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shopping basketThe internet has given businesses the ability to reach customers across the country, or even across the world. Doing business across state lines can involve different legal issues from keeping one’s business activities within California, and understanding state and federal regulations of business activities that cross state lines is crucial to operating a successful business. A petition for certiorari to the U.S. Supreme Court is asking for clarification on two constitutional doctrines that appear to conflict with each other. Texas Package Stores Assoc., Inc. v. Fine Wine and Spirits of North Texas, LLC, No. 16-242, pet. for cert. (Sup. Ct., Aug. 19, 2016). A doctrine known as the “dormant Commerce Clause” limits the ability of any one state to enact laws restricting interstate commerce, while the Twenty-First Amendment to the U.S. Constitution gives the states broad authority to regulate commerce involving alcohol.

The Commerce Clause, U.S. Const. art I, § 8, cl. 3, empowers Congress “to regulate Commerce…among the several States.” The Supreme Court has interpreted this authority very broadly. It has also recognized a negative converse to this doctrine, known as the dormant Commerce Clause, which bars state laws that discriminate against out-of-state businesses or otherwise unreasonably interfere with interstate commerce. The dormant Commerce Clause has been used, for example, to invalidate a state law that imposed an assessment on all milk sold within the state but only distributed the assessment to in-state dairy farmers. West Lynn Creamery, Inc. v. Healy, 512 U.S. 186 (1994). The court held that this amounted to a discriminatory tax on out-of-state dairy farmers.

The Twenty-First Amendment is best known for repealing the Eighteenth Amendment and ending the period from 1919 to 1933, known as Prohibition, when alcohol was banned throughout the country. Section 2 of the Twenty-First Amendment gives the states the authority to regulate alcohol, including “the transportation or importation into” a state.

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California district mapIn almost any employer/employee relationship, an agreement between the parties governs the terms and conditions of employment, filling in the gaps not covered by local, state, and federal employment laws. These types of contracts rarely involve two parties with equal bargaining power. A longstanding legal principle holds that any provision in an employment contract that contradicts or violates an employment statute or regulation is unenforceable. The California State Legislature can enact laws targeting specific types of employment contract clauses. It recently enacted SB 1241, which takes effect at the beginning of 2017. This bill targets clauses that limit California employees’ ability to assert claims against their employers under California law, commonly known as “choice of law” or “forum selection” clauses.

In any lawsuit, a plaintiff must be able to establish that the court in which they have filed suit has jurisdiction over the defendant(s) and that the venue of the suit is proper. In most disputes filed in state court, a plaintiff must establish that the state of California has jurisdiction and that the county where the court sits is the correct venue. In a federal lawsuit, a plaintiff must establish the court’s personal jurisdiction over the defendant, its subject matter jurisdiction over the lawsuit, and the appropriateness of filing the case in that particular federal district. A defendant may object to the court’s jurisdiction, the venue of the case, or both.

Common jurisdictional questions include the jurisdiction of federal courts over disputes involving state law questions and the jurisdiction of a court in one state over a defendant who lives in another state. Choice of law clauses in written contracts allow the parties to agree in advance to both jurisdiction and venue in the event of a dispute that leads to litigation. For example, a choice of law clause might state that all disputes relating to the contract will be governed by California law and adjudicated in the courts of Alameda County. By entering into a contract with a choice of law clause, a party to a contract is generally deemed to have waived any and all objections to jurisdiction and venue, and to have agreed not to seek either in a different location.

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IrelandTaxes, as the saying goes, are one of only two certainties in life. This part of the adage applies just as much to businesses as it does to individuals. (The extent to which the other part of the adage—“death”—applies to businesses is a question for another day.) Starting and operating a business requires a careful consideration of tax-related consequences, as well as ways to minimize tax obligations. The tech company Apple, based in Silicon Valley but operating all over the world, has recently been the subject of a dispute over tax benefits it has received from the government of Ireland. While the nature of this dispute might not be applicable to most businesses that are smaller than Apple, it offers a demonstration of how businesses obtain tax benefits from various governments.

Corporations, partnerships, and other types of business entities must pay income tax to the federal government and many state governments, along with various other types of taxes, such as sales tax and payroll tax. Tax planning can include not only preparing for future tax obligations but also minimizing those obligations within the boundaries of state and federal tax regulations. A business might be able to take advantage of a “tax loophole,” and it might also be able to obtain tax benefits or concessions directly from a government.

Perhaps the most common way for both individuals and businesses to reduce their tax bill is by reducing their amount of “taxable” income. While they could do this simply by earning less money, the preferred method is to take various deductions, such as business operations and payroll expenses. Their taxable income equals their gross annual income minus all lawful deductions.

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Colorful journalsClass actions allow large groups of individuals with substantially similar claims against one defendant, or a small group of defendants, to pool their claims in a single lawsuit. Federal and state rules impose standards for certifying a case as a class action, and they also regulate the conduct of the case. The Federal Rules of Civil Procedure (FRCP) require the parties to present any proposed settlement to the court for approval. A California federal judge recently denied a joint motion to approve a class action settlement, finding it not to be “fair, adequate, and reasonable” to the interests of all class members. O’Connor et al. v. Uber Technologies, Inc. et al., No. 4:13-cv-03826, order at 2 (N.D. Cal., Aug. 18, 2016).

A class action begins as a lawsuit filed by one or more plaintiffs on behalf of a proposed class of people. The plaintiffs typically propose themselves as representatives of this class for the purpose of the litigation. FRCP 23 establishes four criteria for a class action:  numerosity of class members, commonality of legal and factual questions among all class members, typicality of the class representatives’ claims, and the ability of the class representatives to represent the class “fairly and adequately.” Fed. R. Civ. P. 23(a). Once the court certifies a class, it must notify class members of the pending action. Most class actions are “opt out,” meaning class members are plaintiffs unless they request to be excluded.

The parties to a class action must present any proposed settlement to the court for approval. If the settlement would bind class members, such as by preventing them from asserting further claims under the doctrine of res judicata, the court must conduct a hearing to determine whether the settlement is “fair, reasonable, and adequate.” Id. at 23(e)(2). Individual class members must receive notice of the proposed settlement and must have an opportunity to object.

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moneyBusinesses that sell goods and services to the general public must take care regarding how they advertise their products and themselves in order to avoid possible claims under state and federal consumer laws prohibiting false or misleading statements and other “unfair business practices.” Consumers may be able to assert claims in court for both intentional and negligent violations of these laws, as demonstrated by a lawsuit filed recently in a California federal court, Rose v. Zara USA, Inc., No. 2:16-cv-06229, complaint (C.D. Cal., Aug. 19, 2016). The plaintiff alleges that the defendant, a clothing retailer organized in New York and based in Europe, deceived consumers by listing prices in euros but charging customers “arbitrarily inflated amounts” in dollars. Id. at 9.

Most business torts, much like tort law pertaining to personal injuries, can be broadly divided into two categories:  intentional torts and negligence. Intentional torts typically require proof that a defendant acted willfully or intentionally. In some cases, a plaintiff must also prove that the defendant intended the harm to occur. Consumer protection statutes do not necessarily require a plaintiff to prove intent, but they may permit additional damages if a plaintiff can prove that a defendant acted willfully.

A claim for negligence does not require proof that a defendant had any particular mental state. It focuses instead on duties of care owed by a defendant. A plaintiff must establish four elements in order to prevail on a negligence claim:  (1) the defendant owed a duty of care to the plaintiff, or to the general public; (2) the defendant breached this duty; (3) the breach proximately caused the plaintiff’s harm; and (4) the plaintiff suffered measurable damages as a result.

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lorryThe precise nature of the legal relationships between an employer and the people who work for it depends on whether those workers are employees or independent contractors. Employees are often entitled to a broad range of legal protections regarding minimum wage, overtime hours, unemployment compensation, and other terms and conditions of employment. Independent contractors, on the other hand, are generally only entitled to whichever rights are defined in their contract. Misclassifying an employee as an independent contractor can result in substantial penalties under California law. See Cal. Lab. Code § 226.8. Recent court decisions in California have closely examined the distinction between employees and independent contractors as workers challenge their alleged independent contractor status.

The legal standard for determining whether someone is an employee or an independent contractor varies from state to state. California has adopted the common-law rule known as the “right to control” test, which examines whether the employer “has the right to control the manner and means of accomplishing the result desired.” S. G. Borello & Sons, Inc. v. Dep’t of Industrial Relations, 48 Cal.3d 341, 350 (1989). To put it in overly simple terms, if the employer has the authority to dictate when and where work is to occur, such as at the employer’s place of business between 9:00 a.m. and 5:00 p.m., the worker is probably an employee. If the worker has the autonomy to determine their own hours and location of work, they are probably an independent contractor.

Reality is rarely so simple, of course. The California Supreme Court acknowledged in Borello that the “right to control” test “is often of little use in evaluating the infinite variety of service arrangements.” Id. It identified eight additional factors that courts should consider, including whether the worker “is engaged in a distinct occupation or business”; which party “supplies the instrumentalities, tools, and place of work”; whether payment is made “by the time or by the job”; and whether the work is outside the scope of the employer’s “regular business.” Id. at 351.

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Fox NewsCalifornia law gives the directors and officers of a corporation principal authority over the corporation’s ordinary affairs. It also identifies certain fiduciary duties that the directors and officers owe to the shareholders and to the corporation itself. Under the “duty of loyalty,” directors and officers must always act in the best interests of the corporation and its shareholders. Breaches of this duty may result in civil liability to the shareholders. An ongoing scandal involving a major media company offers a demonstration, of sorts, of the duty of loyalty, based on allegations against the former chairman and chief executive officer. These allegations also demonstrate how a director might be able to avoid liability by showing a good-faith belief that their actions benefited the corporation.

A director of a corporation operating in California has a duty to act “in good faith…in the best interests of the corporation and its shareholders,” with a level of care that “an ordinarily prudent person in a like position would use.” Cal. Corp. Code § 309(a). This is considered a fiduciary duty to the corporation’s shareholders. Small v. Fritz Companies, Inc., 132 Cal.Rptr.2d 490, 499 (2003).

Self-dealing, such as when an officer or director has a conflict of interest with the corporation and acts both in their own interest and against the corporation’s interests, is a common example of a breach of the duty of loyalty. California law states that an “interested” director can avoid liability if they disclose to the other directors the “material facts” of any transaction in which they have a conflict of interest, and a majority of the non-conflicted directors approve the transaction. Cal. Corp. Code § 310. A breach of the duty of loyalty occurs when a conflicted director fails to disclose or actively conceals material information from the corporation.

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Video Surveillance Camera“Business torts” typically involve claims for acts that cause economic harm to a business operation, as opposed to tort claims involving physical or emotional harm. Businesses and business owners should be aware, however, that they can also face liability for torts involving physical or various non-economic damages. This extends beyond negligence claims related to accidents involving business property or employees, as demonstrated by a massive jury verdict earlier this year against a media company for invasion of privacy and other claims. The plaintiff, a well-known media personality, sued the company over its publication of a recording of him engaging in sexual activities with another person, commonly known as a “sex tape,” which he claims was made without his knowledge or consent. Bollea v. Gawker Media, et al., No. 12012447-CI-011, 1st am. complaint (Fla. Cir. Ct., Pinellas Cty., Dec. 28, 2012). The verdict could have a significant impact on businesses involved in media or publication of any kind, including many in Silicon Valley.

Business tort claims like tortious interference with a contract or injurious falsehood typically include intent as a required element of the claim. A plaintiff must prove that the defendant acted intentionally or willfully in a way that caused harm. Some business torts, however, are based on a theory of negligence, which requires a plaintiff to prove that the defendant owed a duty of care to the plaintiff or the public, that it breached that duty, and that this breach caused a measurable injury to the plaintiff. Damages in business tort cases may include lost profits, lost business opportunities, and restitution.

“Personal torts” involve direct physical or emotional harm to an individual. Torts like battery require proof of physical contact and harm, while intentional infliction of emotional distress requires proof of outrageous conduct that causes substantial emotional distress and damage. Another category of tort claims, commonly known as “dignitary torts,” involve intentional offenses against a person’s dignity, such as defamation and invasion of privacy. The Bollea case involved both dignitary and personal torts.

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Empty stacksCopyright law protects “original works of authorship,” giving a copyright owner the exclusive right to publish, distribute, exhibit, reproduce, and otherwise exploit these works. 17 U.S.C. § 102(a). The Fair Use doctrine allows the use of a copyrighted work by others, without the copyright owner’s permission, under certain circumstances. A long-running dispute involving the “Google Books” project, which involves the digitization of thousands of books for online searches, alleged infringement of the authors’ copyrights. In late 2015, a federal appellate court affirmed a lower court order dismissing the case on Fair Use grounds. Authors Guild v. Google, 804 F.3d 202 (2d Cir. 2015). The U.S. Supreme Court denied the plaintiff’s petition for certiorari in April 2016.

Federal copyright law allows several exceptions to copyright owners’ exclusive rights to copyrighted works. Under one exception, “libraries and archives” may reproduce copyrighted works if they do not do so for commercial benefit, they make the copies available to the public, and they include a notice of copyright with the copy. 17 U.S.C. § 108. At first glance, it might seem like this exception should apply to Google Books, but court decisions in the case focused on Fair Use.

Under the Fair Use doctrine, the use of a copyrighted work is not infringing if its purpose involves “criticism, comment, news reporting, teaching…, scholarship, or research.” 17 U.S.C. § 107. This is not an exhaustive list of permissible uses, and court decisions have identified multiple uses that fall under Fair Use. Even the commercial use of copyrighted works can be covered by Fair Use in certain situations. See Campbell v. Acuff-Rose Music, Inc., 510 U.S. 569 (1994).

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solar panelsEmployers in California must, at times, balance the needs of their business with their employees’ rights under local, state, and federal laws. The National Labor Relations Act (NLRA), 29 U.S.C. § 151 et seq., protects workers’ rights to engage in union-related activities, as well as the rights of workers who do not want to engage in such activities. The federal government has exclusive jurisdiction over disputes of this nature, meaning that the NLRA preempts state law claims. A California appellate court recently held, however, that preemption does not necessarily extend to business tort claims against a labor union, upholding an injunction in a trespass lawsuit. Wal-Mart Stores, Inc. v. United Food and Commercial Workers Int’l Union, 16 C.D.O.S. 7079 (Cal. App. 2d Dist., 2016).

Section 8 of the NLRA, codified at 29 U.S.C. § 158, prohibits “unfair labor practices” by both employers and labor organizations. Labor organizations may not, for example, “picket or cause to be picketed, or threaten to picket or cause to be picketed,” an employer when it is not the employees’ authorized representative, and the employer has either already recognized a different union as the authorized representative or is in the process of doing so. 29 U.S.C. § 158(b)(7).

Employers can bring a complaint against a union under § 8 to the National Labor Relations Board (NLRB), which is authorized by the NLRA to adjudicate disputes. The NLRB has exclusive jurisdiction over unfair labor practice claims, meaning that any dispute involving a practice addressed in § 8 of the NLRA must first go before the NLRB. This applies to both state and federal claims and is known as “preemption.” The U.S. Supreme Court has held that “state jurisdiction must yield” when a matter falls under the purview of the NLRA. Wal-Mart, slip op. at 6, quoting San Diego Bldg. Trades Council v. Garmon, 359 U.S. 236, 244 (1959).

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