Class Action Defense Blog

Marilyn Barrett, California Tax Attorney at Jeffer Mangels, Discusses Select Tax Provisions of President Obama's Economic Stimulus Package

Effective February 17, 2009, President Barack Obama signed into law the American Recovery and Reinvestment Act of 2009 (otherwise known as the "Stimulus Bill"), $787 billion economic stimulus legislation which President Obama said marks a "major milestone on our road to recovery." Tax provisions account for over $288 billion of this amount. One of the author's partners, Marilyn Barrett -- a former chair of the Taxation Section of the State Bar of California and the Los Angeles County Bar Association and who works in the Tax Department of Jeffer Mangels Butler & Marmaro LLP -- assists clients on corporate and partnership tax matters and tax controversy matters, and serves as outside general counsel to mid-market public and privately held companies. Ms. Barrett has written and lectured extensively in the tax area, and has prepared an article addressing select tax provisions of the Stimulus Package. The first section describes business tax incentives, the second section describes energy-related tax incentives, and the third section describes tax provisions affecting individual taxpayers Several non-tax provisions have also been included.

Extension of Bonus Depreciation IRC § 168(k) allows additional depreciation in the first year certain assets are placed in service equal to 50% of the basis of the property (referred to as "bonus depreciation"). Bonus depreciation is allowed for both regular tax and the AMT. Property eligible for bonus depreciation is (i) MACRS property with an applicable recovery period of 20 years or less; (ii) water utility property; (iii) computer software (other than purchased software); or (iv) qualified leasehold improvement property, the original use of which commences with the taxpayer. Bonus depreciation expired at the end of 2008 except for certain transportation property which has an expiration date of December 31, 2009.

The Stimulus Bill extends the expiration date for one year to the end of 2009 and through 2010 for the transportation property.

Continue reading "President Obama's Economic Stimulus Package--The American Recovery and Reinvestment Act of 2009: Summary of Selected Tax Provisions" »

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In Split Decision, California Supreme Court Holds that State's Ban on Gay Marriage is Unconstitutional; Concurring and Dissenting Opinions Conclude that Legality of Same Sex Marriages is a Legislative rather than Judicial Matter

While the six cases consolidated for argument before the California Supreme Court were not class action lawsuits, the author has received numerous inquiries from attorneys, both from within the State of California and from sister states, inquiring into the status of the California Supreme Court decision in the same sex marriage cases. Accordingly, while the decision does not arise out of a class action, the author notes that today the Supreme Court issued its opinion and, by a 4-3 vote, struck down California's ban on same sex marriages as unconstitutional. In re Marriage Cases, ___ Cal.4th ___ (Cal. May 15, 2008). Chief Justice George wrote the majority opinion, joined by Justices Kennard (who also penned a short concurring opinion), Werdegar and Moreno. Two concurring and dissenting opinions were filed: one by Justice Baxter, joined by Justice Chin, and one by Justice Corrigan. The court's opinions may be found below. The file is large, so please be patient.

Download PDF file of In re Marriage Cases

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On June 27, 2006, U.S. Surgeon General Richard H. Carmona released a mammoth report on secondhand cigarette smoke that is likely to benefit the class action plaintiff lawyers far more than the children the report seeks to protect. The report - entitled, "The Health Consequences of Involuntary Exposure to Tobacco Smoke" - spans more than 700 hundreds pages with exhibits, and provides a comprehensive analysis of the health risks associated with "passive" smoking, or in the words of the report, "involuntary smoking." Those risks are substantial, increasing the risk of developing heart disease and lung cancer by an estimated 25-30% and 20-30%, respectively. The risk to infants and children are even more substantial, and is now known to be a cause of SIDS (sudden infant death syndrome), respiratory problems, including asthma, and ear infections in that group. And the risks are unavoidable: the Surgeon General concludes that there is no "risk-free" level of exposure to secondhand smoke; even brief exposure immediately effects the cardiovascular system adversely.

California state and federal court class action defense attorneys should anticipate that the report is likely to lead to class action test cases, particularly in light of California's act of becoming the first state to declare secondhand smoke a "toxic air contaminant." On January 26, 2006, the California Environmental Protection Agency announced, "Today the California Air Resources Board (ARB) identified environmental tobacco smoke (ETS), or second-hand smoke, as a Toxic Air Contaminant (TAC). ETS is now formally identified as an airborne toxic substance that may cause and/or contribute to death or serious illness. ARB's action to list ETS as a TAC was based on a comprehensive report on exposure and health effects of ETS." Now that the U.S. Surgeon General has announced that there is no safe level for exposure to secondhand smoke, and has confirmed in a comprehensive report the health risks associated with exposure to secondhand smoke, class action plaintiff lawyers are likely to test the waters on new and novel theories.

In part this prediction is based on experience: California class action plaintiff lawyers have already threatened to sue banks, property managers and property owners for "wrongfully" exposing customers to the secondhand smoke of other customers while using or standing in line to use bank ATM machines, as well as near entrances to banks. The California Attorney General has weighed on that subject, warning at least one plaintiffs' lawyer to consider carefully before filing such a lawsuit. The author predicts that it will not be long before a plaintiffs' lawyer seeks to use the Surgeon General's report as the foundation in a class action lawsuit. As a class action defense attorney, the author sincerely hopes that he is wrong. Only time will tell.

Posted In: Class Actions In The News, Topics of Interest

28 U.S.C. S 1447 - 30 day Time Limit

Defendants in class actions often remove their case to federal court whenever possible. Plaintiffs invariably seek to remand class actions to state court. Thus, once a class action has been removed to federal court, it can be expected that plaintiff's counsel will file a motion to remand the matter to state court. Remand of cases to state court is governed by 28 U.S.C. S 1447(c). "A motion to remand the case on the basis of any defect other than lack of subject matter jurisdiction must be made within 30 days after the filing of the notice of removal," 28 U.S.C. S 1447(c). However, "If at any time before final judgment it appears that the district court lacks subject matter jurisdiction, the case shall be remanded." Id.

Thus, like its removal counterpart (28 U.S.C. S 1446(b), which requires removal within 30 days of receipt of the necessary pleading or other paper), Section 1447(c) requires that any motion to remand - except one based on lack of subject matter jurisdiction - "must be made within 30 days after the filing of the notice of removal." The United States Supreme Court summarized the requirement this way:

Once a defendant has filed a notice of removal in the federal district court, a plaintiff objecting to removal "on the basis of any defect in removal procedure" may, within 30 days, file a motion asking the district court to remand the case to state court. S 1447(c). This 30-day limit does not apply, however, to jurisdictional defects: "If at any time before final judgment it appears that the district court lacks subject matter jurisdiction, the case shall be remanded." Ibid.

Caterpillar Inc. v. Lewis, 519 U.S. 61, 69, 117 S.Ct. 467, 473 (1996).

The exception for subject-matter jurisdiction cases simply reflects the general rule that jurisdictional defects may be asserted at any time and cannot be waived. See, Regents of University of California v. Bakke, 438 U.S. 265, 380 n.1, 98 S.Ct. 2733, 2794 n.1 (1978) ("lack of jurisdiction . . . touching the subject matter of the litigation cannot be waived by the parties") (quoting United States v. Griffin, 303 U.S. 226, 229, 58 S.Ct. 601, 602, 82 L.Ed. 764 (1938)). See also, United States v. Meyer, 439 F.3d 855, 863 (8th Cir. 2006) ("[l]ack of subject matter jurisdiction cannot be waived by the parties or ignored by the court") (quoting In re Wireless Tel. Fed. Cost Recovery Fees Litig., 396 F.3d 922, 928 (8th Cir.2005)).

Continue reading "Motions to Remand: Class Action Defense Issues" »

Posted In: Removal & Remand, Topics of Interest

California Law on Enjoining a Former Employee from Competing Unfairly

In a misguided effort to catch up to a competitor, a business may hire a competitor’s key employees for the purpose of using the trade secret information known to the employee. Or, an employee may quit and go into competition with the former employer, using the confidential, proprietary and trade secret information learned while on the job. Whether characterized as misappropriation or theft of trade secrets, or as unfair competition, the bottom line is that such conduct represents an unfair business practice that can be enjoined under California law.

In a separate article, we explored the enforceability of non-compete agreements in California in light of the statutory prohibition against such agreements set forth in Business & Professions Code section 16600. We noted there that broad exceptions exist to the statutory prohibition, centering around an employer’s legitimate need to protect confidential and proprietary information. We address here the quantum of proof required to enjoin a former employee from using trade secrets in the service of a competitor.

We first address the validity of the “inevitable discovery” rule in California. The inevitable disclosure doctrine permits an employer to enjoin a former employee from working for a competitor “by demonstrating the employee’s new job duties will inevitably cause the employee to rely upon knowledge of the former employer’s trade secrets.” Whyte v. Schlage Lock Co., 101 Cal.App.4^th 1443, 1446 (2002). Prior to Whyte, “[n]o published California decision ha[d] accepted or rejected the inevitable disclosure doctrine.” Id. Whyte unambiguously rejected it. Id., at 1447. Thus, California court decisions upholding non-compete agreements have not done so based on the inevitable discovery rule.

However, these decisions have not always required actual proof of use, either. It may be sufficient if the company can demonstrate the actual “threat” that confidential information will be used by the former employee to benefit a competitor.

Continue reading "California Misappropriation/Misuse of Trade Secrets" »

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Labor law class action claims are on the rise. Congress and the courts have noted with dismay the widespread abuse of class actions. For example, in the House Conference Report accompanying what later became the Private Securities Litigation Reform Act of 1995 (PSLRA), 109 Stat. 737 (codified at 15 U.S.C. §§ 77z-1 and 78u-4), Congress explained that class actions were hurting “the entire U.S. economy.” H.R.Rep. No. 104-369, p. 31 (1995). The House Conference Report identified widespread abuse, including frivolous lawsuits, burdensome discovery requests (aimed at extorting settlements), targeting deep-pocket defendants, and “manipulation by class action lawyers of the clients whom they purportedly represent.” Id. Perhaps nowhere is this abuse more prevalent than in the meteoric rise of class actions alleging labor law violations.

In the litigious society we live in, the knee-jerk reaction of individuals who are fired for valid grounds such as theft, incompetence, disruptive behavior, etc. is a lawsuit back against the company for alleged labor law violations. This vehicle provides the means for the disgruntled employee to exact his or her “pound of flesh.” Unfortunately, all too often the employee simple desire to exact vengeance is manipulated by plaintiff’s counsel into a purported class action, “identifying” patterns of abuse that exist only in the imagination of plaintiff’s counsel.

This is not to suggest, of course, that an employer can do no wrong. Certainly if a company is violating state or federal labor laws, litigation is an appropriate vehicle to rectify such deficiencies. Not all such class actions are frivolous: as with every profession and every field, there are many honest and talented attorneys who devote their energies to carefully investigating “facts” reported to them by prospective clients, and to filing class actions that seek to redress what they in good faith believe to be a pattern and practice of employee abuse. If personal experience is any guide, however, these attorneys represent the minority of those who file class actions.

Continue reading "Defense and Prevention of Class Action Claims Alleging Labor Law Violations" »

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Scope of California Business & Professions Code Section 16600

As businesses increasingly seek to hire the key employees of their competitors, the differences in state laws concerning non-compete agreements and protection of trade secrets has become more important. In California, the general rule is that non-compete agreements are unenforceable. That statement, however, is an oversimplification. In fact, non-compete agreements are enforceable in California under the right circumstances.

California Business and Professions Code section 16600 provides that "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 California Supreme Court has held that that “[t]his section invalidates provisions in employment contracts prohibiting 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 v. Reuben H. Donnelley Corp., 62 Cal.2d 239, 242 (1965) (italics added). (California’s Uniform Trade Secrets Act may be found at Civil Code section 3426.1.)

Despite the sweeping language utilized by some courts, the exception to the statutory prohibition against non-compete agreements is actually read expansively. In fact, several cases hold that the “trade secret” exception encompasses any act that may be considered “unfair competition.” Thus, one appellate court recently held that Section 16600 “prohibits the enforcement of [a] noncompete clause except as is necessary to protect trade secrets,” Metro Traffic Control, Inc. v. Shadow Traffic Network, 22 Cal.App.4th 853, 860 (1994) (citing Muggill, 62 Cal.2d at 242), but then explained:

Continue reading "California Law on the Validity of Non-Compete Agreements" »

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A class action defendant often benefits if it is able to remove the case to federal court whenever possible. Plaintiffs, however, know this, and often artfully draft their class action complaints with an eye toward avoiding federal court jurisdiction. "[I]n general, district courts have federal-question jurisdiction only if a federal question appears on the face of a plaintiff's complaint. [Citations.] The artful pleading doctrine creates an exception to this general rule." T & E Pastorino Nursery, 268 F.Supp.2d at 1247.

"Artful pleading exists where a plaintiff articulates an inherently federal claim in state-law terms. [Citations.] A federal court may exercise removal jurisdiction under the 'artful pleading' doctrine, even if a federal question does not appear on the face of a well-pleaded complaint, in three circumstances: (1) where federal law completely preempts state law; (2) where the claim is necessarily federal in character; and (3) where the right to relief depends on the resolution of a substantial, disputed federal question." T & E Pastorino Nursery, at 1247.

If the plaintiff's right to relief depends on the resolution of a substantial, disputed federal question, then removal is proper regardless of the disguises the plaintiff utilizes to hide the true nature of his or her claims. Thus, if a plaintiffs' suit is couched in terms of state law but is founded on and wholly derivative of federal law, then removal is proper. As Sparta Surgical Corp. v. National Ass'n of Sec. Dealers, Inc., 159 F.3d 1209, 1212 (9th Cir. 1998), held:

Here, although Sparta's theories are posited as state law claims, they are founded on the defendants' conduct in sus-pending trading and de-listing the offering, the propriety of which must be exclusively determined by federal law. The viability of any cause of action founded upon NASD's conduct in delisting a stock or suspending trading depends on whether the association's rules were violated.

"To bring a case within the [federal-question removal] statute, a right or immunity created by the Constitution or laws of the United States must be an element, and an essential one, of the plaintiff's cause of action." Gully v. First Nat'l Bank in Meridian, 299 U.S. 109, 112 (1936). "Claims brought under state law may 'arise under' federal law if vindication of the state right necessarily turns upon construction of a substantial question of federal law, i.e., if federal law is a necessary element of one of the well-pleaded claims." Ultramar America Ltd. v. Dwelle, 900 F.2d 1412, 1414 (9th Cir. 1990).

Continue reading "The Use by a Plaintiff's Lawyer of “Artful Pleading” to Avoid Removal: Defense of Class Actions Issues" »

Posted In: Removal & Remand, Topics of Interest

California Court Upholds Arbitration Clause With Class Action Waiver In Employment Agreement

On January 19, 2006, the California Court of Appeal for the Second District, Division 5, addressed “the enforceability of a pre-employment arbitration agreement containing a class action waiver.” Gentry v. Superior Court, 135 Cal.App.4^th 944, 37 Cal.Rptr.3d 790, 791 (Cal.App. 2006). In 1995, while employed by Circuit City, Gentry received an “Associate Issue Resolution Package” and a copy of the company’s “Dispute Resolution Rules and Procedures” setting forth various procedures for resolving employment-related disputes. The documents contained an arbitration agreement that included a class action waiver provision. The company provided each employee with 30 days to opt out of the arbitration agreement, but Gentry did not elect to do so. 37 Cal.Rptr.3d at 791-92.

In 2002, Gentry filed a putative class action against Circuit City in California state court alleging that Circuit City misclassified employees in order to avoid paying overtime. Id., at 791. Circuit City moved to compel arbitration. The trial court compelled arbitration with the class action waiver, and stayed the superior court action. The appellate court stated:

The issue in this case is a narrow one: whether the class action waiver in the Circuit City arbitration agreement is an unconscionable provision that renders the provision unenforceable. We conclude the provision is neither procedurally nor substantively unconscionable. Id., at 792.

Gentry recognized that the California Supreme Court “has found pre-employment arbitration agreements is to be adhesive where the agreement is made a condition of employment.” Id., at 793 (citations omitted). This case was different, however, because “Signing the arbitration agreement was not made a condition of Gentry’s employment; he was given 30 days to decide whether or not to opt out of the agreement, and chose not to do so.” Id. The Court also rejected Gentry’s claim that Circuit City “attempted to ‘sucker unsophisticated employees into opting out’ by touting the advantages of arbitration”; the court found that Circuit City had fairly presented both the advantages and disadvantages of arbitration. Id., at 794.

Finally, the court observed that Circuit City would not preclude litigation by means of the class action waiver: “Gentry has alleged statutory violations that could result in substantial damages and penalties should he prevail on his individual claims.” Id., at 795-96. For all of these reasons, the appellate court believed that Discover Bank v. Superior Court, 36 Cal.4^th 148 (Cal. 2005), which invalidated a class action waiver provision in a consumer contract of adhesion involving a credit card company, “does not render the class action waiver in this case unenforceable.” Id., at 791.

The opinion is well worth reading. If the case remains viable, Gentry will prove extremely useful in preventing employment law class actions. Defense attorneys and in-house counsel are well advised to keep track of the status of Gentry.

Posted In: Arbitration, Class Actions In The News, Employment Law Class Actions, Class Action Court Decisions, Topics of Interest

California Appellate Court Resolves Matter of First Impression Regarding Reattaching Liens

Under California law, a wiped out junior lien reattaches if the trustor repurchases the real property that secured the debt. The question is, if the trustor obtains a purchase-money loan to buy the property, does the reattaching lien have priority over the purchase-money loan?

This was a matter of first impression when addressed by the court in DMC, Inc. v. Downey Sav. & Loan Assn., 99 Cal.App.4th 190 (2002). As the DMC Court explained at page 195,

The issue in this case, assuming that the original owner's repurchase of the property after a nonjudicial foreclosure revives the previously-extinguished junior lien, is whether the new purchase-money deed of trust has lien priority over the revived junior lien. This court and the parties have not found any California cases addressing this specific issue.

The junior lienor, DMC, argued that its lien was "first in time" and, accordingly, was entitled to priority. "In California, lien priority is determined by the "first in time, first in right" approach. In regards to real property, liens that are recorded first have priority over any later-recorded liens." DMC, at 195-96 (footnote and citations omitted).

The new lender, Downey Savings, on the other hand, argued that purchase-money loans are entitled to "super-priority" under California law:

A purchase-money mortgage, for example, has priority over all other liens on real property. Civil Code section 2898, subdivision (a) provides: "A mortgage or deed of trust given for the price of real property, at the time of its conveyance, has priority over all other liens created against the purchaser, subject to the operation of the recording laws."

DMC, at 196 (footnote and citations omitted).

After analyzing cases from sister jurisdictions, the court held that both equity and law required that the purchase-money mortgage be given priority:

In this case, the foreclosure sale extinguished DMC's lien. Without Downey's loan, DMC would have been left holding a wiped out junior lien without any legal claim to repayment. The money advanced by Downey, therefore, afforded DMC a second bite at the apple. Regardless of whether the unexpected opportunity would be fruitful, DMC was no worse off than before the repurchase. Under these circumstances, we conclude that, when the original owner's repurchase of the property after a trustee's sale revives the junior deed of trust, that lien remains second to the purchase-money deed of trust that essentially replaced the original senior lien and made possible the repurchase, and hence, the revival of the junior lien.

DMC, at 200 (footnotes and citations omitted).

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