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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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NY Photographic [CC BY-SA 3.0 (http://creativecommons.org/licenses/by-sa/3.0/)], via PicserverDoing business across state lines can potentially empower courts in other states to exercise jurisdiction over your business. The legal doctrine of personal jurisdiction determines when a court in a particular state may exercise its authority over a party located elsewhere, but the circumstances when this occurs can be difficult to define. The Delaware Supreme Court recently ruled that the mere act of registering in Delaware as an out-of-state, or “foreign,” corporation did not render a Georgia corporation subject to the state’s jurisdiction. Genuine Parts Co. v. Cepec, No. 528,2015, slip op. (Del. Sup. Ct., Apr. 18, 2016). While the ruling is only effective in Delaware, it could have important ramifications around the country.

Business entities created under state law protect owners from liability and offer other benefits. A business must form under the laws of a particular state, and businesses located all over the country choose to form as corporations under Delaware law. This makes them foreign corporations in their own home states, which means they must register as a foreign corporation before they may do business. In California, for example, foreign corporations must obtain a “certificate of qualification” from the Secretary of State. Cal. Corp. Code § 2105. The question for the Delaware Supreme Court was whether this registration, by itself, establishes personal jurisdiction.

Courts have held that exercising personal jurisdiction without justification violates a person’s due process rights. The U.S. Supreme Court has ruled that a court may only exercise personal jurisdiction over an out-of-state person if they have sufficient “minimum contacts” with that state. Int’l Shoe Co. v. Washington, 326 U.S. 310, 316 (1945). The meaning of “minimum contacts” has generally been decided on a case-by-case basis. The court set a much higher standard for situations in which the claim of jurisdiction is based on contact by a defendant’s subsidiary company. Daimler AG v. Bauman, 571 U.S. ___ (2014).

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NOAA [Public domain], via Wikimedia CommonsDisputes arising from maritime transactions, which often cross both state and national boundaries and involve numerous related business entities, can present difficult challenges for creditors. The Federal Rules of Civil Procedure include provisions to assist plaintiffs in the Supplemental Rules for Admiralty or Maritime Claims and Asset Forfeiture Actions (the “Supplemental Rules”). A recent New York court decision demonstrates the complexity of such transactions and the role of the Supplemental Rules. D’Amico Dry Ltd. v. Primera Maritime (Hellas) Ltd., No. 1:09-cv-07840, order (S.D.N.Y., Jul. 30, 2015). The case involved disputes ranging from Texas to England with 20 or more parties. The issues presented in D’Amico could be of particular interest to businesses involved in shipping in the Bay Area.

The Supplemental Rules address two common problems in maritime commercial claims. First, parties to a dispute may be located in different jurisdictions, either within the U.S. or across national borders, and any assets owned by a defendant may be highly mobile. Second, businesses engaged in maritime trade often use multiple shell businesses to protect assets, making the enforcement of existing judgments difficult.

Rule B of the Supplemental Rules allows a claimant to file an ex parte lawsuit to attach one or more assets owned by a defendant, if it states in a verified pleading that it cannot locate the defendant in the jurisdiction where the asset is located. This is a quasi in rem proceeding, which combines elements of both an in personam and an in rem lawsuit. The plaintiff’s claim is against an item of property, but in direct relation to a claim against its owner. In situations in which a plaintiff cannot locate assets owned by a defendant because other business entities hold title to all relevant assets, Rule B allows a plaintiff to assert a claim involving those other business entities if it can demonstrate that they operate as alter egos of the defendant.

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KVDP (Own work) [CC BY-SA 3.0 (http://creativecommons.org/licenses/by-sa/3.0)], via Wikimedia CommonsThe California Transparency in Supply Chains Act (CTSCA), Sen. Bill No. 657 (2009-2010 Reg. Sess.), was signed into law in 2010 and took effect in 2012. It requires manufacturers and retailers doing business in the state of California to “disclose their efforts to eradicate slavery and human trafficking from their direct supply chains.” Id. Additionally, it gives the state Attorney General access to a list of businesses required to make these disclosures. It is important to note at the outset that most manufacturing and retail businesses are not subject to the CTSCA’s disclosure requirements. The law only applies to businesses with “annual worldwide gross receipts” of $100 million or more. Id. Its provisions are important for all California businesses to understand, however, as it is part of a series of laws targeting human trafficking and forced labor.

The federal Victims of Trafficking and Violence Protection Act (VTVPA) of 2000 defines “‘severe forms of trafficking in persons,” in part, as “recruit[ing], harboring, transport[ing], provi[ding], or obtaining…a person for labor or services,” using “force, fraud, or coercion” in order to subject the person to “involuntary servitude,” slavery, or other forms of forced labor. Pub. L. 106-386 § 103(8)(B) (Oct. 28, 2000), 114 Stat. 1470. It defines “involuntary servitude” as a condition in which a person believes that they must perform services in order to avoid “serious harm or physical restraint” or “abuse…of the legal process.” Id. at § 103(5), 114 Stat. 1469.

The Legislature noted in the CTSCA’s preamble that human trafficking is illegal under state, federal, and international law. It further noted that, while various legislatures have passed numerous laws imposing criminal penalties on traffickers and protecting the rights of trafficking victims, few laws have “address[ed] the market for goods and products tainted by slavery and trafficking.” S.B. 657 at § 2(f). Market forces generally drive demand for less-expensive goods, and the Legislature acknowledged that consumers are in the best position to influence the market through purchasing decisions. The goal of the CTSCA is therefore to make information about trafficking and forced labor available to consumers, with the hope that consumers will reward businesses that avoid goods associated with forced labor, or that take direct action to fight human trafficking.
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