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Thursday, May 30, 2013

Recent Rulings of Interest

We regularly compile a few recent rulings that may be of interest to our clients and friends.  Feel free to contact any of the firm's litigation attorneys should you have questions about these cases.

[1. Insurance]

"FIRE SALE" TRIGGERS COVERAGE FOR TRADE LIBEL 


An insured threatened to sell high-end products at close-out prices and the manufacturer sued, contending this would result in a diminution of its brand and trademark. The insurer (whose policy covered claims for disparagement of goods) refused to defend the claim contending that there was no potential for coverage because price reduction itself was not product disparagement and thus not covered under the policy. The trial court granted summary judgment in favor of the insurer, which was reversed on appeal. The appellate court found that the underlying complaint did not need to allege all of the elements of a cause of action for trade libel to trigger coverage for product disparagement. Instead, coverage could be triggered for trade libel because it was a reasonable interpretation that the insured's "fire sale" of products disparaged claimant's high-end product.




[2. Real Estate]

"BAD FAITH WASTE" OF SECURITY CAN BE ALLEGED BY FORECLOSING LENDER 


After buyers bought a parcel of property with a deed of trust to secure approximately 90% of the purchase price, they demolished the structure with the intent to build a new building. After they failed to complete the new building and defaulted on their payment obligations, the holders of the security interest foreclosed and then brought suit for bad faith waste. The trial court found no bad faith existed because the borrowers had a good faith intent to build the new building. The court of appeal reversed, holding instead that bad faith waste may exist, regardless of whether the owners acted intentionally or recklessly. The court found that the destruction of the building constituted bad faith waste because there was no showing that its destruction was somehow caused by economic pressures of a depressed market.




[3. Contract Law]

EXPERT TESTIMONY ON CUSTOM AND PRACTICE SHOULD HAVE BEEN CONSIDERED BY TRIAL COURT 


When a personal manager who had an oral agreement with an actress for a percentage of her income was terminated, he contended that he should be able to receive a percentage of income from engagements entered into and services rendered while he served as her manager. In response to a summary judgment by the actress, the manager submitted the declaration of a long time talent agent and personal manager as to the custom and practice in the entertainment business for compensation after a manager is terminated. The trial court refused to consider the declaration and judgment was entered for the actress. On appeal, the court found that the trial court erred in refusing to consider the declaration of the expert whose credentials qualified him to testify as to the custom and practice in the industry.




[4. Trade Secrets]

PLAINTIFF WHO SUBMITTED NO EVIDENCE OF TRADE SECRET THEFT LIABLE FOR DEFENDANT'S ATTORNEY'S FEES, EVEN THOUGH DISCOVERY WAS NOT COMPLETE 


A company sued its competitor for misappropriation of trade secrets after several of its employees went to work for the competitor, claiming on information and belief that the former employees stole certain trade secret software. Plaintiff failed to oppose a motion for summary judgment, which was granted. Thereafter, the defendant filed a motion for attorney's fees under the Uniform Trade Secrets Act, which provides for the recovery of attorney's fees if the action is brought in bad faith. Plaintiff opposed the motion, contending that discovery was not complete. The trial court awarded attorney's fees to the defendant and plaintiff appealed. The court of appeal held that the trial court was correct because there was no evidence in the record that there was any theft of trade secrets. This absence alone was sufficient in order to award attorney's fees to the defendant.




[5. Arbitration]

ARBITRATION ORDERED EVEN THOUGH CC&R'S WERE CREATED BEFORE ANY CONDOS WERE SOLD

 

A developer created a homeowner's association when it developed a condominium project and included in the covenants, conditions and restrictions ("CC&R's") a provision that construction claims against the developer were required to be arbitrated. The HOA later sued the developer for construction defects and the developer contended that under the CC&R's the claims must be arbitrated. The trial court invalidated the arbitration clause in the CC&R's, finding that the HOA could not have consented to arbitration since it did not even exist when the CC&R's were recorded. The court of appeals agreed with the trial court, but the Supreme Court reversed finding, among other things, that it is not unreasonable based upon statutory and decisional law pertaining to common interest developments for a developer to bind future condominium owners via CC&R's to arbitrate their disputes.

   


[6. Arbitration]

CLASS ACTION WAIVER DOES NOT DEFEAT AN ARBITRATION CLAUSE UNDER THE FEDERAL ARBITRATION ACT 


When a buyer purchased a used car from a Mercedes dealership and experienced mechanical problems, she brought a class action lawsuit. The sales agreement contained an arbitration clause under the Federal Arbitration Act (FAA) and included a class action waiver. The dealership petitioned for arbitration, which the trial court denied on the grounds that the Consumers Legal Remedies Act (CLRA) prohibited class action waivers. The court of appeals reversed the trial court and ordered the case to arbitration, citing to recent US Supreme Court cases and holding that the FAA's main purpose was to have streamlined results in arbitrations and the CLRA's class action waiver was an impediment to the FAA's policy objectives.


Wednesday, May 29, 2013

California Franchise Tax Board Hot Audit Issues Part I

Mayer Nazarian
Geoffrey A. Weg
Recently, the California Franchise Tax Board announced the most common tax audit issues affecting Individuals, Pass-Through Entities and Corporations. 

Over the next few weeks we will briefly highlight these areas.
 
This week, we will discuss the top issues for Personal Income Taxpayers.
 

1. Like-Kind-Exchange Transactions - Sale of Property Through an IRC 1031 Exchange with incorrect treatment of boot, identification of property, and/or "drop and swap transactions.”
 
2. Securities Transactions - Overstated stock basis, unreported option premium income, and regulated futures contracts. 
 
3. Rental Real Estate Losses - The treatment of the real estate activity as passive or nonpassive may vary for Federal versus State tax purposes, therefore, the classification selected by the taxpayer must be appropriate. (Generally, losses from passive activities, including rental real estate, may be deducted only up to the amount of income from passive activities. Any excess loss is carried forward to the following year or years until the interest in the activity is disposed in a fully taxable transaction. In some cases, a taxpayer may classify rental activities as nonpassive for federal purposes. However, for California purposes rental activities are generally considered passive, with a few exceptions.) 
 
4. Residency - Residency status for state tax purposes is based upon the taxpayer's specific situation which includes consideration of where the taxpayer has the closest connections and whether or not he/she receives substantial benefits and protection from the state. 
Please contact our Tax and Wealth Planning attorneys for consultation or assistance in the identification, clarification or resolution of these issues. 

Part two will be published next week.

Contact Mayer Nazarian
Contact Geoffrey A. Weg

Monday, May 20, 2013

Another Bad Employee Compensation Idea: Paying Exempt Employees By The Hour, With No Minimum Guarantees

David Krol
Is it a good idea to compensate an employee based solely on the number of hours worked, with no guaranteed minimum, if that employee would otherwise be exempt from overtime?  The answer is no.  Negri v. Koning & Associates (May 16, 2013, H037804), ___ Cal.App.4th ___.  That's because, to be exempt from overtime, employees must perform specified job functions in a particular manner and must also receive a "salary," not an indeterminate sum based solely on the amount of hours they work. 
 
Negri was an insurance claims adjuster at Koning & Associates who was paid $29 an hour with no minimum guarantee.  He worked for Koning for 66 weeks, and estimated that he worked approximately 20 hours a week as overtime.  When Negri sued Koning for overtime pay, Koning argued that Negri was exempt from overtime under a 2011 Supreme Court decision which held that, based on the job functions performed by an insurance claims adjuster, the adjuster was an exempt employee.  Applying that decision, the trial court found that Negri was exempt and therefore not entitled to overtime.  The Court of Appeal reversed. 
 
Under California Labor Code Section 515, to be exempt from overtime, an employee must perform specified duties in a particular manner and be paid “a monthly salary equivalent to no less than two times the state minimum wage for full-time employment.”  Even though Negri's job duties would have rendered him exempt, the Court of Appeal had little difficulty in concluding that Negri wasn’t exempt because he didn’t earn a "salary":  he wasn’t paid a predetermined amount based on the number of hours worked.  His employer therefore owed him overtime – a result which could have been avoided if Koning had paid Negri a guaranteed salary.
 
If you’re considering creative ways to pay your employees, you should consult with counsel beforehand.
 
Contact David Krol