Always striving not to reinvent the wheel, I keep my eyes open for articles that do a good job of explaining basic legal concepts.  In that regard, I receve many calls from prospective clients who don’t yet know the fundamentals of pursuing an online defamation claim.  Many times, the callers want to sue Google since it is Google’s search engine that is revealing the sites that are posting the defamatory comments.  That is not possible (although we have had pretty good luck getting Google to cooperate in taking down blogs on their own service and in one instance Google agreed to stop indexing a particular magazine, but that is rare).

The following article [reprinted with permission] provides a brief outline of how to attack online defamation.  If you happen to be in New Jersey, contact the author for any action you need to pursue or defend.  If you’re here in California, or the action needs to be brought in California, then call Morris & Stone at (714) 954-0700.

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Individuals now have the freedom to inexpensively and easily share everything  from their art to their opinions online. However, the ease and anonymity  associated with posting information on the Internet, comes at the cost of  providing a perfect avenue for those seeking to abuse the system. So what  happens when, for instance, an opinionated Internet rant goes too far? What if a  video stream broadcast damages the reputation of someone featured in it? More  importantly, do the victims of these scenarios have any rights under the law, or  are they at the mercy of the author or poster?

Fortunately for victims, the law of defamation has been evolving in order to  accommodate the legal ills associated with online publication. However, many  people still fail to avail themselves of these legal protections because they  are unclear about to which rights and remedies they are entitled. Therefore,  individuals wishing to protect their rights and reputations must understand how  the law of defamation applies to online activity. Defamation is defined as the  communication of a statement that makes a claim, expressly stated or implied to  be factual, that may give an individual, business, product, group, government,  or nation a negative image. The two subcategories of defamation are libel and  slander. Libel requires that defamation be committed in a printed forum, while  slander requires that the defaming words be spoken aloud.

Online publications are subject to the law of libel; online video posts are  subject to the law of slander. If a party believes that defamation may have  occurred because of the idea(s) presented in an online writing, he or she can  successfully sue the author for libel by showing: that the defamatory statement  was published, that it refers to the victim, that it is false, and that the  victim’s reputation has been harmed by the writing. A party who feels victimized  by video content can sue for slander under the same legal standard as is applied  to libel. Victims of defamation can recover both actual damages and punitive  damages.

Still, it is important to keep in mind the following caveats with regard to  defamation law as it applies to the Internet. If the author of a defamatory  statement is anonymous, a victim can request (through court proceedings) that  the wrongdoer’s identity be revealed. Also, in the event that the victim of  defamation is a public figure, actual malice must be proven (in addition to the  aforementioned elements). Finally, although the authors of misinformation can be  held liable for defamation, blog owners generally bear no responsibility for the  comments posted to their site by third parties. Thus, it is evident that the law  of defamation, although limited in its applicability to the Internet can still  offer numerous protections and remedies against those wishing to cause undue  damage to the reputations of others.

Article Source: http://EzineArticles.com/4043133

I don’t mean to imply that someone should put on a false front, but interviewing is like a first date; the other person knows you possess some flaws, but they want to feel like you respect them enough to forgo slurping your soup just this once.

So, make sure your phone is off before you walk into the interview.  Unless your wife is nine months pregnant, don’t even check who is calling.  Be super nice to the support staff, because they may well be asked about you.  Don’t be late, and don’t act rushed.

For a list of ways to blow an interview, go to Top Ten Ways to Blow a Job Interview.

The fact pattern is so common that I have given it a name — the “‘I Know Better’ Syndrome”, or “Syndrome” for short.  The Syndrome arises when an employee takes a firm stand on some issue, to the point of refusing to do what they are told, believing that they have a better understanding of the law or company policies.

For example, the company policy will be that reimbursements can’t be made out of petty cash without a receipt. The boss tells an employee to reimburse another worker for a company lunch, and the employ refuses because the worker does not have a receipt. The boss writes her up for insubordination, but the employee will have none of that and goes to Human Resources to complain that she was written up when all she did was follow company policy. The next thing she knows, she is called in and terminated because her inflexible adherence to the strict letter of the policies has just become too much of an annoyance.

So it was in the San Diego case.  Here is a summary of the facts, as reported by Sign On San Diego. The Superior Court in San Diego is way behind the electronic curve so I could not review the actual court documents on file.  This summary is based on what was reported on Sign On San Diego and may not be entirely accurate. The point here is not the specific facts but the legal issue they illustrate.

Shari Watson, a Chula Vista council aide, was told to deposit a $2,400 check from Cox Communications, made out to “The City of Chula Vista/International Friendship Games”. This bothered Watson, because Cox had only agreed to a $1,000 sponsorship for the event.  Watson could not reconcile why Cox would be sending a check for $2,400.  Watson asked Deputy Mayor Rudy Ramirez if she could call Cox to see if the check was made out in error, but he told her to go ahead and deposit it and let the finance department work out any problems.

Freeze.  Right there is the moment in time that employees fall prey to the I Know Better Syndrome.  The supervisor has just given clear instructions, but the employee thinks she knows better.  Watson was absolutely, positively, 100% correct – the check was a mistake, and was meant for payment of city permits and not for the event – but that wasn’t really the issue. Ramirez had instructed her to deposit the check and let another department deal with the possible mistake, according to the article. When Watson refused to deposit the check, Ramirez had another employee deposit it, and the accounting snafu was eventually rectified. However, Ramirez fired Watson, allegedly for her “inability to take direction.”

Well that can’t be allowed to stand, right? After all, Watson was doing the right thing, and what she was being asked to do might even be illegal.  That’s what Watson and her attorney thought, so she sued for wrongful termination, claiming she was a whistle blower and that it was therefore a violation of public policy to terminate her for refusing to engage in illegal activity.

Judge William Cannon disagreed, ruling that even if all the allegations of the complaint were taken as true, the facts did not constitute a wrongful termination. As an at-will employee, Watson could be fired for no reason, so long as the termination was not a violation of public policy. If depositing the check had been illegal, Watson’s termination would have been wrongful. But apparently Judge Cannon decided that depositing the check would not have been illegal.

So there is the lesson. You can and should stand up to your boss and refuse to engage in illegal activity, but you must be certain that the activity is genuinely illegal. If you bet wrong, it can cost you your job. According to the article, Watson’s attorney is vowing to appeal, but if Sign On San Diego accurately reported the facts, that appeal is very unlikely to succeed. The reason is that if Ramirez did tell Watson to go ahead and deposit the check, and then allow another department to figure it all out, then I can’t imagine how that would rise to the level of illegal activity.  I don’t see a basis for Watson to refuse to do what she was asked.  If I had been in Watson’s position, I would have deposited the check and resolved to make it my daily routine to follow up until the matter was resolved.  If it turned out that the issue was never resolved and the check was part of some nefarious scheme, then the issue could have been reported up the chain.

Rare North-American SLAPP Platypus

A few months back I won on an anti-SLAPP motion that I brought long after the case was filed. The thing is, I was not representing the Defendant initially, but when I was retained the first thing I saw from my review of the case was that the case was a quintessential SLAPP.  No discovery or anything beyond the complaint and answer had occurred, so I persuaded the court to allow me to bring a SLAPP motion well beyond the normal 60-day deadline.  I won the motion, the case was over, the client celebrated with champagne, and all was good with the world.

That case got some publicity, and now it seems like every attorney thinks they can file an anti-SLAPP motion at any time during the litigation, even on the eve of trial. It just happened to me today. Our case is nearly two years old, and the trial is about a month away.  All of a sudden, defense counsel decided that our action is a SLAPP, and it would be an unforgivable miscarriage of justice to allow this matter to go to trial without first bringing an anti-SLAPP motion. Indeed, this was such an emergency, that defense counsel had to go into court on an ex parte basis to ask the court to shorten the notice period to bring the motion because there is not enough time before the trial.  An ex parte application requires a showing of irreparable harm, and defense counsel so argued.

The anti-SLAPP motion, which was attached to the ex parte application, was utterly without merit, which is not surprising given that if the complaint was a SLAPP the defendant’s counsel certainly would have been able to reach that conclusion in the prior 22 months. Not surprisingly, the application DENIED.

Why would an attorney do such a thing? By Code, an anti-SLAPP motion is supposed to be brought within 60 days of service of the complaint. It can be brought later upon a showing of good cause to the court, but any delay is counterproductive. The point of an anti-SLAPP motion is to stop a SLAPP action from going forward, and stay the discovery. The discovery stay is one of its most powerful attributes, since the plaintiff is basically frozen in time and made to show his proof without the benefit of any discovery. If the motion is brought after discovery, the defendant loses the biggest advantage of the anti-SLAPP motion. And nothing changes during an action that somehow makes a complaint a SLAPP when it was not previously. In other words, discovery might reveal that an action is ripe for a motion for summary judgment, but it is very unlikely that discovery will reveal that an action was a SLAPP if that was not apparent from the complaint.

So, what possible justification could there be for this tactic of waiting until the eve of trial to bring a meritless anti-SLAPP motion?

Delay.

The ruling on an anti-SLAPP motion can be appealed. The judge today could have easily said, “Well, Mr. Morris, he is seeking only permission to file the motion on shortened notice; the motion is not yet before me, so I can’t decide its merits now. I’ll go ahead and let him file it, and then we can take a look at the merits.” If the judge had gone down that road, the defendant would have bought himself about a one year delay, since he would then have appealed the denial of the anti-SLAPP motion.

“Isn’t that a costly proposition for the defendant, given that you can recover attorney fees on a SLAPP motion?”, you might ask.  Actually, attorney fees are not reciprocal with an anti-SLAPP motion.  If the defendant successfully brings an anti-SLAPP, he gets his fees, but if the plaintiff defeats the anti-SLAPP, fees are only awarded if the motion was frivolous, and that is a very high standard.  Thus, beyond paying his own attorney, there was very little downside to attempting this delaying tactic.

This precise strategy was successfully employed in Platypus Wear, Inc. v. Goldberg. In that case, the defendant waited about a year to bring an anti-SLAPP motion. The trial judge, probably thinking he was being fair to give defendant a chance to present the motion, granted leave to file the motion, which was then denied. Of course, defendant appealed, and the Court of Appeal took the opportunity to explain that judges must not fall prey to this delaying tactic. The heart of the court’s reasoning is set forth at length below, if you are curious, but here is the essential part of the reasoning:　

“The primary reasons that Goldberg offered, and that the trial court cited, for allowing the late filing of his anti-SLAPP motion were that doing so would serve both judicial economy and the public policy behind the anti-SLAPP statute. However, these reasons could apply to any late filing. Implicit in Goldberg’s argument is the premise that a trial court should hear any potentially anti-SLAPP meritorious motion, no matter how late in the case it is filed.

…

In this unusual statutory context, in which a party has the right to an interlocutory appeal of a denial of anti-SLAPP motion, a trial court must be wary about freely granting a party the right to file an anti-SLAPP motion past the 60–day deadline. As reflected in Olsen and Morin, the Legislature’s act in allowing an interlocutory appeal of the denial of an anti-SLAPP motion is clearly tied to the fact that the statute contemplates that most such motions will be filed within 60 days of the filing of the complaint.

…

Rather than advancing the anti-SLAPP statute’s purpose of promptly resolving SLAPP suits, the trial court’s ruling had the effect of undermining that statute, as discussed in Olsen.”

We are well award of the anti-SLAPP tricks, and as today’s victory illustrates, know how to stop them.

[Platypus Wear, Inc. v. Goldberg, 166 Cal.App.4th 772 at 783 - 787.]

“There are two potential purposes of the 60–day limitation. One is to require presentation and resolution of the anti-SLAPP claim at the outset of the litigation before the parties have undertaken the expenses of litigation that begin to accrue after the pleading stage of the lawsuit. The other is to avoid tactical manipulation of the stays that attend anti-SLAPP proceedings. The ‘prejudice’ to the opponent pertinent to these purposes is that which attends having to suffer such expenses or be subjected to such a stay. ( Olsen, supra, 134 Cal.App.4th at p. 287, 35 Cal.Rptr.3d 909.)

The 60 day period in which a defendant may file a SLAPP motion as a matter of right appears to be intended to permit the defendant to test the foundation of the plaintiff’s action before having to ‘devote its time, energy and resources to combating’ a ‘meritless’ lawsuit. [Fn. omitted.] ( Morin, supra, 122 Cal.App.4th at p. 681, 19 Cal.Rptr.3d 149.)

[B]y the time Goldberg filed his application on October 31, 2006, the parties had already completed a substantial amount of discovery, and the trial was scheduled to commence in less than three months. By the time the trial court held a hearing on Goldberg’s anti-SLAPP motion, on January 19, 2007, the December 15, 2006 discovery cut-off date had already passed, and the trial was scheduled to begin in a week. Thus, one of the basic purposes of the anti-SLAPP statute—to allow for the prompt resolution of disputes before significant pretrial discovery expenses are incurred—could not be met in this case. In fact, allowing the late filing undermined this goal, in that the trial court continued the trial date, at Goldberg’s request, after the hearing on the anti-SLAPP motion.

The primary reasons that Goldberg offered, and that the trial court cited, for allowing the late filing of his anti-SLAPP motion were that doing so would serve both judicial economy and the public policy behind the anti-SLAPP statute. However, these reasons could apply to any late filing. Implicit in Goldberg’s argument is the premise that a trial court should hear any potentially anti-SLAPP meritorious motion, no matter how late in the case it is filed. The Olsen court rejected this argument. ( Olsen, supra, 134 Cal.App.4th at p. 286, 35 Cal.Rptr.3d 909 ["Discretion to permit or deny an untimely motion cannot turn on the final determination of the merits of the motion"].) In addition, because Goldberg could have attempted to narrow the issues in the case by way of a motion for summary judgment or a motion for judgment on the pleadings, these rationales have very little persuasive force. (See Kunysz, supra, 146 Cal.App.4th at p. 1543, 53 Cal.Rptr.3d 779 ["The same issues raised by [defendant's] renewed anti-SLAPP motion could just as easily have been raised by, for example, a motion for summary judgment or a motion for judgment on the pleadings”].)

The arguments Goldberg made at the hearing on his application are equally unpersuasive. Goldberg’s counsel’s explanation that Goldberg did not file an anti-SLAPP motion earlier because the case had been “focused on other issues,” is little different from the explanation the Morin court rejected, i.e., that the party had been “devot[ing] time, energy and resources,” to litigating the case rather than pursuing an anti-SLAPP motion.  (Morin, supra, 122 Cal.App.4th at p. 681, 19 Cal.Rptr.3d 149.)

Goldberg’s suggestion at the hearing that the trial court should grant his application to allow the late filing because his current counsel had not been counsel of record during the initial 60–day period is also without merit. Goldberg’s current counsel substituted into the case in March of 2005, far in advance of the October 31, 2006 application to allow a late filing. ( Olsen, supra, 134 Cal.App.4th at p. 285, 35 Cal.Rptr.3d 909 ["A claim of excuse from untimeliness based on late discovery after obtaining new counsel is generally unavailing"].) In addition, Goldberg’s counsel’s suggestion that Goldberg should be allowed to bring the anti-SLAPP motion in order to afford the trial court greater discretion to “parse causes of action,” is misguided, since an anti-SLAPP motion is not to be used for this purpose. (See Mann v. Quality Old Time Service, Inc. (2004) 120 Cal.App.4th 90, 106, 15 Cal.Rptr.3d 215

Goldberg has not demonstrated anything in the procedural history of this case, and specifically, in the litigation involving other parties, that would justify allowing the late filing. The lengthy delay in bringing the matter to trial occasioned by Luce Forward’s interlocutory appeal is, if anything, a factor that weighs against granting Goldberg’s application.

In this unusual statutory context, in which a party has the right to an interlocutory appeal of a denial of anti-SLAPP motion, a trial court must be wary about freely granting a party the right to file an anti-SLAPP motion past the 60–day deadline. As reflected in Olsen and Morin, the Legislature’s act in allowing an interlocutory appeal of the denial of an anti-SLAPP motion is clearly tied to the fact that the statute contemplates that most such motions will be filed within 60 days of the filing of the complaint. (See Olsen, supra, 134 Cal.App.4th at p. 287, 35 Cal.Rptr.3d 909; Morin, supra, 122 Cal.App.4th at p. 681, 19 Cal.Rptr.3d 149.)

While a trial court enjoys considerable discretion regarding whether to allow the late filing of an anti-SLAPP motion, in this case, the delay was extreme, the reasons Goldberg offered in his application for the delay in filing the motion were weak, the court’s reasons for granting the application were unrelated to the purpose of the SLAPP statute, and the potential prejudice to Platypus, given the lengthy delay occasioned by the appeal, is great. Rather than advancing the anti-SLAPP statute’s purpose of promptly resolving SLAPP suits, the trial court’s ruling had the effect of undermining that statute, as discussed in Olsen.

In applying the standard of review articulated in Olsen to this case, “[T]he grounds given by the court for finding the anti-SLAPP motion [timely] are inconsistent with the substantive law of section 425.16, [and] the application to the facts of this case is outside the range of discretion conferred upon the trial court under that statute, read in light of its purposes and policy.” (Olsen, supra, 134 Cal.App.4th at p. 285.)

When do you get triple damages and all of your attorney fees for fraud? When you hire Morris & Stone (although your results could differ).

Breach of contract is easy to spot, but business owners are often confused about what constitutes fraud. Someone fails to pay all the money owed on an invoice, and the client wants us to add a cause of action for fraud. That’s probably not fraud.

The elements of fraud are (1) a misrepresentation of a material fact; (2) made with the intention that the party rely on that representation to his detriment; (3) reasonable reliance on the misrepresentation; and (4) damages. As you can see from the above elements, in the case of a contract, for there to be fraud the fraudulent intent must exist at the time of the contract. If a person enters into a contract intending to perform, if he later fails to perform, that breach will not transmute into fraud no matter now egregious and flagrant his breach. To prove fraud, you must show that at the time the defendant entered into the agreement, he had no intention of performing.

So how do you get into the mind of the defendant to determine if he intended to perform when he signed the agreement? Thankfully, California courts have held that the behavior after the contract was signed can be used to show that the defendant never intended to perform. In our case, the defendant borrowed a significant amount of money from our client, and pursuant to the agreement that money was to be invested in a business venture. The money was never repaid, and our client hired us to recovery the money.

We went her one better. We sued for fraud, because we could see no indication that the money ever went into the business venture. We felt that would be sufficient to show that at the time of the contract the defendant did not intend to perform. He was free to argue that he intended to invest the money at the time of the contract and therefore it was not fraud, but how would he explain that the money was never used for the intended purpose? As we suspected, defendant fought us on discovery, and when we compelled him to respond, he could not provide any proof that the money had ever gone to the business.

But here is where we got really creative. There is a criminal code section that makes it illegal to receive stolen property, and allows a victim to bring a civil action against the criminal to recover three times the value of the stolen property. We sued under that section, alleging that the entire loan process had just been a artifice to relief our client of her money. In other words, he stole the money from our client through a bogus business venture, and kept that money for himself. It was no different than if he had stolen the money by hacking into her checking account. The fact that he used loan documents to steal the money did not make it any less of a theft.

A fact pattern that will support this breach of contract/fraud/theft approach does not arise very often, but we have tried it twice before.  In both of the prior actions, we won on the breach of contract and fraud causes of action, but could not get the judge to consider the theft cause of action.  The theft cause of action provides a real conceptual hurdle for most judges.  Many judges are former District Attorneys or Public Defenders, and their criminal law backgrounds taught them that a criminal cannot be convicted of both stealing property and receiving that property. Yet, here I am arguing to them that I want damages under a statute dealing with receiving stolen goods even though this is the same person that stole the goods (here, the money). In reality, the law says that someone cannot be convicted of both offenses, but can be charged with either. Indeed, the law says that if the statute of limitations has passed for the theft of the goods, the thief can still be charged with receiving the property, because the statute actually states that it is an offense to receive or exercise control over the stolen property. Thus, the same person that steals the property is guilty of exercising control over it if it still has not been returned.

The second conceptual hurdle involves the erroneous concept that the defendant must have been convicted of the offense before the civil suit can take place. After all, the judges reason, the legal standard for the burden of proof on a criminal conviction is beyond a reasonable doubt, whereas in civil court it is just more probable than not. How can a defendant be made to pay under a criminal statute when he has never been convicted of the offense? Complicating the matter, no reported decision has ever discussed the civil remedies under the criminal statute upon which we were relying.

In reality, these concerns are easily disposed of, but the judge must be made to wrap his mind around the concept. In the latter case, no criminal conviction is necessary because it still must be shown in the civil action that the defendant committed the offense. Other cases involving civil enforcement of criminal statutes have made clear that the primary reason the statutes provide for a civil remedy is that law enforcement does not always have the will or resources to go after a criminal. A victim of a crime should not be dependant on the vagaries of the criminal system in order to seek redress. For example, there is a statute that permits cable companies to seek civil damages for the theft of a cable signal. What are the odds that police departments around the state are going to devote resources to going after cable thieves? Therefore, the Court of Appeal held that cable companies can prosecute under these criminal statutes whether or not the defendant has ever been criminally charged. It’s a win-win. The cable company can become its own police force in order to discourage cable thieves, and the government need not devote resources to that purpose.

So it is here. There would be little disincentive to using false pretenses to “borrow” money if the worst that could happen to the defendant was that he would someday be ordered to return the money. Morris & Stone uses this criminal statute to impose a quasi-criminal remedy on the defendant, providing a much greater disincentive regarding this type of fraud, since the defendant must pay back three times the amount he took.

This judge finally got it, and tripled the damages, awarding our client three times what she had loaned to the defendant.  As a huge bonus, the statute provides that the defendant must pay all attorney fees incurred by the plaintiff.  Absent a contract provision, you are not entitled to recover attorney fees under a breach of contract case, and rarely under a fraud claim.  Since we used this criminal statute, the court also awarded our client her attorney fees.

We might just start wearing badges.

The attorneys managed to convince a Superior Court Judge in San Diego that when Starbucks permitted “supervisors” (you know, the ones that make 25 cents an hour more because they’ve been there the longest) to take a cut of the community tips, that violated section 351. The judge awarded $105 million in damages for this outrage. Since Starbucks would need to sell like a hundred Caramel Macchiatos to cover that, it appealed.

The Court of Appeal said, “hold the foam.” The flaw in the logic is obvious (understanding that I always have perfect 20-20 hindsight with court decisions).  When I sit down at a restaurant, enjoy my meal and the service, and then leave a tip, I am leaving a tip for my specific server. However, when I order a latte at a Starbucks and drop my change into the tip jar, who am I tipping? I’m certainly not intending to tip only the barista. At that point, I don’t even know who is going to prepare my beverage (or even if it will be tip worthy). It is probably far more likely that I’m tipping the friendly cashier that accurately took my order and retrieved my scone. Or perhaps my intent was to tip the person that cleaned the washroom where I washed my hands before stepping up to the counter. As you can see, in the case of a community tip jar, we can never truly know who generated the tip, so it makes much more sense to assume that it is my intent to tip everyone working there, who have all joined to make this such a special coffee experience, from the supervisors down. Hell, I wouldn’t even mind if the owners took a cut, because after all they are the ones that hired the fine people who cleaned the restroom, who took my order, who retrieved my scone and who made the Venti, whole milk, extra hot latte that Aaron drank.

Indeed, the Court of Appeal concluded that the purpose behind section 351 was not so much to quibble about splitting up the tips, but rather to “prevent a fraud on the tipping public” by prohibiting an employer from giving a tip left for a server to someone not intended by the tipper. There is no such fraud with the Starbucks tip jar.

Recently, the California Supreme Court put another crack in the ol’ tip jar. In Lu v. Hawaiian Gardens Casino, Inc., former dealer Louie Hung Kwei Lu sued the casino, claiming its policy of requiring dealers to segregate 15 or 20 percent of their tips and pay them into a community tipping pool violated the statute. Lu launched his action before I had written my Starbucks article, so without the benefit of that wisdom, he felt it was unfair that a percentage of “his” tips were being distributed to various service workers, including the people who brought him his chips, host, floor people and concierges. But in Lu’s defense, a dealer’s situation is slightly different than the community tip jar at Starbucks.  When someone gives a tip to a dealer, he or she is usually thanking the dealer for a good hand.  It is far more likely that tip is intended for and directed at the dealer, not the people who support him.  Thus, under the reasoning of the Starbucks case, splitting the dealer’s tip would be a fraud on the tipping public.

But the Supreme Court dealt Lu a bust hand, upholding the ruling of the Court of Appeal.  It gave no thought to the intent of the tipper, but instead decided that Labor Code section 351 does not provide a private cause of action for violation of that section. Rather, the penalties for violating the statute are built in. Section 351 provides that an employer who violates section 351 is guilty of a misdemeanor, and can be fined or even imprisoned. The statute does not also permit doubling down with private actions by the employees themselves.

But Lu, or at least others who follow, did win the side pot.  While the Supreme Court held that there is no private action under section 351, the court noted there would be nothing preventing a claim under some other theory, such as common law conversion (the civil law equivalent of theft).

Summary:

In a ruling long awaited by the employment law sector, the California Supreme Court effectively rejected the use of most non-competition agreements in California.

In Edwards v. Arthur Andersen, the unanimous court held that Business and Professions Code § 16600 gives California workers great freedom to switch jobs, to compete against old employers and to solicit former clients. “In sum, following the Legislature, this court generally condemns noncompetition agreements,” Justice Ming Chin wrote. “Under the statute’s plain meaning, therefore, an employer cannot by contract restrain a former employee from engaging in his or her profession, trade, or business unless the agreement falls within one of the exceptions to the rule.”

Although the business litigation attorneys at Morris & Stone have long advised that this ruling was coming, this ruling finally creates a brighter line distinction by the state’s highest court. Any non-compete agreements that don’t fall under one of the statutory exemptions are void.  Previously there was still a potential loophole by which a non-compete agreement could be found enforceable. The Federal Ninth Circuit had ruled that section 16600 contained a “narrow restraint” exception that allowed companies to use non-compete agreements so long as the pacts only restricted “a small or limited part” of their employees’ future ability to work.

In Edwards, accounting firm Arthur Andersen argued that the Ninth Circuit’s “narrow restraint” exception validated the company’s non-competition agreement, which tax manager Raymond Edwards signed in 1997. In 2002, following upheavals at Arthur Andersen, banking corporation HSBC offered Edwards a job on the condition that he and Arthur Andersen terminate his non-compete contract. Edwards refused to sign the termination agreement because it required him to give up all future legal claims. Arthur Anderson had recently been indicted in connection with the Enron debacle, and Edwards was justifiably concerned that if he was later pulled into the controversy, he might be giving up any indemnity claims against Arthur Anderson if he signed the termination agreement. Arthur Andersen fired Edwards for his refusal to sign the termination agreement, and HSBC rescinded its job offer. Edwards sued both companies for interfering with his career.

“Contrary to Andersen’s belief, however, California courts have not embraced the Ninth Circuit’s narrow-restraint exception,” Justice Chin wrote. “We reject Andersen’s contention that we should adopt a narrow-restraint exception to §16600 and leave it to the Legislature, if it chooses, either to relax the statutory restrictions or adopt additional exceptions to the prohibition-against-restraint rule under §16600.”

Unfortunately, the Supreme Court, in a footnote, declined to address a trade-secret exception to §16600. The most common dispute when an employee goes to work for a competitor is the issue of clients. The former employer will claim that the client list is a trade-secret, and therefore the employee cannot call on those clients. The employee will claim that there is nothing special about the clients. These competing claims can seriously impact the employability of that employee, because prospective employers do not want to have to worry about who is being solicited by their employees. This decision will place great emphasis on California’s Uniform Trade Secrets Act, a statute that gives employers the right to protect certain company information, including client lists.

——————————————————————————–

In Depth Analysis:

The California Supreme Court granted review to address the validity of noncompetition agreements in California and the permissible scope of employment release agreements. The Court limited review to the following issues: (1) To what extent does Business and Professions Code section 16600  prohibit employee noncompetition agreements; and (2) is a contract provision requiring an employee to release “any and all” claims unlawful because it encompasses nonwaivable statutory protections, such as the employee indemnity protection of Labor Code section 2802?

The California Supreme Court concluded that section 16600 prohibits employee noncompetition agreements unless the agreement falls within a statutory exception, and that a contract provision whereby an employee releases “any and all” claims does not encompass nonwaivable statutory protections, such as the employee indemnity protection of Labor Code section 2802.

FACTS

In January 1997, Raymond Edwards II (Edwards), a certified public accountant, was hired as a tax manager by the Los Angeles office of the accounting firm Arthur Andersen LLP (Andersen). Andersen’s employment offer was made contingent upon Edwards signing a noncompetition agreement, which prohibited him from working for or soliciting certain Andersen clients for limited periods following his termination. The agreement was required of all managers, and read in relevant part:

“If you leave the Firm, for eighteen months after release or resignation, you agree not to perform professional services of the type you provided for any client on which you worked during the eighteen months prior to release or resignation. This does not prohibit you from accepting employment with a client. [¶] For twelve months after you leave the Firm, you agree not to solicit (to perform professional services of the type you provided) any client of the office(s) to which you were assigned during the eighteen months preceding release or resignation. [¶] You agree not to solicit away from the Firm any of its professional personnel for eighteen months after release or resignation.”

Edwards signed the agreement.

Between 1997 and 2002, Edwards continued to work for Andersen. In March 2002, the United States government indicted Andersen in connection with the investigation into Enron Corporation, and in June 2002, Andersen announced that it would cease its accounting practices in the United States. In May 2002, Andersen internally announced that HSBC USA, Inc. (a New York-based banking corporation), through a new subsidiary, Wealth and Tax Advisory Services (WTAS), would purchase a portion of Andersen’s tax practice, including Edwards’s group.

In July 2002, HSBC offered Edwards employment. Before hiring any of Andersen’s employees, HSBC required them to execute a “Termination of Noncompete Agreement” (TONC) in order to obtain employment with HSBC. Among other things, the TONC required employees to (1) voluntarily resign from Andersen; (2) release Andersen from “any and all” claims, including “claims that in any way arise from or out of, are based upon or relate to Employee’s employment by, association with or compensation from” defendant; (3) continue indefinitely to preserve confidential information and trade secrets except as otherwise required by a court or governmental agency; (4) refrain from disparaging Andersen or its related entities or partners; and (5) cooperate with Andersen in connection with any investigation of, or litigation against, Andersen. In exchange, Andersen would agree to accept Edwards’s resignation, agree to Edwards’s employment by HSBC, and release Edwards from the 1997 noncompetition agreement. HSBC required that Andersen provide it with a completed TONC signed by every employee on the “Restricted Employees” list before the deal went through. At least one draft of the Restricted Employees list contained Edwards’s name. Andersen would not release Edwards, or any other employee, from the noncompetition agreement unless that employee signed the TONC.

Edwards signed the HSBC offer letter, but he did not sign the TONC.  In response, Andersen terminated Edwards’s employment and withheld severance benefits. HSBC withdrew its offer of employment to Edwards.

PROCEDURAL HISTORY

On April 30, 2003, Edwards filed a complaint against Andersen, HSBC and WTAS for intentional interference with prospective economic advantage and anticompetitive business practices under the Cartwright Act (Bus. & Prof. Code, § 16720 et seq.). Edwards alleged that the Andersen noncompetition agreement violated section 16600, which states “[e]xcept as provided in this chapter, every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.” He further alleged that the TONC’s release of “any and all” claims violated Labor Code sections 2802 and 2804, which make an employee’s right to indemnification from his or her employer nonwaivable.

Edwards settled with all parties except Andersen. The trial court dismissed all claims against Andersen, except for those relating to intentional interference with prospective economic advantage, which it concluded presented pure questions of law. The trial court heard argument from both parties, but took no evidence. The court determined all issues of law in favor of Andersen on the merits, and entered judgment in its favor. The trial court specifically decided that (1) the noncompetition agreement did not violate section 16600 because it was narrowly tailored and did not deprive Edwards of his right to pursue his profession; and (2) the TONC did not purport to waive Edwards’s right to indemnification. Thus, requiring him to sign these documents was not unlawful. Edwards appealed the trial court’s decision.

At issue in the Court of Appeal was one of the elements required to prove a claim for intentional interference with prospective economic advantage. In order to prove a claim for intentional interference with prospective economic advantage, a plaintiff has the burden of proving five elements: (1) an economic relationship between plaintiff and a third party, with the probability of future economic benefit to the plaintiff; (2) defendant’s knowledge of the relationship; (3) an intentional act by the defendant, designed to disrupt the relationship; (4) actual disruption of the relationship; and (5) economic harm to the plaintiff proximately caused by the defendant’s wrongful act, including an intentional act by the defendant that is designed to disrupt the relationship between the plaintiff and a third party. (Korea Supply Co. v. Lockheed Martin Corp. (2003) 29 Cal.4th 1134, 1153-1154.) The plaintiff must also prove that the interference was wrongful, independent of its interfering character. (Della Penna v. Toyota Motor Sales, U.S.A., Inc. (1995) 11 Cal.4th 376, 392-393.) “[A]n act is independently wrongful if it is unlawful, that is, if it is proscribed by some constitutional, statutory, regulatory, common law, or other determinable legal standard. (Korea Supply, supra, 29 Cal.4th at p. 1159.)

At issue in the Edwards case was the third element of the tort. In the Court of Appeal, Edwards argued the independently wrongful acts requirement in this case was met in several ways: (1) the noncompetition agreement was illegal under section 16600, making Andersen’s demand that he give consideration to be released from it against public policy; (2) the TONC’s additional release of “any and all” claims constituted a waiver of his indemnity rights in violation of Labor Code sections 2802 and 2804; and (3) the TONC’s nondisparagement clause violated Labor Code section 1102.5. In the published part of its opinion, the Court of Appeal held: (1) the noncompetition agreement was invalid under section 16600, and requiring Edwards to sign the TONC as consideration to be released from it was an independently wrongful act for purposes of the elements of Edwards’s claim for intentional interference with prospective economic advantage; (2) the TONC purported to waive Edwards’s indemnification rights under the Labor Code and was therefore in violation of public policy and an independently wrongful act; and (3) the TONC’s nondisparagement provision did not violate Labor Code section 1102.5 and so was not an independently wrongful act.

THE HISTORY OF SECTION 16600

Under the common law, as is still true in many states today, contractual restraints on the practice of a profession, business, or trade, were considered valid, as long as they were reasonably imposed. (Bosley Medical Group v. Abramson (1984) 161 Cal.App.3d 284, 288.) This was true even in California. (Wright v. Ryder (1868) 36 Cal. 342, 357 [relaxing original common law rule that all restraints on trade were invalid in recognition of increasing population and competition in trade].) However, in 1872 California settled public policy in favor of open competition, and rejected the common law “rule of reasonableness,” when the Legislature enacted the Civil Code. (Bosley, supra, 161 Cal.App.3d at p. 288.)  Today in California, covenants not to compete are void, subject to several exceptions discussed briefly below.

Section 16600 states: “Except as provided in this chapter, every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.” The chapter excepts noncompetition agreements in the sale or dissolution of corporations (§ 16601), partnerships (ibid.; § 16602), and limited liability corporations (§ 16602.5). In the years since its original enactment as Civil Code section 1673, our courts have consistently affirmed that section 16600 evinces a settled legislative policy in favor of open competition and employee mobility. (D’sa v. Playhut, Inc. (2000) 85 Cal.App.4th 927, 933.) The law protects Californians and ensures “that every citizen shall retain the right to pursue any lawful employment and enterprise of their choice.” (Metro Traffic Control, Inc. v. Shadow Traffic Network (1994) 22 Cal.App.4th 853, 859.) It protects “the important legal right of persons to engage in businesses and occupations of their choosing.” (Morlife, Inc. v. Perry (1997) 56 Cal.App.4th 1514, 1520.)

The Supreme Court has invalidated an otherwise narrowly tailored agreement as an improper restraint under section 16600 because it required a former employee to forfeit his pension rights on commencing work for a competitor. (Muggill v. Reuben H. Donnelley Corp. (1965) 62 Cal.2d 239, 242-243 (Muggill); Chamberlain v. Augustine (1916) 172 Cal. 285, 289 [invalidating contract with partial trade restriction].) In Muggill, the court reviewed an adverse judgment against a company’s retired employee whose pension plan rights were terminated after the former employee commenced work for a competitor. (Muggill, at p. 240.) The retired employee had sued the former employer, seeking declaratory relief on the ground that the provision in the pension plan that terminated the retirement payments because the retiree went to work for a competitor was “against public policy and unenforceable.” (Ibid.) Muggill held that, with exceptions not applicable here, section 16600 invalidates provisions in employment contracts and retirement pension plans that prohibit “an employee from working for a competitor after completion of his employment or imposing a penalty if he does so [citations] unless they are necessary to protect the employer’s trade secrets [citation].” (Muggill, at p. 242.)   In sum, following the Legislature, the Supreme Court generally condemns noncompetition agreements. (See, e.g., Armendariz v. Foundation Health Psychcare Services, Inc. (2000) 24 Cal.4th 83, 123, fn. 12 [such restraints on trade are "illegal"].)

Under the statute’s plain meaning, therefore, an employer cannot by contract restrain a former employee from engaging in his or her profession, trade, or business unless the agreement falls within one of the exceptions to the rule. (§ 16600.)  Andersen, however, asserted that the California Supreme Court should interpret the term “restrain” under section 16600 to mean simply to “prohibit,” so that only contracts that totally prohibit an employee from engaging in his or her profession, trade, or business are illegal. It would then follow that a mere limitation on an employee’s ability to practice his or her vocation would be permissible under section 16600, as long as it is reasonably based. Andersen contended that some California courts have held that section 16600 (and its predecessor statutes, Civil Code former sections 1673, 1674, and 1675) are the statutory embodiment of prior common law, and embrace the rule of reasonableness in evaluating competitive restraints. (See, e.g., South Bay Radiology Medical Associates v. Asher (1990) 220 Cal.App.3d 1074, 1080 (South Bay Radiology) [§ 16600 embodies common law prohibition against restraints on trade]; Vacco Industries, Inc. v. Van Den Berg (1992) 5 Cal.App.4th 34, 47-48 (Vacco) [§ 16600 is codification of common law reasonable restraint rule].)

Andersen claimed that these cases show that section 16600 “prohibits only broad agreements that prevent a person from engaging entirely in his chosen business, trade or profession.  Agreements that do not have this broad effect — but merely regulate some aspect of post-employment conduct, e.g., to prevent raiding [employer’s personnel] — are not within the scope of [s]ection 16600.”  As Edwards observes, however, the cases Andersen cites to support a relaxation of the statutory rule simply recognize that the statutory exceptions to section 16600 reflect the same exceptions to the rule against noncompetition agreements that were implied in the common law. For example, South Bay Radiology acknowledged the general prohibition against restraints on trade while applying the specific partnership dissolution exception of section 16602 to the facts of its case. (South Bay Radiology, supra, 220 Cal.App.3d at p. 1080.)  In that case, the covenant not to compete was set forth in a partnership agreement to which appellant doctor was a party. When appellant’s partnership with several other doctors dissolved due to his inability to work following an accident, he challenged the noncompete clause. The court found the partnership exception to section 16600 applicable. (South Bay Radiology, supra, at pp. 1078-1080.) Vacco involved the sale of shares in a business, an exception to section 16600 found in section 16601. The Court of Appeal upheld an agreement not to compete made by a terminated employee who had sold all of his stock in the business for $500,000 prior to his termination. In applying the exception to section 16600, the court held that section 16601 “permits agreements not to compete made by a party selling the goodwill of a business or all of the shares of stock in a corporation.” (Vacco, supra, 5 Cal.App.4th at p. 47.) As the Court of Appeal recognized, “Fairly read, the foregoing authorities suggest section 16600 embodies the original, strict common law antipathy toward restraints of trade, while the section 16601 and 16602 exceptions incorporated the later common law ‘rule of reasonableness’ in instances where those exceptions apply.”

However, the California Supreme Court concluded that Andersen’s noncompetition agreement was invalid. As the Court of Appeal observed, “The first challenged clause prohibited Edwards, for an 18-month period, from performing professional services of the type he had provided while at Andersen, for any client on whose account he had worked during 18 months prior to his termination. The second challenged clause prohibited Edwards, for a year after termination, from ‘soliciting,’ defined by the agreement as providing professional services to any client of Andersen’s Los Angeles office.” The agreement restricted Edwards from performing work for Andersen’s Los Angeles clients and therefore restricted his ability to practice his accounting profession. (See Thompson v. Impaxx, Inc. (2003) 113 Cal.App.4th 1425, 1429 [distinguishing "trade route" and solicitation cases that protect trade secrets or confidential proprietary information].) The noncompetition agreement that Edwards was required to sign before commencing employment with Andersen was therefore invalid because it restrained his ability to practice his profession. (See Muggill, supra, 62 Cal.2d at pp. 242-243.)

The Ninth Circuit’s Narrow-Restraint Exception

Andersen argued to the Supreme Court that it should adopt the limited or “narrow-restraint” exception to section 16600 that the Ninth Circuit discussed in Campbell v. Trustees of Leland Stanford Jr. Univ. (9th Cir. 1987) 817 F.2d 499 (Campbell), and that the trial court relied on in this case in order to uphold the noncompetition agreement.  In Campbell, the Ninth Circuit acknowledged that California has rejected the common law “rule of reasonableness” with respect to restraints upon the ability to pursue a profession, but concluded that section 16600 “only makes illegal those restraints which preclude one from engaging in a lawful profession, trade, or business.” (Campbell, supra, 817 F.2d at p. 502.)  The court remanded the case to the district court in order to allow the employee to prove that the noncompetition agreement at issue completely restrained him from practicing his “profession, trade, or business within the meaning of section 16600.” (Campbell, at p. 503.)

The confusion over the Ninth Circuit’s application of section 16600 arose in a paragraph in Campbell, in which the Ninth Circuit court noted that some California courts have excepted application of section 16600 ” ‘where one is barred from pursuing only a small or limited part of the business, trade or profession.’” (Campbell, supra, 817 F.2d at p. 502.) The Ninth Circuit cited two California cases that it believed may have carved out such an exception to section 16600. (See Boughton v. Socony Mobil Oil Co. (1964) 231 Cal.App.2d 188 (Boughton) [interpreting deed restriction on land use] and King v. Gerold (1952) 109 Cal.App.2d 316 (King) [rejecting manufacturer’s argument that clause not to produce its product after license expiration was not an illegal restraint under section 16600].) Andersen relied on those cases, citing them as the underpinnings of the Ninth Circuit’s exception to section 16600, and urging the court to adopt their reasoning. As the Court of Appeal observed, however, the analyses in Boughton and King do not provide persuasive support for adopting the narrow-restraint exception.  In Boughton, the restriction was not upon the plaintiff’s practice of a profession or trade, but took the form of a covenant in a deed to a parcel of land that specified the land could not be used as a gasoline service station for a specified time period. (Boughton, supra, 231 Cal.App.2d 188.)  Because the case involved the use of the land, section 16600 was not implicated.  Of note is the fact that Boughton relied on King, an unfair competition case in which the court applied a trade secret exception to the statutory rule against noncompetition clauses. (King, supra, 109 Cal.App.2d 316.) In King, the plaintiff was not simply engaged in the manufacture and sale of goods (house trailers) but was allegedly using a trailer design substantially similar to his former employer’s, the inventor of the design. (Id. at p. 318.)

Andersen was correct, however, that Campbell had been followed in some recent Ninth Circuit cases to create a narrow-restraint exception to section 16600 in federal court. For example, International Business Machines Corp. v. Bajorek (9th Cir. 1999) 191 F.3d 1033, upheld an agreement mandating that an employee forfeits stock options if employed by a competitor within six months of leaving employment. General Commercial Packaging v. TPS Package (9th Cir. 1997) 126 F.3d 1131, held that a bargained-for contractual provision barring one party from courting a specific named customer was not an illegal restraint of trade prohibited by section 16600, because it did not “entirely preclude[]” the party from pursuing its trade or business. (General Commercial Packaging v. TPS Package, supra, 126 F.3d at p. 1133.)

Contrary to Andersen’s belief, however, California courts have not embraced the Ninth Circuit’s narrow-restraint exception. Indeed, no reported California state court decision has endorsed the Ninth Circuit’s reasoning, and the California Supreme Court was of the view that California courts “have been clear in their expression that section 16600 represents a strong public policy of the state which should not be diluted by judicial fiat.” (Scott v. Snelling and Snelling, Inc. (N.D.Cal. 1990) 732 F. Supp. 1034, 1042.)  Section 16600 is unambiguous, and if the Legislature intended the statute to apply only to restraints that were unreasonable or overbroad, it could have included language to that effect. The California Supreme Court rejected Andersen’s contention that California Supreme Court should adopt a narrow-restraint exception to section 16600 and leave it to the Legislature, if it chooses, either to relax the statutory restrictions or adopt additional exceptions to the prohibition-against-restraint rule under section 16600.

Contract Provision Releasing “Any and All” Claims

Edwards was not terminated from Andersen for refusing to sign the noncompetition agreement. Rather, Andersen made it a condition of Edwards’s obtaining employment with HSBC that Edwards execute the TONC, releasing Andersen from, among other things, “any and all” claims, including “claims that in any way arise from or out of, are based upon or relate to [Edwards’s] employment by, association with or compensation from” Andersen. As the Courtof Appeal held, to the extent Andersen demanded Edwards execute the TONC as consideration for release of the invalid provisions of the noncompetition agreement, it could be considered a wrongful act for purposes of his claim for interference with prospective economic advantage. An employer “cannot lawfully make the signing of an employment agreement, which contains an unenforceable covenant not to compete, a condition of continued employment . . . . [A]n employer’s termination of an employee who refuses to sign such an agreement constitutes a wrongful termination in violation of public policy.” (D’Sa v. Playhut, Inc., supra, 85 Cal.App.4th at p. 929.)

More importantly in the Edwards case, however, are the provisions of the TONC that purport to release Andersen from liability for claims arising out of Edwards’s employment with that company. These are the provisions that Edwards contested in the appellate court. As is a fairly typical practice, at the time of his separation from Andersen, Edwards was asked to execute a broad general release in Andersen’s favor. Section (1)(d) of the TONC provided that Edwards must release and discharge Andersen from “any and all actions, causes of action, claims, demands, debts, damages, costs, losses, penalties, attorneys’ fees, obligations, judgments, expenses, compensation or liabilities of any nature whatsoever, in law or equity, whether known or unknown, contingent or otherwise, that Employee now has, may have ever had in the past or may have in the future against any of the Released Parties by reason of any act, omission, transaction, occurrence, conduct, circumstance, condition, harm, matter, cause, or thing that has occurred from the beginning of time up to and including the date hereof, including, without limitation, claims that in any way arise from or out of, are based upon or relate to Employee’s employment by, association with or compensation from [Andersen] or any of its affiliated firms, except for claims (I) arising out of [Andersen’s] obligations set forth in this agreement or (ii) for any accrued and unpaid salary or other employee benefit or compensation owing to employee as of the date hereof.” The trial court concluded that on the issue of waiver of indemnity, the TONC was a typical broad release that did not request indemnity rights be waived. The court added that “the Labor Code pretty much tells us that right can’t be waived. As a matter of law, any provision in the release that attempts to waive it would be void.” The court concluded that it did not have to reach the question because the release did not require Edwards to “give up his rights as a matter of law.”

The Court of Appeal disagreed. It concluded that the TONC’s plain language did indeed implicitly waive Edwards’s Labor Code section 2802, subdivision (a), indemnity rights, and that Andersen could not make Edwards’s future employment contingent on his waiving the statutorily mandated rights. As California Supreme Court explain, California Supreme Court disagree with the Court of Appeal on this point. Labor Code section 2802, subdivision (a), provides for an employee’s right to indemnity. That subdivision reads: “An employer shall indemnify his or her employee for all necessary expenditures or losses incurred by the employee in direct consequence of the discharge of his or her duties, or of his or her obedience to the directions of the employer, even though unlawful, unless the employee, at the time of obeying the directions, believed them to be unlawful.” Labor Code section 2804 voids any agreement to waive the protections of Labor Code section 2802 as against public policy. Labor Code section 2804 provides, “Any contract or agreement, express or implied, made by any employee to waive the benefits of this article or any part thereof, is null and void, and this article shall not deprive any employee or his personal representative of any right or remedy to which he is entitled under the laws of this State.” (Italics added.) Courts have interpreted Labor Code section 2804 to apply to Labor Code section 2802, making all contracts that waive an employee’s right to indemnification null and void. (See Liberio v. Vidal (1966) 240 Cal.App.2d 273, 276, fn. 1.) Thus, indemnity rights are nonwaivable, and any contract that does purport to waive an employee’s indemnity right would be contrary to the law and therefore unlawful to that extent.

“California has a strong public policy that favors the indemnification (and defense) of employees by their employers for claims and liabilities resulting from the employees’ acts within the course and scope of their employment.” (Chin et al., Cal. Practice Guide: Employment Litigation (The Rutter Group 2007) ¶ 3:1, p. 3-1.) Labor Code section 2802 codifies this policy and gives an employee a right to indemnification from his or her employer. (See Grissom v. Vons Companies, Inc. (1991) 1 Cal.App.4th 52, 59-60 [the purpose of Lab. Code, § 2802 is "to protect employees from suffering expenses in direct consequence of doing their jobs"]; Janken v. GM Hughes Electronics (1996) 46 Cal.App.4th 55, 74, fn. 24 [Lab. Code, § 2802 "shows a legislative intent that duty-related losses ultimately fall on the business enterprise, not on the individual employee"].) Edwards asserts that the TONC’s language releasing “any and all” claims encompassed his statutorily nonwaivable right to indemnification under Labor Code section 2802, thus amounting to an independent wrongful act that would support his intentional interference with prospective advantage claim. The Court of Appeal agreed with Edwards, concluding that although the TONC did not reference the right to indemnity, it did not have to because those rights were “necessarily encompassed within the clear terms of the broad release.”

The Court of Appeal found it especially telling that Labor Code section 2802 requires indemnification for “all necessary expenditures or losses incurred by the employee in direct consequence of the discharge of his or her duties,” and that the TONC waives claims for losses, costs, and expenditures “of any nature whatsoever.” Although the Court of Appeal noted that the TONC did not expressly waive Edwards’s indemnity rights, the court cited Bardin v. Lockheed Aeronautical Systems Co. (1999) 70 Cal.App.4th 494, 505 (Bardin), for the rule that “[a] broadly worded release covers all claims within the scope of the language, even if the particular claim is not expressly listed.” In Bardin, the appellant, Bethany Bardin, applied for a job with the Los Angeles Police Department (LAPD). The LAPD performed an investigation into Bardin’s background, in the course of which it obtained information from her former employer, Lockheed Martin Corporation (Lockheed). (Id. at pp. 497-498) When applying to the LAPD, Bardin signed a “Release and Waiver” form that “released any former employer from ‘any or all liability for damage of whatever kind, which may at any time result to [appellant], . . . because of compliance with this authorization and request to release information . . . .’ ” (Id. at p. 498.) When the LAPD did not offer her a job, Bardin sued Lockheed, claiming it provided the LAPD with misleading negative information that caused the LAPD to reject her employment application. (Id. at pp. 498-499.) Bardin claimed that the release did not “expressly release respondents from disseminating false or baseless statements,” but the court disagreed, finding that the release “broadly and unambiguously releases a former employer ‘from any and all liability for damage of whatever kind . . . .’ ” (Id. at p. 505.)

The language “any and all” is common to both the release in Bardin and the release in the present case (and is common to most release agreements). In addition, the remaining language in both releases is generally similar. But the rights being released in each are entirely different. Unlike the rights at issue in Bardin, the indemnity rights in the present case are nonwaivable under Labor Code section 2802, and any waiver that attempts to waive those rights is unlawful. Therefore, the fact that the California Supreme Court ad to interpret those rights as within the scope of the phrase “any and all,” made Bardin inapposite in the Edwards case. In contrast to Bardin, the Edwards TONC expressly excepted two types of claims from release. The first were claims arising from the TONC itself. The second was for “any accrued and unpaid salary or other employee benefit or compensation owing to Employee as the date hereof.” The Court of Appeal believed that indemnity rights did not fall within either of these exceptions, and even if the right to indemnification did qualify as compensation, the release remained invalid because its exception applied only to compensation owed as of the date of the agreement, a clause that would have improperly waived Edwards’s right to future indemnity claims under Labor Code section 2802. The Supreme Court also noted that because the release expressly excepted two types of claims, but did not expressly exempt indemnification rights, the release intended to waive those rights. As the California Supreme Court explained, under Labor Code section 2802, a contract provision releasing “any and all” claims generally does not encompass nonwaivable statutory protections, and in particular does not implicitly apply to an employee’s right to indemnification from the employer.

“Where the language of a contract is clear and not absurd, it will be followed. [Citations.] But if the meaning is uncertain, the general rules of interpretation are to be applied.” (1 Witkin, Summary of Cal. Law (10th ed. 2005) Contracts, § 741; Civ. Code, §§ 1637, 1638; see also Sierra Vista Regional Medical Center v. Bontá (2003) 107 Cal.App.4th 237, 245-246.) In Edwards, the meaning was in dispute and uncertain; the California Supreme Court had to therefore decide what the phrase “any and all” means. “If a contract is capable of two constructions courts are bound to give such an interpretation as will make it lawful, operative, definite, reasonable and capable of being carried into effect . . . .” (Rodriguez v. Barnett (1959) 52 Cal.2d 154, 160; see also Jones v. Humanscale Corp. (2005) 130 Cal.App.4th 401, 411; Loral Corp. v. Moyes (1985) 174 Cal.App.3d 268, 278; Civ. Code, §§ 3541 ["[a]n interpretation which gives effect is preferred to one which makes void”], 1643 ["[a] contract must receive such an interpretation as will make it lawful, operative, definite, reasonable, and capable of being carried into effect”].)

The Edwards TONC did not expressly reference indemnity rights, and California Supreme Court should not read it as encompassing a waiver of Edwards’s indemnity rights. Giving the TONC such a reading is consistent with the tenets of contractual interpretation because it makes the contract lawful, valid and capable of being carried into effect. In addition, our conclusion makes it unnecessary to insert additional language or terms into the contract, which is consistent with Code of Civil Procedure section 1858 and its mandate that when courts construe an instrument, a judge is “not to insert what has been omitted, or to omit what has been inserted . . . .” “[I]t is one of the cardinal rules of interpreting an instrument to give it such construction as will make it effective rather than void.” (Toland v. Toland (1898) 123 Cal. 140, 143.) The California Supreme Court applied this rule in holding that a contract provision releasing “any and all” claims, such as that used in the TONC in the present case, does not encompass nonwaivable statutory protections, such as the employee indemnity protection of section Labor Code 2802. In so holding, the California Supreme Court interpret the TONC such that it does not violate Labor Code section 2804. As a consequence, the TONC was neither unlawful nor null and void.

Even if the California Supreme Court ignored the above principles of contract interpretation, it could still find that releasing “any and all” claims does not implicate Edwards’s nonwaivable right to indemnity. Andersen contended it did not except indemnity rights from the release because it was aware that under Labor Code section 2804, such rights are statutorily nonwaivable. Andersen asserted essentially that such an exception was legally unnecessary. California case law arguably supported Andersen’s contention. “‘”[A]ll applicable laws in existence when an agreement is made, which laws the parties are presumed to know and to have had in mind, necessarily enter into the contract and form a part of it, without any stipulation to that effect, as if they were expressly referred to and incorporated.” [Citation.]’” (Torrance v. Workers’ Comp. Appeals Bd. (1982) 32 Cal.3d 371, 378, quoting Alpha Beta Food Markets v. Retail Clerks Union (1955) 45 Cal.2d 764, 771.) This means that when the California Supreme Court interpreted the TONC, it could presume that Andersen knew Edwards’s indemnity rights were statutorily nonwaivable. It also means California Supreme Court may treat the TONC as if it expressly includes the substance of Labor Code section 2804: that no employee’s right to indemnification, to which he or she is entitled under the law, can be waived. (Liberio v. Vidal, supra, 240 Cal.App.2d at p. 276 & fn. 1.) Therefore, the waiver of “any and all” claims would not encompass the right to indemnification, because California Supreme Court treat the TONC as expressly incorporating the law that the employee cannot waive that right. Edwards argued that contract drafters could easily fix the overbroad release problem by including the clause “except as otherwise prohibited by law” after “any and all.” But that distinction was no important. The phrase “except as otherwise prohibited by law” is vague and essentially informs the employee of nothing. In addition, it appears most practitioners already operate with the understanding that the release does not encompass items “otherwise prohibited by law.” If they do, they are null and void under the Labor Code.

Therefore, the California Supreme Court believed that voiding all existing releases which include the language “any and all” is inappropriate. The California Supreme Court concluded that a contract provision releasing “any and all” claims does not encompass nonwaivable statutory protections, such as the employee indemnity protection of Labor Code section 2802 and, accordingly, is not void under Labor Code section 2804.

CONCLUSION

The California Supreme Court held that the noncompetition agreement was invalid under section 16600, and the Court rejected the narrow-restraint exception urged by Andersen. Noncompetition agreements are invalid under section 16600 in California even if narrowly drawn, unless they fall within the applicable statutory exceptions of sections 16601, 16602, or 16602.5. In addition, the California Supreme Court concluded that the TONC at issue in the case did not purport to release Andersen from any nonwaivable statutory claims and therefore is not unlawful under Labor Code sections 2802 and 2804.

Aaron Morris is a Partner with the law firm of Morris & Stone, LLP, located in Tustin, Orange County, California. He can be reached at (714) 954-0700, or by email.  The practice areas of Morris & Stone include employment law (wrongful termination, sexual harassment, pregnancy discrimination), business litigation (breach of contract, trade secret, partnership dissolution, unfair business practices, etc.), real estate and construction disputes, first amendment law, Internet law, discrimination claims, defamation suits, and legal malpractice.

California is an at-will employment state, meaning that employers can terminate employees for any reason or no reason at all. Although there are statutory exceptions prohibiting employers from taking adverse employment action on the basis of race, gender, and other protected groups, a loophole in Megan’s Law serves to make sex offenders a protected group giving them rights that other employees do not have.

Sex offenders are filing claims for wrongful termination, utilizing Megan’s Law as the legal grounds to secure and retain employment. The Megan’s Law Statute, set forth in California Penal Code Section 290.46, states that a person is authorized to use information disclosed pursuant to the statute — that a person is a registered sex offender –  “only to protect a person at risk.”  California Penal Code § 290.46(1).  The statute specifically “prohibits, except as authorized to protect a person at risk or pursuant to another provision of law, the use of any information that is disclosed through the statute for purposed related to any of the following: health insurance, insurance, loans, credit, employment, education . . ., and housing and accommodations.” California Penal Code § 390.46(2)(E).

In other words, California employers may not discriminate in employment of an employee on the basis of his or her status as a registered sex offender, if such status is discovered through the Megan’s Law website, unless it is to protect a person at risk or pursuant to some other provision of law.  One such provision of law is Labor Code section 432.7, which addresses what questions an employer can ask an employment applicant.  Labor Code section 432.7 allows an employer to ask and use the fact of a “conviction” in determining any condition of employment; however, legal practice guides have interpreted it to apply only to hiring.  As such, California employers may discriminate in “hiring” sex offenders if that information comes from a questions about convictions.  However, if the employer fails to ask whether the applicant has any convictions, and later discovers through the Megan’s law website that its employee is a registered sex offender, the employer is liable for wrongful termination if it terminates the sex offender employee based on that information.

This serves to put the employer in an unenviable position: it may be held liable for the sex offender employee’s negligent conduct (for instance, if the sex offender employee physically abuses a co-worker) or face a claim by the sex offender employee for wrongful termination if it fires said employee.

Further, it is nonsensical that an employer can learn this information through other sources (i.e. public records search) and legally terminate the employee on that basis, yet is liable if obtained on the Megan’s Law website.  I suppose an employment attorney could suggest to clients that they check the Megan website to see if the employee is listed as a sex offender, and if so, then find the same information from some other source so the termination or rejection would not be based on what was found on the Megan site.  But that would circumvent the absurd result intended by our fine Legislature that sex offenders receive special protections, and I would never suggest such a thing.

The new law, Vehicle Code Section 23123, provides that “a person shall not drive a motor vehicle while using a wireless telephone unless that telephone is specifically designed and configured to allow hands-free listening and talking, and is used in that manner while driving.”

If the driver is a minor under age 18, the law is more restrictive and prohibits the use of any “mobile service device” at any time the minor is operating a motor vehicle. A mobile service device is defined to include not just cell phones, but a variety of electronic devices.

How does this affect you as a California employer?

It will probably never even occur to most California employers that this seemingly innocuous law can expose them to liability if violated by an employee.  If you are one of the many California employers that routinely issues cell phones to its employees, or permits employees to use their cell phones to conduct business on your behalf, you could be liable for your employee’s violation.  Many small business owners are simply unaware that an employer can be held vicariously liable for resulting injuries and property damage if its employee causes an accident while talking on a cell phone for business purposes in violation of the new law.

Taking these simple precautions can reduce an employer’s potential liability for damages relating to employee violations of the new law:

(1)        Draft and distribute a clear policy on the new law in employee handbooks, and have your employees sign an acknowledgment of receipt of the new policy or new handbook incorporating such policy.

(2)       When issuing a cell phone to new employees, provide a copy of the new law, the company’s policy on such law, and again have the employee sign an acknowledgment of receipt of such material. You should also routinely issue “hands free” devices with each cell phone and require the employees use of the device.

(3)       Have a training class for all employees on the new law, the company’s new policy requiring employee compliance with said law when using the company cell phone or their own personal cell phone if used to conduct company business.

(4)       Provide or post information on the new law and your new company policy in the office kitchen, break room or other public areas in your office.

(5)       Inform employees that they company will not foot the cost for violations of the new law, and that they will be personally liable if they choose to violate the new law.

(6)       Create a disciplinary policy for any employee who violates the new law, which ultimately can lead to the termination of the violating employee.

(7)       If you employ minors, you should taken even greater precautions with such employees especially if their job duties include driving for work purposes. It is a great temptation to a teenager to simply text a friend while driving, and this is a violation of the new cell phone law.

The applicable statute is set forth in its entirety below.  You may wonder why the statute provides that it is automatically repealed as of 2011.  That’s because we will all have cell phones implanted in our brains by then, so no hands free laws will be necessary.  Actually, the law that replaces it is already on the books and becomes effective the moment the first is repealed.  The new law takes away many of the exceptions, making the hands free law even stricter in three years.  If you need specific legal assistance with such a problem or to help you develop a policy or procedure for your company, contact me.

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Vehicle Code Section 23123:

(a) A person shall not drive a motor vehicle while using a wireless telephone unless that telephone is specifically designed and configured to allow hands-free listening and talking, and is used in

that manner while driving.

(b) A violation of this section is an infraction punishable by a base fine of twenty dollars ($20) for a first offense and fifty dollars ($50) for each subsequent offense.

(c) This section does not apply to a person using a wireless telephone for emergency purposes, including, but not limited to, an emergency call to a law enforcement agency, health care provider, fire department, or other emergency services agency or entity.

(d) This section does not apply to an emergency services professional using a wireless telephone while operating an authorized emergency vehicle, as defined in Section 165, in the course and scope of his or her duties.

(e) This section does not apply to a person when using a digital two-way radio that utilizes a wireless telephone that operates by depressing a push-to-talk feature and does not require immediate proximity to the ear of the user, and the person is driving one of the following vehicles:

(1) (A) A motor truck, as defined in Section 410, or a truck tractor, as defined in Section 655, that requires either a commercial class A or class B driver’s license to operate.

(B) The exemption under subparagraph (A) does not apply to a person driving a pickup truck, as defined in Section 471.

(2) An implement of husbandry that is listed or described in Chapter 1 (commencing with Section 36000) of Division 16.

(3) A farm vehicle that is exempt from registration and displays an identification plate as specified in Section 5014 and is listed in Section 36101.

(4) A commercial vehicle, as defined in Section 260, that is registered to a farmer and driven by the farmer or an employee of the farmer, and is used in conducting commercial agricultural operations, including, but not limited to, transporting agricultural products, farm machinery, or farm supplies to, or from, a farm.

(5) A tow truck, as defined in Section 615.

(f) This section does not apply to a person driving a school bus or transit vehicle that is subject to Section 23125.

(g) This section does not apply to a person while driving a motor vehicle on private property.

However, logic also dictates that if an implied contract to terminate only for cause can defeat the at-will presumption of Section 2922, then isn’t it reasonable that there might also be enforceable implied contracts not to demote except for cause? Based on the decisions of California’s appellate courts, this second part of the syllogism does not seem to have wide support.

For some inexplicable reason, both trial and appellate courts tend to lose all memory of basic contract law when the case arises in the employment context. When confronted with claims that an implied contract existed not to demote without cause, the courts have insisted on going outside simple contract analysis. Turner v. Anheuser-Busch, Inc., is a typical example. In that case, the plaintiff was demoted and given a pay cut. He sued, claiming that his demotion was a breach of contract. Apparently feeling that it had to raise the plaintiff’s demotion to the level of a termination before it could even consider the matter, the California Supreme Court based its entire analysis on whether the demotion and pay cut rose to the level of a constructive discharge. From that perspective, the court determined that no constructive discharge had taken place, and that the demotion was therefore a sacrosanct business decision.

Why is this sort of deference given? Well, quite reasonably, courts are loathed to substitute their own business acumen for that of business owners. If the courts go down that path, then every business decision will be subject to judicial review. If there is an actual termination, and ample evidence to demonstrate that an implied contract not to terminate existed, then the courts will step into the breach (pun intended). But a “mere” demotion somehow seems like a far lesser business decision, and therefore not worthy of judicial intervention. Next, the courts undoubtedly reason, they will be asked to decide who gets the corner office.

Again, though, this reasoning ignores contract law. Parties are free to enter into a “no demote” contract, or even one for the corner office, and there is no reason such a contract cannot arise by implication. If such a contract is breached, the employee should be afforded a remedy.

This seemingly obvious reasoning finally dawned on the Supremes in November 1995, in a case entitled Scott v. Pacific Gas & Electric. In Scott, two engineers were charged with possible policy violations. Even though they seemingly absolved themselves of any wrongdoing, the company decided to demote them anyway. As in Turner, they sued claiming that there was an implied contract that they would not be demoted without good cause.

Although they prevailed at the trial level, the Court of Appeal reversed. Refusing to give a simple thumbs up or down to the implied contract, instead the court held that to even allow the finding of an implied contract not to demote would be to intrude too far into managerial discretion.

The Supreme Court was not so absolute, and reversed. However, the decision did not come easy. The court still felt compelled to put the matter in some larger context than simple contract law. It spoke in terms of public policy, and noted that some scholars have actually concluded that a sense of job security can be good for a workforce. Therefore, it is conceivable, the court reasoned, that a company could actually create an atmosphere where the employees come to believe that they will not be demoted except for cause. The court concluded that there is something to be said for actually trying to decipher and enforce the agreement between the parties, as opposed to ignoring that agreement and deciding all employment matters on public policy grounds.

To the extent that Scott will embolden plaintiffs’ attorneys to go to court with demotion causes of action, such an impact will probably be short lived. Companies have effectively incorporated the at-will termination presumption into their policies, and Scott will simply force companies to do the same with the at-will demotion presumption. Nonetheless, there is satisfaction in the fact that the Supreme Court has brought intellectual honesty to this issue.