protections, where applicable. Secure key domain names and social media accounts to market the brand. Adopt a brand-policing system to monitor third party trademark filings and infringing use to prevent dilution of rights. Develop brand- usage guidelines to foster brand recognition among consumers. Frequently audit existing trademarks to determine if more filings are warranted.
Keep good records of trademark use, sales histories, advertising figures and advertising samples. This information is often critical to demonstrate not only ownership of the brand, but the brandʼs strength and associated goodwill. When taking the brand to international markets, manufacturing or distributing abroad, devise a strategic trademark filing plan that addresses both offensive and defensive considerations. Indeed, in some countries, the first to file a trademark/brand name automatically gets the rights – exposing brand owners to international vulnerabilities.
The brand will likely become the most valuable asset of the business. Failing to properly protect, maintain and enforce it will diminish its value—making it harder to demand top dollar when selling the brand (or when attempting to attract investment capital).
Advice for Brand Buyers
A potential brand buyer or investor should conduct thorough IP diligence before any transaction. Doing so will help the buyer assess the monetary value and risks associated with the transaction. The buyer should request, and the seller should provide, lists identifying U.S and international trademarks, copyrights, patents, domain names, trade secrets, social media accounts and any other information proprietary to the business. As a potential acquirer of the IP (or investor), it is not enough to simply rely on the information the brand builder provides. Verify the information by cross-checking it against publicly available trademark, copyright and patent records. Double check the title-holder of each IP asset and look for any recorded security interests. Confirm the IP is not the subject of active litigation. If the IP was involved in prior litigation, what was the result? Have there been any cease and desist letters or threats of litigation regarding the IP? Have all deadlines been met to ensure the IP is still valid and enforceable?
Request copies of any agreements involving the IP. In the event the brand has been licensed, carefully evaluate the license agreements, paying attention to territories to which the license applies, the license term, payment obligations, assignability, and whether the agreement is exclusive or non-exclusive. What are the grounds/consequences for terminating? Does that impact your interest in the IP and/or the value of it?
In the case of copyrighted works, confirm appropriate assignment documents and work for hire agreements have been executed to avoid any surprising claims regarding ownership post-closing. Verify that all domain names and social media accounts are in fact controlled by the business. Obtain the contact details for the administrators of each and ensure the accounts can be easily transferred post- closing.
Whether brand building or brand buying, diligence in both cases is imperative. As a brand builder, start in the right direction by protecting the brand through trademark searches, clearance and filing. Maintain and protect IP assets by adopting appropriate maintenance and enforcement protocols. As a brand buyer, be thorough in verifying the ownership, enforceability and risks associated with the IP assets. In both cases, utilizing an experienced attorney can prevent costly missteps and can help to position the brand for not only local, but global success.
ORIGINALLY PUBLISHED IN THE MAY 2017 ORANGE COUNTY LAWYER MAGAZINE
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It has been over twenty years since the Family and Medical Leave Act of 19931 went into effect, requiring certain large employers to provide job-protected and unpaid leave to employees for certain medical and family reasons, including bonding time with a new child. At the time of this article’s publication, however, there is still no federal mandate for paid parental leave, despite that dozens of other developed nations provide for such a benefit—to new mothers and fathers alike. In both 2013 and 2015, federal legislation to provide paid family leave was introduced, but never made its way through the legislative process.2
In the meantime, many companies have stepped in to try to keep pace with the recent rising trend to provide paid family leave to employees. At least one company has publicly stated their intent in doing so was to stay competitive in a global market and to serve the American workplace. In conjunction with the birth of Mark Zuckerburg’s daughter, Facebook announced in late 2015 that it was extending its parental leave policy for full-time employees to cover four months of paid leave for all new parents.3 This news came after an announcement by Netflix in August of that year to provide unlimited paid leave to its salaried employees—both new moms and dads—during the first year after a child’s birth or adoption.4 Microsoft followed suit, announcing twelve weeks of paid leave for new parents.5
Amazon also announced its paid parental leave policy in late 2015 offering six weeks of paid parental leave for all new parents employed at the company for one year or more.6 In November 2015, Spotify announced it would offer six months of fully paid parental leave to all full-time employees.7 In 2016, the trend continued. Netflix expanded its parental leave policy to include hourly workers, offering them between twelve and sixteen weeks paid leave depending on their job.8 Other major companies, such as Deloitte, Hilton, Nike, Coca-Cola, Ikea, and Etsy, announced generous paid family leave policies throughout the year as well. Even the Pentagon announced in 2016 that it would provide twelve weeks of paid maternity leave for all uniformed service members.9
During the contentious 2016 presidential campaigns, both candidates notably supported paid family leave, albeit in different forms. Then Republican presidential nominee Donald Trump announced a plan for six weeks of paid maternity leave, through unemployment insurance, for new mothers whose employers do not guarantee paid leave.10 Democratic rival Hillary Clinton proposed to ensure that employees taking up to twelve weeks of leave through the Family and Medical Leave Act would receive at least two-thirds of their wages, up to a ceiling.11
Earlier this year, federal lawmakers announced plans to reintroduce paid family leave legislation that would create a universal, gender-neutral, paid family and medical leave program.12 In particular, the new law would provide workers with at least two-thirds pay (up to a cap) for up to twelve weeks of time off for their own health conditions, including pregnancy and childbirth, or to care for others. It would do this by creating an independent trust fund within the Social Security Administration to collect fees and provide benefits. The trust would be funded by employee and employer contributions of two-tenths of a percent of wages each, creating a self-sufficient program that would not add to the federal budget. Lawmakers behind the bill assert leave would be made available to every individual regardless of the size of their current employer and regardless of whether such individual is currently employed by an employer, self-employed, or currently unemployed, as long as the person has sufficient earnings and work history. As such, the law would apply to young, part-time, and low-wage workers. Given that President Trump has expressed support for government-mandated paid leave, there is more than a glimmer of hope for such a bill, which has not made strides in the past.
California passed the nation’s first paid leave law in 2002.13 The wage replacement portion of the federal paid family leave bill is modeled after successful state programs in California and New Jersey. California’s paid family leave program is not really a leave program, but rather a partial wage replacement program administered through the state’s disability system and not by employers. It is fully funded by employees’ contributions. It applies to all parents who take off time from work to bond with a child within one year of birth, adoption, or placement as a foster child. It also provides payments to people who take time to care for seriously ill family members. Citing how globalization has put pressure on wages and benefits, Governor Brown signed legislation in April 2016 that will increase the wage replacement rate under California’s program from its current level of fifty-five percent to sixty or seventy percent (depending on the worker’s income).14 Notably, however, Governor Brown vetoed a bill which would have required small businesses not covered by the Family and Medical Leave Act to provide six weeks of unpaid, job-protected parental leave.
Some cities and states have taken paid parental leave a step further. In April 2016, San Francisco passed an ordinance requiring employers with twenty or more employees (with at least one working in the city) to offer supplemental compensation to all employees, including part-time and temporary employees, who use California paid family leave benefits for new child bonding.15 The amount of supplemental compensation an employer would need to pay is the difference between the employee’s current normal gross weekly wage and state benefits received. Employers with fifty or more employees are required to comply beginning on January 1, 2017; employers with thirty-five or more employees are required to comply beginning on July 1, 2017; and employers with twenty or more employees are required to comply beginning on January 1, 2018.
Luckily for city employees, Seattle recently expanded paid leave for city employees who are new parents from four to twelve weeks and created a new four-week family leave policy for city employees who need to care for sick family members.16 Similarly, in Boston, city employees have been entitled to up to six weeks of paid parental leave since 2015.17 Boston’s ordinance applies to men and women, as well as same-sex couples. It also applies to each instance of eligible employees’ birth of newborns, adoption, surrogacy or other methods, and stillbirths.
In April 2016, New York state passed a paid family law that, when fully phased-in, will allow employees to be eligible for twelve weeks of paid leave when caring for an infant, a family member with a serious health condition, or to relieve family pressures when a family member, including a spouse, domestic partner, child or parent, is called to active military service.18 Paid leave to care for a new child will be available to both men and women, and will include leave to care for an adoptive or foster child. Implementation of New York’s paid leave law will be gradual. Beginning January 1, 2018, employees will be eligible for eight weeks of paid leave, earning fifty percent of their weekly pay (up to a cap). The number of weeks of leave and amount of pay increases annually until, by 2021, employees will be eligible for the full twelve weeks of paid leave, earning sixty-seven percent of their weekly pay (up to a cap). New York’s paid family leave will be funded by a weekly payroll tax of about $1 per employee, deducted from employees’ paychecks. As a result, employers will not have to bear the financial burden of funding the paid leave benefits provided under the new state law.
In December 2016, Washington, D.C. passed a universal paid leave ordinance which gives full- and part-time workers in the city eight weeks of leave at up to ninety percent of their full weekly wages for birth, adoption or fostering.19 The bill also provides for six weeks of family leave to look after a sick relative and two weeks for a personal medical emergency. The paid leave program will be funded by a new business tax that would raise $250 million a year to cover costs. Washington, D.C.’s ordinance covers only private-sector workers, excluding those on city or federal payroll. To qualify, a worker need only be employed in D.C.; residents of other cities and states with jobs in the capital are eligible. Non-profit workers and the self-employed are also covered.
Amidst the flurry of recent paid family leave activity at federal, state, and local levels, as well as from the business sector, many companies hoping to stay competitive, boost morale, and gain positive media attention, may find themselves wondering how they can get in on the action before they miss the boat. Before announcing any future paid parental leave policy, however, employers should consider and prepare for the implementation process of such a policy, as well as possible ramifications. For instance, employers should set up appropriate forms and acknowledgments in advance, and devise a protocol for management to follow in distributing and using these documents. Management and human resources should be trained on how to roll out the new policy, and understand what not to say when employees request to use leave.
Employers will want to consider whether they want to provide paid leave on a gender-neutral basis, for how long, and for how much pay. Employers are each uniquely situated and can come up with paid family leave plans tailored to meet their needs. Employers should also consider what eligibility criteria they want their employees to meet before taking leave, and whether the leave should be job-protected. They may also want to consider whether the paid family leave should run concurrent with other available leaves, and whether a third-party vendor, human resources, or managers will have the discretion to grant or deny leaves.
Sticky situations should also be contemplated and addressed. For instance, should the paid family leave policy be retroactive and apply to an employee whose baby was born before the policy was implemented? Is an employee permitted to use the leave intermittently? If so, what level of incremental use would the employer deem to be appropriate? What if an employee gives birth to twins? What if two employees have a child together? Again, each business may have its own reasons for coming out one way versus the other on these issues. The point is, it is better to deal with the tough questions before they become employee relations problems.
Last but not least, it is always critical to review a company’s proposed paid family leave policy with an eye towards litigation—both single-plaintiff and class action cases. More often than not, classes get certified based on written policies alone. It is also possible that employees could make discrimination claims with respect to the implementation of the policy. In defense of those claims, the requisite forms and acknowledgments should be helpful to minimize risk in that area.
(1) Family Medical Leave Act (FMLA) of 1993, 29 U.S.C. § 2601 (2012).
(2) Family and Medical Insurance Leave Act of 2013, H.R. 3712, 113th Cong. (2013); Family and Medical Insurance Leave Act, S. 786, 114th Cong. (2015).
(3) Kristy Woudstra, Facebook Parental Leave: the Company Expands Its Policy, Huffington Post (Nov. 30, 2015), http://www.huffingtonpost.com/2015/11/30/facebook-parental-leave_n_8683198.html.
(4) Heather Kelly, Netflix Employees Can Now Take Unlimited Paid Parental Leave, the Company Announced Tuesday, CNN (Aug. 5, 2015), http://money.cnn.com/2015/08/04/technology/netflix-parental-leave.
(5) Julia Greenberg, Microsoft Offers Big Upgrade to Paid Leave for New Parents, Wired (Aug. 5, 2015), https://www.wired.com/2015/08/microsoft-offers-big-upgrade-paid-leave-new-parents.
(7) Emily Peck, Spotify’s New Parental Leave Policy is Pretty Amazing, Huffington Post (Nov. 19, 2015), http://www.huffingtonpost.com/entry/spotify-parental-leave_us_564de6c7e4b08c74b73483fe.
(8) Shane Ferro, Netflix Just Made Another Huge Stride on Parental Leave, Huffington Post (Dec. 9, 2015), http://www.huffingtonpost.com/entry/netflix-paid-parental-leave-hourly-workers_us_56685ae1e4b009377b233a79.
(9) The Editorial Board, The Pentagon’s New Parental Leave, N.Y. Times (Feb. 2, 2016), https://www.nytimes.com/2016/02/02/opinion/the-pentagons-new-parental-leave.html.
(10) Heather Long, Many Women Voted for Trump. Will He Keep His Promises to Them?, CNN Money (Dec. 6, 2016), http://money.cnn.com/2016/12/06/news/economy/donald-trump-childcare-maternity-leave/.
(11) Megan A. Sholar, Donald Trump and Hilary Clinton Both Support Paid Family Leave. That’s a Breakthrough, The Washington Post (Sept. 22, 2016), https://www.washingtonpost.com/news/monkey-cage/wp/2016/09/22/donald-trump-and-hillary-clinton-both-support-paid-family-leave-thats-a-breakthrough/?utm_term=.0c8de2f5ab23.
(12) Family and Medical Insurance Leave Act, S. 337, 115th Cong. (2017); FAMILY Act, H.R. 947, 115th Cong. (2017).
(14) Patrick McGreevy, Brown Signs California Law Boosting Paid Family-Leave Benefits, Los Angeles Times (Apr. 11, 2016), http://www.latimes.com/politics/la-pol-sac-paid-family-leave-california-20160411-story.html.
(16) Office of the Mayor, Mayor Murray, Council Enact Twelve-Week Paid Parental Leave, Increased Wage Transparency for City Employees, Office of the Mayor (Feb. 13, 2017), http://murray.seattle.gov/mayor-murray-council-enact-12-week-paid-parental-leave-increased-wage-transparency-city-employees/.
(17) Andrew Ryan, City Council Approves Paid Parental Leave Measure, The Boston Globe (Apr. 29, 2015), https://www.bostonglobe.com/metro/2015/04/29/city-council-approves-paid-parental-leave-for-municipal-employees/6JZ4eVovEtrX7CKDWgWKhP/story.html.
(18) Emily Peck, New York Just Passed America’s Best Paid Family Leave Law, The Huffington Post (Apr. 4, 2016), http://www.huffingtonpost.com/entry/new-york-paid-family-leave_us_5702ae75e4b0daf53af042b7.
PROACTIVITY AND PROBLEM SOLVING ARE KEYS TO AVOIDING COSTLY LITIGATION
Litigation in California is booming.
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Litigation in California is booming. More companies are being hit with lawsuits and many companies are moving their headquarters out of California. Therefore, it makes sense to consider ways to avoid costly
litigation in California.
Attorneys working in-house for California companies are often juggling a variety of tasks and the nature of the work can become reactive. To the extent that in-house counsel can be proactive in identifying potential legal issues and working with the business to resolve those issues, the companies will be in better shape to avoid costly litigation. Of course, the difficulty lies in the details. It is sometimes unclear where to focus efforts on being proactive and how to solve potential problems. The tips below are a helpful guide for in-house counsel.
FILING OF AMICUS BRIEF IN HIGHLY-WATCHED PAGA CASE
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Call & Jensen attorneys Julie Trotter, Jamin Soderstrom, and Delavan Dickson recently served as counsel for three of the nation’s largest business associations in filing an amicus brief with the California Supreme Court: the Retail Litigation Center (representing the Retail Industry Leaders Association), the California Retailers Association, and the California Grocers Association. The case,Williams v. Superior Court (Marshalls), involves a dispute over the appropriate scope of discovery in an employee action brought under the Private Attorneys General Act (PAGA), the trial court’s power to manage discovery, and the privacy rights of non-party employees. Arguing as counsel for Amici Curiae in support of Marshall’s, Call & Jensen urged the High Court to affirm the lower court and hold that trial courts possess substantial discretion to manage discovery in a PAGA action, including by phasing or sequencing discovery that involves other employees’ private information. The brief also highlighted abuses of the PAGA statute, emphasized the practical effect a reversal would have on California employers, and questioned the perverse incentives involved with “PAGA-only” cases.
A RAY OF LIGHT FOR EMPLOYERS: GOVERNOR BROWN VETOES AB 465
ORIGINALLY PUBLISHED OCT 22, 2015 ON SHOP-EAT-SURF
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Employers in the apparel and action sports industry deserve some good news every now and then. In a surprise move, on October 11th, Governor Brown vetoed AB 465 which outlawed the use of most mandatory arbitration agreements as a condition of employment, making California the only state in the country to have this particular prohibition. The bill provided only two narrow ways an arbitration agreement could be upheld as enforceable in the employment context: 1) the waiver of a jury trial must be knowing, voluntary, in writing, and not made as a condition of employment; and 2) if the employee is individually represented by legal counsel in negotiating the terms of the arbitration agreement. The stated rationale for the proposed law was concern about contracts that are coerced or involuntary. However, coercion and lack of consent have always been grounds to invalidate contracts. In addition, California law on employment arbitration agreements already requires the employer to pay for the arbitration, prohibits any limitations on employees’ remedies, and imposes other requirements to ensure fairness. In short, the proposed law was unnecessary at best.
Governor Brown seems to agree, because he picked up on the overbreadth and illegality of the bill and refused to sign it. In his veto message, Governor Brown indicated that he would not be willing to take such a far-reaching step proposed by the bill for a number of reasons. First, California courts have already addressed the concept of unfairness in arbitration agreements. Second, a blanket ban on mandatory arbitration agreements have consistently been struck down as violative of the Federal Arbitration Act (“FAA”).
Now, embarrassingly, there are two more arbitration cases pending before the U.S. Supreme Court that arise from courts in California. In MHN Government Services, Inc. v. Zaborowski, the issue is whether unfair portions of an arbitration provision can be severed but the arbitration provision as a whole enforced. Most experts believe that the U.S. Supreme Court will overrule the Ninth Circuit and hold that the arbitration provisions can and should be enforced. Also, in DIRECTV, Inc. v. Imburgia, this case involves whether an arbitration provision in a DIRECTV customer agreement was properly found to be unenforceable under California interpretation of contract rules.
By vetoing AB 465, it is clear that the Governor understands that California cannot impede upon a substantive federal right – the right for parties to agree to arbitrate their disputes. Indeed, employers should be allowed to require their employees to agree to arbitrate disputes that may arise during the course of employment. Arbitration in the employment context can provide many benefits for an employer. If the employer has a large number of employees, it can add a class action waiver clause in the arbitration provision and effectively wipe out the risk of a class action. In addition, arbitration can often-times be a swifter, less expensive and more efficient means at resolving certain disputes. Finally, depending on the issues in the case, arbitration will remove the risks of a run-away jury which every employer wants to avoid. Trial attorneys can put virtually any monetary theory of damages in front of a jury and push for extreme numbers. Juries have little guidance on how to respond and often times they are forced to negotiate with the most extreme members in order to reach a verdict. In some instances, juries return verdicts that are no different than picking a number out of a hat. In arbitration, although there is risk that a company could end up with an arbitrator whose decision is devoid of reason, the risk is far less. For this reason, employers should be thrilled with Governor Brown’s decision to veto AB465.
Gina Miller is a shareholder of Call & Jensen, whose practice focuses on employment and commercial matters. She has litigated and counseled clients in a variety of industries, including apparel and action sports. For more information on Gina Miller, please email her firstname.lastname@example.org.
CONSUMER GOODS & RETAIL ROUNDTABLE FEATURES CALL & JENSEN EXPERT
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Call & Jensen Shareholder Scott Shaw provided his insights into consumer goods and retail trends in a recent Roundtable published in the Los Angeles Business Journal. Participating in a dialogue that included other experts from UPS and Marcum, Mr. Shaw weighed in on issues ranging from the Sharing Economy to legal challenges facing retailers and manufacturers of consumer goods.
Mr. Shaw represents retailers and businesses in the areas of intellectual property, business and employment litigation, with an emphasis in fashion law and action sports.
CALL & JENSEN AWARDED CALIFORNIA LABOUR & EMPLOYMENT LAW FIRM OF THE YEAR (CALIFORNIA)
CORPORATE LIVEWIRE GLOBAL AWARDS WINNER 2014
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Call & Jensen is a full service civil litigation boutique that handles high stakes employment litigation and business matters throughout California and the country. Founded in 1981 with lawyers from the nation’s best law schools and the world’s most well respected firms, the firm’s clients include a list of some of the largest companies in the world. Call & Jensen litigates with excellence and dedication to its clients’ objectives. In addition to countless defense verdicts and judgments, Call & Jensen has also obtained seven and eight figure verdicts, judgments, and settlements when representing its corporate clients as plaintiffs.
Attorneys of the firm practice at all trial and appellate levels, and represent clients in responding to federal and state agencies. The firm handles issues for its clients in all key areas including employment and labor, intellectual property, trade secrets, commercial litigation, complex class actions, real estate, false advertising and unfair competition, and product liability. Located near federal and state courts in all seven Southern California counties, Call & Jensen attorneys are also regularly tapped as counsel for cases across the country.
Call & Jensen offers its clients a team of attorneys with extensive expertise in all aspects of employment and labor law, including litigating discrimination, harassment and retaliation cases under Title VII and California’s Fair Employment & Housing Act. Some of the firm’s most notable results have included employer judgments and dismissals in wage and hour class actions, trade secrets cases, and employment-related tort claims. In addition, Call & Jensen attorneys regularly provide workplace and employment law advising.
GOING GLOBAL — NAVIGATING THE EXPAT EMPLOYMENT RELATIONSHIP TO REDUCE LITIGATION RISKS
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Cross-border employment relationships provide valuable growth opportunities for employees while giving companies access to unique talent, skill sets, and points of view. Employees may seek expatriate opportunities for personal reasons or professional development. According to a recent Mercer survey, 70% of companies expected to increase their short-term expat assignments. Employers large or small, however, need to be aware that easy mobility raises complex legal issues. In addition to tax and jurisdictional consequences, employers need to consider litigation risks and what happens when the relationship ends.
Establishing the Employment Relationship
Many articles examine the tax ramifications of expat assignments, but from a litigation perspective the “who” and the “what” are equally important. Who is the employer? And is an employment relationship even necessary? Companies should consider whether they can use distributors, subsidiaries or other entities such as third-party agencies to shield the parent from having a presence in the foreign country. Other times companies desire to shield the host-country entity, and instead designate the home-country entity as the employer.
Secondments, dual employment, and localization have benefits and drawbacks. As experienced litigators know, however, it is not the label alone that matters. Companies need to be consistent. For instance, if the home-country entity is to be the sole employer, ensure the employment offer comes from the home country, the home country is actively involved in monitoring the assignment (i.e. fielding questions from the employee, guiding the employee through personnel actions like reviews, PIP’s etc.), the employee has a resource at the home-country entity, and the home country makes essential personnel decisions. If, instead, the home country desires to avoid jurisdiction or a presence in the host country, it should take a back seat and let the host-country entity control the employment relationship. Absent clear demarcation, the employee could be entitled to the protections and benefits of both countries.
A related consideration is whether the company structured its compensation package in a way that could artificially inflate a potential damages award. Companies that attempt to neutralize tax consequences for expats by inflating their base salary may be surprised when this inflated number is used to calculate damages.
Hoping to avoid legal and financial consequences of a foreign employment relationship, many companies turn to independent contractors. However, countries around the world closely scrutinise these arrangements and have different or more extensive requirements than the U.S.
Legal Landmines for Independent Contractors
As in the U.S., the main factor for determining independent contractor status in many countries is the control the employer retains regarding how tasks are performed, hours, location, business risk, payment terms, and other aspects of the relationship. A written agreement is just the starting point.
Some countries presume an employer/employee relationship exists (e.g. Mexico, Panama, Costa Rica, Venezuela, Chile, Peru, Portugal, South Africa, the Netherlands). In many, economic dependence is a critical factor. In Spain, for example, individuals who derive at least 75% of income from a single client are entitled to vacation, severance and other benefits.
1. Rules for Independent Contractor Agreements
In some countries, independent contractor agreements should contain special provisions. In India, for instance, the agreement should accurately state the contractor has a “permanent tax account number” and withholds and pays his own taxes. Reference to the Turkish Code of Obligations is required in Turkey, and in Indonesia the agreement should expressly invoke the Indonesian Civil Code. Various countries have specific registration requirements for independent contractors, (e.g. Russia, Israel), and the agreement must reference them.
Consequences for misclassifying expats can be severe, including government or agency actions for failure to withhold taxes and social charges leading to civil and criminal penalties and/or an action by the “contractor” for vacation, termination rights and other employee benefits.
2. Potential Liability for Misclassification
Companies on the losing side of a misclassification analysis face financial and operational consequences. In the U.S., liability usually consists of six categories:
2. Social security
3. State unemployment/workers compensation insurance
5. Employer plan benefits
Abroad, a misclassified contractor may trigger the above, plus additional liabilities:
7. vacation, back holidays
8. mandatory benefits (i.e. profit sharing, thirteenth-month pay, mandatory bonus, payments to state housing and unemployment funds)
9. Severance pay, notice pay and liability for unfair dismissal
10. Fines, percentages of unpaid withholdings, penalties for severe violations
Independent contractors who are improperly classified must be paid like employees (taxes, social benefits, paid childbirth leave, etc.). Misclassification may also result in an entity being deemed to have a presence in the foreign country, leading to severe tax and other consequences.
Handling Real and Perceived Cultural Differences and Discrimination
Regardless of whether an individual is deemed an employee or an independent contractor, companies with a global workforce face increased legal risks when expat employees are thrust into new environments. Real or perceived cultural differences and work habits can lead to discrimination or harassment claims. A good training program and dedicated HR specially trained to handle expats can help avoid misunderstandings.
Title VII and the ADA apply extra-jurisdictionally to protect U.S. citizens working abroad for American companies. Most other countries also have laws prohibiting discrimination and harassment in the workplace, and many countries have more expansive protections than the U.S., like prohibiting bullying or moral harassment.
In the U.S., employers may not discriminate based on national origin. Thus, employers may face liability if expat employees are treated differently because they are from a certain country or display the physical, cultural or linguistic characteristics of a particular national group. 29 C.F.R. §§ 1606.1. On the other hand, expats are not entitled to protections based on their citizenship status alone.
Joint Employment and Jurisdictional Concerns
Companies often confront litigation in one or more countries, against multiple corporate entities. Commonly, both the host and home entities are named as joint employers. For instance, where the home country is set up as the employer and payor, but the host country supervises the day-to-day workplace activities both companies would likely be named in the lawsuit. If avoiding foreign jurisdiction is of paramount concern, the home entity should minimise its oversight of the assignment. This goal must be balanced against the possibility the employee will be deemed an employee of the host entity, subject to the full protections afforded in the host country.
The broader implications of the company’s position on the “who” aspect of the employer relationship should also be considered. What jurisdictional challenges exist, and will they be undermined by the way the company has designated the employing entity? Have all the technicalities of the Hague Convention been satisfied, or does the host country afford similar protections and opportunities to the claimant such that the home entity can mount a challenge based on forum non conveniens? Also, can an arrangement be reached with opposing counsel to avoid costly legal challenges with potentially far-reaching ramifications on jurisdiction and entity status?
Expat assignments can be rewarding for both the employee and company, but it is important to consider what happens if things go wrong. Considering litigation risks and challenges unique to cross-border employees can help companies make the best choices when structuring the “who” and “what” of the relationship.
Call & Jensen is a full service civil litigation boutique that handles high stakes employment litigation and business matters throughout California and the country. Founded in 1981 with lawyers from the nation’s best law schools and the world’s most well respected firms, the firm’s clients include some of the largest companies in the world. Call & Jensen litigates with excellence and dedication to its clients’ objectives. In addition to countless defence verdicts and judgments, Call & Jensen has also obtained seven and eight figure verdicts, judgments, and settlements when representing its corporate clients as plaintiffs.
Attorneys of the firm practice at all trial and appellate levels, and represent clients in responding to federal and state agencies. The firm handles issues in all key areas including employment and labour, intellectual property, commercial litigation, complex class actions, real estate, false advertising and unfair competition, and product liability. Located near federal and state courts in all seven Southern California counties, Call & Jensen attorneys are regularly tapped to serve as counsel for cases across the country.
Call & Jensen offers its clients a team of attorneys with extensive expertise in all aspects of employment and labour law, including litigating discrimination, harassment and retaliation cases under Title VII and California’s Fair Employment & Housing Act. Some of the firm’s most notable results have included employer judgments and dismissals in wage and hour class actions, trade secrets cases, and employment-related tort claims. In addition, Call & Jensen attorneys regularly provide workplace and employment law advising.
A sea change in the U.S. workforce is swelling. Over the past 10 years, companies looking for alternatives to the traditional employee work model have increasingly turned to contingent arrangements. Recent data suggests that 30-40% of American workers hold part-time, temporary, or contract positions. According to a Randstad Workforce360 Study, two out of three U.S. companies are already using contingent workers. Moreover, while U.S. companies lead the world in using temporary workers as a core part of their business strategy, surveys show the rest of the world is not far behind in the quest for new work paradigms as the economic issues contributing to this shift become globalised. Business executives, in-house counsel, and HR professionals must strategically analyse legal issues surrounding the contingent workforce to stay ahead. This article addresses the key issues you need to understand.
GROWTH OF CONTINGENT STRATEGIES
The U.S. Bureau of Labor Statistics defines contingent employees as “those who do not have an implicit or explicit contract for ongoing employment.” While there are many possible contingent work relationships, the most common are workers leased through temporary agencies, independent contractors with a defined scope and duration of work, and interns. The most recent U.S. Department of Labor survey found that roughly 30 percent of the American workforce (or 42.6 million people) are in contingent positions, and the Bureau of Labor Statistics estimates that this figure has increased by at least 30 percent since the last survey in 2006. In its latest report on trends shaping the next decade, tax preparation software company Intuit estimated that by 2020, 40 percent of U.S. workers will be in contingent positions.
BENEFITS OF USING A CONTINGENT WORKFORCE
Companies can derive a number of benefits from using a contingent workforce. Temporary hires and contractors are less expensive than traditional employees because companies generally do not pay them benefits like health insurance, vacations and holidays. Employers can also avoid social security and Medicare taxes, and do not make unemployment contributions for leased workers. Using an agency to prescreen workers and manage employment issues also reduces administrative and human resources burdens. Temporary workers are particularly popular in times of economic instability because they tend to increase efficiencies and flexibility as companies can reduce or increase contingent workers during periods of low or high demand/production. A temp-to-hire method of screening employees may lead to better and more lasting permanent hire decisions. High-talent consultants typically unaffordable to a company for a permanent position may be hired for short periods on specific projects.
RISKS OF USING AGENCY EMPLOYEES AND CONTRACTORS
While there are many benefits to a contingent workforce, companies must also be aware of the risks. Widespread use of temporary workers to perform job functions similar to full-time employees may lead to worker tensions and a decreased sense of security. High turnover can increase training costs, add inefficiencies, and create knowledge gaps – for instance, if a temporary worker is put in charge of a segment of work and the assignment ends without an effective transition.
One of the most significant risks is the possibility of misclassification lawsuits alleging that workers should have been classified as “employees,” and are now owed benefits and other back pay. Microsoft’s landmark settlement of $97 million with its “permatemps” in 2000 still serves as a cautionary tale, and there has been a recent rise of internship class action lawsuits. Moreover, governments at both the federal and state level are focusing on this hotbed issue. The IRS recently conducted a three-year project that included 2000 employee audits per year on worker classification and other issues. Over a dozen states have introduced model professional employer organisation legislation. California recently introduced stiff new penalties of $5,000 to $25,000 per violation for willfully misclassifying a worker as an independent contractor. The U.S. Congress is also expected to reintroduce a bill that would limit “safe harbour” relief under Section 530 of the Revenue Act for misclassifying independent contractors.
REDUCING LEGAL RISKS
The popularity of the contingent workforce model suggests that companies view the benefits as outweighing the risks, and the following guidelines can help reduce those risks:
1. CENTRALISE DECISIONS ON CONTINGENT WORKFORCE STRATEGY AND CONTRACTS.
Companies are vulnerable when different managers make decisions regarding worker classification, whether to hire interns or temps, and which agencies to use. Decentralised planning can lead to redundant or undesirable contracts, inefficiencies, additional expenses, and mixed messaging about how the company views employees. Moreover, hiring global contingent workers presents its own set of issues with respect to visas, international laws, state laws, contract issues, and tax risk. Centralise decisions over long-term strategy, contracts, and temporary worker allowances to ensure the right direction for your company.
2. PROVIDE GUIDANCE TO MANAGEMENT ON WORKER CLASSIFICATION.
State and federal definitions of employee, interns and independent contractors vary; therefore companies must ensure that their employees are properly classified federally and in every state to avoid claims. In general, the amount of direction and control you exert over the individual is critical in determining whether the worker is an employee or independent contractor. Interns must meet a six factor test under the U.S. Department of Labor regulations to avoid wage and hour liability. Further, even if employed by a professional employer organisation, a temporary worker could claim joint employment by both the agency and the client if the worker meets the “employee” definition. In this regard, it is prudent to carefully scrutinise liability terms and indemnity provisions in temp agency contracts. Since managers, and not company executives, interact with the workforce on a daily basis, managers also need to be apprised of the legal tests to ensure that workers’ duties do not stray into an area that would create an employment relationship and lead to company exposure.
3. REGULARLY AUDIT WORKER CLASSIFICATION.
Regular audits as to whether temporary workers, contractors and interns are properly classified can reduce exposure to claims of joint employment and misclassification. Audits also provide an opportunity to ensure that the use of temporary workers is consistent with long-term objectives, and analyse whether workers can be realigned or reclassified.
4. LIMIT THE LEVEL OF DISCRETION AND ACCESS TO COMPANY INFORMATION AS APPROPRIATE.
Temporary workers may not be as loyal to the company, particularly when it comes to keeping business information confidential. Moreover, with the higher turnover rate of contractors and temps, managers need to be instructed to carefully consider whether to put sensitive projects or pieces of company information under the sole management of a contractor.
Job search company CareerBuilder reported that 42 percent of surveyed employers using outside temp workers plan to hire temps in 2013. When converting temporary workers to employees, you should ensure that they are properly classified in their new roles. The scope of the workers’ job duties may change, as well as the salary basis, which should trigger a review to confirm that workers are being properly classified as exempt or non-exempt from federal and state wage-and-hour laws.
By keeping up to date on the changing federal and state landscape, conducting regular audits, thinking strategically about long-term goals and contracts, and providing proper guidance to managers, you can ensure that your company’s contingent workforce is delivering an overall value to your company.
Contact Jacqueline Beaumont or Julie Trotter for more info.
CALL & JENSEN AWARDED CALIFORNIA LABOUR & EMPLOYMENT LAW FIRM OF THE YEAR
CORPORATE LIVEWIRE GLOBAL AWARDS 2013
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Call & Jensen was recently honored in receiving the 2013 Corporate LiveWire Global Award for California Labour & Employment Law Firm of the Year. The Global Awards identify the successes of businesses, finance firms and individuals who have led the way in every sector over the past twelve months. They are compiled by Corporate LiveWire, a resource for professionalsin the global corporate and business community, to honor those who standout as consistently showing best practice and innovation in their work. Call & Jensen is honored to receive this award alongside fellow law firm awardees including Gibson Dunn, Littler, Latham & Watkins, DLA Piper, and Davis Polk & Wardwell.
Call & Jensen is a full service civil litigation boutique that handles high stakes employment litigation and business matters throughout California and the country. Founded in 1981 with lawyers from the nation’s best law schools and the world’s most well respected firms, the firm’s clients include a list of some of the largest companies in the world. Call & Jensen litigates with excellence and dedication to its clients’ objectives. In addition to countless defense verdicts and judgments, Call & Jensen has also obtained seven and eight figure verdicts, judgments, and settlements when representing its corporate clients as plaintiffs.
Attorneys of the firm practice at all trial and appellate levels, and represent clients in responding to federal and state agencies. The firm handles issues for its clients in all key areas including employment and labor, intellectual property, trade secrets, commercial litigation, complex class actions, real estate, false advertising and unfair competition, and product liability. Located near federal and state courts in all seven Southern California counties, Call & Jensen attorneys are also regularly tapped to serve as pro hac vice or admitted counsel for cases across the country.
Call & Jensen offers its clients a team of attorneys with extensive expertise in all aspects of employment and labor law. Call & Jensen attorneys have extensive experience in litigating discrimination, harassment and retaliation cases under Title VII and California’s Fair Employment & Housing Act. Some of the firm’s most notable results have included employer judgments and dismissals in wage and hour class actions, claims for misappropriation of trade secrets, and employment-related tort claims.
In addition, Call & Jensen attorneys regularly provide advising regarding reductions in force, the WARN Act, employee investigations and terminations, drafting and implementing workplace policies and employee handbooks, employee compensation and bonuses, workplace privacy matters, social media and internet issues, and issues relating to competition and solicitation of employees. As experts in the field, Call & Jensen attorneys are frequently invited to speak at conferences, and regularly publish articles on hot topics and emerging issues.
Complex cases often contain multiple disciplines. All of the attorneys who practice employment law at Call & Jensen have also litigated contract disputes and business tort claims, and represent companies in commercial negotiations and mediation. This diversity of practice ensures that each of Call & Jensen’s litigators have a broad business knowledge and capabilities. The firm is thus able to take a two-pronged approach to incoming employment lawsuits and potential issues, combining deep employment law knowledge with the ability to skillfully and strategically litigate at the highest level of practice in court.
Beyond the tangible metrics of success, Call & Jensen is devoted to specific principles and values, born of its client-centered approach. These principles and values are what make the Firm not only successful but unique.
Contact Jacqueline Beaumont or Julie Trotter for more info.
THE ABSOLUTE POLLUTION EXCLUSION: NAVIGATING PATHWAYS AROUND TOTAL CONFUSION
ORIGINALLY PUBLISHED IN THE ABA ICLC COMMITTEE NEWS, WINTER 2013
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THE ABSOLUTE POLLUTION EXCLUSION: NAVIGATING PATHWAYS AROUND TOTAL CONFUSION
“Rarely has any issue spawned as many, and as variant in rationales and results, court decisions as has the pollution-exclusion clause.” 1
While the pronouncement of the Supreme Court of Alabama may have been a little extreme, the fact remains that a decade later, courts are still citing it as accurate. The pollution exclusion remains in many jurisdictions as uncertain as ever, due to inconsistent, fragmented, factually-specific, and overly broad judicial precedent. As a result of this discord, parties lack certainty in determining when a pollution exclusion may be applicable to their case. This article addresses the history of the exclusion, problems and issues in interpretation, arguments for and against a narrow reading of the clause, and a recent case study from California’s evolving case law. Some take-home lessons are also provided for addressing this exclusion pre- and post-claim.
The Development And Evolution Of The Pollution Exclusion
The pollution exclusion is a standard form endorsement to the CGL policy. Its evolution is the product of decades of tension between, on one hand, judicial interpretation confirming defense and indemnity coverage for environmental pollution, and, on the other hand, attempts by the insurance industry to exclude such coverage for a broad array of pollution related injuries from their standard policies.
CGL policies are typically designed to provide coverage for “sums that the policyholder becomes legally obligated to pay as damages because of ‘bodily injury’ or ‘property damage.’” Prior to 1966, the standard-form CGL policy provided coverage for bodily injury or property damage caused by an “accident,” but failed to provide a definition for the term “accident,” leading to many judicial decisions that extended CGL coverage to pollution-related injuries or damages.2
During the 1960s, however, the insurance industry’s concern regarding the costs of insuring such incidents was dramatically heightened by the birth of sweeping federal statutes such as the Clean Air Act that expanded the expenses and obligations associated with the cleanup of environmental hazards, as well as the notoriety of several large-scale and expensive environmental catastrophes.3
In 1966, the insurance industry responded to these developments with a revised standard CGL policy, changing the term “accident” to “occurrence,” and specifically defining the term “occurrence” to be “an accident, including injurious exposure to conditions, which results, during the policy period, in bodily injury and property damage that was neither expected nor intended from the standpoint of the insured.”4
Yet, despite the insurance industry’s efforts, the courts continued to apply revised CGL policies to cover accidents caused by environmental pollution, so insurers in 1970 modified the policy again to draft a “qualified pollution exclusion,” which was developed as a standard form exclusion (f).5 This exclusion provided, in relevant part:
This policy shall not apply to bodily injury or property damage arising out of the discharge, dispersal, release or escape of smoke, vapors, soot, fumes, acids, alkalis, toxic chemicals, liquids or gases, waste materials or other irritants, contaminants or pollutants into or upon land, the atmosphere or any watercourse or body of water; but this exclusion does not apply if such discharge, dispersal, release or escape is sudden and accidental.6
But the industry’s revisions again led to diverging judicial viewpoints on coverage, this time centering around the meaning of the term “sudden and accidental.”7 Additionally, the 1980s ushered in the passage of even more statutes expanding liability for environmental remediation, such as the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA).8
Insurers again went back to the drawing board, and in 1985 began promulgating a new “absolute pollution exclusion,” eliminating the term “sudden and accidental” and the requirement that the pollutant be discharged “not or upon land, the atmosphere or any watercourse or body of water.”9 The absolute pollution exclusion is a standard exclusion (f) Insurance Services Office (“ISO”) Form CG 00 01.10 However, in practice, insurers often make variations to the language of this exclusion.
A “total pollution exclusion” has also been in widespread use since the mid-1980s. Generally, the total pollution exclusion is less qualified and more extensive, often containing no express exception to the exclusion for damage by “hostile fire.”11 However, the term has been applied to a number of variations on the “absolute pollution exclusion,” some of which are fairly identical.12
Ambiguity And Jurisdictional Splits In Interpretation
In the past three decades, the standard-form CGL pollution exclusion has not changed, but courts have continued to apply it unevenly across the nation, and inconsistently from case to case within a single jurisdiction.13 Given the scale of the expenses at issue in defending and indemnifying claims of “property damage” and “bodily injury,” it is no surprise that the scope of the pollution exclusion has emerged as “one of the most hotly litigated insurance coverage questions to arise over the past three decades.”14 Over 200 decisions from more than 36 states have analyzed the exclusion, on issues ranging from what substances qualify as a “irritant” or “contaminant,” to what constitutes a “discharge, dispersal, release or escape,” to what types of negligent acts can be categorized as pollution for purposes of the exclusion.15
Disputes over the application of the exclusion center around its meaning, often applying the insurance policy interpretation doctrines of plain meaning, ambiguity, and whether the exclusion is conspicuous, plain and clear.
For simplicity, we roughly divide jurisdictions into two camps regarding the application of the “pollution exclusion” to acts of negligence: (1) One camp, conscious of the historical development of the exclusion, as well as the reasonable expectations of a policyholder, applies the exclusion narrowly only to what is viewed as “traditional environmental pollution”; (2) The other camp sees the exclusion as an unambiguous contract provision, reading it broadly to preclude coverage for all claims that involve toxic substances, regardless of whether they result from conventional types of pollution to the soil, land, air, or water, or from acts of negligence in the usual course of business that happen to involve harmful substances.16 The first favors policyholders and the second favors insurers, and their advocates generally divide along those lines.
But the fragmentation of authority does not end there. Still other courts have noted that “[a] term which is clear in one context may be ambiguous in another,” allowing arguments to begin anew with each new set of facts.17 Even the split of authority is itself viewed differently by different courts: some decisions have cited to the existence of conflicting judicial interpretations of policy terms as evidence of ambiguity, whereas other courts have found the conflict not to be determinative of ambiguity.18
Moreover, while many lawsuits have been filed involving some aspect of the absolute pollution exclusion, a number of jurisdictions still have a surprising dearth of authority regarding its application. For example, the California Supreme Court did not issue an opinion rejecting the insurance industry’s broad interpretation until 2003, when it held in MacKinnon v. Truck Insurance Exchange, 31 Cal. 4th 635 (2003) that it would apply the exclusion to exclude only “injuries arising from events commonly thought of as pollution, i.e., environmental pollution,” as opposed to mere “ordinary acts of negligence involving toxic chemicals” resulting in bodily injury. The New Jersey Supreme Court took up the issue two years later and came to a similar conclusion.19 The Supreme Courts of Alaska and Georgia did not analyze whether the absolute pollution exclusion was ambiguous until 2008; both found that it was not and applied the exclusion literally.20
Even more recently, federal courts in a handful of jurisdictions have been handed the job of determining whether the total pollution exclusion was ambiguous or limited to environmental pollution only, without any clear and controlling state precedent, and have certified the question to their state’s highest courts.21
Thus, decades after its most recent iteration has been released into the world, it would seem that whether the total pollution exclusion is plain or ambiguous, or is applied narrowly or broadly, is in many ways an unsettled issue.
Navigating A Path Between Extremes
Is the Exclusion: (1) Clear and Unambiguous Resulting in a Literal Interpretation or; (2) is the Exclusion Ambiguous or so Overbroad that it Violates the Insured’s Reasonable Expectations of Coverage?
Courts interpreting the exclusion narrowly in favor of finding coverage have relied on insurers’ motivation in drafting the exclusion, and have argued that to expansively apply the scope of the exclusion beyond the insurers’ stated objective of avoiding expense and exposure resulting from environmental litigation, to situations not remotely resembling traditional environmental pollution, would give the insurers a undeserved windfall.22
As a second rationale for narrow interpretation of the exclusion, some courts have argued that interpreting the term “pollutant” in the exclusion literally to mean any possible “contaminant or irritant” would have absurd or otherwise unacceptable results, overextending the reach of the “total pollution exclusion” to everyday events that simply happen to involve something that could be characterized as a substance that is an irritant – for example, a slip and fall on a puddle of spilled swimming pool chlorine, or application of iodine to someone who has an unexpected allergic reaction.23
Third, many courts have cited to the doctrine of interpreting the policy according to the reasonable expectations of the policyholder that the exclusion is a term of art limited to environmental pollution.24 These courts have refused to broadly apply the exclusion to factual scenarios that fall so far adrift of expectations of what is meant by a “total pollution exclusion” that a reasonable insured would not be plainly and clearly alerted that a claim would not be covered.25 These courts have noted that interpreting the exclusion broadly effectively eviscerates CGL coverage for “bodily injury” or “property damage” for policyholders in certain industries,26 As proffered by the Wisconsin Supreme Court, “[t]he reach of the pollution exclusion clause must be circumscribed by reasonableness, lest the contractual promise of coverage be reduced to a dead letter.”27
Additionally, some courts have mulled over the meaning of the terms “discharge, dispersal, release or escape” in the total pollution exclusion, maintaining that these terms signify some type of freedom from containment, over a substantial area. These courts have found the application of the total pollution exclusion to be inappropriate in factual scenarios where, for example, the claim resulted from the negligent handling of chemicals to be otherwise intentionally applied or directed locally in the course of business.28
In contrast, courts to apply the exclusion broadly have found, more simply, that the exclusion clearly and unambiguously excludes all “bodily injury” or “property damage” coverage, whenever a cause of injury can be characterized as a pollutant, broadly defined, notwithstanding the policyholder’s reasonable expectations of coverage.29
A Case Study From California
Particularly in jurisdictions taking a narrow reading of the exclusion, policyholders and insurers have continued to hotly dispute coverage in cases where a pollution exclusion is present, and especially so where the court has based its narrow reading on the holding that the exclusion was ambiguous when applied to the facts of the case.
For example, in California, the MacKinnon opinion sought to provide clarity to litigants. However, since virtually all claims over which the application of the total pollution exclusion is debated will involve some act of negligence (or typically be subject to other policy exclusions), parties have simply taken the language of MacKinnon and battled over the question of what constitutes a “traditional environmental pollution,” as opposed to an act of negligence that merely happens to involve toxic substances.30 Moreover, MacKinnon’s finding that the exclusion was ambiguous as applied to the facts therein, and thus the exclusion susceptible to the interpretations of both the policyholder and the carrier, may have caused carriers to reserve rights and litigate more frequently than in other jurisdictions where courts have stated on the record that the exclusion unambiguously does not apply in cases that do not involve traditional environmental pollution.31
As a result, in many cases, a judicial determination that is too specific or too vague means that the question is simply reopened for a renewed debate each time it is asserted. Ultimately, this uncertainty increases expenses for both carriers and policyholders, and can lead to unfair results.
In an attempt to provide more clarity to one jurisdiction’s narrow reading of the total pollution exclusion, a recent opinion from the Central District of California sets forth a more specific test in Great American Assurance Co. v. M.S. Industrial Sheet Metal, Inc., Case No. 8:11cv00754 (C.D.Cal.2012) (Docket No. 67). In that case, policyholder and contractor M.S. Industrial Sheet Metal tendered to its CGL carrier a personal injury/negligence claim in which two plaintiffs claimed that M.S. Industrial’s installation and/or recommendation of a workplace ventilation system for a commercial printer caused them to be exposed to harmful printer exhaust while working within a warehouse.
The carrier, Great American Assurance Company, filed a declaratory relief action regarding its duty to defend M.S. Industrial in light of a total pollution exclusion endorsement. Both parties filed cross-motions for summary judgment on the issue of whether a duty to defend was owed. The carrier argued for a literal “but-for” application of the exclusion since the personal injury plaintiffs alleged that they were harmed as a result of chemicals in the air, and further tried to compare the industrial setting of the claim to prior precedent to argue that the exclusion should apply. The court disagreed and held that the total pollution exclusion did not apply to preclude the duty to defend for the claim.
The court reasoned, pursuant to MacKinnon, that the claim clearly presented a case of ordinary negligence that happened to involve toxic substances, as opposed to traditional environmental pollution. The court set forth a new two-part test: the total pollution exclusion applies to preclude insurance coverage in California only if the exposure is (1) from a toxic environmental pollution or accident that is a persistent by-product of the insured’s business as opposed to a “localized toxic accident”; and (2) if the facts of the exposure fall within the insurance industry’s historical objective of avoiding liabilities for environmental catastrophes related to industrial pollution.
Thus, while maintaining MacKinnon’s narrow approach, the court also added clarity to theMacKinnon decision.
Conclusion and Take-Home Lessons
Uncertainty regarding the total pollution exclusion is likely to last for some time. How can you best protect your client from uncertainty and expense related to the total pollution exclusion?
Even before a claim is filed, when selecting or renewing CGL policies, companies should closely review any provisions regarding “pollution,” and evaluate their potential liability under a variety of factual scenarios. In jurisdictions broadly interpreting the scope of the total pollution exclusion, policyholders should purchase additional pollution coverage.
If a dispute regarding coverage arises, policyholder counsel can look to some of the above arguments, as most jurisdictions apply some variation of the rule that insurance policy provisions must be interpreted broadly and in favor of coverage. Contrary precedent may very well be distinguishable based upon the facts of the case and may even render the exclusion ambiguous. Prior decisions and rationales set forth by courts in the policyholder’s jurisdiction are likely to be inconsistent and often lead to conflicting results when applied to the facts of your client’s case. If so, resort to well established principles of policy interpretation to establish the insurer’s obligation to provide policy benefits. You may be able to properly frame the coverage determination in favor of finding coverage.
Don’t limit yourself. If your jurisdiction’s case law is not well-developed, it may be that that your best arguments come from other states, or that the issue needs to be reviewed by a higher court. Even if your jurisdiction has set forth a standard, your case may present a need to update that standard to make it more specific or general. Lastly, stay aware of how your arguments in the coverage case may impact your client in handling the underlying claim; in some jurisdictions, you may have grounds for a stay of the coverage dispute while the underlying action is pending.
* Eric Little is the managing partner of Little Reid & Karzai LLP in Irvine, California. And solely represents policyholders. Jacqueline Beaumont is an associate at Call & Jensen in Newport Beach, California, and was counsel for the policyholder in Great American v. M.S. Industrial, Inc.
2 The development of the pollution exclusion clause is relatively uncontroverted and has been extensively discussed by the courts; among the most comprehensive treatments are in Belt Painting Corp. v. TIG Ins. Co., 100 N.Y.2d 377, 384-87 (N.Y. 2003); Am. States Ins. Co. v. Koloms, 177 Ill. 2d 473, 489-492 (Ill. 1997).
3 See id.
4 See id.
5 See id.
6 See id.
7 See id.
8 See id.
9 See id.; see also discussion in Porterfield, 856 So. 2d at 796 (Ala. 2002); MacKinnon v. Truck Ins. Exch., 31 Cal. 4th 635, 650 (Cal. 2003).
10 The absolute pollution exclusion in ISO Form CG 00 01 12 07 states in relevant part that the policy shall not apply to ““Bodily injury” or “property damage” arising out of the actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of “pollutants” ….” Pollutant is defined as “any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste. Waste includes materials to be recycled, reconditioned or reclaimed.”
11 This carve back to the pollution exclusion typically states that the pollution exclusion does not apply to personal injury and property damage “caused by heat, smoke or fumes from a hostile fire” … which is defined as one that “is uncontrollable or breaks out from where it was intended to be.” Maffei v. Northern Ins. Co. of N.Y. 12 F3d 892, 895 (9th Cir. [Cal.] 1993).
12 Stempel on Insurance Contracts, 3d. Ed., 14-166 (14.11[C]) (2007).
13 See discussion in Porterfield, 856 So. 2d at 800-806 (Ala. 2002).
19 Nav-Its, Inc. v. Selective Ins. Co. of Am., 183 N.J. 110 (N. J. 2005).
20 Whittier Properties, Inc. v. Alaska Nat. Ins. Co., 185 P.3d 84, 90 (Alaska 2008); Reed v. Auto-Owners Ins. Co., 284 Ga. 286, 288 (2008).
21 See Century Sur. Co. v. Casino W., Inc., 677 F.3d 903 (9th Cir. 2012)(certifying question to Nevada Supreme Court); Nationwide Mut. Ins. Co. v. Overlook, LLC, 785 F. Supp. 2d 502, 511 (E.D. Va. 2011)(discussing prior certification of question of law, which Supreme Court of Virginia “declined to accept,” and resolving issue); Apana v. TIG Ins. Co., 574 F.3d 679, 684 (9th Cir. 2009)(certifying question to Hawai’i Supreme Court); City of Chesapeake v. States Self-Insurers Risk Retention Group, Inc., 271 Va. 574 (2006)(answering prior certified question regarding application of exclusion in Virginia); see also Eott Energy Pipeline Ltd. P’ship v. Hattiesburg Speedway, Inc., 303 F. Supp. 2d 819, 821, 824 (S.D. Miss. 2004) (noting in diversity case that “the Mississippi Supreme Court has yet to decide a case involving a pollution exclusion of any kind in an insurance policy” and that “if this Court had the power to do so, it would certify this issue to the Mississippi Supreme Court.”);Bituminous Cas. Corp. v. Cowen Const., Inc., 55 P.3d 1030 (Okla. 2002)(answering certified question regarding scope of pollution exclusion).
22 See, e.g., Am. States Ins. Co. v. Koloms, 177 Ill. 2d at 493-493 (Ill. 1997); Doerr v. Mobil Oil Corp., 774 So. 2d 119, 126 (La. 2000) opinion corrected on reh’g, 782 So. 2d 573 (La. 2001); Andersen v. Highland House Co., 93 Ohio St. 3d 547, 551 (Ohio 2001); Gainsco Ins. Co. v. Amoco Prod. Co., 53 P.3d 1051, 1066 (Wyo. 2002).
23 See MacKinnon, 31 Cal. 4th at 650 (Cal. 2003) and cases cited therein.
24 See, e.g., Sullins, 340 Md. At 515-516 (Md. 1995); Andersen, 93 Ohio St. 3d 547 (Ohio 2001).
25 See Regional Bank of Colorado v. St. Paul Fire and Marine Ins. Co. 35 F.3d 494, 498 (10th Cir. [Colo.] 1994).
26 See discussion in Am. States Ins. Co. v. Kiger, 662 N.E.2d 945, 948-49 (Ind. 1996) (exclusion was in garage policy issued to gas station); Ayersman v. W. Virginia Div. of Enviromental Protection, 208 W. Va. 544, 546 (W. Va. 2000) (skeptical of applying exclusion to “p[rimary function” of insured state department of environmental cleanup and protection.”
27 Donaldson v. Urban Land Interests, Inc., 211 Wis. 2d 224, 233 (Wis. 1997).
28 See MacKinnon, 31 Cal. 4th at 650 (Cal. 2003) and cases cited therein.
29 See, e.g., Nautilus Ins. Co. v. Country Oaks Apartments Ltd., 566 F.3d 452, 458 (5th Cir. [Tex.] 2009); see also Heyman Associates No. 1 v. Ins. Co. of State of Pa., 231 Conn. 756, 776 (1995).
30 See Cold Creek Compost, Inc. v. State Farm Fire & Cas. Co., 156 Cal. App. 4th 1469, 1480-1486 (Cal. App. 2007); Cas. Co. of Reading, PA v. Miller, 159 Cal. App. 4th 501, 514-516 (Cal. App. 2008); and cases discussed therein.
31 Compare the decision of the Illinois Supreme Court in American States Insurance Company v. Koloms, 177 Ill. 2d 473 (1997); MacKinnon has been cited in approximately three times more pollution exclusion cases in its own federal and state jurisdictions for the number of years the decision has been on the books.FOR MORE INFO CONTACT JACQUELINE BEAUMONT
SOCIAL MEDIA: 10 LEGAL GUIDELINES FOR BUSINESS EXECUTIVES
ORIGINALLY PUBLISHED MARCH 18, 2013 IN THE ORANGE COUNTY BUSINESS JOURNAL
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Social media is a powerful tool to link businesses with potential customers. Mastering the initial business aspects of growing a social media presence is only the first step; it is equally critical to recognize and address the significant legal risks that go along with it. If you are a business executive, HR professional, or in-house counsel, the odds are that your inbox is cluttered with emails about the latest social media issue. This article cuts through the chaos and covers the top areas of legal risk that you need to understand and control.
1. PROTECT AGAINST DISCLOSURE OF TRADE SECRETS AND CONFIDENTIAL INFORMATION.
In recent years, the spread of social media has posed even greater challenges to the confidentiality of corporate information. Knowingly or not, employees now have the opportunity to disclose confidential information on social media websites, in blogs and even anonymous comments. California courts have long held that widespread, anonymous disclosure of company information over the Internet may destroy its status as a trade secret. To keep valuable company information confidential, and avoid losing intellectual property rights, (1) clearly identify and mark company confidential information, (2) provide clear guidance to employees regarding maintaining confidentiality, especially in social media and (3) restrict disclosure of such information to a need-to-know basis.
2. TRAIN SUPERVISORS ON THE MANY HR ISSUES RAISED BY SOCIAL MEDIA.
Social media raises a host of human resources issues when “Myspace” clashes with “my work space.” Employers commonly scour the Internet for a more candid glimpse of job applicants and social media now provides instant answers to those “donʼt ask” questions (marital status, religion, etc.). If you would not ask it in an interview, do not base an employment decision on the same information gleaned from a Facebook page. More importantly, implement a thorough hiring and screening process to help later prove that hiring decisions were not based on illegal criteria. Harassment, discrimination, retaliation and privacy claims are also impacted by employeesʼ access to personal details about coworkers in social media: “Can I, should I, ʻfriendʼ my boss?” “What if I was ʻtaggedʼ in a photo from the office party?” While it may be a tempting solution to monitor all employeesʼ social media content, as of 2013 a new law, California Labor Code § 980, prohibits employers from asking employees for access to social media passwords, with limited exceptions. Instead, instruct supervisors that conduct in cyberspace can be the basis for employment claims. As courts are increasingly turning to the Internet for evidence of discriminatory intent, train employees not to post information that could contribute to a hostile work environment. 3. ENSURE COMPLIANCE WITH SECURITIES LAWS.
Social media poses particular risks for publicly-traded companies. The line between private and public life has blurred, particularly for executives privy to earnings data and forecasts. Shareholders increasingly demand up-to-the-minute information, and potential investors “follow” corporate thought leaders through a variety of outlets. In 2008, the SEC published guidance about when disclosure of information on a company website might be deemed “public” under Regulation Fair Disclosure (“Reg FD”). Last year, the SEC issued its first Wells Notice to Netflix for potential violations based on a Facebook post by its CEO. The SEC has also investigated Whole Foods and threatened to block its purchase of competitor Wild Oats after its CEO was caught using a pseudonym to make critical statements online to lower Wild Oatsʼ stock price. Even the FBI has used social media to investigate possible insider trading and securities fraud. All publicly-traded companies must understand and communicate clear rules regarding what is and is not appropriate, legally, to post about the companyʼs business. Do not let an errant “tweet” turn into a full-blown SEC investigation. 4. INTERACT WITH COMPETITORS APPROPRIATELY.
Develop a strong company policy against making comments in social media about competitors to avoid legal claims, including disparagement, defamation and interference with business. Respect the intellectual property of others. Sidestep legal disputes by avoiding use of competitorʼs names (e.g. “betterthanacme.com”). In addition, guard against the risk of an antitrust investigation or claim by instructing employees not to share information via association-sponsored social networking that could be construed as a violation of antitrust laws. Employees should understand that encouraging anticompetitive practices is illegal whether via social media or any other format. 5. PROTECT TRADEMARKS AND PATENTS.
Social media communications are often informal, and response times quick. Nevertheless, always use full and consistent company trademarks and trade names. Continuous and consistent company use is vital to retaining legal protection of the trademarks. Protect against impersonation and “cybersquatting” by others by promptly issuing cease-and-desist demands, and pursue legal action if needed under the Anticybersquatting Consumer Protection Act and other channels. 6. COMPLY WITH TRUTH AND ACCURACY LAWS IN ADVERTISING, ENDORSEMENTS AND CONTESTS.
A host of federal and state laws require truth in advertising. When posting about the features of a product, be certain that your comments are not misleading. The Federal Trade Commission has issued new rules specific to the disclosure of endorsements in social media, such as when a blogger is paid to post about a product. Employees who truly love your companyʼs product should disclose their relationship whenever posting a favorable review. Also, be aware that numerous state laws and regulations govern online contests, lotteries, prizes, reward practices and sweepstakes. Consult legal counsel before providing any incentives online. 7. USE LEGAL PRIVACY AND DATA COLLECTION PRACTICES.
Certain laws, such as HIPAA, govern the collection of personal information. Privacy considerations also apply to social networking sites. For example, websites that collect information from children under the age of 13, such as on a “fan” page, are required to comply with the federal Childrenʼs Online Privacy Protection Act. If personal data collection is anticipated, post a privacy notice describing data collection and use practices. In addition, the federal CAN-SPAM Act and state laws establish requirements for commercial messages sent via email. Thoroughly vet your companyʼs online interactions with legal counsel for compliance with data collection and privacy rules.
8. ENSURE THAT YOUR COMPANY, NOT YOUR EMPLOYEES, OWN SOCIAL MEDIA ACCOUNTS.
Be clear with your employees that social media and blogging accounts that they register, author or contribute to for company business – and any accounts or pages that contain the company name, product names or trademarks – are company property. The best practice is to register the account in the companyʼs name, and use the company name in the handle. Do not give a single employee exclusive knowledge of all credentials, and ensure that policies and new hire agreements clarify that accounts and log-in credentials belong to the company. Conduct exit interviews and ensure that accounts are transitioned and passwords changed when an employee leaves.
9. UNDERSTAND THAT SOCIAL MEDIA CAN BE REQUESTED IN DISCOVERY AND USED AS EVIDENCE.
Social media is permanent. Even if it is “deleted,” written over, or password-protected, content may be retrieved through search engines, archives, web-crawlers, dated print-outs, forensic retrieval, or an ISP or services provider/host. Even anonymous blog postings may be traceable through IP addresses.
Social media may also be used in court as evidence. Companies are increasingly dealing with specific requests for social media in electronic discovery, and many broad legal requests will encompass online content. Ensure good custodial practices by updating your electronic document retention policies to encompass company social media. Without clear guidance, employers run the risk that their default procedure will write over Internet data, potentially subjecting them to legal sanctions for destroying relevant evidence.
When put on notice of a potential legal claim, you should immediately issue a “litigation hold order,” instructing pertinent employees to preserve evidence (including relevant personal devices, non-company emails or social media accounts). Fulbrightʼs 2013 Annual Litigation Trends Survey Report shows an increasing number of U.S. companies have had to preserve or collect data from an employeeʼs personal social media account (20 percent), or mobile device (41 percent), in connection with a dispute or investigation.
10. PROACTIVE COMPANIES MUST CREATE A SOCIAL MEDIA POLICY FOR EMPLOYEES.
To help mitigate risk and avoid PR disasters, it is critical to develop a clear social media policy that sets boundaries while balancing employee rights, including the right to criticize the company or complain about working conditions. Your policy can and should encourage professionalism and civility, prevent employees from wasting work time, prohibit harassment and discrimination, protect confidential information and trade secrets, and avoid unauthorized statements on behalf of the company. On the other hand, your policy should not prohibit employees from making disparaging comments, posting photographs, or discussing wages or working conditions. Over the past year, the NLRB has aggressively attacked social media policies that could chill concerted activity. Although the NLRBʼs authority may now be in question (a court recently found President Obamaʼs recess appointments to the NLRB to be “constitutionally invalid”), it is important to harmonize your social media policy with your employeesʼ protected rights. A good company policy should be simple, yet complete, establishing clear boundaries and proactively addressing issues of confidentiality, responsibility for social media comments, and other legal issues.
WHAT ATHLETES, AGENTS, AND SPONSORS NEED TO KNOW ABOUT CONTRACT LAW
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What’s more risky than dropping in on a 50-foot wave at Mavericks? Legally speaking, it could be acting as the athlete agent for the guy who’s doing it. California’s law governing athlete agents, the Miller-Ayala Athlete Agents Act, or AAA, is an important, and frequently misunderstood piece of legislation with serious consequences. In fact, it is quite possible for a person to act as an athlete agent – and risk the serious consequences that go along with it – without even knowing they have responsibilities under the act. For industry players, it is important to know what kind of deals is covered by the AAA, and whether they need to be concerned about an agent’s compliance with the act.
The AAA was enacted in 1997 in large part to address the growing problem of predatory sports agents. One of the bill’s sponsors, USC alumni and sports enthusiast Senator Ruben Ayala, was quoted as saying, “I’ve had enough of these unscrupulous agents who offer kids money to sign with them. Under current law, they can get a university on probation or make a kid ineligible to play and nothing happens to the agent. They just move on to the next kid.” The AAA addressed these perceived problems by imposing strict requirements on athlete agents. For instance, the law requires athlete agents to file certain background information with the Secretary of State for public disclosure and to notify potential clients the information is available. While these requirements are primarily designed to protect athletes, they also protect companies considering working with an athlete.
The AAA is filled with pitfalls and its penalties are harsh. For example, the act requires every athlete agent to carry insurance of at least $100,000 for claims that might be brought against them, yet insurance policies or bonds for this kind of liability may be difficult to procure. Also, athlete agents are required to update their disclosures with the Secretary of State within seven days of any change in their disclosure information — such as taking on a new client or revising a fee schedule. Violation of any provision can result in criminal prosecution, civil liability, and forfeiture of any money earned as an athlete agent.
Given the high stakes for athlete agents and the people they deal with, it is extremely important to know whether the act applies to a given contract. Simply put, the AAA applies in two situations: (l) where an agent negotiates directly with an athlete; and (2) where an agent acts on behalf of an athlete to negotiate a deal with a sponsor, team, or other organization for money.
To determine whether a contract is governed by the AAA, the first question to ask is whether an athlete is involved in the transaction. If the deal will require the contracting party to pay some kind of compensation to an athlete, it is likely covered by the AAA and the parties should make sure all athlete agents participating in the deal are in compliance. Another common situation that could raise concerns is when a company sponsors an athletic team rather than the athletes on the team. If the company were to sponsor individual athletes, then the AAA would apply to those athletes’ agents. On the other hand, if the company were to sponsor the team itself, the contract would be enforceable even if the agent acting on behalf of the team had not satisfied the requirements of the AAA. Furthermore, the company’s agents who, for example, assist in obtaining opportunities to sponsor events, or connect with a drink sponsor, or find other marketing opportunities, would not be considered athlete agents under the act. In these situations, where no athlete is involved, the agents who negotiate the deal are not “athlete agents,” as defined in the AAA.
The AAA’s definition of an athlete agent is narrowly tailored to only include persons who negotiate deals on behalf of athletes, but it is broad in the sense that it covers a wide array of deals involving athletes. Unlike acts in other states, which are designed only to protect student athletes, the AAA also extends protection to professional athletes and defines “employment as a professional athlete” broadly to include employment through endorsements in addition to employment in the more traditional “player on the team” sense.
As a practical matter, action sports athletes are often represented by agents who are not familiar with their responsibilities under the AAA. Unfortunately, the AAA is harsh, and failure to know the law is not a defense. Unlike other industries, where sports agents must be “certified,” agents in the action sports industry are not “certified,” so they need to educate themselves. If they fail to comply with the AAA, both the athletes they represent and the companies involved in the deals they negotiate may have recourse against them for significant sums of money.
Privacy has become one of the most controversial and debated issues of the internet age. Neither Congress nor the Courts have entirely kept pace with the subject—making it difficult for businesses to know precisely how to deal with the issue. Adding to the complexity is the fact that privacy may be protected under state constitutions, state privacy acts, insurance record laws, unfair and deceptive trade practices acts and state common law. Plaintiffs have been casting wide nets in privacy cases, alleging a myriad of wrongs including misrepresentation, failure to disclose, breach of contract, state advertising violations, trespass to chattels, basic invasion of privacy, and more. Given this backdrop, companies must take care when developing on-line privacy policies and practices, and must also take care not to do anything contrary to their adopted policies. To avoid liability, companies should be familiar with the potential triggers for FTC investigations and personal causes of action.
Inadequate Security: Promising security, but then failing to provide adequate security. This can be true even if a data breach does not occur. See In the Matter of Microsoft Corp. (2002); In re Guess.com, Inc. (2003).
Security Issues and Failure to Train: Suffering a data security breach due to negligence or failure to properly train employees about adequate security practices. FTC v. Eli Lilly(2002).
Deceptive Data Collection: Collecting data deceptively even if the individual is not visiting the company’s website. FTC v. ReverseAuction.com, Inc. (2000).
Inadequate Disclosure of Extent of Data Gathering: Failing to clearly and conspicuously inform users about the extensiveness of internet browsing tracking software. In re Sears Holdings Management Corp. (2009).
The federal government created multiple statutes to address the technology age and privacy, such as, The Computer Fraud and Abuse Act of 1986 (“CFAA”), 18 U.S.C.A. § 1030 (enacted to make it a criminal offense to damage or steal data by accessing a computer without authorization or by exceeding any authorized access); The Children’s Online Privacy Protection Act (“COPPA”) U.S.C.A. §§ 6501 et seq., (enacted to addresses children’s privacy on the Internet); and The Controlling the Assault of Non-Solicited Pornography and Marketing Act of 2003 (“CAN SPAM”), (enacted to regulating unsolicited commercial e-mail, and others), to name a few. States have also taken action by creating laws similar to those we see on the federal level and by adopting relevant language in insurance codes, consumer protection statutes, and industry specific regulations. The wireless industry has created an onslaught of privacy concerns. The Electronic Privacy Information Center (“EPIC”) has taken action against violators of privacy policies and is quickly demonstrating its dedication to protecting consumer privacy. More recently, the Obama administration created new regulations referred to as a “Privacy Bill of Rights.” This has not yet been signed into law, but would require companies to increase protection of consumers’ online information, maintain reasonable expectations of security, collect of only necessary information, and hold companies accountable for lost data.
Licensing can be like jumping into cold water at 6 am – you’re hesitant to do it, but once you’re in the water and catch your first wave, you’re fine. Start-up brands and established brands are often unsure about the details and/or benefits of licensing. To some, licensing may help increase business beyond what they ever expected. To others, licensing can be your worst nightmare.
The first rule is to think of licensing as a marriage. Don’t get involved in a licensing deal with someone you hardly know, or with someone you don’t trust. Many licensing agreements fail because the parties did not share the same goals when the relationship was formed. Conflicts can be avoided by choosing the right partner at the outset.
Another critical aspect of licensing that is often overlooked is the plan. You need to have a licensing strategy. Too many companies go down the wrong path by not defining their core objectives through licensing. For example, allowing a licensee to mass produce certain products in the wrong markets with promises of substantial royalties may sound appealing at first, but it could ruin the brand’s core image and value in the long run.
Also, as with any agreement—know the terms; monitor performance; and diligently enforce your rights. It’s your brand and you need to protect it. You need to ensure that your intellectual property rights remain valid and protectable, which usually means completing proper registrations and establishing a portfolio. In addition, in the event of unforeseen risk or potential damage to your brand and/or your rights, you will need to know the potential triggers for termination of the relationship. Hopefully, the relationship is successful, but if not, you need to cancel and move on. In this respect, your licensing agreement should be thought of as your prenuptial agreement in a marriage.
Finally, licensing deals can be complex, sometimes overwhelming, and may take weeks or months to negotiate. For this process, you’ll want to consult a lawyer with experience in negotiating licensing agreements.
ORIGINALLY PUBLISHED ON APRIL 16, 2010 IN JOURNAL OF INTELLECTUAL PROPERTY LAW & PRACTICE
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This book’s perspectives on gray markets (parallel trade) is clear from its subtitle. The author is a partner at Call, Jensen & Ferrell, specializing in IP litigation and brand protection. While acknowledging that he has produced ‘no spy novel,’ he has provided a very readable, black and white review of the unauthorized grey market in the USA. He focuses in particular on the implications of grey markets for brands, especially due to intermingling with counterfeit goods, and outlines the business and legal strategies that can be employed to protect brands from the grey market.
The author commences by reviewing the industries which face counterfeits and grey markets, from airline and automotive parts to cigarettes and alcohol, also encompassing unbranded goods such as steel and timber. He proceeds to survey the changes to distribution and the grey market resulting from globalization, the internet, and other technological change before considering the economic and social consequences of grey markets. Having introduced his topic, the author then divides the rest of the book into his three main subheadings of prevention, detection, and reaction (principally litigation). Under the heading of prevention, the author considers the need to educate those within the company and distribution chain as well as consumers, government, and the media. This sage advice follows numerous case studies of grey markets which have developed where excessive sales targets and/or insufficient scrutiny resulted in significant supplies of low-cost products reaching the marketplace. Accordingly, the author proceeds to outline a range of strategies which can be used to maintain integrity of the supply chain or otherwise limit the risk of grey markets. These practical strategies provide a useful starting point for considering supply chain management. However, European readers should take care, as some of the (implicit) suggestions, such as a licensing restriction ‘that the dolls . . . could only be sold to those who would agree not to use or resell the licensed products outside of Spain’, while doubtless useful before the courts in the USA, would almost certainly breach what is now Article 101 TFEU (ex-Article 81 EC) as a restriction of competition in Europe.
The author then turns to detection, starting with ‘red flags’ which may suggest grey market activity, such as low pricing, unreasonable spikes in orders or unusual delivery requests, and more specific methods of detecting grey market activity, such as audits, internet monitoring, and trap purchases.
Last but not least, the author considers ‘reaction’, including civil and criminal arbitration, ITC proceedings, and arbitration. This part occupies roughly half of the book and takes the reader through jurisdiction, preliminary remedies (including the risks of brand owner liability where seized goods are grey market rather than counterfeit), discovery, and theories of liability (both against contractual partners and against third-party distributors). Alongside the usual suspects of copyright and trade mark law, there is detailed treatment of tortious interference with contract or with prospective economic advantage. Interestingly for the European reader, the author reviews in some detail the approach of the US courts to various issues which continue to trouble the courts in Europe, such as exhaustion of performance rights, software licensing, and changes to the condition of trade marked goods. He also outlines some state-specific laws which restrict the grey market. However, disappointingly, there is no significant discussion of antitrust or interstate commerce restrictions on liability.
The author concludes with a very brief summary of the approach to grey markets in other key jurisdictions around the globe: Canada, Mexico, Europe, Russia, and China.
Overall, this book provides a clear opposition to grey markets and a practical approach to minimizing the danger posed to brands. Although the ethical approach may seem rather one-sided to Europeans, trained in the fierce protection of parallel trade by the European Commission and courts as part of the drive towards a single market, the book avoids becoming a polemic, maintains a steady focus on the reasons for brand owners to be concerned by grey markets, and provides a broad range of strategies which can be adopted against them in the USA.
(Reviewing David R Sugden’s “Gray Markets: Prevention, Detection and Litigation”) By Christopher Stothers
GRAY MATTERS: WHEN THE LEGAL AND BLACK MARKET COLLIDE
ORIGINALLY PUBLISHED ON JUNE 17, 2009 IN CALIFORNIA’S DAILY JOURNAL
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Not long ago, brand owners could take comfort in the intrinsic barriers hampering black marketers. While most large cities have places known by their dwellers to be sources of cheap goods of dubious origin, consumers have to consciously decide to explore these markets in addition to or in lieu of conventional establishments. Canal Street in New York’s Chinatown is a well-known example. The street is lined with densely packed shops offering watches, purses, and other luxury items at prices that are corruptively low. Until relatively recently, these markets did not pose a significant threat to brand owners. The remote locations of these markets created a sufficient bulwark to market entry. As a result, brand owners knowingly conceded that a small percentage of its would-be buyers bought cheap knock-offs instead.
Many brand owners justified their tolerance of these bazaars on the belief that someone shopping for a twenty-dollar Rolex watch is not even a would-be customer. This customer is simply looking for a cheap gimmick or perhaps his or her economic reality precludes any possibility of buying a genuine product for several thousand dollars more. Brand owners were also untroubled because the knock-offs were so obviously inferior to the genuine goods they sought to mimic. While a Guci purse may have looked just like a Gucci purse from across a dimly lit cocktail lounge, a casual glance in an unobstructed environment could quickly distinguish the two. Because such a terse inspection could expose these products as feeble imitations, brand owners concluded that no real threat existed.
Times have changed. Customers looking for bargains found in the black or gray market now have the ability to virtually browse anywhere there is an Internet connection. Equally vexing for brand owners is the modern difficulty of spotting illegitimate products. Indeed, the obstacles that were once sufficient to relieve concern for brand owners have been removed. The gray and black market economies have enjoyed incredible growth extending their reaches from Canal Street to our laptops.
A LITTLE PERSPECTIVE
In 2005, Arnold Schwarzenegger joined his friend and fellow action star Jackie Chan in Hong Kong to promote a campaign against film piracy in China. The 30-second anti-piracy public service announcement featured both actors in leather jackets zooming down a road on motorcycles, dodging exploding cars and other hazards. “When you buy pirated movies and music, you support criminals!” Mr. Chan says. Mr. Schwarzenegger adds, “Let’s terminate it!” Today, many countries are haplessly devoid of the necessary resources and infrastructure to adequately protect intellectual property. Countless articles and books can be found lamenting the lack of international enforcement to protect American innovation. It is worth remembering, however, that America is an ex-pirate itself:
[O]ne of the undeniable reasons [Charles] Dickens had gone to America [in 1841] was to work for the acceptance of International Copyright so that his books, among those others to be sure, would no longer be pirated by unscrupulous American publishers. It was a mission in which he entirely, humiliatingly failed, and a copyright agreement between England and the United States was not concluded until 1891. Gehard Joseph,Charles Dickens, International Copyright, and the Discretionary Silence of Martin Chuzzlewit, 10 Cardozo Arts & Ent. L.J. 523 (1992).
Assaults on innovation are nothing new. What is novel is how easy mounting these assaults has become. Today, laser printers, scanners, and computer graphics software allow fraudsters with limited budgets and sophistication to mass produce fake labels, trademarks, and other documentation. Other technologies similarly allow for low cost replication of CDs and DVDs. These latter technologies hurt many industries beyond music and film. Software and hardware products (that require software) are similarly duplicated further depriving revenues to the legitimate brand owner.
Technological progress has also made transporting pirated products faster and easier. Advancements in cargo containers, better roll-on and roll-off tools, superior port management, and even modern refrigeration techniques have all played a role in improving worldwide shipping. In addition, companies like UPS, FedEx, and PayPal provide business owners with a litany of tools to make efficient the machine of national and international commerce. From tracking products and confirming delivery to ensuring payment and tracking invoices, the world’s smallest business can now seamlessly participate in the global economy. These tools remove what were once barriers to market entry and create a much more level playing field. Because technological innovation is unbiased, the modern tools of transportation and logistics assist marketers just as they assist brand owners.
In this era of fast and easy duplication, the realities of globalization are forcing companies to have a paradoxical business strategy. While intellectual property is enduring a season of heightened vulnerability, American businesses are essentially forced to share their secrets with outsourced foreign partners to remain viable. Less than honorable partners may over-manufacture genuine goods, manufacture their own copycat goods, or share secret processes to other individuals or companies. The accounts of American businesses getting burned by foreign deceit are endless. And yet, remaining domestic for all operations is rarely a viable option. Brand owners must therefore be willing to go overseas but prudent enough go overseasprepared.
The speed and simplicity in which people communicate, buy, sell, and ship products across oceans and borders have paved the way for a worldwide outburst of infringement. While many brand owners were savvy to take advantage of the benefits modern globalization offered, the attendant harm to brand integrity caught most companies completely flat footed.
Because the bells of globalization and modern technology cannot be un-rung, brand owners must learn to capitalize and cope with the rewards and risks in this new economy. To generalize, American businesses have done a fine job capitalizing on the rewards. Where American companies have fallen short has been with respect to stepping-up efforts to protect their brands and intellectual property. The benefits of global expansion reach far beyond legitimate trade. Illegitimate trade has been equally eager to take advantage of the efficiencies and economies of scale that globalization offers. As a result, threats to brand owners in the form of black or gray market activity have skyrocketed in size and scope since the 1990s. Revenues derived from counterfeiting and piracy have increased by more than 400 percent since the early 1990s. During the same time period, legitimate trade only increased by 50 percent.
There are few, if any, industries immune from attack. From the luxurious to the mundane and the simple to the complex, there is now a global network of illegitimate traders willing to copy or divert genuine products for their own profits’ sake. Given the ease in which these illegitimate products can be bought and sold, it is important that brand owners take preventative action.
ORIGINALLY PUBLISHED JANUARY 21, 2009 IN CALIFORNIA’S DAILY JOURNAL
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When Sugden’s law partner, Scott Ferrell, is in the trenches on a complex intellectual property case, he says he usually logs off the computer and hits the pillow around 1 a.m. When Ferrell awakes a few hours later, he says, “it’s common for me to have a dozen new emails from Dave” about the case that Sugden typed out while he was sleeping. Colleagues say Sugden’s near round-the-clock work approach and sharp legal wit has helped build the type of resume claimed by only the most seasoned practitioners.
Though Sugden’s been a lawyer just seven years, he already has racked up four multimillion-dollar judgments. His biggest was a $47 million punitive damages verdict two years ago on behalf of telecommunications giant Nortel Networks.
He also won $5 million, $10 million and $20 million “consent judgments” for the company in the past few years – awards in which a defendant corporation agrees to pay a judgment when faced with hard evidence on claims, such as warranty fraud and illegal product marketing.
Sugden this month was named sole managing partner of his 24-attorney litigation boutique, Call & Jensen in Newport Beach. He also found time to write a widely praised book on brand protection focusing on the concept of gray marketing – a phenomenon in which a company’s products are illegally distributed.
“Dave has a Herculean work ethic,” Ferrell says.
A native of Vancouver, B. C., Sugden moved to California to play baseball at Pepperdine University, where he earned a history degree in 1998. He earned his law degree there three years later, gravitating to the field after watching his father practice business litigation while growing up. He joined Call Jensen & Ferrell right out of law school. He said the partners let him cut his teeth quickly on complex cases.
“As a young lawyer, I hit the ground running,” Sugden says. “I got in trial and got deep experience almost immediately, helping me grow relatively quickly for my age.”
While Sugden said his dogged work schedule has helped fuel his big results, he said another secret to his success is being respectful of everyone, whether it be jurors, judges or opposing counsel.
Lu Pham, a Dallas-based attorney who faced off against Sugden last year, called him “one of the best lawyers I’ve ever worked against.” Pham agreed to the $20 million consent judgment after Sugden argued that Pham’s client, Alliance Telecom, had stolen Nortel’s software. Pham said Sugden was “well prepared.”
“Not only does he know the law, he knows his facts inside and out,” Pham said.
In several instances, Sugden has convinced judges to allow him to go into defendant companies with the U.S. marshal’s office to conduct “surprise searches and seizures” of evidence, such as incriminating emails and other documentation. He says such evidence has dramatically bolstered his arguments and led to big awards.
Sugden tries to leave the office by 5:30 p.m. to spend time with his wife, Marni, a marketing executive, and their two children, Charlotte, 4, and Audrey, 3. He says he tucks the kids in bed and then logs back on the computer, working into the middle of the night. He says he catches a “few” hours of sleep before heading back to the office around 9 a.m. “The hours are long,” Sugden says.“But fortunately I like the work, so it’s not too bad.”