Cal Supreme Court Approves Class Action Fees Based on Settlement Percentage

California Supreme Court Approves Award of Class Action Attorney Fees Based on a Percentage of the Class Action Settlement

Earlier this month, the California Supreme Court issued its decision in a case challenging the traditional method of calculating attorney fees to be paid to the plaintiff attorneys in wage and hour class actions. Laffitte v. Robert Half International Inc., ____ Cal.4th ____, 2016 Daily Journal Daily Appellate Report 8287 (California Supreme Court August 11, 2016).  That case involved a $19 million settlement of three related wage and hour class action lawsuits against the staffing firm Robert Half International, Inc. The settlement provided that no more than one-third of the settlement amount would go to the plaintiff attorneys, also known as the “class counsel.”  The class counsel sought an award of the maximum amount, $6,333,333.33. A single member of the class objected to the requested attorney fee. Nonetheless, the trial court approved the settlement and awarded the requested attorney fee.  The objecting class member appealed, and the Court of Appeal affirmed the trial court’s rulings.  The California Supreme Court accepted the objecting class member’s petition for review for the sole purpose of deciding whether a 1977 California Supreme Court decision, Serrano v. Priest (1977) 20 Cal.3d 25, sometimes referred to as Serrano III, prohibited trial courts from calculating an attorney fee award as a percentage of the settlement amount in class action settlements. The California Supreme Court also considered whether trial courts can use various alternative methods of calculating attorney fees as a means of checking whether the percentage amount is appropriate.

The objecting class member argued that Serrano III requires that attorney fee awards by trial courts be calculated based on the amount of time spent by the attorneys on the case rather than a percentage of the settlement amount. The California Supreme Court disagreed, however, stating that Serrano III arose under a “private attorney general doctrine” that was not applicable to this wage and hour class action.

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.

Tenant Security Deposits and “Deduct-and-Return” Under Civil Code Section 1950.5

Subject to certain limitations, a landlord may withhold tenant security deposits in order to clean, repair, and make ready a rental unit for new tenants.  In fact, California Civil Code Section 1950.5 provides that the landlord may use summary “deduct-and-return” procedures (that is, procedures that do not require formal legal process) as long as certain rules are followed.

“Deduct-and-Return” Under Civil Code Section 1950.5

Under California law, after a tenant has vacated the premises a landlord has 21 days or less to notify the tenant either (1) that the landlord will provide a full refund of the security deposit, or (2) mail or personally deliver to the tenant an itemized statement listing the amounts of any deductions from the security deposit and the reasons for the deductions, together with a refund of any amounts not deducted. Civil Code Section 1950.5(g)(1).  The landlord must include copies of receipts for the charges that were incurred to repair or clean the rental unit with the itemized statement, or, if the landlord or their employees performed the work or repairs, then the itemized statement must describe the work performed, including the time spent, the hourly rate charged, and the hourly rate must be reasonable. Civil Code Section 1950.5(g)(2).

Failing to Follow the Section 1950.5 Procedure and Potential Penalties

When a landlord fails to follow the timeline and steps identified in Section 1950.5 in good faith, the landlord loses the ability to use the summary procedure.  Put differently, the landlord cannot simply “deduct-and-return” the tenant’s security deposit, but, instead, must return the security deposit in full and bring an action for damages to recover amounts owed to clean and/or repair the rental units.

If the landlord withholds the tenant’s security deposit in bad faith then the tenant may bring an action against the landlord and the landlord may be forced to pay “statutory damages of up to twice the amount of the security, in addition to actual damages.” Civil Code Section 1950.5(l).

Riverisland, Parol Evidence, and the Fraud Exception

We recently wrote about contract integration clauses, which will usually state that the contract is “completely integrated,” and the parol evidence rule, which works to keep out prior or contemporaneous statements or writings that would modify the contract.  In this post we discuss Riverisland Cold Storage, Inc. v. Fresno–Madera Production Credit Assn., 55 Cal. 4th 1169 (2013).   In short, Riverisland states that the parol evidence rule is not a bar to evidence that goes to show fraud in connection with the contract, and the court may look to, for example, prior statements and emails, to determined what agreement was made by the parties.

In Riverisland, the plaintiffs restructured and reaffirmed a debt owed to the Fresno-Madera Production Credit Association (“Credit Association”).  The restructuring agreement provided that the Credit Association would take no enforcement action for three months if the plaintiffs made specified payments and pledged eight (8) parcels of land as additional collateral.

Later, the plaintiffs fell behind on payments and the Credit Association instituted foreclosure proceedings. Eventually, the plaintiffs repaid the loan and the Credit Association dismissed its foreclosure proceedings.

However, the plaintiffs filed an action seeking damages for fraud and negligent misrepresentation, and included causes of action for rescission and reformation of the restructuring agreement. In their complaint, the plaintiffs alleged that the Credit Association’s vice president told them two weeks before the agreement was signed that the Credit Association would extend the loan for two years in exchange for two “ranch properties” as the additional real-property collateral, but the written contract actually allowed for only an additional three months of forbearance and identified eight (8) parcels as additional collateral.

The plaintiffs did not read the agreement, but simply signed it at the locations tabbed for signature. The Credit Association moved for summary judgment, contending that the plaintiffs could not prove their claims because the parol evidence rule barred evidence of any representations contradicting the terms of the written agreement.

At the time that the plaintiffs brought their complaint, California had operated under the longstanding rule set forth in Bank of America etc. Assn. v. Pendergrass, 4 Cal. 2d 258 (1935), which prohibited the use of parol evidence in cases where fraud is alleged in connection with a purportedly “integrated” contractual agreement.

In Riverisland the Supreme Court concluded that the limitations Pendergrass placed on the fraud exception to the parol evidence rule were not supported by the language of the statute establishing that exception (CCP § 1856(f)(g)) or consistent with prior case law. (55 Cal.4th at 1182)  Further, it held that “Pendergrass failed to account for the fundamental principle that fraud undermines the essential validity of the parties’ agreement. When fraud is proven, it cannot be maintained that the parties freely entered into an agreement reflecting a meeting of the minds. . . . Parol evidence is always admissible to prove fraud, and it was never intended that the parol evidence rule should be used as a shield to prevent the proof of fraud.” (Id. at 1180–1182)

How will this affect contract related litigation in California?   Riverisland leans against a court granting dispositive motions, like demurrers, motions for summary judgment, and motions for judgment on the pleadings, where the plaintiff alleges or can show that there is parol evidence supporting their claims, even if the contract is “fully integrated” and/or has an integration clause.

What is the Parol Evidence Rule?

A key part of understanding why an integration clause is important is understanding what the parol evidence rule is.

What is the Parol Evidence Rule?

Generally speaking, the parol evidence rule bars (or keeps out) extrinsic evidence of a prior or contemporaneous agreement.  In English, this means that once parties to a contract sign and agree to the terms of the contract, the parol evidence rule will keep the parties to the agreement from trying to submit prior oral or written statements to modify or contradict terms or clauses in the contract.

Take the example we posted in our previous blog post on integration clauses.  In that example, Party B agreed to buy “industry standard gears” for a specified sum, but in Party B’s conversations with Party A, they discussed “type-1” gears.  Thus, when Party A delivers “type 3” gears, Party B will go to court and attempt to submit parol evidence that the agreement was for 100 “type-1” gears.

As we noted in prior posts, the parol evidence rule is codified in California Code of Civil Procedure section 1856, which states that the “[t]erms set forth in a writing intended by the parties as a final expression of their agreement with respect to the terms included therein may not be contradicted by evidence of a prior agreement or of a contemporaneous oral agreement.”   Likewise,  California Civil Code section 1625 states that “[t]he execution of a contract in writing, whether the law requires it to be written or not, supersedes all the negotiations or stipulations concerning its matter which preceded or accompanied the execution of the instrument.”

As we explained in our prior blog post, most contracts have an integration clause, which will be used  to determine whether the contract is “a final expression” of the parties’ agreement.  Assuming that is the case, a party will have to show that an exception to the parol evidence rule applies.

What are the Exceptions to the Parol Evidence Rule?

Generally, the parol evidence rule will not allow a party to a written agreement to submit prior inconsistent statements (written or oral), although there are exceptions.  The following general circumstances are exceptions to the parol evidence rule:

  • Incomplete writings
  • Collateral or independent agreements
  • Subsequent agreements
  • Ambiguity or uncertainty in instrument
  • Illegality or bad faith
  • Fraud
  • Mistake
  • Lack of consideration

If one of these exceptions applies a party may then be able to submit evidence that was prior to or contemporaneous with the written contract in order to explain or contradict the terms of the deal.

Parent-Child Exclusion From Property Tax Reassessment

California provides various exclusions from reassessment of property tax when a “change of ownership” occurs.  One of the most common exclusions is used to prevent reassessment for transfers from a parent to a child or from a grandparent to a grandchild (often referred to as the “parent-child exclusion”).  However, it is important to understand when a “change in ownership” occurs and how long you have to apply for an exclusion from property tax reassessment.

“Change of Ownership”

Generally, Revenue & Taxation Code Sections 60 through 62 define the events (i.e., the sales and transfers) that trigger property tax reassessments under provisions of the California Constitution, commonly known as Proposition 13.  These trigger events are known as a change of ownership.  Generally, whenever a change of ownership occurs that is not subject to an exclusion provided under the Revenue and Taxation Code, the transferee must file a change in ownership statement in the county where the real property is located. Cal. Rev. & Tax. Code § 480(a).

Revenue and Taxation Code section 60 defines a “change in ownership” as “a transfer of a present interest in real property, including the beneficial use thereof, the value of which is substantially equal to the value of the fee interest.”  The transfer of a fee interest is commonly accomplished via a sale from one person or entity to another.

Transfers can also be through legal trusts.  In fact, transfers between parents and children typically take place through trusts that are set up by the parent(s) for the benefit of the child after the parent passes away.   The Revenue and Taxation Code also provides that circumstances constituting a “change in ownership” occur when any interests in real property which vest in persons other than the trustor (i.e., the trust creator) or when a revocable trust becomes irrevocable (such as the parent/trustor passing away).

Thus, there is a change of ownership when the children receive the full present interest in real property, even when the property remains in the trust.  Luckily an exclusion is available to prevent a costly property tax reassessment, but must be timely claimed.

The Parent-Child Exclusion

Certain constitutional initiatives (including Propositions 13, 58, and 193) were passed that provide for exclusions to reassessment when the transfer is from a parent to a child or from a grandparent to a grandchild.  Those initiatives were codified in the California Revenue & Taxation Code, which states (in relevant part) that “a change in ownership shall not include the purchase or transfer of real property . . . between parents and their children.”  Cal. Rev. & Tax. Code § 63.1.

But, in order to avoid reassessment under the parent-child exclusions described above, once there is a change in ownership a claim for the exclusion must be filed within three (3) years after the date of the purchase or transfer of real property, or prior to transfer of the real property to a third party (whichever is earlier).  If no claim for a parent-child exclusion is filed within the three (3) year period, then it may be filed within six months from the date of mailing of a notice of supplemental or escape assessment that was issued as a result of the purchase or transfer of the real property.  Cal. Rev. & Tax. Code § 63.1.

Doing Business in California: Failing to Obtain a Certificate of Qualification

Doing Business in CaliforniaAs we discussed in our blog last week, a foreign corporation or other business entity transacting business within California must comply with the certification requirements of Corporations Code § 2105 and obtain a Certificate of Qualification.  As set forth in the following list, the consequences for failing to comply with the California Corporations Code (the “Code”) can be harsh.

  • A foreign entity is not permitted to maintain an action or proceeding within California regarding business transacted intrastate until it comes within compliance of the Code.

  • Transacting unauthorized intrastate business is deemed as consenting to the jurisdiction of California courts in any civil action arising in California in which the entity is named as a defendant.

  • The entity may be subject to a per diem (per day) penalty of $20.00 for each day that unauthorized intrastate business is transacted.

  • Prosecution may be brought by the California Attorney General and an additional money penalty may be sought against the entity.

The harsh consequences described above can be avoided by obtaining a Certificate of Qualification.  Under Corporations Code § 2105, in order to obtain that certificate a foreign corporation or other business entity must file a form prescribed by the Secretary of State that is signed by a corporate officer or a trustee stating, among other things:

  • Its name and the state or place of its incorporation or organization.

  • The street address of its principal executive office.

  • The street address of its principal office within California, if any.

  • The name of an agent for service of legal process located within California.

  • Irrevocable consent to service of process directed to it upon the California agent designated

  • Affirmation of compliance with certain insurance requirements, if applicable.

Once the foreign entity makes all appropriate filings and pays the associated filing fees it receives a Certificate of Qualification from the Secretary of State.

The corporation may then maintain or refile a case that had been dismissed because of its non-compliance.  However, and importantly, the corporation must be cognizant of the otherwise applicable statute of limitations and refile promptly if necessary.  If refiling an action that had previously been dismissed, the entity must file receipts and evidence of compliance (such as the Certificate of Qualification) with the clerk of the court.

Doing Business in California: “Transacting Intrastate Business”

We have previously written about doing business in California, and how the California Corporations Code uses a “transacting intrastate business” test.  Importantly, if a corporation or other entity is deemed to be doing business in California under the “transacting intrastate business” test, that entity must obtain a “Certificate of Qualification” under Corporations Code § 2105.  This post will look at what will and will not constitute “transacting intrastate business.”

Transacting Intrastate Business

Transacting intrastate business means that the entity or some part thereof enters into or conducts repeated and successive business transactions (sales, deals, etc.) in California.  Like many legal tests, certain factors will be weighed to determine whether or not the test is satisfied.  To assist courts and businesses in determining what may or may not qualify as transacting intrastate business, Corporations Code § 191 sets out what activities will not be considered to be transacting intrastate business, although a listed activity may be taken with other activities that, taken together, constitutes transacting intrastate business.  Some of the protected activities include:

(1) Maintaining or defending any action or suit or any administrative or arbitration proceeding, or effecting the settlement thereof or the settlement of claims or disputes.

(2) Holding meetings of its board or shareholders or carrying on other activities concerning its internal affairs.

(3) Maintaining bank accounts.

(4) Maintaining offices or agencies for the transfer, exchange, and registration of its securities or depositaries with relation to its securities.

(5) Effecting sales through independent contractors.

(6) Soliciting or procuring orders, whether by mail or through employees or agents or otherwise, where those orders require acceptance outside this state before becoming binding contracts.

(7) Creating evidences of debt or mortgages, liens or security interests on real or personal property.

(8) Conducting an isolated transaction completed within a period of 180 days and not in the course of a number of repeated transactions of like nature.

Likewise, a foreign corporation will not be considered to be transacting intrastate business solely because one of its subsidiaries transacts intrastate business.  A foreign corporation or other entity  will also not be considered to be transacting intrastate business solely because of its status as any one or more of the following:

(1) It is a shareholder of a domestic corporation.

(2) It is a shareholder of a foreign corporation transacting intrastate business.

(3) It is a limited partner of a domestic limited partnership.

(4) It is a limited partner of a foreign limited partnership transacting intrastate business.

(5) It is a member or manager of a domestic limited liability company.

(6) It is a member or manager of a foreign limited liability company transacting intrastate business.

In addition to the above, it is important to note that, in the digital age, an entity conducting significant business over the internet may have sufficient contacts with California to allow a court to exercise personal jurisdiction over the entity.  Furthermore, California law permits a plaintiff to conduct initial discovery against a defendant corporation or other entity to determine whether or not the corporation has been doing business within the state.

Ninth Circuit: Section 16600 Applies to Settlements

Section 16600 of the California Business and Professions Code prohibits contracts from restraining individuals “from engaging in a lawful profession, trade, or business of any kind.”  While the reach of Section 16600 is broad (recently reaching as far as the  Delaware Court of Chancery), it has traditionally been applied only to employment contracts or agreements that contain non-competition or non-compete clauses where the former employee is prevented from working with a competitor.

But what about a settlement agreement that prohibits employment with a former employer, i.e., an agreement that a former employee can only work for competitors?  Last week the 9th Circuit Court of Appeals addressed that very issue in Golden v. California Emergency Physicians Medical Group, No. 12-16514, 2015 WL 1543049 (Apr. 8, 2015).

In that case, Donald Golden (“Golden”), an emergency room doctor, sued his former employer, California Emergency Physicians Medical Group (“CEP”), and others alleging various causes of action including racial discrimination.  In open court CEP agreed to pay a “substantial monetary amount” to Golden, and Golden agreed to withdraw his claims against CEP and “waive any and all rights to employment with CEP or at any facility that CEP may own” now and in the future.  (Notably, CEP is a consortium of more than 1,000 physicians and staffs and manages emergency rooms and inpatient centers throughout California.) 

Golden later refused to sign the settlement agreement.  The district court ultimately granted a motion by Golden’s former counsel to intervene and ordered that the settlement agreement be enforced. Golden appealed to the 9th Circuit on the single issue that the settlement agreement was void under Section 16600.

After addressing the issue of ripeness, the majority began by noting that the California Supreme Court had not ruled on whether Section 16600 applies outside of “typical so-called ‘non-compete covenants,’” and specifically “whether a contract can impermissibly restrain professional practice, within the meaning of the statute, if it does not prevent a former employee from seeking work with a competitor and if it does not penalize him should he do so.”

The majority found that the breadth of the statute meant that Section 16600 was not so limited and that the district court improperly determined that the settlement agreement need not comply with Section 16600.  As the court noted, Section 16600 prohibits “every contract” (not specifically excepted by another statute) that “restrain[s]” someone “from engaging in a lawful profession, trade, or business.”  Therefore, Section 16600 applies to all such restrictions “no matter [their] form or scope.”  The case was reversed and remanded to the district court for further proceedings.

Notably, former 9th Circuit chief justice Alex Kozinski filed  a dissenting opinion accusing the majority of ruling on the case despite the fact that, according to him, “the settlement agreement does not limit Dr. Golden’s ability to practice his profession at this time—except to the extent that he can’t work for CEP.”  In his opinion, the majority misconstrued Section 16600 and allowed it to preserve “an unfettered right to employment in all future circumstances, no matter how remote or contingent.”  Judge Kozinski would have dismissed the case for lack of standing until Golden had actually been fired or denied a position due to the settlement agreement. 

California’s Presumption Against Non-Compete Agreements Recognized in Delaware

Terms of Employment ContractPreviously on the blog we discussed how non-compete agreements in California are presumed void unless they meet one of two very narrow statutory exceptions. A recent decision from the  Delaware Court of Chancery further emphasized the reach and effect of this presumption by upholding a California employee’s right to contract despite a non-compete agreement in an employment contract governed by Delaware law.

Specifically, in  Ascension Insurance Holdings, LLC v. Underwood et al., the Delaware Court addressed the issue of whether a non-compete provision governed by Delaware law could be enforced against a California-based employee competing against his California-based employer. Ascension Insurance Holdings, LLC v. Underwood et al., C.A. 9897-VCG (Del Ch. January 28, 2015). 

Ascension is a limited liability company incorporated in Delaware, but its principal place of business is in California.  Ascension acquired the assets of another company and as part of the acquisition Underwood entered into agreements not-to-compete with Ascension or its subsidiary Alliant Insurance Services, Inc. (“AIS”), where Underwood had been previously employed.

Underwood allegedly began competing in violation of the agreement’s non-compete, and Ascension sought an injunction seeking to enforce the non-compete against Underwood. The defendants argued that the covenant was not enforceable as it was against the public policy of California. However, Ascension argued that the covenant not-to-compete signed by Underwood contained a Delaware choice of law provision, and therefore the covenant was enforceable.

The Delaware Court of Chancery concluded that California law, not Delaware law, applied. Despite the fact that the employment agreement contained a Delaware choice-of-law provision, the court did not enforce the non-compete agreement and denied the request for an injunction. The court noted that it does not have to automatically defer to the parties’ choice of law selection, but rather examined whether enforcement of the non-compete would conflict with California’s strong statutory policy against non-compete agreements.  In fact, the court found that such a conflict did exist, and it also found that California’s interest in upholding its policy against the enforcement of non-competes outweighed Delaware’s interest in enforcing the non-compete agreement.

The impact of this case is significant in light of the fact that many companies chose to incorporate in Delaware but principally operate in California, and that those companies may also choose to apply Delaware law to their contractual agreements.  A recent report found that out of 211,929 observed businesses nationwide, 54.57% incorporated in Delaware. The next biggest state is New York with 5.15%, followed by California with 4.38%.  The top 10 states make up over 80% of all corporations.

If you have any questions about on-compete clauses, consult with an experienced attorney. Ezer Williamson Law provides a wide range of both transactional and litigation services to individuals and businesses. Contact us at (310) 277-7747 to see how we can help you.