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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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prism ringLaws at the federal and state levels regulate multiple aspects of the employer/employee relationship. Federal law sets certain minimum standards for many employers nationwide, such as a minimum wage of $7.25 per hour and a prohibition on specific types of discrimination. State laws may add to these minimum requirements, but they cannot reduce the standards set by the U.S. Congress. California has augmented the protections afforded to employees in many ways, including a state law prohibiting wage disparities based on gender. Several bills recently enacted by the California Legislature have further added to these provisions. Employers in the Bay Area and throughout California should understand how these amendments might affect them.

Prior to the 2015 session of the California Legislature, the California Labor Code prohibited employers from paying workers of different genders at different rates for “equal work” performed “in the same establishment.” The law defined “equal work” as work that “requires equal skill, effort, and responsibility” and is “performed under similar working conditions.” Cal. Lab. Code § 1197.5(a) (2014). Pay disparities were permissible if they were based on systems of seniority, merit, “quantity or quality of production,” or another “bona fide factor other than sex.” Id. Penalties for violations of these provisions included the amount of underpaid wages, along with “an additional equal amount as liquidated damages.” Id. at § 1197.5(b).

The California Legislature passed SB 358 in 2015, and it took effect on January 1, 2016. The bill amended § 1197.5 to expand the prohibition on wage disparities based on gender. Whereas an employee previously had to show a disparity in pay among workers “in the same establishment,” SB 358 allowed comparisons among all employees performing “substantially similar work.” Cal. Lab. Code § 1197.5(a) (2015). The assessment of whether the work is substantially similar is based on “a composite of skill, effort, and responsibility…under similar working conditions.” The same exceptions, such as a seniority- or merit-based system, still apply, except that the statute now addresses “bona fide factor[s] other than sex” in far greater detail. Id. at § 1197.5(a)(1)(D).

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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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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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