Validity of Employee Nonsolicitation Agreements Now in Question

California, unlike most of the rest of the United States, generally prohibits noncompetition agreements except in very limited circumstances involving the sale of a business. (See Business & Professions Code § 16600 et seq.) But California also recognizes an employer’s right to protect its trade secrets. (See Civil Code § 3426 et seq.) As a result, in California, a former employee’s right to compete with his or her former employer frequently comes into conflict with the employer’s right to protect its trade secrets, and often results in litigation. It is not unusual for the new employer to also become embroiled in the litigation.

For over 30 years, it was generally thought that an employer could prevent its current and former employees from using its trade secret information to solicit its customers and employees, without running afoul of California’s prohibition against noncompetition agreements. For example, in Loral Corp. v. Moyes, 174 Cal.App.3d 268 (1985), a former company officer was subject to an agreement to preserve the confidentiality of all trade secrets and prohibited from disrupting or interfering with the business by raiding its employees or disrupting its relationships with customers. The company sued the former officer for violation of that provision and the court held that the provision did not constitute an invalid restriction on the former employee’s ability to compete. However, in American Credit Indemnity Co. v. Sacks, 213 Cal.App.3d 622 (1989), the court of appeal ruled that when a former employee sends out an announcement of her new employment to customers on a trade secret list, that does not constitute a misappropriation of the employer’s trade secret list as long as she does not actually solicit business from those customers.

AMN Healthcare, Inc. v. Aya Healthcare Services, Inc., Case No. D071924 (4th Appellate District, November 1, 2018) is the most recent appellate decision arising from a claim by an employer that its former employees are misappropriating its trade secret information. AMN was in the business of recruiting nurses for temporary assignments at hospitals and other healthcare organizations. AMN treated those temporary nurses as its employees. AMN’s employees who did the recruiting were subject to a Confidentiality and Non-Disclosure Agreement that, among other things, prevented the employees from soliciting any AMN employee to leave AMN for at least a year. Several AMN employees left and went to Aya Healthcare Services, which was also in the business of recruiting and placing temporary nurses. AMN sued both its former employees and Aya. Ultimately, the trial court granted summary judgment for the former employees and Aya, and enjoined AMN from enforcing its employee nonsolicitation provision. On appeal, the court of appeal affirmed the trial court’s rulings.

In reaching its decision, the court of appeal in AMN Healthcare concluded that the employee nonsolicitation provision violated Business and Professions Code section 16600 and was therefore void. The court engaged in a detailed analysis but, most importantly, the court said, “This provision clearly restrained individual defendants from practicing with Aya their chosen profession – recruiting travel nurses . . . .” (Slip Opinion, at 16.) The court also questioned the continuing validity of the 1985 decision in Loral Corp. v. Moyes.

The facts of AMN Healthcare are unusual in one very important respect: AMN’s former employees were in the business of recruiting the very employees that they were accused of soliciting – temporary nurses. Therefore, preventing them form soliciting temporary nurse employees obviously restricted their ability to compete with AMN. This fact distinguishes the case from the garden-variety situation in which, say, the current and former employers both make widgets. In that situation, preventing a former employee from soliciting its widget makers and widget sellers does not significantly limit the former employee’s ability to compete in the widget business. One might therefore conclude that in the garden-variety situation an employee nonsolicitation agreement is not an unlawful noncompetition agreement. Nonetheless, the broad-stroke language and analysis in AMN Healthcare calls into question all employee and customer nonsolicitation agreements. Therefore, companies should consult with their employment counsel to determine whether it makes sense to remove such provisions from their employee policies, practices and agreements or, alternatively, whether the facts and circumstances of their business, and the trade secret nature of the information they seek to protect, justify their nonsolicitation agreements.

Employee Cannot Pursue PAGA Claims Against Employer After Settling Individual Claims

In one of the final judicial decisions of 2017, a California court of appeal has held that an employee who settled his individual wage and hour claims against his former employer could not continue to pursue his PAGA claims against that employer. The court therefore affirmed the trial court’s judgment dismissing the employee’s PAGA claims. Kim v. Reins International California, Inc., 2d Dist. Case No. B278642 (filed December 29, 2017).

The Plaintiff, Justin Kim, sued his former employer, Reins International California, Inc. (“Reins”) alleging individual and class claims for wage and hour violations and seeking civil penalties on behalf of the State of California and aggrieved employees under the Labor Code Private Attorneys General Act of 2004 (“PAGA”). Mr. Kim had signed an arbitration agreement at the commencement of his employment; therefore, Reins moved to compel arbitration of Mr. Kim’s individual claims, dismiss his class claims, and stay his PAGA cause of action until the arbitration had concluded. The trial court granted the motion. While the arbitration was pending, Mr. Kim accepted Reins’ offer to compromise under Code of Civil Procedure section 998. As a result, Mr. Kim dismissed his individual claims with prejudice and dismissed the class claims without prejudice, leaving only the PAGA cause of action.

Reins filed a motion for summary adjudication of the PAGA cause of action, arguing that after Mr. Kim dismissed his individual causes of action he was no longer an “aggrieved employee” under PAGA and therefore could not longer pursue the PAGA cause of action. The court granted the motion. Mr. Kim appealed.

PAGA provides that an action may be brought by “an aggrieved employee on behalf of himself or herself and other current or former employees.” Labor Code section 2699(a). The term “aggrieved employee” “means any person who was employed by the alleged violator against whom one or more of the alleged violations was committed.” Labor Code section 2699(c). The court concluded that once Mr. Kim settled his individual claims and dismissed them with prejudice, he was no longer an “aggrieved employee” as defined in Labor Code section 2699, so he no longer had standing to maintain his PAGA action.

The court noted that Mr. Kim’s inability to pursue his PAGA cause of action, because he was no longer an “aggrieved employee,” would not prevent any other aggrieved employee from bringing a PAGA action against Reins. The court rejected Reins’ suggestion that the trial court’s dismissal with prejudice of Mr. Kim’s PAGA cause of action was a “decision on the merits” that would bar any other employee from bringing a PAGA claim against Reins.

The decision in Kim v. Reins International California, Inc. is not surprising, but suggests a likely employer strategy for trying to avoid liability under PAGA. That strategy depends on the employer’s ability to settle a plaintiff employee’s individual wage and hour claims. Such a strategy may be pursued regardless of whether the employee is subject to mandatory arbitration of his or her individual claims. However, such a strategy may have a higher likelihood of success if the employee is subject to mandatory arbitration since the PAGA claims are likely to be stayed while the employee’s individual claims are litigated in the arbitration forum.

What Happens At the End of an LLC’s Term?

In its operating agreement, a Limited Liability Company, or LLC, may specify a termination date or other event that will result in the dissolution of the LLC. On the termination date or occurrence of another specified event, the LLC is “dissolved” (Corporations Code section 17707.01(e)), with only limited powers to “wind up” its affairs (Corporations Code section 17707.04).

Generally, after the dissolution has occurred, a certificate of dissolution must be filed with the California Secretary of State. Corporations Code section 17707.08(a). Upon the completion the winding up of the LLC’s affairs, a certificate of cancellation of the articles of organization must be filed with the California Secretary of State. Corporations Code section 17707.08(b). When the certificate of cancellation is filed, “a limited liability company shall be cancelled and its powers, rights and privileges shall cease.” Corporations Code section 17707.08(c).

Even after the filing of a certificate of cancellation, the LLC continues to exist for the purpose of prosecuting and defending actions by or against it in order to collect and discharge obligations, disposing of and conveying its property, and collecting and dividing its assets. Corporations Code section 17707.06(a). However, “A limited liability company shall not continue business except so far as necessary for its winding up.” Corporations Code section 17707.06(a).

Even after a certificate of dissolution has been filed, the LLC can be revived under limited circumstances enumerated in Corporations Code Section 17707.09, by the filing of a “certificate of continuation,” which has the effect of nullifying the certificate of dissolution.

Ezer Williamson Law provides a wide range of both transactional and litigation services to individuals and businesses. We have successfully prosecuted and defended various types of business and property claims. Contact us at (310) 277-7747 to see how we can help you with your business law concerns.

California Supreme Court Issues Important New Wage and Hour Decision

On July 13, 2017, the California Supreme Court issued a decision that California employment law attorneys have been anticipating for over two years. Williams v. Superior Court (Marshalls of California, LLC) (S227228 7/13/17). The Williams decision significantly impacts the nature and extent of the information employers may be forced to give employees who sue their employers on what are commonly called “PAGA” claims. But before explaining that decision, a bit of background information is required.

In California, employees have at least four different ways to make claims against their current or former employers for unpaid wages and penalties: (1) They can make an administrative claim with the State Labor Commissioner (a “wage claim”); (2) they can file an individual lawsuit in court; (3) they can file a wage and hour class action on behalf of themselves and other current and former employees; or (4) they can file a “representative” action under California’s Labor Code Private Attorneys General Act of 2004, commonly known as a PAGA Claim. The first two options, the wage claim and the individual lawsuit, typically seek recovery only of wages and penalties due to an individual claimant or plaintiff. The other two options seek wages or penalties, or both, for a much wider group of employees, represent a risk of far greater liability for the employer and a far greater potential attorney fee reward for the plaintiff’s attorneys. Thus, plaintiff attorneys prefer to bring class actions and PAGA claims rather than wage claims and individual lawsuits. Not surprisingly, class actions and PAGA claims tend to strike fear in employers.

Under the current state of California and federal law, wage and hour class actions may well be less scary for employers than PAGA claims. It used to be the other way around, because in a PAGA claim all that can be recovered are the myriad penalties assessable under the California Labor Code for violation of the wage and hour provisions of the Labor Code. While those penalties can be substantial they are typically (but not always) far, far less than the unpaid wages resulting from an employer’s wage and hour violations.

There are two reasons why PAGA claims have become more problematic for employers relative to class actions. First, the California Supreme Court has held that plaintiffs in PAGA claims do not have to meet certain requirements that they must meet in class actions. Arias v. Superior Court (2009) 46 Cal.4th 969. So PAGA claims can be more difficult to defend against than class actions. Second, as a result of developments in federal law over the last several years, employers can frequently require employees to sign mandatory arbitration agreements that require them to arbitrate all wage and hour claims and give up any right to bring a wage and hour class action in court or in arbitration. Thus, for many employers, the risk from wage and hour class actions has been greatly reduced – in fact almost eliminated.

Employers have argued that PAGA claims are also subject to mandatory arbitration under federal law. They have also argued that they should be able to avoid “representative” PAGA claims in the same way they can avoid class actions. In other words, they have argued that they should be able require employees to sign mandatory arbitration agreements that require them to arbitrate all PAGA claims and give up any right to bring a PAGA claim in court or in arbitration on behalf of anyone other than themselves. However, in Iskanian v. CLS Transportation Los Angeles, LLC (2014) 59 Cal.4th 348, the California Supreme Court noted that PAGA claims are a form of government action – with the plaintiff acting as a “private attorney general” on behalf of the state of California to collect Labor Code penalties. The California Supreme Court reasoned that forcing plaintiffs to arbitrate their PAGA claims and preventing PAGA claims on behalf of other employees would really be preventing California from bringing such claims, thereby frustrating the purpose of the PAGA law. Therefore, the California Supreme Court held that employees cannot be forced to arbitrate PAGA claims and cannot be forced to give up their right to bring such claims on behalf of other employees.

That brings us to the decision issued on July 13, 2017 by the California Supreme Court, Williams v. Superior Court (Marshalls of California, LLC) (S227228 7/13/17). In Williams, the plaintiff, Mr. Williams, had worked in a single Marshalls store in California. He brought a PAGA claim, asserting that Marshalls had violated California wage and hour laws including those governing employee meal and rest breaks. Apparently, Marshalls had over 16,000 current and former employees in the time period covered by Mr. Williams’ lawsuit, spread across a large number of stores across the state. In the course of pretrial discovery, Mr. Williams asked Marshalls for the names and contact information for all of those thousands of employees. Marshalls refused Mr. Williams’ request, claiming the request was unfairly burdensome and would violate the privacy rights of those employees. Marshalls argued that until Mr. Williams had demonstrated that his claim of alleged wage and hour violations had some merit he should only be given information on the employees who had worked at the same store as Mr. Williams. The trial court and the court of appeal (in a 2015 decision) agreed with Marshalls. Mr. Williams sought and obtained review by the California Supreme Court.

At this point, it bears noting that if Mr. Williams had brought his law suit as a class action (assuming he had not signed a mandatory arbitration agreement giving up his right to bring a class action), he probably would have been entitled to the names and contact information for all of the thousands of current and former employees. But Marshalls’ argument was that, as the California Supreme Court has held, a PAGA claim is not a class action. So, logically, the rules governing a PAGA claim should be different. The trial court and the court of appeal agreed.

Yesterday, the California Supreme Court disagreed with each of Marshalls’ arguments, and reversed. Therefore, at least for the foreseeable future, plaintiffs in PAGA actions, just like plaintiffs in wage and hour class actions, can require the defendant employers to provide the names and contact information of potentially thousands of current and former employees impacted by the plaintiffs’ PAGA claims.

Ezer Williamson Law – 2016 Year in Review

In 2016, Ezer Williamson continued to achieve excellent results for its clients, opened a second office, and expanded into the area of labor and employment law.

The Firm is excited to announce the completion of our newly remodeled South Bay office and our expanded team, including the addition of Robert C. Hayden, Esq., as Senior Counsel, and Dominique Stango and Heather Domingo, the Firm’s new legal assistants.  The addition of Mr. Hayden, Ms. Stango, and Ms. Domingo reflects both the Firm’s commitment to providing exemplary service to our clients, as well as the growth and success the Firm has experienced throughout the 2015 and 2016 periods.

In 2016, the Firm achieved many favorable outcomes for our clients, including, (1) securing a settlement valued in excess of $1 million for the plaintiff in a commercial lease dispute, (2) resolving claims valued in excess of $20 million stemming from a Federal Multidistrict litigation matter regarding mortgage-backed securities, (3) resolving claims made against a real estate investor by an alleged employee, for less than 1% of the multi-million dollar amount sought, (4) successfully negotiated a complicated settlement transaction of a partnership dispute that included several business entities, and (5) favorably resolved a substantial wage and hour class action brought on behalf of individuals who claimed to be improperly classified as independent contractors rather than employees.

As we look forward to 2017, Ezer Williamson plans to further deepen and expand the services offered to our clients, including growing the Firm’s Labor and Employment practice group, as well as continuing to develop the Firm’s presence in our Century City office.

Ninth Circuit Rules Employer’s Mandatory Arbitration Agreement Violates the National Labor Relations Act

The Ninth Circuit recently ruled that an employer’s mandatory arbitration agreement that included a class action waiver violated the National Labor Relations Act (the “Act”) and therefore was unenforceable. Morris v. Ernst & Young LLP (9th Cir. August 22, 2016) 834 F.3d 975. The Ninth Circuit’s ruling endorses the position taken by the National Labor Relations Board (the “Board”) on this issue and is consistent with the position taken by the Seventh Circuit. However, the Ninth Circuit’s ruling is in conflict with the position taken by the Second, Fifth and Eighth Circuits, each of which has held that the Federal Arbitration Act requires that class action waivers contained in employers’ mandatory arbitration provisions must be enforced under the recent arbitration decisions of the United States Supreme Court. This split among the Circuits renders a future United States Supreme Court decision on this issue all but inevitable.

Stephen Morris and Kelly McDaniel brought a wage and hour class action against their employer, Ernst & Young (“E&Y”). E&Y moved to compel arbitration pursuant to a “concerted action waiver” signed by Morris and McDaniel. The concerted action waiver required employees (1) to pursue all claims against E&Y in arbitration and (2) to arbitrate only as individuals. The effect of the two provisions was that employees were prohibited from bringing class action claims “in any forum – in court, in arbitration proceedings, or elsewhere.” 834 F.3d at 979.

The Second, Fifth and Eighth Circuits have held that the Federal Arbitration Act requires that such arbitration agreements be enforced. However, the Ninth Circuit characterized the issue in a very different way: “The problem with the contract at issue is not that it requires arbitration; it is that the contract term defeats a substantive federal right to pursue concerted work-related legal claims.” 834 F.3d at 985. The court also said, “The same provision in a contract that required court adjudication as the exclusive remedy would equally violate the [Act].” 834 F.3d at 984.

Two years ago, the California Supreme Court addressed the identical issue in Iskanian v. CLS Transportation Los Angeles, LLC (2014) 59 Cal.4th 348, 366-374. In Iskanian, the California Supreme Court performed an independent analysis of the issue and concluded that such waivers are enforceable. The California Supreme Court’s analysis was similar to that of the Fifth Circuit, whose decisions the court cited. Since the California Supreme Court’s holding on this issue is contrary to that of the Ninth Circuit, it is likely that California’s trial and appellate courts will follow the California Supreme Court’s lead, and will enforce class action waivers contained in employers’ mandatory arbitration provisions, unless either the California Supreme Court changes its mind or the United States Supreme Court decides the issue.

Ezer Williamson Law proudly announces Robert C. Hayden as Senior Counsel

Ezer Williamson Law proudly announces the addition of Robert C. Hayden as Senior Counsel.

Mr. Hayden brings with him over 37 years of legal experience and expertise in the areas of labor and employment law, as well as extensive experience in business and commercial litigation, including contract and intellectual property disputes.

Prior to joining Ezer Williamson, Mr. Hayden was a partner at RG Lawyers LLP where he practiced for over six years representing both employees and companies in employment litigation, including wage and hour class actions, wrongful termination, and employment litigation.

Prior to RG Lawyers, Mr. Hayden was a partner with K&R Law Group LLP. At K&R, Mr. Hayden created and headed the employment law group for approximately 11 years, until the firm’s dissolution. While at K&R, Mr. Hayden also worked on complex commercial, business, contract, and intellectual property litigation.

Mr. Hayden began his career in 1978 in the Labor and Employment Department of Kindel & Anderson and moved with the head of that department to Overton, Lyman & Prince to develop a Labor & employment practice at that firm. He became a partner in 1985 and left in 1989 upon the firm’s dissolution. During his time at Kindel & Anderson and Overton, Lyman & Prince, Mr. Hayden represented employers in all aspects of union organizing campaigns, unfair labor practice proceedings before the National Labor Relations Board, and state and federal litigation.  Following the dissolution of Overton,  Mr. Hayden spent over six years at Lewis, D’Amato, Brisbois & Bisgaard (now Lewis, Brisbois, Bisgaard & Smith), leaving as a partner in 1995 to develop the Employment Law group at K&R Law Group.  While at Lewis, D’Amato, Mr. Hayden worked on a wide range of civil litigation matters, including real estate, construction, contract, and commercial disputes.

Mr. Hayden graduated from Stanford University in 1975 with a Bachelor of Science degree.  He then received his legal education at University of California at Berkeley – Boalt Hall School of Law, where he was awarded a Juris Doctor degree in 1978.

To read more about Mr. Hayden, please visit his attorney page here.

What is a Change Order in a Construction Contract?

“No prudent individual would make a contract for the construction of a building of any magnitude without incorporating a provision somewhere making specific and definite arrangements concerning extra work.” City Street Improvement Company v. Kroh, 158 Cal. 308, 321 (1910).

Previously on our blog, we discussed how changes to construction contracts are often unavoidable, but that there are limitations to how much a construction contract can change. In this article, we will discuss the proper tool for acceptable change requests: the “change order.”

A change order is essentially an amendment to a construction contract. It represents the mutual consensus between the parties on a change to the schedule, price, work, or other contract term.  Like any other contract amendment, a change order has to meet the requirements of valid contract formation (offer, acceptance, reasonable identification of changed terms, exchange of consideration, and be signed by both parties).

A change order should always be accompanied by documentation, such as original contract documents, emails discussing the change, revised plans and specifications, meeting minutes, and any other reports that might be related to the change order.  Change orders and associated documents should be kept on file with all other project records.  Moreover, since the statute of limitations for most construction claims is ten years, every contract, change order, and supporting document for a change order should be kept at least that long. Finally, it is especially important to determine and document the cost of a change order.

If you have questions about construction contract claims, consult an experienced attorney. Ezer Williamson Law provides a wide range of both transactional and litigation services to individuals and businesses. We have successfully prosecuted and defended various types of business, real estate, construction and property claims. Contact us at (310) 277-7747 to see how we can help you with your business, real estate or construction law needs.

What is Incorporation by Reference in a Contract?

Previously on our blog, we discussed how more complex contracts allude to other existing contracts and documents. Incorporation by reference is the method of making these alluded-to documents part of a contract, and is often used to save space when parties want to include or reference another legal document or contract into a new contract. To properly incorporate another document by reference, it has to be adequately described in a new contract, and it is good practice also to attach a copy of the referenced document to the new contract to which it is being incorporated.

The concept of incorporation by reference is similar to that of flow-down contract clauses in construction contracts.  For example, a flow-down clause is used to bind subcontractors to the general contractor in the same fashion as the general contractor is bound under its contract with the property owner. In the same vein, subcontracts usually incorporate general contracts by reference.

When drafting an incorporation by reference clause, parties have the option to incorporate certain provisions of an existing legal document, or the entire document. If the parties make it clear that only certain provisions are to be incorporated, the incorporation by reference clause should be explicitly clear in its limited scope and purpose. However, if the incorporation clause is very general, this could lead to potential disputes about which provisions to a contract were incorporated. To avoid any confusion, parties should specify exactly which terms are being incorporated.

Any time existing legal documents are incorporated by reference, there is a potential for conflicting terms. It is therefore important that all provisions are reviewed for conflicts, and a contract provision dictating how conflicting terms will be resolved should also be included.

Ezer Williamson Law provides a wide range of both transactional and litigation services to individuals and businesses. We have successfully prosecuted and defended various types of business, real estate, construction and property claims. Contact us at (310) 277-7747 to see how we can help you with your business, real estate or construction law needs.

Examples of California Unfair Competition Lawsuits

Previously on the blog, we discussed what constitutes unfair competition in California. In this article, we will share a few examples of recent unfair competition lawsuits involving California businesses.

As a refresher, California Business and Professions Code Section 17200 prohibits “unfair competition,” which includes any unlawful, unfair or fraudulent business act or practice. It also includes any unfair, deceptive, untrue or misleading advertising, as well as any other act prohibited by the Business and Professions Code. A  violation under this code section is often one of the many allegations making up a lawsuit accusing a business of some sort of fraud or deceptive practice prohibited by a different state rule or statute leading to wide variation in unfair competition lawsuits in California.

Recent unfair competition lawsuits include:

  • The district attorney offices for the counties of Los Angeles and San Francisco claimed that Uber violated California’s unfair competition laws by misguiding and overcharging consumers;
  • The district attorney offices for the counties of Yolo, Sacramento, and San Joaquin  filed an unfair competition lawsuit against chocolate Easter bunny candy-maker R.M. Palmer Co., alleging that the false-bottomed boxes used to sell the product “Too Tall Bunny” amount to deceptive packaging; and
  • In a case that could impact millions of Americans, two private individuals have brought an unfair competition lawsuits against Apple, alleging that the company falsely advertised the storage capacity available in its iPhones, iPads and iPods, because the large data footprint of the iOS 8 operating software eats into the advertised capacity of Apple’s mobile devices, making a fraction of the advertised capacity of the devices available to users.

Ezer Williamson Law provides a wide range of both transactional and litigation services to individuals and businesses. We have successfully prosecuted and defended various types of business, real estate, construction and property claims. Contact us at (310) 277-7747 to see how we can help you with your business, real estate or construction law needs.