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:
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.
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.”
A new California Senate Bill recently passed in the Senate Labor Committee, and it is intended to amend Labor Code 512 to “clarify” existing law. There is no question that existing law could benefit from clarification. What is less certain is whether SB 1539 actually provides the much needed clarity, or whether it adds further confusion and, thereby, further ammunition for litigation. Discussed below are a few of the key areas of existing law that SB 1539 hopes to “clarify.” Ultimately, these authors believe that SB 1539 does provide some needed clarification but that it continues to leave employers in the dark — and thus exposed to costly litigation — with respect to some key aspects of the meal period laws.
By way of background, existing statutory law does not define what it means to “provide” a meal period. Labor Code Section 512 simply mandates that employers must provide their employees with a 30 minute meal period if they work more than 5 hours in a workday, and another 30 minute meal period if they work more than 10 hours in a workday. Although the Industrial Welfare Commission (“IWC”) Orders also set forth various requirements for meal periods, they are likewise silent in defining what it means to “provide” a meal period to employees.
The California Appellate Court in Brinker Restaurant Corporation v. Superior Court, No. D049331, 2008 WL 2806613 (July 22, 2008), recently tussled with trying to interpret whether an employer’s duty to provide a meal period means the employer must ensure its employees actually take a meal period, or whether an employer satisfies its obligation by simply making a meal period available to its employees. In a closely watched case, the appellate court held that an employer is only required to make meal periods available to employees. In Brinker, the appellate court found that the trial court “incorrectly assumed that, in order to render an informed certification decision, it did not have to resolve the issue of whether Brinker had a duty to ensure that its employees take their meal periods.” (Id. at *16.) The appellate court reasoned that the trial court did not properly evaluate whether common questions regarding plaintiffs’ meal period claim predominate over individual issues. Thus, the appellate court held that class certification was improper. (Id. at *23) (The trial court’s decision was wrong “because meal breaks need only be made available, not ensured, individual issues predominate in this case and the meal break claim is not amenable class treatment.” Id at 58))…)
Employment lawyers have certainly paid close attention to the Brinker case because it casts doubt on the decision in Cicairos v. Summit Logistics, Inc. (2005) 133 Cal.App.4th 949, which had previously suggested that an employer’s obligation to provide its employees with meal periods is not satisfied by assuming that the meal periods were taken. Instead, Cicairos suggested employers have an affirmative duty to ensure that the employees take meal periods. The appellate court in Brinker distinguished Cicairos and limited the case to its facts. (Id. at *22) (stating that the Cicairos court “only decided meal breaks must be provided, not ensured”).)
The California appellate court in Brinker, however, was not the first court to distinguish Cicairos. The United States District Court, Northern District, essentially disagreed with Cicairos and granted summary judgment in favor of the employer. (See White v. Starbucks (N.D. Cal. 2007) 497 F.Supp.2d 1080.) Faced with a putative class action for alleged meal period and rest break violations, Starbucks successfully argued that employers cannot be required to actually make sure that all employees take their 30 minute meal periods, because doing so would create an unreasonable and unworkable strict liability standard. (See id. at 1088 (it “cannot be the rule that employers must ensure that a meal period is actually taken, regardless of what an employee does, because that would create a strict liability standard”).) Accepting Starbuck’s argument, the Northern District limited the Cicairos case to the facts presented. (Id. at 1088.) Ultimately, the district court concluded that “the California Supreme Court, if faced with this issue, would require only that an employer offer meal breaks, without forcing employers actively to ensure that workers are taking these breaks.” (Id. at 1088-89 (reasoning that “the employee must show that he was forced to forego his meal breaks as opposed to merely showing that he did not take them regardless of the reason”); see also Kenny v. Supercuts, Inc., No. C-06-07521, 2008 WL 2265194 at *7 (N.D. Cal. Jun. 2, 2008) (denying class certification in meal period case and following Starbucks).)
The Central District also adopted the reasoning in Starbucks. In Brown v. Federal Express Corp., 249 F.R.D. 580 (C.D. Cal. 2008), the Central District held that California law only requires employers to make available a meal period, “not ensure that employees take advantage of what is made available to them.” (Id. at 585.) The court further stated: “It is an employer’s obligation to ensure that its employees are free from its control for thirty minutes, not to ensure that the employees do any particular thing during that time.” (Id.) The court specifically declined to rely on Cicairos: “This Court is not persuaded of the contrary holding in Cicairos.” (Id. at 586.) Instead, the Central District court relied on dicta in Murphy v. Kenneth Cole Productions, Inc. (2007) 40 Cal.4th 1094, implying that an employer is not required to ensure that an employee take a meal period so long as the employer does not force its employee to work through a meal period. (Id.; see also Salazar v. Avis Budget Group, Inc., No. 07-CV-0064, 2008 WL 2676626 at *4 (S.D. Cal. 2008) (denying class certification in meal period case and following Brown, Kenny, and Starbucks). )
In light of the uncertainties left in the wake of recent California and federal case law, SB 1539 would provide some needed statutory clarity. Specifically SB 1539 defines “providing the employee with” a meal period as “giving the employee an opportunity to take,” such that the requirement that an employer “provide an employee with” a meal period is satisfied when the employer provides the employee with an opportunity to take the meal period. SB 1539 thus rejects a strict liability standard and employers could rest assured that they do not have an affirmative obligation to self police their employees or hire employees whose sole function it is to have a stopwatch to ensure that employees actually take their scheduled meal periods. SB 1539 suggests that the Legislature never intended to require employers to police their employees in this manner. Thus, SB 1539’s clarification is appropriate and needed, especially given the appellate court’s decision in Cicarios.
Unfortunately, SB 1539 does not address the implication in Brinker that a meal period may commence after the first five hour work period. The ambiguity in Brinker is that the appellate court interpreted the language of Section 512(a) literally and stated that it “generally requires a first meal period for every ‘work period of more than five hours per day.'” (Emphasis in case). This language-taken to its “literal” extreme-seems to imply that a first meal period may commence any time during the “day” after the employee works for five hours. However, it was generally understood prior to Brinker that a first meal period cannot commence after 6 hours of work (or 5 to be conservative), based on the language in Labor Code Section 512(b), which provides: “Notwithstanding subdivision (a), the Industrial Welfare Commission may adopt a working condition order permitting a meal period to commence after six hours of work if the commission determines that the order is consistent with the health and welfare of the affected employees.” The IWC does not appear to have adopted a regulation allowing a meal period to commence after six hours, so this implies that a meal period must commence prior to 6 hours of work. Still, this issue is unclear and the provisions of the Labor Code, the IWC regulations, and case law is evolving and changing. Even the Brinker case discussed above may not stand if the California Supreme Court has a different perspective on the issue.
In addition to the meaning of “provide” a meal period, SB 1539 also attempts to clarify existing law regarding on-duty meal periods. Existing law, as stated in Labor Code Section 226.7 prohibits an employer from requiring its employees to “work” during any meal period mandated by an applicable Industrial Welfare Commission Wage Order. Labor Code Section 226.7 further states that if an employer fails to provide a meal period, then the employer must pay an additional hour of pay at the employee’s regular rate of compensation. Based on the plain reading of this statute, an employer cannot “require” (e.g., command, compel, etc.) an employee to “work” during his or her meal period. The Legislature’s intent apparently was to give employees a choice to “work” during their meal period, so long as the employer does not “require” them to “work.”
Notwithstanding the Legislature’s intent, the IWC has stated that unless the employee is relieved of all duty, the meal period must be considered “on duty” and counted as “time worked.” This means that an employee who is relieved of all duty during his or her meal period would be considered “off-duty,” although no California case has engaged in this analysis or clarified what it means to be “relieved of all duty.” Further, according to the IWC, on-duty meal periods are only permitted if (1) the nature of the work prevents an employee from being relieved of all duty, and (2) when the employee agrees to an on-the-job meal period in writing. Thus, if an employee is not relieved of all duty and the foregoing requirements are not met, the employer is vulnerable to liability under Labor Code Section 226.7 for failing to provide a meal period in accordance with an applicable IWC Wage Order.
Although Labor Code Section 226.7 seems to allow employees the flexibility to agree to work during their meal periods, the language of applicable IWC Wage Orders is ambiguous because the language fails to offer any guidance for determining when a meal period is considered on-duty versus off-duty. Conspicuously, there is no definition or guidance provided for determining when an employee is “relieved of all duty.” One reasonable interpretation is that a “working” meal period (i.e. a meal period during which an employee is actually performing duties and tasks for his or her employer) is equivalent to an “on-duty” meal period. If, however, the IWC’s definition of “on-duty” means something less than being engaged in “work,” then it is unclear whether the IWC’s requirements are properly based on statutory authority and/or whether they are consistent with statutory authority and case law. For example, an employee would not seem to be “on-duty” if he or she was required to remain on premises (and thus was entitled to compensation for such time) during a paid lunch period but was not required to do any work?
While SB 1539 plainly states that an “off-duty meal period” means a meal period that lasts 30 minutes during which time the employee is relieved of all duty, it fails to provide a much needed definition of the phrase “relieved of all duty.” Notably, Labor Code Section 512 currently does not include the term on-duty or off-duty, but the IWC Wage Orders generally define on-duty meal periods as those meal periods where the employee is not relieved of all duty. Thus, the “current law” regarding on-duty versus off-duty meal periods remains unclear because, as discussed above, there is no statutory distinction or explanation of what it means to be on-duty or off duty.
While not answering the question of what it means to be relieved of all duty, SB 1539 does set forth a definitive list of conditions under which an employee would be allowed to take an on-duty meal period. Specifically, SB 1539 allows “on-duty” meal periods if (a) the employees are covered by an IWC Wage Order that authorizes an “on-duty” meal period, (b) the employee and employer enter into an on-duty meal period agreement, (c) the employee is allowed to eat while on-duty, (d) the meal period is counted as time worked, and (e) the nature of the work prevents the employee from being relieved of all duty based on one of the following 6 enumerated statutory conditions:
Based on the language above, SB 1539 appears to expand and codify the IWC Wage Order provisions governing on-duty meal period requirements.
As discussed above, arguably the bigger problem is that SB 1539 does not establish a test for determining whether an employee is “relieved of all duty.” Without any California legal authority on this issue, employers are left without a clear answer. Employers can argue, however, that the test for determining whether an employee is relieved of all duty should depend on whether the employee is actually working. This argument is reasonable, given the plain language of Labor Code Sections 226.7 and 512 (and SB 1539), as well as certain language found in California case law. In Madera Police Officers Association v. City of Madera (1984) 36 Cal.3d 403, 410, for example, the California Supreme Court said that “no one question is likely to be dispositive of the question of whether the employee was working during lunchtime.” Also, the court in McFarland v. Guardsmark, LLC, 2008 WL 698481 (N.D. Cal. 2008), stated that “where the employee agrees to take an ‘on duty’ meal period, and gets paid for working during the time he is eating, there is no ‘waiver’ of the meal period.” (Id. at *6.) This language supports the argument that an on-duty meal period is one where the employee is “working,” and if the employee is not “working” the meal period should be treated as an “off-duty” meal period. Although no California case appears to define the term “work,” the U.S. Supreme Court has defined the term “work” as “physical or mental exertion (whether burdensome or not) controlled or required by the employer and pursued necessarily and primarily for the benefit of the employer and his business.” (Tennessee Coal & RR Co. v. Muscoda Local No. 123 (1944) 321 U.S. 590, 598.)
The California Legislature should consider clarifying the intended meaning of when an employee is “relieved of all duty,” and clarify that an employee is not automatically “on-duty” if the employee is required to remain on the premises. Federal law specifies that “[i]t is not necessary that an employee be permitted to leave the premises if he is otherwise completely freed from duties during the meal period.” (29 C.F.R. § 785.1.9) Federal courts have relied on three different tests to determine whether an employee is completely relieved of his or her duties. The first test asks whether or not the employee’s time spent during the meal period is primarily for the employer’s benefit. (Henson v. Pulaski County Sheriff Dep. (8th Cir. 1993) 6 F.3d 531; Hahn v. Pima County (2001) 24 P.3d 614, review denied Jan. 8, 2002.) The second test focuses on whether the employee is completely free of any work-related tasks, and is used in non-law enforcement cases. (Kohlheim v. Glynn County (11th Cir. 1990) 915 F.2d 1473.) The third test looks at whether the employees are primarily engaged in work-related activities during meal breaks. (Armitage v. City of Emporia (10th Cir. 1992) 982 F.2d 430; Lamon v. City of Shawnee (10th Cir. 1992) 972 F.2d 1145, 1157.)
In the meantime, employers in California can argue that SB 1539 implies an employee must be actually engaged in work (i.e. performing actual duties) for a meal period to be considered on-duty. On the flip side, a meal period during which an employee has no obligation to do actual work should be considered a bona fide meal period even if they are subject to some small degree of employer control. (E.g., if they are required to remain on premises but are otherwise relieved of all duties.) This interpretation is consistent with the common understanding of the term “work.” It is also reasonable since no California court has defined an on-duty meal period. Although the case of Bono Enterprises, Inc. v. Bradshaw (1995) 32 Cal.App.4th 968 upheld a DLSE policy that an employee who has a duty or obligation to remain on the premises during meal periods is not “free of all duty.” The California Supreme Court’s opinion in Tidewater Marine Western, Inc. v. Bradshaw (1996) 14 Cal.4th 557, 574, disapproved of Bono Enterprises and held that the DLSE’s policy discussed in Bono Enterprises was an invalid regulation that was not adopted in accordance with the Administrative Procedures Act (“APA”), Gov. Code, §§ 11340 et seq. Further, subsequent courts have seemed to limit the holding in Bono Enterprises to the rule that “an employee who is subject to an employer’s control does not have to be working during that time to be compensated” under the IWC’s definition of “hours worked.” (See Morillion v. Royal Packing Co. (2000) 22 Cal.4th 575, 578 (emphasis added).) In other words, the Bono Enterprises holding that an employee must be paid for all time spent under his or her employer’s control is still good law, however, no case has reasoned that remaining under an employer’s control means that the employee is not relieved of all duty such that an employer would have to pay the employee a penalty for failing to provide a meal period.
In short, SB 1539 is a step in the right direction, but it may need to further “clarify” the requirements and legal standards for on-duty meal periods to provide the much needed guidance that employers and the courts are seeking.
Written discovery is often insufficient to develop the best record for trial. Informal fact gathering can help tip the balance in your client’s favor. An attorney employing self-help, however, must be careful to stay within ethical and legal boundaries. This article identifies five pitfalls associated with informal discovery, whether conducted by lawyers directly or through private investigators.
FAILING TO PROPERLY INSTRUCT YOUR INVESTIGATOR
A frequent mistake made by attorneys is to fail to clearly instruct the investigator on the ethical and legal rules governing their conduct. Both ABA Model Rule 5-3 and California Rule of Professional Conduct 3-110 require an attorney to adequately supervise non-attorney investigators to ensure compliance with ethical standards for attorneys. The Model Rules go so far as to make the attorney liable for acts of the investigator that violate the Model Rules, if the attorney knows of or ratifies those acts. The rules seek to ensure that an attorney does not circumvent ethical standards by delegating to an investigator. Instructions must include what can or should be done, what is to be avoided, and whether and who the investigator can employ to perform the assigned tasks. Failure to properly instruct an investigator may lead to unethical behavior, which may result sanctions. In the worst cases, sanctions can include prohibiting the use of improperly-obtained evidence at trial, or even terminating sanctions. One of the authors of this article obtained a dismissal of a trade secret misappropriation lawsuit as a sanction when plaintiff’s private investigator trespassed on his client’s property dumpster diving in search of evidence of misappropriation. The private investigator was hired by the client directly. The lawyers were involved, but they failed to take precautions to ensure that the investigator acted lawfully.
To satisfy their ethical obligations, the lawyers in the above example could not simply instruct the investigator to avoid unlawful conduct. Attorney involvement must go beyond that, as illustrated by Stephen Slesinger, Inc. v. Walt Disney Co., 155 Cal. App. 4th 736 (Cal. Ct. App. 2007), in which a Los Angeles court awarded terminating sanctions based on unethical conduct by a private investigator who had been admonished by the plaintiffs to “obey the law.” Plaintiffs claimed royalty payments allegedly due for Winnie the Pooh Merchandise under a licensing agreement with Disney. The Court issued terminating sanctions after plaintiffs’ investigator was found to have stolen more than 6,000 pages of documents from garbage dumpsters located at multiple Disney document production facilities. In affirming the sanction, the appellate court ruled that plaintiffs failed to adequately supervise the investigator’s activities, that circumstantial evidence showed their knowledge or deliberate indifference to his trespasses, and that they were vicariously liable for his work. “In short, Sands’s deliberate misconduct is also the deliberate misconduct of [Stephen Slesinger, Inc.].”Id. at 769.
The perils associated with investigator misconduct can be greater still. California law holds both a company and its attorneys liable for negligent hiring, and vicariously liable for the intentional torts of a private detective agency committed in the course of employment. InNoble v. Sears, Roebuck and Company, a consumer alleged that she suffered personal injuries while shopping at Sears. 33 Cal. App. 3d 654, 663 (Cal. Ct. App. 1973). Defendants hired an investigator to obtain the address of a witness, plaintiff’s friend. The investigator ultimately gained admittance to plaintiff’s hospital room and secured the address “by deception.” Id. at 657. In reversing the trial court’s dismissal of the claims, the appellate court held that the company, its attorneys, the investigator, and the investigator’s employee could all be found liable for the employee’s “unreasonably intrusive investigation” violating the plaintiff’s right to privacy. Id. at 660.
A threshold factor in determining whether the retention of an investigator is negligent is whether the investigator is licensed. Noble, supra, at 664. In California, an employer can confirm an investigator’s license online by consulting the Bureau of Security and Investigative Services, an agency within the Department of Consumer Affairs. Confirmation of a license, however, is not itself sufficient to establish reasonable care in hiring. Attorneys should check references to confirm that a proposed investigator maintains an ethical practice. The California Association of Licensed Investigators may provide further guidance and recommendations for selecting an investigator.
When retaining a private investigator, one should maintain a professional, cordial relationship that emphasizes at all times that the interest to be served is to discover the truth, not to manufacture evidence, or to earn one’s keep by producing positive evidence. One of the authors once impeached an adversary’s forensic investigator with an e-mail communication in which the investigator’s supervisor instructed her, in substance, “to find something, because the client is paying us a lot of money to deliver results.” An attorney should never assume that an investigator will know to avoid such a communication.
Once retained, the attorney must set the parameters of the investigator’s conduct. Attorneys should develop a set of guidelines to review orally with the investigator, and consider developing a written contract that expressly states these expectations of professionalism.
PRETEXTING OR MAKING FALSE STATEMENTS
One ethical pitfall that occurs with some frequency is pretexting, which is the use of false pretenses as a method of discovery. Pretexting generally involves the use of information about an individual, such as a social security number, to impersonate the individual and mislead information providers into giving out additional information that would generally only be available to the authorized individual. Attorneys, and private investigators, when gathering facts, must avoid making false or misleading statements representing that they are authorized to obtain personal information when in fact they are not.
Until recently, a number of statutes covered pretexting activities only with respect to certain records. For example, the Gramm-Leach-Bliley Act of 1999, 15 U.S.C. § 1681q, prohibited the use of pretexting to acquire personal financial information from financial customers or institutions. The Fair Credit Reporting Act, 15 U.S.C. § 1681q, enacted in 1968, barred individuals from obtaining consumer information under false pretenses from a consumer reporting agency. Enacted in 1914, the Federal Trade Commission Act, 15 U.S.C. § 45, prohibited unfair or deceptive acts or practices affecting commerce, which covered many aspects of pretexting but did not give the FTC authority to seek civil penalties in certain cases.
No law specifically banned the use of pretexting to obtain telephone records until Congress enacted the Telephone Records and Privacy Protection Act (TRPPA) of 2006, 18 U.S.C. § 1039, making it a crime to knowingly and falsely obtain “confidential phone records information,” punishable by a fine and up to ten years’ imprisonment. Congress’s findings supporting the TRPPA describe pretexting as fraud on a material fact that persuades someone to disclose information: pretexting occurs when “a data broker or other person represents that they are an authorized consumer and convinces an agent of the telephone company to release the data.” Telephone Records and Privacy Protection Act of 2006, Pub. L. No. 109-476, § 2, 120 Stat. 3568 (codified at 18 U.S.C. § 1039). Even greater penalties may be assessed under state law against the use of fraudulent statements to obtain consumer and employee telephone records information, as is the case with California Penal Code § 638, enacted several months before the TRPPA. Section 638 subjects any person who attempts to procure telephone calling records through fraud or deceit to a penalty of a $10,000 fine and up to one year of jail time.
Rules of professional conduct regarding pretexting provide some guidance, but also leave a considerable grey area that cautions restraint. Ethics rules do not define wrongful pretexting in terms of what specific activity is acceptable. A case from New Jersey illustrates what are likely the outer limits of what a court is willing to define as an ethical misrepresentation in the context of gathering facts in aid of litigation. In Apple Corps Ltd. v. International Collectors Society, Yoko Ono’s counsel hired investigators to investigate whether a postage stamp company was violating the terms of a settlement agreement with John Lennon’s estate concerning stamps bearing the rock star’s image. 15 F. Supp. 2d 456 (D.N.J. 1998). The investigators posed as consumers and placed orders by phone with the stamp company for products not authorized under the settlement agreement. The stamp company sold the products to the investigators, which was the critical piece of evidence showing the stamp company’s violation of the settlement agreement. After the plaintiffs sought a contempt order and injunction, the stamp company motioned for ethical sanctions against plaintiff’s counsel, claiming their behavior was deceitful. The Apple Corps court held that the phone calls did not violate ABA, New York or New Jersey ethics rules prohibiting fraud and deceitful conduct, although the investigators did not identify their purpose in calling. The court held that rules prohibiting deception are not violated where lawyers and their investigators “act as members of the general public to engage in ordinary business transactions with low-level employees of a represented corporation” to detect violations of the law. Id. at 474-75. To what extent the conduct approved in Apple can be generalized to all cases is open for debate. Arguably, undercover investigative acts that verge on pretexting, such as those undertaken by the Apple Corps attorneys, appear to be accepted only in those narrow areas where courts or ethics boards have expressed some approval, as in the contexts of housing discrimination and trademark disputes, where the potential violations would otherwise not easily be detected or proven.
In contrast to Apple Corps, the Oregon Supreme Court held that an attorney’s false representations to investigate a potential claim did violate Oregon’s misconduct rule prohibiting “fraud, deceit or misrepresentation.” In re Gatti, 330 Ore. 517 (Or. 2000). Gatti, a lawyer, sought to investigate whether Comprehensive Medical Review (CMR), a company that conducts claims reviews for State Farm Insurance Company, employed unqualified reviewers and used an improper cost-cutting formula to determine whether to grant medical coverage for chiropractic services. Gatti, posing as a chiropractor, called a reviewer who worked for CMR to ask questions about his qualifications. Then Gatti called a CMR executive and falsely stated that he himself had performed medical examinations, was interested in working as a CMR claim reviewer, and had been referred to CMR by both State Farm and the chiropractor-reviewer Gatti had called. The court held that the Oregon Bar could prosecute Gatti based on a disciplinary rule prohibiting knowingly misrepresenting one’s identity with the intent that it be acted upon, in circumstances where disclosing one’s real identity would have influenced the recipients’ conduct. Id. at 527-28. In response to the In re Gatti decision, which met with a critical response from the state bar, Oregon adopted a new professional rule, now Rule 8.4(b), permitting attorneys to supervise lawful covert activity in the investigation of violations of law or rights, where the supervising lawyer in good faith believes there is a reasonable possibility of unlawful activity.
The differences in conduct engaged in by Yoko Ono’s attorneys and Gatti are important. One conclusion to be drawn is that an investigator’s failure to identify her true objectives is acceptable if she is acting as a member of the general public, doing something that members of the public typically can do in relation to a particular transaction. In such a situation, the investigator is not lying to the investigation target, nor is she tricking the target into acting differently or giving out information that would not otherwise be given in such a situation. However, where an investigator lies about his identity or poses as someone else in order to mislead the target into disclosing information that would otherwise be withheld, then such activity is treated as violative of the rules of professional conduct. Model Rules of Professional Conduct 4.1, 4.4(a), and 8.4(c) give detail to the ethical standards against deceit. In Gatti, as part of his investigation of potential violations, the attorney went further than merely inquiring about the prerequisites to become a CMR reviewer. He lied to his targets, falsely identifying himself as a licensed chiropractor, to gain confidences that, likely, would not have otherwise been revealed to him. This affirmative step, coupled with its material effect on whether information would otherwise have been given, is what separates Gatti’s investigation from that of Yoko Ono.
Prudent counsel will err on the side of avoiding misrepresentations, and will instruct an investigator to conduct themselves accordingly.
USING AN INVESTIGATOR TO COMMUNICATE WITH A REPRESENTED WITNESS
Another pitfall in using a private investigator is the possibility that she will communicate with someone already represented by counsel in connection with the matter at issue. Ethical rules prohibit an attorney from communicating about the subject of the representation with a witness the attorney knows to be represented by another lawyer, without the consent of the witness’s counsel. The same rules apply to private investigators. The ABA states the rule this way: “Since a lawyer is barred under Rule 4.2 from communicating with a represented party about the subject matter of the representation, she may not circumvent the Rule by sending an investigator to do on her behalf that which she is herself forbidden to do.” ABA Comm. on Ethics and Prof’l Responsibility, Informal Op. 95-396 (1995). Comment 4 to Model Rule 4.2 also states: “A lawyer may not make a communication prohibited by this Rule through the acts of another.” Likewise, California Rule of Professional Conduct 2-100(a) prohibits a member from communicating “directly or indirectly” with a party known to be represented in the matter. The consequences of violating this rule include both professional and evidentiary sanctions.
That is not to say that all inadvertent or unwitting contacts with a represented party will result in sanction. Many courts would find no violation if the investigating attorney does not actually know that the witness is represented in the matter at the time of the communication. InJorgensen v. Taco Bell Corp., the trial court declined to find unethical conduct in connection a pre-litigation investigation in which plaintiff’s investigator interviewed Taco Bell employees before the plaintiff had filed a complaint. The Court held that it was not possible for the attorney to know that Taco Bell was represented in the as-yet-unfiled matter. 50 Cal. App. 4th 1398 (Cal. Ct. App. 1996). The court did not require the attorney to contact Taco Bell’s in-house counsel to determine whether Taco Bell was actually represented in the matter before making contact. This rule will not be the same for every jurisdiction. Some jurisdictions that follow the ABA Model Rules will impute knowledge of a witness’s representation to an attorney under certain circumstances. See, e.g., Featherstone v. Schaerrer, 34 P.3d 194 (Utah 2001). Therefore, counsel considering such contacts must be careful to research the rules of the applicable jurisdiction.
This rule against ex parte communications extends to any person or witness represented by counsel in a matter to which the conversation relates, including potential parties. With respect to represented organizations and companies, the Model Rules distinguish between communications with a company that is represented, its low level employees, and its former employees. The Model Rules do not require the consent of the organization’s counsel for communications with former employees. The attorney or investigator, however, must be careful to avoid eliciting the substance of privileged communications. Prior consent of corporate counsel in many instances is not required for communications with low-level employees, since the Rule only prohibits communication with an employee who “supervises, directs or regularly consults with the organization’s lawyer concerning the matter or has authority to obligate the organization with respect to the matter or whose act or omission in connection with the matter may be imputed to the organization for purposes of civil or criminal liability.” Model Rules of Prof’l Conduct R. 4.2 cmt. 7. Many states have adopted rules and standards similar to the ABA Model Rules on organizational employees. See, e.g., Cal. Rules of Prof’l Conduct R. 2-100(b)(2). In 2002, the ABA narrowed the scope of the ex parte communications rule with respect to organizational employees. The prior standard prohibited communication with any person “whose statement may constitute an admission on behalf of the organization,” which some courts had interpreted broadly to bar ex parte communications with any witness who could bind the organization in a legal, evidentiary sense.See Am. Bar Ass’n Annotated Model Rules of Prof’l Conduct R. 4.2 (5th ed. 2003). Even when communications with a current low-level employee are not barred by the ex parte rule, however, an attorney or investigator must be mindful of interactions with other rules, such as Model Rule 4.4, which prohibits the use of discovery methods that violate the legal rights of the organization, such as attorney-client privilege.
Before interviewing or communicating with a third party or potential witness, consider whether the contact falls within the ethical rules. Has a complaint been filed? Do you know whether the third party is represented? How does your jurisdiction define knowledge of representation, and whether a particular witness is represented by corporate counsel? Is the witness a low-level employee of an adverse party? If so, did they engage in any acts or omissions which might be imputed to their employer for liability purposes? These rules apply regardless whether the “ex parte” contact is initiated by an attorney, investigator or other person supervised by the attorney or investigator.
FAILING TO PRESERVE ATTORNEY-CLIENT PRIVILEGE
Another pitfall in using a private investigator is the potential loss of the attorney-client privilege or work product protection. Under both federal and California law, attorney work product and attorney-client privilege are granted to a private investigator as the agent or representative of attorney. United States v. Nobles, 422 U.S. 225 (U.S. 1975); Rodriguez v. McDonnell Douglas Corp., 87 Cal. App. 3d 626 (Cal. Ct. App. 1978).
To avoid waiver of any privileges, it is important that an investigator undertake the same precautions as an attorney. In Roberts v. Americable International, Inc., the plaintiff asserted work product and attorney client privilege with respect to tape recordings of conversations between plaintiff and the individual defendant manager made secretly by the plaintiff for use in an employment discrimination case. 883 F. Supp. 499 (E.D. Cal. 1995). Plaintiff asserted attorney-client privilege and work product protection. The court denied the privilege assertion because none of the recorded communications was for the purpose of seeking legal advice. The court ruled the materials were not attorney work product because the recordings did not reveal the mental processes of the attorney or investigator— neither of whom were parties to the taped conversation. In the same vein, the court in Laxalt v. McClatchy required two investigators retained by defendants in connection with a libel action to respond to the plaintiff’s deposition questions seeking to discover facts including the identity of witnesses and documents pertinent to the case and other information obtained during their employment with defendants. 116 F.R.D. 438 (D. Nev. 1987). The court drew a line, however, at requiring investigators to point out which witnesses they had interviewed, and to state which documents they had been shown by defendants, since this type of information was likely to reveal the type of mental impression and trial strategy that the work product doctrine protects.
Secret recordings pose a number of problems including waiver. While the ABA no longer considers it to be an ethical violation to secretly record another party, such recordings may violate other applicable regulations. ABA Comm. on Ethics and Prof’l Responsibility, Formal Op. 01-422 (2001). Where secret recording violates state law, as in California under Penal Code section 632, or under professional rules relating to fraud and deceit, work product protection does not apply. Even when the recordings are lawful, attorneys should keep in mind the evidentiary issues they raise, including the quality of the recording and authentication.
Even when a privilege applies to an investigator’s work, it may be waived under the same rules and exceptions applicable to attorneys. By listing a private investigator as a witness, a party is deemed to waive the work product privilege with respect to matters covered in the investigator’s testimony. Nobles, 422 U.S. at 225. In jurisdictions with a crime-fraud exception, the attorney-client privilege will not extend to work performed by an investigator in aid of a fraud or crime. See, e.g., In re Fulton County Grand Jury Proceedings, 244 Ga. App. 380 (Ga. Ct. App. 2000). Voluntary disclosure to others and failure to timely assert work product protection or attorney-client privilege are other common sources of waiver.
DISQUALIFYING YOURSELF AS A WITNESS
Both Model Rule 3.7 and California Rule 5-210 prohibit an attorney from acting as a witness on a contested issue in a case the attorney is a likely witness, but do not disqualify other members of the attorney’s firm. Courts typically weigh the prejudice to the opposing side against the hardship of retaining new counsel to the client employing the attorney-witness. Most jurisdictions permit disqualification only with respect of performing the role of advocate at trial, and not with respect to pretrial activities or preparation outside the courtroom. California’s attorney-witness rule is more limited and only applies where the attorney’s testimony will be delivered in front of a jury. Another consideration is the party calling the attorney-witness: some courts, including in California, hold that the advocate-witness rule disqualifies an attorney only where she is a necessary witness for her own client, and many courts find no disqualification where opposing counsel merely announces an intention to call the attorney as witness without showing additional necessity. California allows the attorney-witness prohibition to be waived by the client. Even where a jurisdiction allows waiver, however, a prudent attorney should be cautious about asking juries to assess the attorney’s own credibility.
Over the last few months, federal and state courts have issued a number of important new employment law decisions. Some, but not all, of these cases place additional burdens on employers defending claims at trial. Other cases bring needed clarification to previously ambiguous issues and should be helpful for employers.
UNITED STATES SUPREME COURT DECISION
EMPLOYERS DEFENDING AGE DISCRIMINATION CLAIMS BEAR BURDEN ON “REASONABLE FACTORS OTHER THAN AGE” DEFENSE
In Meacham v. Knolls Atomic Power Lab., No. 06-1505 (U.S. June 19, 2008), the United States Supreme Court held in a 7-1 decision that an employer defending a disparate-impact claim under the Age Discrimination in Employment Act (ADEA) bears both the burden of production and the burden of persuasion in defending on the basis that the decision was made for “reasonable factors other than age” (the RFOA defense).
FACTUAL AND PROCEDURAL BACKGROUND
In 1996, the U.S. government ordered its contractor, Knolls Atomic Power Laboratory, Inc., to reduce its naval nuclear reactor operational workforce as a result of the post–Cold War reduction in need. Knolls instituted a buyout offer which reduced the workforce by 100 jobs, but still needed to cut 30 more. Accordingly, Knolls instructed its managers to rate subordinates based on three scores—performance, flexibility, and critical skills. Along with consideration for years of service, the score totals were used to determine layoffs. Of the 31 salaried employees laid off, 30 were at least 40 years of age. Twenty-eight of them sued for both disparate-treatment (discriminatory intent) and disparate impact (discriminatory result) under the ADEA and state law. A jury awarded the plaintiffs $6 million, and the Second Circuit Court of Appeals affirmed the finding of disparate impact but reversed the disparate-treatment claim, pursuant to the employer’s defense that the workforce reduction decisions were made on the basis of reasonable factors other than age (RFOA). The plaintiff appealed on the basis of conflicting appellate precedents as to whether the RFOA defense must be proven reasonable by the employer, or proven unreasonable by the employee.
The Supreme Court reviewed the text of the Act, finding that because the ADEA exempted decisions made for reasonable factors other than age as activity “otherwise prohibited” by the Act, it was an affirmative defense to be raised by an employer, and “entirely the responsibility of the person raising it.” Accordingly, the Court held that the employer bears both the burden of proof (by introducing evidence of other reasonable factors) and of persuasion (by arguing that such evidence shows that the employment action was made for reasons other than age). The Supreme Court also confirmed its prior decision in Smith v. City of Jackson, 544 U.S. 228 (2005), that the application of the RFOA defense does not examine whether there are alternative methods for the employer to reach its goals, as does the separate “business necessity test” under discrimination law. Rather, the Court clarified, the main inquiry in assessing an RFOA defense to a disparate-impact claim is not whether the employment action was taken on account of “factors other than age,” but whether those factors were “reasonable.”
APPLICATION FOR CALIFORNIA EMPLOYERS
This decision has little impact on California employers, who have been held to the burden of production on the RFOA defense since a Ninth Circuit decision in 1983. (Criswell v. Western Airlines, Inc., 709 F. 2d 544, 552 (1983).) However, for the rest of the country’s employers, the Supreme Court’s decision makes it easier for employees to bring age discrimination lawsuits, and more costly for employers to defend on the basis of reasonable factors other than age. California employers should continue to carefully assess legal exposure prior to making reductions in the workforce, including an assessment of the statistical impact of the layoff with respect to age. Employers should develop objective factors that can be articulated for the layoff decision, and ensure that the objective criteria are applied consistently.
NINTH CIRCUIT DECISIONS
EMPLOYEES HAVE A REASONABLE EXPECTATION OF PRIVACY IN TEXT MESSAGES ON EMPLOYER-ISSUED PAGERS PURSUANT TO INFORMAL POLICY OF NOT MONITORING CONTENTS
In Quon v. Arch Wireless Operating Co. Inc., 529 F.3d 892 (9th Cir. 2008), the Ninth Circuit Court of Appeals sharpened limits on an employer’s ability to conduct electronic monitoring of employees’ text messages.
FACTUAL AND PROCEDURAL BACKGROUND
The City of Ontario Police Department contracted with Arch Wireless to provide its employees with two-way alphanumeric text-messaging pagers and wireless text message service. The City had a general employee “Computer Usage, Internet and E-mail Policy,” which provided that the City-owned computers and associated services were to be used for City-related business only, that access to the Internet and e-mail systems was not confidential, that users had no expectation of privacy in the use of these systems, and that use of obscene or harassing language on the systems was prohibited. The City did not have a policy expressly governing the use of the pagers or text messages sent and received via the pagers. However, the City did have an informal policy governing their use: the Arch Wireless contract allotted the City 25,000 characters per pager per month, and the City paid fees to Arch Wireless for overage charges. Jeffery Quon went beyond the overage limit three or four times. The lieutenant responsible for the contract and for collecting money to pay overage charges told Quon that if he simply reimbursed the full overage charge, then there would be no need to do an audit to determine how many messages were work-related and how many were personal. Each time, Quon paid the overage charges. The lieutenant also told Quon that the use of the pagers was considered e-mail and public records, and could be audited at any time.
After Quon and another employee went over the message limit on multiple occasions, the City police chief ordered an internal affairs investigation to determine whether the character limits should be increased because overages were being incurred for City business. The contents of the text messages was stored on the Arch Wireless server, and Arch Wireless turned over the contents to the City upon e-mail request. No notice was provided to the employees that the City was obtaining the transcripts. The transcripts disclosed that many of the text messages sent by Quon included sexually explicit messages to other employees and his wife.
Quon, his wife, and two other police employees involved in the exchange brought suit against the City, Arch Wireless, and Department individuals. They claimed, among other things, that the City and the Department had violated their rights under the federal and California constitutions by procuring and reading the stored text messages. The court agreed that the employees had a reasonable expectation of privacy in the text message, but held a jury trial on the issue of the Police Chief’s intent in the investigation; the jury determined that the search was reasonable. The district court held for defendants. Plaintiffs appealed.
EMPLOYEE RIGHT TO PRIVACY
The Ninth Circuit agreed with the trial court that the employees had a reasonable expectation of privacy under the Fourth Amendment and the right to privacy under the California Constitution. Despite the City’s general computer use policy disclaiming employees’ expectation of privacy in computer resources, the Ninth Circuit affirmed that such was not the “operational reality” at the department. The City’s informal policy that the text messages would not be audited if Quon paid the overage charges rendered Quon’s expectation of privacy reasonable. Moreover, evidence showed that the City followed its informal policy by not auditing Quon after he incurred and paid overage charges three or four times. The Ninth Circuit rejected the trial court’s finding on the reasonableness of the search overall, however, stating that, while the purpose of the search was to verify the efficacy of the 25,000 character limit, the purpose of the investigation could have been achieved by less-intrusive means, including means authorized by Quon’s consent, and therefore the search was not reasonable as a matter of law.
APPLICATION FOR CALIFORNIA EMPLOYERS
The decision clarified that an employees’ reasonable expectation of privacy in the content of electronic messages can be bolstered by informal verbal policies, particularly when those informal policies are followed in practice. Although this case involved the Fourth Amendment because it involved a public-sector employee, it also has implications for private employers on the “reasonable expectation of privacy” element under the California Constitution and common law. Employers should review their workplace surveillance practices to ensure compliance with state and federal law. More importantly, employers should review whether their practice of surveillance accords with their written technology use policy, and consider revising the written policy to provide for the contingency of a failure to enforce monitoring rights.
SOCIAL SECURITY ADMINISTRATION “NO-MATCH” LETTERS DO NOT PUT AN EMPLOYER ON CONSTRUCTIVE NOTICE OF HIRING UNDOCUMENTD WORKERS SUFFICIENT TO TERMINATE EMPLOYMENT QUICKLY WIHTOUT CONFIRMATION
In Aramark Facility Services v. Service Employees International, 530 F.3d 817 (9th Cir. 2008), the Ninth Circuit recently held that an employer may be forced to reinstate employees with full backpay if the employer does not give the employees enough time to respond to a no-match letter from the Social Security Administration. At the same time, the employer may be exposed to potential civil and criminal penalties under federal immigration law if the employer continues to employ the no-match employee for too long of a period.
FACTUAL AND PROCEDURAL BACKGROUND
The Social Security Administration uses information from an employee’s W-2 form in determining entitlement to social security benefits, and routinely sends “no-match” letters when there is a discrepancy between the employer’s W-2 records and the SSA database. While the main purpose is benefits-related, the SSA believes that one reason for discrepancies is unauthorized work performed by non-citizens or persons not authorized to work under immigration laws. The no-match letters do not trigger automatic employee penalties or immigration enforcement procedures. However, in August 2007, the Department of Homeland Security (DHS) amended 8 C.F.R. § 247a.1(l) to incorporate receipt of no-match letters as an example of an employer’s knowing employment of a person without appropriate authorization to work in the United States. The DHS regulations are currently subject to a preliminary injunction in federal district court, pending review of revised regulations issued by DHS.
The Aramark case arises out of events occurring in 2003, prior to the DHS’s revised regulations, when Aramark received no-match letters for 3,300 employees nationwide. With respect to the 48 employees at the Staples Center in Los Angeles for whom no-match letters were issued, Aramark managers responded by notifying the employees of the mismatch and instructing them to bring either a new social security card or verification that a new card was being processed, within three working days from the postmarked date of the Aramark letter, or be terminated. The employees were represented by the Service Employees International Union (SEIU), which requested extension of the three-day deadline. Aramark rejected SEIU’s request, and only 15 employees were able to provide proper documentation within the three-day window. Aramark promptly terminated the employment of the 33 remaining employees and notified them that they would be rehired upon providing the correct documentation. Pursuant to arbitration under a collective bargaining agreement, an arbitrator found the firings to be without cause because there was no convincing evidence that the employees were undocumented, and awarded reinstatement and backpay. Aramark filed a complaint with the United States District Court to vacate the award on grounds of public policy, and the district court agreed with Aramark that the arbitration award violated public policy against knowing employment of undocumented workers. SEIU appealed the district court’s decision to the Ninth Circuit.
The Immigration Reform and Control Act of 1986 (IRCA) subjects employers to civil and criminal penalties if they knowingly employ undocumented workers or have “constructive knowledge” of a worker’s undocumented status. Aramark argued that the arbitration award violated public policy because it essentially required Aramark to ignore “constructive notice” of the employee’s undocumented status. The Ninth Circuit sided with the employees, holding that receipt of a no-match letter, without more, does not put an employer on constructive notice that it is employing undocumented workers and is thereby violating federal law. Looking to the immigration regulations prior to the recent DHS revision, the Court held that, for the purposes of the IRCA, constructive notice was narrowly interpreted. Citing the fact that the no-match letters do not create sanctions for employees under immigration law, the court held that a social security number discrepancy does not, by itself, automatically mean that a worker is undocumented; such a discrepancy could arise for a number of non-immigration related reasons. Even the DHS revisions to the regulations made after the firings, which find that no-match letters are an example of constructive notice, punish an employer only for “failing to take reasonable steps” upon such notice within a 90-day “safe harbor provision.” 8 C.F.R. § 247a.1(l)(2)(i)(B). The Ninth Circuit found that the time period of less than three days was too short a period of time to allow workers to respond, and that no negative inference could be drawn from the fact that some workers failed to respond and correct the discrepancy within the three days, particularly given the fact that a no-match letter, alone, does not provide convincing proof of immigration violations. The Ninth Circuit reversed the district court and ordered it to reinstate the arbitration award of reinstatement with full backpay.
APPLICATION FOR CALIFORNIA EMPLOYERS
The Ninth Circuit did not provide guidance as to what steps an employer can take to balance the employees’ rights with the employer’s potential exposure to civil and criminal penalties for employing unauthorized workers. Although enforcement of the DHS regulations is currently stayed, employers should use the DHS “safe harbor” as guidance and not terminate an employee based solely upon receipt of a no-match letter. Under those circumstances, employers should allow an employee a reasonable period of time of at least 90 days to respond to the no-match letter and correct the mismatch. Where no-match letters are a recurring issue, employers should institute policies and procedures for responding. The DHS has set up a free, online E-Verify system, which allows enrolled employers within seconds to verify an employee’s eligibility to work and validity of social security number. Federal contractors are required to use E-Verify under a new executive order issued in June. In any case, employers should seek legal advice before firing an employee upon suspicion that the employee is undocumented, in order to avoid the potential for substantial back pay penalties.
CALIFORNIA APPELL ATE COURT DECISIONS
“PROVIDING” MEAL AND REST PERIODS TO HOURLY EMPLOYEES REQUIRES INDIVIDUAL ANALYSIS
The California Court of Appeal issued a favorable ruling for employers regarding class certification in meal and rest break cases, confirming in Brinker Restaurant Corporation, et al. v. Superior Court, (Hohnbaum) et al., No. D049331 (Cal. Ct. App. July 22, 2008), that California employers satisfy legal requirements for “providing” meal and rest periods by making them available to employees, and need not ensure that they are taken. The court also held that individual issues predominated on both the meal and rest break issue and the off-the-clock work.
Brinker Restaurant Corporation operates 137 restaurants in California, including well-known concepts Chili’s Grill & Bar, Romano’s Macaroni Grill, and Maggiano’s Little Italy. In 2002, the California Division of Labor Standards Enforcements (DLSE) investigated Brinker’s alleged failure to provide meal and rest breaks as required by law, and to pay premium wages to employees not provided with such meal and rest breaks. Brinker settled the subsequent DLSE complaint before any findings could be made. Even so, employees filed a class action complaint alleging rest break violations, meal break and early lunching violations, unpaid off-the-clock work during intended breaks, and time-shaving violations. Plaintiffs moved for certification of a class of more than 63,000 hourly restaurant employees working for Brinker since 2000. The trial court entered a class certification order, which was vacated by the Court of Appeal in October 2007. Following a remand from the California Supreme Court, the Court of Appeal recently issued a new opinion confirming its original analysis and resolving the issues in favor of the employer.
The Court of Appeal stated that a trial court “cannot reach an informed decision” on whether class certification is proper without first determining what laws apply to plaintiffs’ claims. Subsequently, the Court of Appeal analyzed each claim alleged by plaintiffs. In all cases, the court held that the legal standard the employer was held to necessarily involved individual factual issues and therefore the class could not be certified.
REST PERIOD CLAIMS
Plaintiffs alleged that Brinker violated Labor Code section 226.7 by violating IWC Wage Order 5-2001. Wage Order 5-2001 states that an employer must give an hourly employee a paid rest period of ten minutes “per four (4) hours or major fraction thereof” worked. The Court of Appeal disagreed with plaintiffs’ interpretation, and held that the Wage Order does not mean that an employee must be given a rest break for every three and a half hours of work, but only on days where the employee is scheduled to work only between three and a half and four hours of work. The court further interpreted the regulations to state that rest breaks must be afforded in the exact middle of a four-hour period only when “practicable,” and that “early lunching” (before the first half of an employee’s shift ends) is not unlawful insofar as the regulations do not require rest breaks to be taken before meal breaks in a given shift. More importantly for class certification law, the court held that the issue of whether rest periods are prohibited by the employer or voluntarily waived by the employee is “by its nature an individual inquiry,” interpreting the regulations to provide that employees may waive rest periods and employers are not required to force employees to take them. As a result, the court held, because the breaks need only be made available and not ensured, individual factual issues would predominate, and therefore the case was not amenable to class action treatment.
MEAL PERIOD AND OFF-THE-CLOCK CLAIMS
For the meal break violations, the plaintiffs similarly alleged that Labor Code section 226.7 was violated by early lunching practices, by failing to give employees a meal break for every five consecutive hours worked if a meal break is taken early in the shift, and by Brinker’s alleged failure to ensure that employees took meal periods. As with the rest period claim, the court held that early lunching practices are valid, and that the regulations do not provide for a “rolling” five-hour period whereby the five-hour time period requiring a meal break restarts each time an employee takes a meal break on his or her shift. As for the plaintiffs’ claim that employers must ensure, and not merely provide, meal breaks, the Court of Appeal again held that California law requires that employers need only provide meal periods. Again, the Court denied class certification due to the presence of individual issues in determining why each plaintiff missed a meal break. With respect to plaintiffs’ claims of working off the clock during meal periods, the court made similar rulings.
APPLICATION FOR CALIFORNIA EMPLOYERS
The Brinker decision is a major victory for employers in defeating class actions alleging meal and rest break violations. The decision affirms the current weight of authority that California employers are required only to provide, i.e., make available, meal and rest breaks to employees, and need not ensure that employees take these breaks, and that these types of actions are not amenable to class treatment. In the aftermath of Brinker, the California Labor Commissioner issued a memorandum to all Division of Labor Standards Enforcement staff regarding the decision, instructing that the decision must be followed effective immediately, including the holding that employers must provide meal and rest breaks, but need not ensure that they are taken.
AGREEMENT TO REIMBURSE TRAINING COSTS IS VALID UNDER FAIR LABOR STANDARDS ACT, BUT WITHHOLDING OF FINAL PAYCHECK TO COVER DEBT IS UNLAWFUL
A California Court of Appeal recently concluded, in City of Oakland v. Hassey, Case No. A116360 (Cal. Ct. App. June 18, 2008), that an agreement for reimbursement of training costs was lawful under the Fair Labor Standards Act (FLSA), but that the FLSA prevents an employer from withholding an employee’s final paycheck to cover the training costs owed.
FACTUAL AND PROCEDURAL BACKGROUND
In an effort to encourage its police officers to stay with the department longer, the City of Oakland, in 1996, entered into a memorandum of understanding with the Oakland Police Officers’ Association, whereby the City could require its police officers to reimburse the City for training costs at the Oakland Police Academy if they left the department before five years of service, and the City could collect these expenses from their final paycheck. The amount was staged to decrease over time such that an officer would pay the full $8,000 cost of training for leaving prior to one year of service, the amount would decrease by 20 percent for each year the officer stayed with the department, up to five years. The officers would not have to repay any wages earned during training. When the City hired Kenny Hassey as a police officer in March 1998, Hassey signed an agreement for “reimbursement of training expenses” setting forth the reimbursement conditions. Hassey attended and graduated from the Oakland Police Academy, but soon after was told that he was not performing up to standard and should consider resigning in lieu of termination. Hassey resigned, and upon his resignation signed a “training costs repayment agreement” confirming that he owed repayment of $8,000 in training costs to be paid in installments. The City withheld Hassey’s final paycheck in February 1999, as well as a check to cash out Hassey’s retirement balance, to cover some of the money owed. After Oakland sent a series of collection letters to Hassey and he did not respond, Oakland sued Hassey for breach of contract for the remaining amount of $6,619. In his answer and cross-complaint, Hassey alleged that the contract and paycheck withholding breached the Fair Labor Standards Act and state law, including unfair competition. The trial court held for the City and granted summary judgment on the complaint and cross-complaint.
Hassey argued on appeal that the reimbursement agreement violated the minimum wage and overtime provisions of the FLSA because the agreement was a condition on his wages in violation of federal regulations. The Court of Appeal held that the training costs could not be considered wages incurred “primarily for the benefit of the employer,” noting that a repayment agreement was similar to other valid incentives to offer to workers to stay with the employer. The court also noted that Hassey did not stay with the Police Department long enough for the Department to get the benefit of training Hassey. In any case, Hassey did not prove that deduction of the training costs drove his salary below the minimum wage, and therefore there was no violation of the FLSA or the Labor Code.
The second issue addressed was whether the Department’s withholding of Hassey’s final paycheck to cover part of the training costs was unlawful. The Court of Appeal held in this case that the Department’s withholding did drive Hassey’s wages below minimum wage for the final pay period he worked, violating the FLSA. Citing Barnhill v. Robert Saunders & Co., 125 Cal. App. 3d 1 (1981), the court also confirmed the broader and longstanding California rule that prohibits an employer from deducting any wages from an employee’s paycheck to collect a debt owed to the employer.
APPLICATION FOR CALIFORNIA EMPLOYERS
This case highlights for employers the importance of carefully preparing training and other reimbursement agreements and determining the process for collecting employee debts. Employers should not take payroll deductions from employees’ paychecks unless it is done under the limited circumstances set forth in Labor Code section 224 and with the assistance of legal counsel. Payroll managers and administrators should be trained regarding these laws to ensure compliance with federal and state law.
In a case that will undoubtedly affect thousands of workers statewide, the California Supreme Court issued its ruling today in Brinker v. Superior Court, a wage and hour class action filed by employees of Brinker International, Inc., the parent company of Chili’s restaurant. This is the first in a series of articles by Call & Jensen discussing the Brinker decision and its impact on employers.
MEAL PERIODS – No Duty To “Ensure” Employees Take Meal Periods
The lawsuit largely centered on the language of Labor Code section 512 that states: “An employer may not employ an employee for a work period of more than five hours per day without providing the employee with a meal period of not less than 30 minutes.”
Before today, the unresolved issue before the California Supreme Court was the meaning of the word “providing.” Does an employer have to ensure that an employee has to take a meal period? Or does the employer meet its obligation if the employer makes the meal period available to the employee?
The California Supreme Court concluded that “an employer must relieve the employee of all duty for the designated period, but need not ensure that the employee does no work.” The Supreme Court reversed and remanded for consideration of whether class certification is appropriate.
REST BREAKS – Common Questions Predominate If Employer Has A Uniform Policy That Fails To Authorize All Permitted Rest Breaks
The Supreme Court held that the trial court did not abuse its discretion in certifying a rest period subclass because Plaintiffs had presented substantial evidence of “a uniform rest break policy authorizing breaks only for each full four hours worked.”
Brinker’s uniform policy did not authorize and permit a second rest break for employees working shifts longer than six, but shorter than eight hours. The Supreme Court rejected the reasoning of the Court of Appeal that because rest breaks may be waived proof of violations must be based on individualized proof. The Supreme Court held that: “No issue of waiver ever arises for a rest break that was required by law but never authorized; if a break is not authorized, an employee has no opportunity to decline to take it.”
Per the Supreme Court, “employees are entitled to 10 minutes’ rest for shifts from three and one-half to six hours in length, 20 minutes for shifts of more than six hours up to 10 hours, 30 minutes for shifts of more than 10 hours up to 14 hours, and so on.”
TIMING – No Rolling 5-Hour Rule
Another critical issue before the Supreme Court was the timing of meal periods, specifically whether the wage orders require that a meal period be provided after five consecutive hours of work. In other words, does the statute prohibit the practice of “early lunches” – that is, requiring an employee to take his or her lunch break early in the shift and/or start the clock running on a second 5 hour period? With regard to these issues, the California Supreme Court ruled as follows:
OFF-THE-CLOCK – No Substantial Evidence That Common Questions Predominated
Finally, the Supreme Court held certification was not proper for an off-the-clock subclass. Plaintiffs had contended Brinker required employees to perform work while clocked out, or that their work periods were interrupted. Unlike the rest break claims, however, Plaintiffs did not proffer a common policy alleged to be inconsistent with the Labor Code. In fact, the only policy at Brinker expressly prohibited off-the-clock work – as do most company policies. Moreover, there was no evidence of a systemic policy to pressure employees to work off-the-clock. Notably, the Supreme Court also stated that when employees are clocked out “there is a presumption they are doing no work.”
Please look for further updates from Call & Jensen on the impact of the Brinker decision.FOR MORE INFO CONTACT GINA MILLER
Coming out of the box, it looks like a brand new computer in perfect condition. When the buyer has some questions and calls the manufacturer for technical support, however, he is frustrated to learn that the manufacturer will not support the product because it was sold without its knowledge or authorization. The customer is certain that there must be some mistake. After all, the computer was not bought from some covert computer peddler doing business out of his van in a dark alley; the customer bought it from a retail establishment that was openly advertising and selling all types of computers and hardware for the whole world to see. How can the manufacturer possibly claim that this computer was sold without its knowledge or permission?
After some further investigation, it turns out that the computer was indeed sold without the manufacturer’s authorization.
The computer was sold on the “gray market.”
WHAT IS THE GRAY MARKET?
A large part of many businesses’ success today is their ability to distribute products all over the world through authorized distribution channels. The price at which products are sold to distributors often depends on the location of the distributor and intended end user. For example, prices for products in developing countries are invariably less expensive than developed countries. Unfortunately, a destructive market exists where products are diverted from the authorized channels and imported into the United States without a business’ knowledge or consent. These “gray market” products end up being sold at lower prices than those offered by domestic distributors. Unsuspecting customers purchase these branded products at greatly discounted prices. Meanwhile, authorized domestic distributors have difficulty legitimately competing with these “gray marketers” because of the dramatic price disparity.
When manufacturers learn that domestic customers purchased products intended for developing countries, they face a difficult dilemma when asked for warranty support. On the one hand, they can provide support for a product that did not generate one penny’s worth of domestic revenue. On the other hand, they can refuse to provide support and suffer the intangible consequences of a disgruntled customer.
HOW TO STOP THE GRAY MARKET?
One school of thought naively instructs businesses to eliminate the gray market by simply selling its products for the same price all over the world. See e.g., NEC Electronics v. CAL Circuit Abco, 810 F. 2d 1506 (9th Cir. 1987) (“If [the plaintiff] chooses to sell abroad at lower prices than those it could obtain for the identical product here, that is its business. In doing so, however, it cannot look to the United States trademark law to insulate the American market or to vitiate the effects of international trade. This country’s trademark law does not offer [the plaintiff] a vehicle for establishing a worldwide discriminatory pricing scheme . . ..”).
Axiomatically, the economic realities of the global marketplace will not sustain a manufacturer selling its laptop computers to retailers for the same price in Manhattan as Macau. A company ambitious to have an international presence understands it is imperative to price its products in relevant relation to the geographic region. If this same company wants to stop its products returning to the United States through the gray market, therefore, it must take action.
Too often, companies mistakenly believe the gray market is sufficiently addressed by dedicating its sales and marketing group to enforce the problem. Since they are the “boots on the ground,” the theory goes, they are best suited for identifying and reporting suspected gray market activity. The problem with this ostensible solution lies with how most sales and marketing employees are compensated. The vast majority of companies pay their sales employees a base salary with added commissions for sales made. With no economic incentive for catching gray marketers, time spent policing the gray market is time that could otherwise be spent making a sale and making more money. Gray market enforcement becomes a low priority or no priority at all.
Instead, companies that are serious about protecting the integrity of their brand should designate a group of employees to be dedicated to gray market prevention. Unlike a company’s sales force, the income and incentives for this group must be aligned with the goal of stopping gray market transactions.
Authorized distributors must likewise be encouraged to (1) avoid the temptation of participating in the gray market, and (2) report those suspected of gray market activity. With respect to the first item, the authorized distributorship agreement should clearly articulate the manufacturer’s right to periodically inspect and audit the distributor’s inventory to ensure that all products are legitimate. In the event that gray market products are discovered, the penalties should be severe and strictly enforced. Encouraging authorized distributors to report suspected gray market activity through economic incentives will give a company an added weapon in the fight against the gray market.
When suspicious products are examined, the manufacturer must also be able to trace the product backwards through the distribution chain and identify with precision where the gray market leak occurred. For example, product codes that are not easy to remove or deface can identify that a product was manufactured for sale in China and shipped to an authorized distributor in Beijing. If this product was instead discovered in a retail store in Boston, the manufacturer can contact the distributor in Beijing; unless the distributor can accurately account for the product’s sale to a bona fide end user in China, that distributor has violated its distributorship agreement and should be appropriately sanctioned.
Finally, manufacturers should publicize their efforts and enforcement of gray market activity. “Cease and desist” letters should be sent to those suspected of gray market transactions. When litigation becomes necessary, the lawsuit and its subsequent settlement or trial victory should be circulated within the appropriate industry. Gray marketers invade industries and companies where they believe their activities can proceed without consequence. By making public a company’s efforts to stop and punish those who engage in this unlawful activity, gray marketers will be deterred from engaging in transactions with respect to that particular company and prey on others easier targets.
The gray market is a significant problem that is growing worse at an alarming rate. Companies committed to selling their products in the global marketplace will inevitably face the gray market challenge. In order to maintain profitability, brand integrity, and legitimate competition, companies must take adequate measures to discourage gray market activity and punish those who are unjustly enriching themselves doing so.
In today’s world of music “sharing,” “open source” software, and YouTube, intellectual property owners face increasing challenges when they endeavor to persuade a jury that a defendant’s misappropriation or infringement warrants a large damages award:
These are the questions many jurors ask themselves as they hear the statement of the case prior to voir dire. Especially when the plaintiff is a recognizable name suing a smaller unrecognizable defendant, suspicions of underlying motivations and merits exist.
There are two possible explanations, among others, for such juror preconception. First, personal experience; omnipresent in the digital age is the ability to download software, music, and video without payment or consequence. Such downloads are sometimes illegal, sometimes not. The attendant result is a sense of entitlement with respect to the acquisition of intellectual property. As a result, jurors are less likely to impugn culpability on a defendant when they can empathize with the defendant’s conduct – albeit on a smaller scale.
A second explanation is the intangible nature of intellectual property. When someone steals or destroys real or personal property, jurors have little hesitation when asked to quantify the property’s value. By looking at comparable properties or products, jurors deliberate by going through a relatively familiar process and examine a relatively familiar set of factors. When asked to quantify the value a source code, customer list, or song, however, jurors are left to consider a multitude of unfamiliar and often esoteric factors to a deliberated conclusion.
As explained in greater detail below, there are strategies available that intellectual property owners and their counsel should be mindful of at trial in order to surmount these challenges and obtain adequate relief.
STEP ONE: INTRODUCE THE VICTIM.
Common in wrongful death or personal injury trials is time devoted to introducing the victim to the jury. Before even addressing issues of liability or damages, the jury learns about the victim’s personality, family, interests, and hobbies. Such evidence is admissible because, as a matter of law, it may be relevant to the measure of emotional harm suffered by the victim or the victim’s loved ones. The motivation behind introducing such evidence is, however, only partially legal. Pragmatism is equally motivating: showing the appeal of the victim increases the likelihood that the jury will actually like him or her.
When the plaintiff is a corporate entity, presenting these likeability factors is equally important. To avoid the perception that a faceless entity is seeking monetary damages, it is imperative to introduce facts that will provide a positive impression to the jury. Examples of such facts are: (1) the number of years a company has been in business and, if applicable, a company’s humble beginnings; (2) the number of jobs a company provides in the jurisdiction where the case is being tried; and (3) examples of charitable donations or activities in which a company participates. Just like an individual plaintiff, it is important that the jury like the corporate plaintiff.
STEP TWO: INTRODUCE THE INTELLECTUAL PROPERTY AND ITS VALUE.
When an invention, trademark, or copyright product is illegally duplicated or distributed, the enjoyment of the product by the duplicator does not necessarily impair the enjoyment of the inventor or owner. Unlike conversion of tangible property like a car, crop, or computer hardware, duplication of computer software or fabric designs does not deprive the creator of possession or use. Instead, the harm is purely economical. This results in two principal dangers:
First, there is the danger that the inventor will not recoup its “cost of expression,” the time and effort devoted to creating and marketing the product, because the inventor is undercut by an infringer only needing to recoup his “cost of production.” The second danger pertains to the inventor or creator’s reputation. Especially in the context of trademark infringement, consumers mistakenly associating an imitation product with that of the creator’s product can cause injury to a business reputation; while a business reputation takes years to earn, it can be lost in an instant.
When trying to prove infringement of various intellectual property rights, it is not uncommon for the mundane facts such as trademark validity or copyright registration to be among the case’s “stipulated facts.” In a time saving endeavor, most courts require the parties to identify various “stipulated facts” prior to trial that need not be disputed. Defendants will typically freely stipulate to the registration of a copyright or the validity of a trademark.
While it is good practice to have such stipulated facts memorialized, it is unwise for a plaintiff to give short attention to these seemingly banal facts in order to fast track its presentation. The jury is well served learning about the time, effort, and money that was spent creating the protected property. In addition, because opening statements will already have foreshadowed the assertion that the defendant infringed or misappropriated the property, spending time proving the value of the product will heighten the jury’s anticipation of learning how and what the defendant did to warrant the lawsuit.
When discussing the efforts to create the property at issue, the plaintiff must be equipped with verifiable facts showing with particularity what was done. Ubiquitous in complaints alleging the infringement or misappropriation of intellectual property is the boiler plate paragraph describing generically the value of the product. In trade secret cases, for example, myriad complaints contain language such as the following: “Plaintiff has invested substantial money and effort in developing proprietary [the alleged trade secret]. As a result of its investment of substantial effort and expense, Plaintiff has developed and maintains extensive confidential information. Such information is subject of efforts that are reasonable under the circumstances to maintain its secrecy.”
While such vanilla allegations may be sufficient to get a complaint beyond the pleading stage of litigation, a scrutinizing and suspicious jury will require much more information. And much more detail. For example, in the context of trade secrets, it is important to provide with painstaking particularity how the trade secret was created, how it is valuable, and how it was kept secret.
For example, if the trade secret at issue is a formula or recipe, the plaintiff should present witnesses who are competent to testify about the time, effort, and money that was incurred to prepare the final creation. Such testimony should include specific details regarding the number of people, hours, months, or years involved in the trade secret’s creation. When possible, such testimony should be supported with documents that were prepared long before litigation was ever contemplated. These documents will give the plaintiff added credibility because it will show that proof of the efforts to create the trade secret existed before the plaintiff had an incentive to bolster these figures to prove its damages.
STEP THREE: INTRODUCE THE DEFENDANT – AND HIS MOTIVATIONS.
It is insufficient to show merely what the defendant did to give rise to liability; the jury will want to know why the defendant did what he did. If liability is too difficult to dispute with reasonable credibility, a defendant will almost always argue that his illegal conduct was an innocent mistake. To debunk the merits of this defense, intellectual property owners will want to present all available facts that show the defendant acted with the intent and knowledge to violate the law.
Such facts are obviously case specific. However, in all cases, the plaintiff will have the opportunity to show the economic incentives to copy or steal intellectual property. In addition to showing the value of the property, as described in Step Two, a jury will be interested in learning how the defendant unjustly enriched himself by copying or stealing the intellectual property. For example, the plaintiff can show that the defendant did not need to spend any time or money developing or inventing the property. Moreover, once he had the property, the jury would be interested in learning that the defendant was, for example, able to enjoy revenues with unrealistically high profit margins.
STEP FOUR: SHOW THE HARM.
Sometimes the simplicity of how intellectual property is stolen implies that the offense is nothing more than a peccadillo. After all, the argument will go, how harmful can something really be when it was accomplished with a few key strokes or clicks on a mouse? To combat these themes and arguments, plaintiffs must be prepared to present competent evidence to show the fair market value of the intellectual property that was taken.
Even if recovery of the fair market value is not an available remedy, it will help the jury understand that what was taken or copied is extremely valuable. Such testimony must be offered by witnesses, perhaps retained experts, who are qualified to articulate how the value of the property was quantified. In addition to showing the analysis, the witnesses should also be prepared to provide analogies that the jury can relate to in order to understand or at least appreciate the assertion that the property is very valuable.
For example, in pseudo cross-examination of its expert, the plaintiff’s counsel may ask, “Dr. Smith, are you really contending that this algorithm is worth ten million dollars? It is a just a short math equation with numbers and symbols.” The expert, prepped for the faux challenge, can respond by saying, “That’s exactly what I’m saying. The Mona Lisa is just a bunch of colors on a canvas. What makes the Mona Lisa valuable is its unique arrangement of colors. The algorithm created by XYZ , Inc. is valuable for the same reason.”
When the jury has an understanding of the property’s value, it can better appreciate the harm to the plaintiff and unjust enrichment enjoyed by the defendant. Accordingly, the jury will have more comfort awarding compensatory and punitive damages that appropriately compensate the plaintiff for its loss and punish the defendant for its unjust gain.
Acknowledging and addressing the impediments to recovering adequate remedies is the most effective way to obtain them in intellectual property cases. Adhering to the steps above will provide the best chance at a valuable victory.FOR MORE INFO CONTACT DAVID R. SUGDEN
Social media policies continue to receive scrutiny from the National Labor Relations Board (“NLRB”), which issued its third “Report on Social Media” on Wednesday, May 30, 2012. As in the previous two reports, the NLRB discusses several recent cases and sets forth its conclusions about the lawfulness of various employers’ social media policies under the National Labor Relations Act (“NLRA”). Once again, the NLRB found that employee postings on social media websites may be considered protected concerted activity under the NLRA. However, what is particularly important about this third report is the inclusion of a sample social media policy that the NLRB has concluded is entirely lawful.
The inclusion of a sample lawful policy provides additional guidance for employers on the appropriate language to include in their social media policies. In addition, attorneys in Call & Jensen’s Employment Law Group are also readily available to further discuss these issues and assist in the drafting or revision of your social media policy.
“Do’s and Don’ts” of Social Media Policies:
Finally, if you do need to revise your social media policy, consider distributing via email and including a return receipt on the message for employees to acknowledge that they have read and understood the communication.
Conventional wisdom instructs defense counsel, when dealing with “hide-the-ball” plaintiffs, to file all necessary motions to compel compliance with the area of law or discovery that is not being fearfully obeyed. The theory, of course, is that diligent defense counsel must not leave a stone unturned and must also bring its adversary’s improper tactics to the court’s attention at each and every instance.
In trade secret litigation, the conventional wisdom is no different. California Code of Civil Procedure section 2019.210 requires that “before commencing discovery . . . the party alleging the misappropriation [of trade secrets] shall identify the trade secret with reasonable particularity.” (Emphasis added). Accordingly, diligent defense counsel will refuse to move forward with discovery until the plaintiff has fully complied with this requirement. In the event defense counsel is not satisfied with the plaintiff’s description, it will bring a motion to compel so that the Court will issue an order that the plaintiff provide the requisite particularity of the trade secret’s description.
This strategy makes sense. After all, one of the purposes behind Section 2019.210 is to “enable defendants to form complete and well-reasoned defenses, ensuring that they need not wait until the eve of trial to effectively defend against charges of trade secret misappropriation.” Computer Economics, Inc. v. Gartner Group, Inc., 50 F. Supp. 2d 980, 985 (S.D. Cal. 1999).
Of course, employing the above strategies generally results in nothing more than compliance with Section 2019.210. In some fortunate cases, monetary sanctions may be awarded. Meanwhile, the plaintiff’s counsel has been given a primer as to what must be alleged and proven once discovery actually commences to prevail in its claims that a trade secret actually exists and was misappropriated.
One alternative strategy that strays from the conventional wisdom can do much more damage to a plaintiff’s trade secret case. As explained in greater detail below, Section 2019.210 can be used as a weapon to devastate a plaintiff’s case. However, as with all powerful weapons, patience and deliberation must be used before it is employed. As explained below, in the litigation context, it must be briefly showcased at the outset of the case and then kept hidden until it is time for summary judgment.
STEP ONE: LAY THE FOUNDATION
In order to set the case up for summary judgment, it is imperative that defense counsel put the plaintiff on notice of its obligations according to Section 2019.210. Rather than bring a motion, or even threaten to bring a motion, a non-threatening letter advising opposing counsel of Section 2019.210’s requirements is sufficient. For example, a letter that innocuously states the following is effective: “I wanted to highlight your attention to California Code of Civil Procedure Section 2019.210, which requires that in any action alleging the misappropriation of a trade secret, the party alleging the misappropriation shall identify the trade secret with reasonable particularity before commencing discovery. While Plaintiff’s Complaint describes in general some information relating to trade secrets, this description is insufficient. Therefore, before next week’s depositions begin, please forward to me Plaintiff’s Section 2019.210 statement.” Plaintiff’s counsel will either comply or, more likely, rely on its “hide-the-ball” tactics and respond with the argument that its description in the complaint was sufficient.
In the latter scenario, it is tempting for defense counsel to file a motion and have the Court admonish the plaintiff’s counsel for its shenanigans. Since admonitions do not win lawsuits, wise counsel must exercise one of the most underutilized skills in modern advocacy: patience.
STEP TWO: BUILD THE TRAP
Without mentioning the plaintiff’s counsel’s failure to comply with Section 2019.210, the next step is to move forward with discovery. Specifically, taking the depositions of various plaintiff witnesses is necessary to have each witness describe “in their own words,” the information that the plaintiff contends is a protected trade secret. Even the most prepared witnesses will be inconsistent in their descriptions of the allegedly proprietary information. Inconsistent testimony is especially common when the plaintiff’s counsel has already failed to describe the trade secret with reasonable particularity because the witnesses will have nothing to read andmemorize.
STEP THREE: WIELD THE SWORD
Once the depositions are complete, the plaintiff’s case is extremely vulnerable to summary judgment on the grounds that the plaintiff failed to comply with Section 2019.210. Specifically, the defendant can argue that the plaintiff, not only failed to describe the alleged trade secret with any particularity, but that the plaintiff also (per the deposition testimony) failed to describe the alleged trade secret with any consistency.
As recent case law makes clear, a plaintiff’s failure to adequately designate an alleged trade secret constitutes a failure to carry their burden on this necessary element of their claim and is grounds for summary judgment. See Imax Corp. v. Cinema Technologies, Inc., 152 F.3d 1161, 1164-65 (9th Cir. 1998) (affirming summary judgment against plaintiff who failed to identify its alleged trade secrets with particularity); Universal Analytics, Inc. v. MacNeal-Schwendler Corp., 707 F.Supp. 1170, 1177 (C.D. Cal. 1989) (granting summary judgment in trade secrets case where defendant established that plaintiff failed to describe allegedly misappropriated trade secrets).
Recently, in Advanced Modular Sputtering, Inc. v. Superior Court, the Court of Appeal “h[e]ld that Code of Civil Procedure section 2019.210. . . is not limited in its application to a cause of action under the Uniform Trade Secrets Act (UTSA)) . . . for misappropriation of the trade secret, but extends to any cause of action which relates to the trade secret.” 132 Cal. App. 4th 826, 830 (2005)(emphasis added). Put another way, exposing a plaintiff’s failure to comply with Section 2019.210 at the right time can be devastating the plaintiff’s case.
Opposing the motion for summary judgment is equally problematic for the plaintiff. As an initial matter, there are little (if any) factual disputes in the motion because the defendant will be relying exclusively on the plaintiff’s allegations and admissions. Moreover, the plaintiff cannot defeat summary judgment by providing further details not included in its section 2109.210 statement. See Pixion, Inc. v. Placeware, Inc., 2005 WL 88968, at *7, *11 (N.D. Cal. 2005)(granting summary judgment, in part, based on plaintiff’s failure to describe alleged web conferencing technology trade secrets with reasonable particularity in its section 2019(d) statement which identified six features of its invention).
Section 2019.210 is an available weapon that becomes even more powerful the longer defense counsel can wait before using it to expose the plaintiff’s failed compliance. Instead of using it to win a discovery battle, defendants would be well advised to wait and use it to achieve full victory.
Unlike criminal cases, a defendant in a civil action is virtually certain to be afforded notice of his alleged misconduct long before he has to sit for a deposition, produce documents, or otherwise explain or justify his alleged misconduct.
What happens then, if the defendant has the mind of a criminal with no reservations about destroying evidence? Especially in today’s digital age, when evidence can be destroyed with a few keystrokes or clicks of a mouse, how can a plaintiff prove, for example, copyright infringement or the misappropriation of trade secrets if the evidence is gone before the defendant even files his responsive pleading?
Although courts are often reluctant to give plaintiffs the opportunity to enter a defendant’s premises without notice to search and seize evidence of wrongdoing, there are weapons found in and out of the Federal Rules of Civil Procedure, which the plaintiff’s practitioner must be aware of to uncover, if not the smoking gun, at least the smoke.
A RULE 65(b) SEARCH AND SEIZURE
In copyright infringement cases, for example, it is often the case that the plaintiff becomes aware of a defendant’s infringement from an “insider” who has knowledge of the infringement without evidence of the infringement. An ex-employee or customer may have heard defendants discussing the fact that they purchased a single software package with one license to install in several different offices. This insider may possess evidence of defendants admitting to owning counterfeit or “cracked” versions of the plaintiff’s software. While this testimony may be persuasive, without direct evidence of wrongdoing, the trial will be nothing more than a battle of contradicting testimony.
Ideally, the plaintiff will want an opportunity to search the defendant’s offices and computers for evidence of infringement before the defendant is afforded an opportunity to engage in Arthur Andersen type “housekeeping.” In some cases, the plaintiff will able to utilize Rule 65(b) of the Federal Rules of Civil Procedure, which authorizes the court to issue a temporary restraining order without notice to the adverse party.
In practice, the plaintiff will file the complaint and its ex parte application for an emergency temporary restraining order under seal and not serve or provide any notice of the lawsuit to the defendant. The application will request that the plaintiff, with the assistance of the United States Marshals, be afforded the opportunity to search for and seize any evidence of infringement.
The relief provided by Rule 65(b) is the exception to the general rule. As explained by the Supreme Court, “our entire jurisprudence runs counter to the notion of court action taken before reasonable notice and an opportunity to be heard has been granted both sides of a dispute.”1 As a result, restraining order applications sought ex parte require the court to serve as the absent party’s advocate, triggering intense judicial scrutiny of a plaintiff’s claims, the relief it seeks, and most importantly, its proffered justification for proceeding ex parte2. Especially when a defendant is unaware that a lawsuit has been filed, such relief also implicates the restrictions imposed by the Fourth and Fifth Amendments of the Constitution.
Accordingly, ex parte relief under Rule 65(b) applies in two situations. First, such relief may be granted when the plaintiff does not know the party’s identity or location. Second, such relief may be granted when “it clearly appears . . . that immediate and irreparable injury, loss, or damage will result to the application before the adverse party or that party’s attorney can be heard in opposition.”3 The former situation is rarely at issue and the latter is rarely provable.
To illustrate, the opportunity to erase computer disks, burn, shred, or hide documents, and coach potential witnesses is present in every civil case. Therefore, a plaintiff must do more than assert that the defendant could or would dispose of evidence if given notice. Instead, a plaintiff must show that the adverse party has a history of disposing of evidence or violating court orders or that persons similar to the defendant have such a history.4
Often, the plaintiff has not had any direct dealings with the defendant and can therefore not present anything beyond intuition, suspicion, or supposition. Without more, the Court will invariably conclude that the plaintiff has not come forth with adequate justification for failing to give notice to the defendant. If the plaintiff wishes to seek injunctive relief, the Court will instruct the plaintiff to bring a fully noticed motion for a preliminary injunction.
Because providing the defendant with notice of the action is tantamount to affording the sinister defendant an opportunity to cover up its tracks of wrongdoing, the plaintiff’s practitioner must be prepared to handle this hurdle dealt by the Court.
THE NEXT BEST THING
No one in America witnessed the murders of Nicole Brown Simpson or Ronald Goldman on June 12, 1994. However, by June 17, 1994, millions of Americans concluded that O.J. Simpson, by then a fugitive from justice in his White Ford Bronco, was the one and only suspect in the double murders on Bundy Drive. Indeed, observing the attempted escape was sufficient for many to conclude that this popular Hall of Famer was a cold blooded killer. Both logically and legally, evidence of flight by a defendant is a silent admission by the defendant that he is unwilling or unable to face the charges against him from which guilt may be inferred.5
The plaintiff’s practitioner must realize that a civil lawsuit is no different. When a plaintiff is denied the rare but essential opportunity to search and seize a defendant’s premises, the plaintiff must do the next best thing: informal and clandestine discovery.
When adhering to the Court’s suggestion of bringing a fully noticed motion for a preliminary injunction, the plaintiff should simultaneously have a strategy in place designed to expose any efforts to eliminate evidence. While it is unlikely that the defendant will pack up his SUV and head for Mexico, defendants in civil lawsuits are rarely suspicious that their conduct following service of a lawsuit could be at issue or even observed. Accordingly, what a defendant does immediately following service can sometimes produce a cornucopia of evidence that would normally be lost forever.
Rather than hire a process server to simply serve the lawsuit and wait to hear from the defendant or his counsel, a plaintiff would be well-advised to hire a reputable private investigator to have a team of individuals conduct surveillance of the defendant and all relevant locations where evidence of wrongdoing could be found (e.g., the defendant’s place of business, residence, etc.). When the team is in place and are conducting surveillance from a public location, the defendant should be formally served with the complaint. From there, the defendant and all relevant locations must be observed and taped. A videotape showing the defendant loading computers and documents into a car or truck immediately after being served with the lawsuit can be very persuasive evidence for a judge or jury.
Dumpster diving (i.e., searching through another’s trash) is not illegal. In 1988, the Supreme Court of the United States concluded in California v. Greenwood that the legality of a warrantless search of a suspect’s trash turned on whether the manifested subjective expectation of privacy in the garbage left on a curb would be accepted by society as objectively reasonable. The Court concluded that, by exposing the garbage to the public and placing it on the side of the street for the express purpose of conveying it to the trash collector, there was no reasonable expectation in the privacy of the discarded items.6
Since Greenwood, dumpster diving has become commonplace among both law enforcement and, perhaps ironically, identity thieves. It has become so prevalent, in fact, that the Federal Trade Commission’s (“FTC”) new “Disposal Rule” provides that businesses must take reasonable measures to protect against unauthorized access to consumer information when the business disposes such information.7
In addition to conducting surveillance, a plaintiff looking for evidence of copyright infringement, trade secret misappropriation, or tortious interference, for example, should also have its private investigators engage in dumpster diving to see whether the defendant has carelessly embarked in a campaign of evidentiary destruction.
A WORD OF CAUTION: INSTRUCT AND SUPERVISE THE INVESTIGATOR
It is imperative that practitioners be aware of the legal limitations of these methods of discovery. As illustrated in Stephen Slesinger, Inc. v. The Walt Disney Co., misconduct in the quest for evidence of misconduct can devastate a party’s case.8
In the early 1990s, plaintiff Stephen Slesinger, Inc. (“SSI”) sued defendant The Walt Disney Corporation (“Disney”) for Disney’s alleged failure to pay the plaintiff royalties in connection with its Winnie the Pooh productions. When SSI commenced litigation, it hired an investigator to surreptitiously procure Disney’s documents outside of the regular discovery process. On some occasions, the investigator discussed his planned activities with SSI. In most instances, he did not.
The lawsuit was litigated for more than ten years before the conduct of SSI’s investigator would be fully addressed by the Court; however, when the conduct was addressed, it cost SSI dearly. To illustrate, the Court first took issue with the fact that neither SSI nor its investigator maintained any logs or records showing what documents were received from the investigator. Next, the Court found that the investigator was not credible when he testified that he only conducted dumpster diving at one Disney location. Even if he did conduct dumpster diving at only one location, the Court noted that the dumpsters at the location “were located on private property, not on a street curb as occurs on trash collection days in residential neighborhoods.” Put another way, “[t]he contents of the . . . dumpsters were not, in this Court’s view, made available to the public so as to give SSI a right to treat Disney’s documents as abandoned and use them for private advantage.”9
Practitioners must be extremely cautious about who they hire to conduct surveillance and dumpster diving. There is no privilege or immunity for breaking the law to obtain evidence.10As the plaintiff’s agent, it is the plaintiff’s responsibility to adequately supervise the investigator’s activities. Pragmatically speaking, the responsibility lies with the plaintiff’s counsel.
In Slesinger, the Court found that the culpability of SSI’s investigator’s shenanigans would be borne by SSI – even if the investigator’s actions conflicted with SSI’s instructions: “SSI claims it instructed [the investigator] to only obtain Disney documents by lawful means, but SSI remains fully responsible for [the investigator’s] misconduct, even if his acts, as SSI’s agents, were contrary to SSI’s explicit instructions.”11
It should be further noted that what SSI’s investigator uncovered was not evidence of Disney’s wrongdoing. Rather, SSI’s investigator recovered privileged documents prepared by Disney’s counsel that, for example, analyzed the risk and potential outcome of the case. SSI’s sole shareholder faxed the document to SSI’s attorneys who in turn circulated and reviewed it in detail. The Court found SSI’s misconduct “willful, tactical, egregious, and inexcusable.”12
When analyzing the appropriate sanction for SSI, the Court explained that neither disqualification of SSI’s counsel nor monetary sanctions were sufficient. SSI’s principals had reviewed the documents and, accordingly, neither disqualification nor monetary sanctions could purge the improperly obtained information from their minds.13
Ultimately, the Court concluded that terminating sanctions were the proper remedy to restore the integrity of the judicial process and fully protect the institution from further SSI abuse.
After more than ten years of litigation, SSI’s complaint against Disney was dismissed.
A RENEWED REQUEST: RULE 65(b) SEARCH AND SEIZURE
So long as the plaintiff’s investigator understands that surveillance and dumpster diving does not entitle him to unfettered access everywhere, the evidence uncovered following service of a lawsuit can often be powerful weapons for liability. In addition, the evidence recovered should also be used to renew the request that the Court grant a Rule 65(b) search and seizure without notice to the defendant. While the defendant will have had some opportunity to conceal evidence of his wrongdoing, he is also under the belief that there will be no discovery until at least the Court holds the formally noticed hearing for a preliminary injunction.
Thus, the plaintiff should go back to Court and explain that as soon as the defendant was served with the complaint, he threw away dozens of pieces of critical evidence showing that he had, for example, pirated the plaintiff’s software. The renewed request will explain that without a Court order the plaintiff will likely never know the extent of defendant’s culpability. It is also worth reminding the Court that irreparable damage may already have been done. Nonetheless, since the initial application was denied on the ground that the plaintiff could not identify specific instances where the defendant has destroyed evidence, it must now grant the motion given that the plaintiff has met its burden with the requisite evidence.
Our legal system generally does not deal effectively with parties who are prepared to lie, destroy, fabricate, or destroy evidence. Courts are suspicious of such charges and often assume that they are made for strategic or tactical reasons. Even when true, charges of misconduct can end up hurting the litigant making them as opposed to the litigant or party actually guilty of the misconduct.
Knowing the limitations of Rule 65 and our justice system in general, it is imperative that a plaintiff understand that there are additional weapons available to prove a defendant’s liability. Conducting surveillance and dumpster diving can sometimes uncover actions that implicate liability better than a White Ford Bronco headed for Mexico.
1 Granny Goose Foods, Inc. v. Brotherhood of Teamsters, 415 U.S. 423, 438-39 (1974).
2 Adobe Systems, Inc. v. South Sun Products, Inc., 187 F. R. D. 636, 639 (S.D. Cal. 1999)citing American Can Co. v. Mansukhani, 742 F. 2d 314, 324 (7th Cir. 1984).
3 Fed. R. Civ. P. 65(b).
4 First Tech. Safety Sys., Inc. v. Depinet, 11 F. 3d 641, 650-51 (6th Cir. 1993).
5 Starr v. U.S., 164 U.S. 627, 632 (1897).
6 California v. Greenwood, 486 U.S. 35 (1988).
7 16 C.F.R. § 682.3 (2005).
8 Stephen Slesinger, Inc. v. The Walt Disney Company, 2004 WL 612818 (Cal. Superior) (Not published).
9 Id. at *5.
10 Pullin v. Superior Court, 81 Cal. App. 4th 1161, 1164-65 (2000).
11 Id. at *5 citing Martin v. Leathman, 22 Cal. App. 2d 442, 445 (1937).
12 Id. at * 13.