Buchanan Law Group
February 10, 2009
As promised (though a bit
delayed), here is Part 3 of our update in changes in law affecting business
owners. In this Law Note, we have selected judicial decisions from 2008 primarily
interpreting California law which affect
businesses in California.
This is just a selection, and does not pretend to encompass all decisions which
have an effect on business owners in California.
However, we do believe our selection of decisions will be meaningful and of use
to our friends and clients. If you have any questions about the decisions we
cite to in this Note, or have questions about other changes in law affecting
your business, please don't hesitate to give us a call!
Shareholders must maintain
continuous ownership of stock throughout the litigation of derivative lawsuits.
In Grosset v. Wenaas, the
California Supreme Court held that shareholders who bring claims on behalf of a
company in which they own stock lose their right to bring such a suit if they
are divested of that stock while the litigation is pending, regardless of
whether the divestiture is voluntary or involuntary. Grosset v. Wenaas, 42 Cal.4th
Companies and Partnerships
General partner in a limited
partnership cannot vote in self-dealing transactions. In Perretta v. Prometheus
Dev. Co., Inc., the Ninth Circuit Court of
Appeals held that a general partner may not cast any vote in ratifying a
self-dealing transaction.Calling a partnership agreement provision that allows an
interested partner's votes to be counted in a ratification vote to ratify a
self-interest transaction "manifestly unreasonable," the court
construed the partnership agreement as requiring ratification by a majority of
unaffiliated partners. Including just such votes would have meant that only 46%
of the unaffiliated voters approved the merger.Perretta v. Prometheus Dev.
Co., 520 F3d 1039 (9th Cir. 2008).
Former Revenue and Taxation Code
§17942 (a state levy imposed since 1994 on LLCs, based on all income earned
both in California
and other states), is unconstitutional.In this case, an appellate
court affirmed a Superior Court for San Francisco County decision concluding
that former §17942, a levy on LLCs registered to do business in California, was
unconstitutional because the levy was measured by the LLC's total income, regardless
of whether the income derived from or was attributable to business within the
state. The court held that the former statute, as applied to the foreign LLC in
the years in question, violated the federal commerce clause and that the
foreign LLC was entitled to a refund. Northwest
Energetic Servs., LLC v. Franchise Tax Bd., 159 CA4th 841, 71 CR3d 642 (2008).
In another case addressing Code §17942, Ventas Finance I,
LLC, a Delaware LLC was registered (from 2001 to 2003) with the California
Secretary of State as a foreign LLC. Ventas paid its $800 minimum tax and
additional amounts imposed on "total income from all sources". In 2005,
Ventas filed a claim for a refund, based upon apportionment and attribution
grounds. The court adopted the findings in Northwest
Energetic Servs., LLC v Franchise Tax Bd.,
159 CA4th 841, 71 CR3d 642 (2008). The court agreed with the Franchise Tax Board,
however, that an
amount determined by fair apportionment and assessment subtracted from the
amount Ventas paid would cure the Commerce Clause violation (i.e., no full refund
was necessary). Ventas Fin. I, LLC v. Franchise Tax Bd., 165 CA4th 1207, 81 CR3d
COMMENT: The above cases were decided at the appellate
level, and the FTB is expected to take Northwest
Energetic to the Supreme Court of California. In addition, attorneys
for Ventas will likely file a
petition with the California Court of Appeal to rehear the issue of
whether Ventas was only entitled to a
partial refund of amounts paid for activities outside the state or if Ventas should
have been entitled to a
full refund of all sums paid. We will update you on the status of
franchise fees for foreign LLCs when the California courts have issued their
decisions with respect to these two cases.
Compensation and Benefits
Forfeiture of restricted stock
purchased under incentive compensation plan with employee wages does not
constitute an unlawful forfeiture of wages. The appellate court held that when an
voluntarily directs that a portion of his or her wages be used to purchase
company stock under a purchase plan that requires the forfeiture of the stock
if the employee leaves the job within 2 years, any subsequent forfeiture of the
employee's stock shares does not constitute an unlawful forfeiture of wages. Schachter
Citigroup, Inc., 159 CA4th 10, 70 CR3d 776
Individuals may sue 401(k) plan
fiduciaries to recover losses to that individual's own plan account under
ERISA. LaRue v.
DeWolff Boberg & Associates, Inc., ___ U.S. ___, 169 L.Ed 2d 847, 128 S.Ct.
Non-competition and non-solicitation
provisions generally void in California. In Edwards v. Arthur Andersen,
the California Supreme Court that under Section 16600 of the Business &
Professions Code 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: §§16601 (sale of a business), 16602
(partnership dissolution), or 16602.5 (LLCs). The court refused to adopt
a narrow-restraint exception to §16600. Edwards v.
Arthur Andersen,44 C4th 937, 81 CR3d
Employers can fire an employee for
marijuana use despite a physician's certificate recommending the employee's
medical use of marijuana. In Ross v. RagingWire Telecommunications, Inc. the California
Supreme Court ruled that California's
Compassionate Use Act of 1996, which allows a person using marijuana for
medicinal purposes a defense to certain state criminal charges, does not
prohibit an employer from firing an employee for marijuana use. Ross v. Ragingwire
Telecommunications, Inc., 49 C4th 920, 70 CR3d 382 (2008).
Meal periods and rest break
obligations clarified. In Brinker Restaurant Corporation et al. v. Superior Court,
California Court of Appeal for the Fourth District ruled that (i) employers
need only "make available" the meal period and rest breaks to employees,
and are not required to ensure that meal periods and rest breaks are actually
taken and (ii) an employee is entitled to a meal break after five hours have
been worked (not for each five-hour period worked) and a rest break after four
hours have been worked. The Supreme
Court of California has granted review of this decision, and the law may be
further clarified or changed - we will keep you updated. Brinker Restaurant Corporation
et al. v. Superior Court, 165 CA4th
25, 80 CR3d 781 (2008).
Extensive control over taxi drivers
ruled out independent contractor status.In a case involving Oakland
taxi cab drivers, the Ninth Circuit found that other evidence of independent
contractor status-no set hours or minimum number of hours, no benefits, no
withholding-was outweighed by indicators of Friendly's significant control of
its drivers. NLRB
v. Friendly Cab Co., Inc., 512 F3d 1090 (9th Cir. 2008).
Commercial tenants have rights to
measure premises and to an accounting of operating expense pass-throughs. In McClain
v. Octagon Plaza, LLC1, a court of appeal panel in
Southern California held that provisions in leases that purport to make binding
on the tenant the square footage of premises for the purposes of determining
rent can be challenged by the tenant based on negligent misrepresentation. It
also ruled that a landlord must provide, at the tenant's request, reasonable
documentation to support the operating expense portion of the rent so that the
tenant can verify that the expenses were actually incurred by the landlord. McClain
v. Octagon Plaza, LLC1, 159 CA4th 784, 71 CR3d 885 (2008).
Internet and Media
Websites denied full immunity from liability for the
content posted by its users. In Fair Housing Council of San Fernando Valley, et
al., v. Roommates.com,
LLC, the Ninth
Circuit ruled that if a website "materially contributed" to the
"development" of unlawful content, it can be held liable for the
unlawful content. The court looked
mainly at the website's forced programming of user profiles. Fair Housing Council
of San Fernando Valley, et al., v. Roommates.com,
LLC, 521 F3d
1157 (9th Cir. 2008).
Objective intent manifested by
parties' conduct implied an unlimited, nonexclusive license for company to use
and modify contracting software writer's source code. A company providing sales
and marketing support to insurance
marketers, had six computer programs created for it by an independent
contractor, with no agreement in place with respect to licensing of the
intellectual property. The Ninth Circuit, affirming the district court, held that
the contractor had granted an implied license for the company to use and modify
the source code of the programs he wrote, which in turn defeated his copyright
infringement and trade secret misappropriation claims. In reaching its
conclusion, the court relied on a three-prong test previously articulated in Effects
Assocs., Inc. v. Cohen, 908 F2d 555, 558 (9th Cir. 1990). Under that test,
a nonexclusive license may be granted by implication as long as (1) a person
(licensee) requests creation of a work; (2) the creator (licensor) makes that
particular work and delivers it to the licensee who requested it; and (3) the
licensor intends that the licensee copy and distribute the work. Asset Mktg.
Sys., Inc. v. Gagnon, 542 F3d 748 (9th Cir. 2008).
This Law Note has been
prepared by Buchanan Law Group for informational purposes only and does not
constitute advertising, a solicitation, or legal advice. Transmission of the
materials and information contained herein is not intended to create, and
receipt thereof does not constitute formation of, an attorney-client
relationship. Readers should not rely upon this information for any purpose
without seeking legal advice from a licensed attorney in the reader's state.
The information contained in this Law Note is provided only as general
information that may or may not reflect the most current legal developments;
accordingly, information is not promised or guaranteed to be correct or
complete. Buchanan Law Group expressly disclaims all liability in respect to
actions taken or not taken based on any or all the contents of this Law Note.
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