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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!
Corporations 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 1100 (2008). Limited Liability 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 823 (2008). 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 employee 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 v. Citigroup, Inc., 159 CA4th 10, 70 CR3d 776 (2008). 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. 1020 (2008). Employment 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 282 (2008). 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, the 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). Real Estate 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., 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., LLC, 521 F3d 1157 (9th Cir. 2008). Intellectual Property 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).
Disclaimer 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.
Sincerely, Robert Buchanan Buchanan Law Group
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