Articles Posted in Business Litigation

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Balance iconIn order for a plaintiff to maintain a lawsuit, they must demonstrate that the court in which they filed suit has jurisdiction over the case. Our legal system identifies two types of jurisdiction. Subject matter jurisdiction means that a court has jurisdiction over the cause of action asserted in the lawsuit. For example, a county-level court in California probably lacks jurisdiction over a claim based entirely on federal law. Personal jurisdiction involves the court’s jurisdiction over the defendants themselves. The U.S. Supreme Court recently considered whether a state court in California had personal jurisdiction over a corporation located outside California in a California business lawsuit involving alleged incidents occurring outside this state. The Supreme Court ruled that this exceeded the state court’s authority. Bristol-Myers Squibb Co. v. Super. Ct. of Cal., 582 US ___ (2017).

The Supreme Court’s landmark ruling on personal jurisdiction is International Shoe v. Washington, 326 U.S. 310 (1945). This case held that a court cannot exercise personal jurisdiction over a corporation based in another state, unless the corporation has “minimum contacts” with the state where the court is located. Id. at 316. Since then, courts have further identified two types of personal jurisdiction. “General jurisdiction” is based on where an individual lives or where a company is domiciled, and it can allow a court to hear almost any case against a defendant. “Specific jurisdiction” is based on a defendant’s connection to the particular state, or “forum.”

When multiple courts could have jurisdiction over a defendant or a particular claim, plaintiffs may seek out the court that they believe will treat them most favorably, based on a range of factors like distinct procedural rules or a more amenable local jury pool. This practice is often known as “forum shopping.” Several recent decisions from the Supreme Court have limited some rather expansive views of personal jurisdiction in cases involving corporations with national or international presences. One case held that a California federal court lacked jurisdiction over a German corporation in a lawsuit involving alleged acts in Argentina. Daimler AG v. Bauman, 571 U.S. ___ (2014). These decisions have had the effect of reducing forum shopping in lawsuits against major corporations.

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text balloonsBusinesses must always be aware of how their actions and communications could affect their legal rights. The media rather frequently report on internal company documents that become public, through the discovery process in litigation or by other means, which at best cause embarrassment for a company. A recent decision from the California Supreme Court, while not directly related to business litigation, offers a useful reminder of the importance of communicating with government officials and employees through “official channels.” The decision, City of San Jose v. Superior Court of Santa Clara Cty., 2 Cal.5th 608 (2017), addresses access to government communications under state law. The court held that official communications by government officials are still public record, even when the official uses a personal email account or mobile device. In other words, anything sent by or to a public official, for official reasons, could become public.

California’s Public Records Act (PRA), Cal. Gov’t Code § 6250 et seq., states that “every person has a right to inspect any public record” upon request, with some exceptions. Id. at § 6253(a). The statute defines a “public record” to include “any writing containing information relating to the conduct of the public’s business” that was “prepared, owned, used, or retained” by any government agency. Id. at § 6252(e). This includes communications written and sent by government employees, as well as those written by private parties and sent to government employees, provided that the subject matter relates to official business.

The San Jose case began in 2009 when an individual made a public records request to the city for “32 categories of public records.” San Jose, 2 Cal.5th at 614. The request was directed to the city itself, its redevelopment agency, the agency’s executive director, and various other officials and employees. The records that were responsive to the request included communications sent and received by city officials and employees. The city produced records of “communications made using City telephone numbers and e-mail accounts,” but not those made with personal phones or email accounts. Id. at 615. The individual who made the request filed suit against the city for declaratory relief.

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carSelf-driving cars have been a subject of great interest in Silicon Valley recently. The technology that would make autonomous vehicles viable on a wide scale is not here yet, but numerous companies are working to make it a reality. As with any new technology, competition can easily lead to conflict. In this case, a company affiliated with the tech company Google has filed suit against the ridesharing company Uber and others, alleging infringement of trade secrets and patent rights, as well as unfair business practices. Waymo LLC v. Uber Technologies, Inc. et al., No. 3:17-cv-00939, am. complaint (N.D. Cal., Mar. 10, 2017).

Unlike other forms of intellectual property, the value of a company’s trade secrets depends on their confidentiality. State and federal trade secret laws therefore focus on preventing or dissuading the misappropriation of trade secrets. A business must show that information meets several criteria in order to invoke trade secret protection. The information must have economic value based on the fact that it is not known to others and not easily discoverable by others who are in a position to benefit from it, and the business must have made reasonable efforts to safeguard the information’s secrecy. 18 U.S.C. § 1839(3), Cal. Civ. Code § 3426.1(d).

California law allows the owner of trade secrets to obtain injunctive relief preventing “actual or threatened misappropriation.” Cal. Civ. Code § 3426.2. If a court finds that an injunction would be “unreasonable,” it can order a person to pay “a reasonable royalty” for use of the information. Id. A court can award damages for “actual loss” or “unjust enrichment caused by misappropriation,” along with punitive damages in an amount up to twice the total amount of damages in cases of “willful and malicious misappropriation.” Id. at § 3426.3. Federal law contains similar provisions for damages and specifically allows courts to order “seizure of property necessary to prevent the propagation or dissemination of the trade secret that is the subject of the action.” 18 U.S.C. § 1836(b)(2).

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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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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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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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Screen Shot 2016-12-01 at 6.08.06 PMA Los Angeles resident is suing Krispy Kreme Doughnuts, Inc. in federal court in California for false advertising. Specifically, plaintiff Jason Saidian claimed that the doughnut company’s blueberry, raspberry, and maple filled doughnuts don’t actually contain fruit or maple. Saidian bought the doughnuts at issue in 2015.

Krispy Kreme, which is based in North Carolina, has not responded to the complaint. The suit includes 10 allegations and seeks national class-action status. Saidian likely chose to file suit in California because the state sets a low bar for establishing violations of the business and professional code, breach of contract, and false advertising. Saidian is specifically suing under California’s False Advertising law.

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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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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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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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