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planetsMinority shareholders, meaning those whose shares in a corporation make up only a small percentage of the total outstanding shares, are at a disadvantage if one or more majority shareholders take actions that harm their interests. State business and corporate laws offer protection against certain potentially harmful actions by the majority. In the event of a merger, for example, minority shareholders can challenge the valuation of the corporation and the resulting price per share that they would receive. The Delaware Court of Chancery recently considered a shareholder’s claim that he did not receive sufficient information to evaluate and object to a planned merger. In Re United Capital Corp., Stockholders Litigation, No. C.A. No. 11619-VCMR, mem. op. (Del. Ch., Jan. 4, 2017).

A “merger,” generally speaking, involves two companies combining to form a single company. Delaware allows a procedure known as a “short-form merger,” which typically involves a parent company merging with a subsidiary. Since the parent company, by definition, owns a majority of the subsidiary’s stock, the merger only requires buying the shares of the minority shareholders. A short-form merger can also occur when one shareholder owns an overwhelming percentage of outstanding shares and wants to buy out the minority shareholders. Shareholder approval is not required for this type of merger. See 8 Del. Code § 253. This was the type of merger that led to the dispute in United Capital.

Minority shareholders who believe their shares have been undervalued in a short-form merger have little legal recourse. The Delaware Supreme Court has held that “absent fraud or illegality, the only recourse for a minority stockholder who is dissatisfied with the merger consideration is appraisal.” Glassman v. Unocal Expl. Corp., 777 A.2d 242, 243 (Del. 2001). This involves “an appraisal by the Court of Chancery of the fair value of the stockholder’s shares of stock” under the circumstances of a merger. 8 Del. Code § 262.

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Via Rodeo DriveCalifornia imposes numerous responsibilities on businesses, particularly in their capacity as employers. These include requirements regarding the payment of wages and the maintenance of employment records. Employers are also prohibited from various types of discrimination under state and federal laws, including discrimination on the basis of race. A putative class action pending in a California federal court alleges race discrimination and various wage and hour violations against a designer clothing retailer. Sampino v. Versace USA, Inc., No. 3:16-cv-07198, am. complaint (N.D. Cal., Apr. 19, 2017).

In addition to general requirements that employers pay their workers for the full amount of compensation that they have earned, California sets numerous additional standards. For example, employers must maintain records of their employees, including payroll records showing the number of hours worked and the wages paid. Cal. Lab. Code § 1174. They must also provide itemized statements to their employees with each paycheck. Id. at § 226. A failure to meet these requirements may result in civil fines and liability to aggrieved employees.

California law prohibits employers from discriminating against employees and job applicants on the basis of race and multiple other factors. Cal. Gov’t Code § 12940(a). It further prohibits an employer, or anyone acting on an employer’s behalf, from “aid[ing], abet[ting], incit[ing], compel[ling], or coerc[ing]” any unlawful acts of discrimination. Id. at § 12940(i). Retaliating against an employee for complaining about prohibited conduct, either internally or to state regulators, also violates state law. Id. at § 12940(h).

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Copyright OfficeOperating an online business requires careful attention to numerous potential liabilities, including copyright infringement. Any online service that allows users to post or share information needs to be aware of the federal laws and regulations dealing with potential copyright infringement. The Digital Millennium Copyright Act (DMCA) is a far-reaching law dealing with copyright on the internet and other digital systems, first enacted by Congress in 1998. Title II of the DMCA, also known as the Online Copyright Infringement Liability Limitation Act (OCILLA), creates a “safe harbor” for certain internet service providers (ISPs). The U.S. Copyright Office recently issued new rules regarding safe harbor protection, which took effect toward the end of 2016.

The DMCA covers a wide range of copyright issues, including a prohibition on attempts to circumvent copy-prevention systems in digital media devices. The statute also allows technicians to make temporary copies of software for the limited purpose of computer repair, reversing a court ruling that this constituted copyright infringement. See MAI Systems Corp. v. Peak Computer, Inc., 991 F.2d 511 (9th Cir. 1993). As the internet has gained prominence, and websites that allow users to upload and share content have become features of daily life for millions of people, the “safe harbor” provisions have perhaps become the most important provisions of the DMCA.

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Silicon ValleyThe U.S. financial system depends on competition in order to maintain efficiency and fairness. Federal and state antitrust laws prohibit a wide range of anti-competitive activities in order to protect the public against monopolistic behaviors. This applies not only to commercial activities like buying and selling goods and services but also features of employment like hiring and salary decisions. When a group of employers makes anticompetitive agreements that harm workers, those workers may have recourse in court. A putative class action in California alleges that two companies entered into an unlawful “anti-poaching” agreement, by which each company agreed not to hire employees of the other company. Frost et al. v. LG Corporation et al., No. 5:16-cv-05206, consol. class action complaint (N.D. Cal., Nov. 8, 2016).

The main federal antitrust law in the U.S. is the Sherman Act of 1890, 15 U.S.C. § 1 et seq. It prohibits various anticompetitive activities, and it empowers the federal government to investigate businesses that have amassed significant market power, sometimes known as “trusts.” California’s Cartwright Act, Cal. Bus. & Prof. Code § 16720 et seq., contains similar provisions. A business does not violate antitrust law solely by attaining a monopoly in a particular market. A company that attains a monopoly by suppressing competition from others does violate antitrust law, however, as does a company that legitimately attains a monopoly and then suppresses competition in order to keep it.

Examples of anticompetitive activities prohibited by the Sherman and Cartwright Acts include price-fixing or boycott agreements between businesses that are otherwise competitors, as well as contractual terms that require customers or vendors to do business exclusively with a particular company. In the context of employment, employers may violate antitrust laws by making agreements to keep wages below a certain level for their employees, as well as anti-poaching agreements that keep employees from changing jobs within their field.

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runners-silhouettes-athletes-635906Patent protection can be the key to many business’ success, giving them the exclusive right to use a particular invention or process, or to license its use to others. The federal government has exclusive jurisdiction over patent law in the U.S. In the event of a patent dispute that crosses international borders, a patent owner in the U.S. has several options, including objecting to the importation of allegedly infringing products. The U.S. International Trade Commission (ITC) is authorized to investigate alleged intellectual property infringement under § 337 of the Tariff Act of 1930, 19 U.S.C. § 1337. A recently-closed matter involving rival wearable technology manufacturers demonstrates this process. In re Certain Activity Tracking Devices, Systems, and Components Thereof, Inv. No. 337-TA-963, notice (ITC, Oct. 20, 2016); see also 81 Fed. Reg. 74479 (Oct. 26, 2016).

Congress created the ITC in 1930, giving it responsibility to report on issues involving customs laws to both the White House and Congress. See 19 U.S.C. § 1332. The ITC’s investigative jurisdiction includes alleged import injuries and intellectual property disputes involving imports. This latter category includes patent, trademark, and copyright infringement.

Section 337 prohibits the importation of items that infringe a patent or copyright issued under U.S. law, as well as the sale of such items after importation. The ITC may initiate an investigation of alleged infringement on its own, or in response to a complaint. If it concludes that infringement has occurred, or is occurring, it can order the exclusion of the articles at issue from importation. This typically only applies to individuals or businesses found to have violated the law, but it can also be a general exclusion.
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DefaultBankruptcy offers a way to obtain relief when one’s available income is not sufficient to cover one’s required debt payments. Federal bankruptcy law offers several options for businesses, including a restructuring of debts through Chapter 11 of the Bankruptcy Code. The goal of a Chapter 11 bankruptcy is to create a plan that pays down much of a business’ debt, discharges some remaining debts, and allows continued business operations once the bankruptcy case closes. Creating a Chapter 11 reorganization plan can be a complex task, depending on the size of the business and the extent of its debts. The Ninth Circuit recently considered a question about whether a default interest rate should still apply after a Chapter 11 debtor cures the default. The court reversed its own precedent, ruling that curing the default does not wipe out the default interest rate. In re New Investments, Inc., No. 13-36194, slip op. (9th Cir., Nov. 4, 2016).

Many secured loan or credit agreements require a debtor to pay a higher interest rate after a default. Almost 30 years ago, the Ninth Circuit held that a debtor who cures the default could eliminate their obligation to pay the default interest in a Chapter 11 bankruptcy. In re Entz-White Lumber & Supply, Inc., 850 F.2d 1338 (9th Cir. 1988). The court based its decision in part on language in the Bankruptcy Code stating that a Chapter 11 bankruptcy plan “shall…provide adequate means for the plan’s implementation, such as…curing or waiving of any default.” 11 U.S.C. § 1123(a)(5)(G).

The Bankruptcy Code does not define “cure,” so the court applied the common meaning of “taking care of the triggering event and returning to pre-default conditions.” Entz-White, 850 F.2d at 1340 (internal quotations omitted). It held that the interest owed by the debtor should be “at the market rate or at the pre-default rate provided for in the contract,” rather than the higher default interest rate. Id. at 1343.

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Banana RepublicThree plaintiffs filed a putative class action against a retail clothing company, alleging that it induced them to enter store locations with misleading advertisements of a storewide sale. The defendant sought summary judgment, partly on the ground that the plaintiffs lacked standing to sue because they had not established actionable economic injuries. The trial court ruled in the defendant’s favor. The appellate court reversed this ruling, finding that the plaintiffs had demonstrated a triable issue of fact as to whether they suffered injuries-in-fact. SV v. Banana Republic, LLC, No. B270796, slip op. (Cal. App. 2nd, Dec. 15, 2016).

The lawsuit asserts causes of action under three California statutes. The Unfair Competition Law (UCL) prohibits “unfair, deceptive, untrue or misleading advertising.” Cal. Bus. & Prof. Code § 17200. The False Advertising Law (FAL) broadly prohibits the advertising of goods or services using “any statement…which is untrue or misleading, and which is known, or which…should be known, to be untrue or misleading.” Cal. Bus. & Prof. Code § 17500. The Consumers Legal Remedies Act (CLRA) prohibits “unfair or deceptive acts or practices” connected with the sale of goods or services. Cal. Civ. Code § 1770(a). The plaintiffs in SV alleged three CLRA violations involving false advertising of goods, false or misleading statements regarding “price reductions,” and misrepresenting the nature of a transaction. Id. at §§ 1770(a)(9), (13), (14).

In order to establish standing under any of these statutes, a plaintiff must demonstrate that they have “suffered injury in fact and…lost money or property” because of the defendant’s unlawful act. SV, slip op. at 10, quoting Kwikset Corp. v. Superior Court, 51 Cal.4th 310, 321 (2011), Cal. Bus. & Prof. Code § 17204. With regard to the amount of damages a plaintiff must show, the court notes that an “injury in fact is not a substantial or insurmountable hurdle.” SV at 10, Kwikset at 324. All three statutes allow restitution and injunctive relief. The UCL and the FAL limit any other kind of damages, but the CLRA expressly includes compensatory and punitive damages as available remedies.

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trademark symbolTrademark registration grants the exclusive right to the registrant to use a name, phrase, or logo in commerce. The Lanham Act, 15 U.S.C. § 1051 et seq., governs this process and provides measures for the enforcement of trademark rights. An important requirement for trademark registration is the use of the mark in interstate commerce, which confers legal jurisdiction on the U.S. Patent and Trademark Office (USPTO). The U.S. Court of Appeals for the Federal Circuit recently ruled on a petition to cancel a trademark registration on the ground that the registrant had not actually used the mark in interstate commerce prior to filing its application. The court’s ruling clarifies what it considers to be the “use” of a mark “in commerce.” Christian Faith Fellowship Church v. Adidas AG, No. 16-1296, slip op. (Fed. Cir., Nov. 14, 2016).

The Lanham Act allows the registration of marks that are already being “used in commerce,” 15 U.S.C. § 1051(a)(1); and marks for which applicants show a “bona fide intention…to use a trademark in commerce,” id. at § 1051(b)(1). Applicants must specify which type of registration they are seeking. The statute defines “use in commerce” as the “bona fide use of a mark in the ordinary course of trade.” Id. at § 1127. With regard to goods produced or sold by the applicant, “use in commerce” includes placing the mark “in any manner on the goods” or on packaging or related materials “when…the goods are sold or transported in commerce.” Id.

Even after the registration of a mark, anyone can petition the USPTO to cancel a registered trademark. A petitioner seeking termination must allege that the registration of that mark is causing them damage or will cause them damage based on a variety of grounds identified in the Lanham Act. Id. at § 1064. The Federal Circuit case mentioned above involved a petition for cancellation filed by a shoe manufacturer (the petitioner), challenging a trademark registered by a church (the respondent).

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thumbs upMost businesses must maintain an online presence these days in order to succeed. Even if a business does not provide any kind of online service, consumers are still likely to look for a website or social media profile. Many consumers will look at websites like Yelp, which allow consumers to rate businesses and write reviews describing their experience. A negative review can damage a business’ reputation, so businesses must be vigilant about their online profile. Some businesses, rather than responding to bad reviews, have tried to prevent bad reviews from ever occurring by placing “non-disparagement” or “gag” clauses in form contracts. These clauses prohibit customers from writing negative online reviews and penalize any who do so. Congress passed the Consumer Review Fairness Act (CRFA) of 2016 in December. This new law prohibits these types of clauses and allows enforcement by federal and state consumer protection agencies.

The CRFA only addresses contractual provisions that penalize consumers for writing negative reviews without regard to whether the negative review is accurate. A customer who writes a false review of a business could be liable to the business for defamation. This requires the business to prove that one or more statements made by the customer were false, that the customer knew they were false, and that the publication of the statement caused actual, measurable harm to the business. A clear-cut example might be a person who completely fabricates a set of facts in order to disparage a business in an online review, leading to a damaged reputation and loss of revenue.

The type of gag clause covered by the CRFA is not uncommon in certain situations, but it is a relatively new phenomenon for consumers and online review sites. These clauses often appear in settlement agreements resolving a lawsuit, in which a plaintiff accepts a settlement payment in exchange for dismissing the case and agreeing not to disparage the defendant with regard to the subject matter of the lawsuit. Both parties have an opportunity to negotiate terms and to review the final agreement before signing.

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carBusinesses that sell goods to the public must follow guidelines established by consumer protection laws, which prohibit deceptive advertising and other fraudulent or misleading acts. This can apply to the use of specific words in particular market sectors. If a word, term, or phrase has a distinct meaning for a particular good or service, it is known as a “term of art.” The misleading use of a term of art could entitle a consumer to damages under various California laws. The Ninth Circuit Court of Appeals recently ruled in favor of a consumer who brought statutory and common-law claims against a car dealership in connection with its use of the term “completed inspection report” in its marketing. Gonzales v. CarMax Auto Superstores, LLC, Nos. 14-56842, 14-56305, slip op. (9th Cir., Oct. 20, 2016).

The plaintiff in Gonzales asserted causes of action under three California statutes. First, the California Consumers Legal Remedies Act (CLRA), Cal. Civ. Code § 1750 et seq., prohibits a wide range of “deceptive practices.” This includes “[m]isrepresenting the…certification of goods;” “[r]epresenting that goods…have…characteristics…which they do not have;” and “[r]epresenting that goods…are of a particular standard, quality, or grade,…if they are of another.” Id. at §§ 1770(a)(2), (5), (7). Consumers may recover actual damages, injunctive relief, restitution, punitive damages, and other relief.

The Song-Beverly Consumer Warranty Act (CWA), also known as the California Lemon Law, covers retail goods sold in the state of California. Cal. Civ. Code § 1790 et seq. It requires sellers to include certain warranties with those goods:  the implied warranty of merchantability and the implied warranty of fitness for a particular purpose. If a manufacturer provides express warranties, it must offer sufficient resources or contract with third-party service providers to fulfill its obligations under those warranties. Damages for consumers include “replacement or reimbursement,” rescission of a sales contract, or the cost of repair. Id. at § 1794. Willful violations may allow an award of double the amount of actual damages.

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