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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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Palm DesertFrom the point of view of a resident, a homeowners’ association (HOA) in California operates much like a government entity. It has the authority to enact legally binding rules and to assess and collect fees for a variety of purposes, such as maintenance of common areas and community-wide utility services. Ongoing drought conditions throughout California have strained the ability of many HOAs to maintain various requirements and services. As just one example, an ongoing dispute in the Coachella Valley area involves a water district’s efforts to maintain water service in the face of water shortages and new state standards for water quality.

More than 1,000 water districts provide services to cities, counties, and other communities throughout California. These districts may bill consumers directly for services, or they may contract with HOAs to provide services to a community. The HOA would then bill individual residents. Increases in fees require a vote by the members of a water district’s board after a public meeting. A 1996 voter initiative, Proposition 218, limits the amount of fee increases to actual increases in a water district’s cost of providing water service. Any increase in fees ultimately falls on consumers, or on HOA members through the HOAs.

New water quality standards established by the California Department of Public Health (DPH) have reportedly led to substantial expenses for many water districts. DPH proposed new standards in 2013 regarding the amount of hexavalent chromium, also known as chromium 6, in drinking water. The consensus among public health officials is that chromium 6 is carcinogenic when consumed above certain amounts. This is the substance made famous by the events depicted in the film Erin Brockovich, in which the residents of a small town in the Mojave Desert experienced high rates of cancer due to chromium 6 in the groundwater. The DPH recommended a cap on chromium 6 of 10 parts per billion (ppb), considerably lower than the federal cap of 100 ppb. Ten ppb became the state standard in May 2014.

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Train couplingWhether federal copyright law, as currently written, is capable of adequately addressing issues presented by 21st-century technology is an open question. A jury in a Northern California court recently rendered a verdict in favor of Google in a copyright lawsuit filed nearly six years ago by the software company Oracle. Oracle America, Inc. v. Google Inc., No. 3:10-cv-03561, complaint (N.D. Cal., Aug. 12, 2010). At the time of filing, Oracle had recently acquired Sun Microsystems, creator of the Java programming language. Google had used Java to build its Android mobile device operating system, and Oracle claimed that Google had infringed its copyright in multiple software protocols known as application programming interfaces (APIs). Two central questions in the case are whether an API is subject to copyright protection, and if so, whether the Fair Use Doctrine applied to Google’s use of the APIs. The May 2016 jury verdict offers an answer for the immediate circumstances, but not necessarily anything to apply to other cases.

Copyright law protects “original works” that are “fixed in any tangible medium of expression.” 17 U.S.C. § 102(a). Computer technology was still largely in its infancy at the time of the most recent overhaul of copyright law in October 1976. At that time, Microsoft and Apple were, respectively, only 18 months and six months old. Congress amended federal copyright law again in 1980 to address copyright protection for “computer programs.” Id. at §§ 101, 117. Court decisions have affirmed that various types of software are subject to copyright protection. See, e.g., Apple Computer, Inc. v. Franklin Computer Corp., 714 F.2d 1240 (3rd Cir. 1983).

Copyright protection does not extend to mere ideas, rather than tangible expressions of those ideas, nor does it apply to a “procedure, process, [or] system” that is separate from a work of authorship. 17 U.S.C. § 102(b). Some software does not meet the federal standard for copyright protection, but it might be eligible for patent protection as a “new and useful process.” 35 U.S.C. § 101. Even if software is protected by copyright, a particular use might not constitute infringement under the Fair Use Doctrine. 17 U.S.C. § 107.

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Trade SecretBusinesses must take great care to protect their intellectual property from various types of infringement. With intellectual property that is subject to copyright, trademark, or patent protection, businesses want to protect their exclusive rights to use, display, or distribution. The value of this type of intellectual property derives from the fact that it is known to others but controlled by its owner. Another type of intellectual property, trade secrets, has value because it is not widely known to others. Businesses have had to rely on state laws to enforce trade secret rights, which can be difficult when a dispute crosses state lines. Federal law, however, now offers similar trade secret protections, thanks to the Defend Trade Secrets Act (DTSA) of 2016, Pub. L. 114-153 (May 11, 2016).

Many different forms of information, such as formulas, processes, or designs, can be considered a trade secret. The Uniform Trade Secrets Act (UTSA) identifies three key features of a trade secret. It must have economic value based on the fact that it is not generally known to others who could also derive economic benefit from it. It must be something specialized enough that others could not, through reasonable effort, develop or discover it themselves. Finally, the person or business claiming it as a trade secret must have made a reasonable effort to keep it secret. The formula for Coca-Cola is one of the most famous trade secrets in the world. It is not patented or copyrighted but instead kept in a vault in the company’s Atlanta, Georgia headquarters.

Forty-seven U.S. states, the District of Columbia, Puerto Rico, and the U.S. Virgin Islands have adopted the UTSA. See Cal. Civ. Code § 3426 et seq. The owner of a trade secret may seek injunctive relief in state court to prevent “actual or threatened misappropriation.” Id. at § 3426.2. A court may also compel a party to take “affirmative acts to protect a trade secret.” Id. The UTSA allows damage awards for actual losses, as well as punitive damages in certain circumstances. It directs courts to use “reasonable means” to “preserve the secrecy of an alleged trade secret,” such as in-camera hearings, orders of nondisclosure, and sealed court records. Id. at § 3426.5.

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Federal antitrust law is intended to protect the competitiveness of the marketplace, based in part on the idea that competition benefits consumers. In a genuinely competitive market, consumers give their business to the company that best meets their wants and needs. Businesses therefore have incentives to be responsive to consumer demands, such as keeping prices low or maintaining a high quality of goods or services. Antitrust law prohibits practices aimed at suppressing or preventing competition. A business that has a monopoly in a particular market does not violate antitrust law solely by virtue of its monopoly, but any activity that prevents competitors from entering the market is likely to draw the attention of regulators. The Federal Trade Commission (FTC), which enforces laws against unfair competition, recently settled a claim alleging anticompetitive practices against a company that was first to market with a polymer used in medical devices. In the Matter of Victrex plc, et al., No. 141-0042, consent order (FTC, Apr. 27, 2016).

BusinessThe Sherman Antitrust Act of 1890, 15 U.S.C. § 1 et seq., established a system of federal laws against anticompetitive business practices. A company that holds a monopoly violates this law if it prevents new entrants to the market, such as by requiring customers to sign contracts with an exclusivity clause stating that they will not do business with any competitors. A company might unlawfully attempt to become a monopoly by selling a product at a loss in order to drive out competitors, a practice known as “dumping.” Two or more companies might violate antitrust law by colluding in a way that prevents competition, such as price-fixing. The FTC Act, 15 U.S.C. § 41 et seq., overlaps somewhat with federal antitrust law in its prohibition on unfair competition.

The respondent in Victrex is a United Kingdom-based manufacturer of polymer products. It was first to market with implant-grade polyetheretherketone (PEEK), a polymer used in implanted medical devices, in the late 1990s. According to the FTC, two other companies began manufacturing implant-grade PEEK in the late 2000s. These potential competitors offered the product to medical device manufacturers at a much lower price, but they were unable to gain much of the market. In 2014, the FTC claimed, the respondent still had more than 90 percent of global sales of implant-grade PEEK.

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