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Archive for the ‘Commercial Litigation/Directors & Officers’ Category

Women On Board

Posted on: October 16th, 2018

By: Rebecca Smith

Nearly one-quarter of California-headquartered publicly held domestic or foreign corporations have no female directors.  No later than the close of the 2019 calendar year, those companies will need to add at least one.  Senate Bill 826 (SB 826) signed by Governor Brown on September 30, 2018 has mandated this change.  And, if the board of directors of a corporation is larger than four board members, the required number of women on the board increases.  If the number of directors is six or more, the corporation must have a minimum of three directors, if the number of directors is five, the corporation shall have a minimum of two directors.  Corporations will be allowed until the close of the 2021 calendar year to add the additional female directors beyond one.

There is a strong likelihood that this new law will be challenged in the courts.  The first argument being made is that the law will displace an existing member of the board of directors solely on the basis of gender.  The new law has attempted to address this by indicating:  “A corporation may increase the number of directors on its board to comply with this section.”  The argument being made is that the law focuses too narrowly on gender instead of other aspects of diversity, including race and sexual orientation.  The government may have to prove not only that there is disparity in board representation among men and women, but also that such a divide is a sufficient reason to create a special law for women.

The other issue in the forefront is to which companies the law will apply.  While the statute provides that the companies will be determined by the location of the principal executive offices according to the corporation’s SEC 10-K form, challenges are being made that the law should not apply to businesses headquartered in California, but incorporated elsewhere.  The new Section 2115.5 of the Corporations Code has attempted to address this issue by indicating that the new requirements shall apply to a foreign corporation that is a publicly held corporation to the exclusion of the law of the jurisdiction in which the foreign corporation is incorporated.  That being said, the “internal affairs doctrine” may provide a basis for the challenge.  The internal affairs doctrine, a choice of law rule in corporation law, provides that the internal affairs of a corporation will be governed by the corporate statutes and case law of the state in which the corporation is incorporated.

So what happens if a company does not comply:  A fine of $100,000 for a first violation, and a fine of $300,000 for a second or subsequent violation.  For purposes of imposing the fine, each director seat required by the section to be held by a female, which is not held by a female during at least a portion of the calendar year is considered a violation.  For the time being, California companies with their principal executive offices in California should start to think about how to comply with the law by the end of 2019 and stay tuned for any changes.

If you have any questions or would like more information, please contact Rebecca Smith at [email protected].

Ninth Circuit Compounds ATDS Confusion in TCPA, Causing FCC to Seek Further Comment

Posted on: October 8th, 2018

By: Matt Foree

As we previously discussed in the ACA International decision, the U.S. Court of Appeals for the D.C. Circuit recently rejected the Federal Communications Commission’s (“FCC”) guidance concerning the definition of automatic telephone dialing system (ATDS), one of the key components of liability in the Telephone Consumer Protection Act (“TCPA”).  Among other things, the TCPA prohibits using an ATDS to make calls to a cellular telephone without consent.  Since the D.C. Circuit’s ruling, courts have wrestled with the analysis of what qualifies as an ATDS, which has created a patchwork of decisions.  Some courts determined that the FCC’s pre-2015 guidance on the topic is no longer relevant.  Other courts have relied on that previous FCC guidance in their rulings.

On September 20, 2018, the U.S. Court of Appeals for the Ninth Circuit added to the confusion.  In the Marks v. Crunch San DiegoLLC case, the court analyzed a device called the Textmunication system, which is a web-based marketing platform used to send promotional text messages to a list of stored telephone numbers.  In analyzing whether the device was an ATDS, the court determined that the FCC’s pre-2015 guidance on the definition of an ATDS were no longer binding. Therefore, it determined that only the statutory definition of ATDS remains, such that it analyzed the device at issue under the definition in the TCPA. The statute provides that an ATDS is “equipment which has the capacity—(A) to store or produce telephone numbers to be called, using a random or sequential number generator; and (B) to dial such numbers.”

The court struggled with the statutory language, finding that it is ambiguous on its face, such that it turned to other aids in interpreting it. Among other things, the court looked at the “context and structure of the statutory scheme.”  In doing so, it determined that, although Congress focused on regulating the use of equipment that dialed blocks of sequential or randomly generated numbers, the statutory language extended to equipment that made automatic calls from lists of recipients.  Therefore, reading the ATDS definition in context and with a view to its “place in the overall statutory scheme,” the Ninth Circuit concluded that the “statutory definition of ATDS is not limited to devices with the capacity to call numbers produced by a ‘random or sequential number generator,’ but also includes devices with the capacity to dial stored numbers automatically.”  Accordingly, the court read the statute to provide that ATDS means “equipment which has the capacity—(1) to store numbers to be called or (2) to produce numbers to be called, using a random or sequential number generator—and to dial such numbers.”

In May of this year, the FCC had previously sought comment on the contours of the ATDS definition in light of the ACA International decision.  Significantly, on October 3, 2018, after the Marks ruling, the FCC requested further comment on interpretation of ATDS in light of the Marks decision. Specifically, the FCC sought further comment on how to interpret and apply the statutory definition of ATDS in light of the Marks decision, as well as how that decision might impact the analysis of the ACA International case.  Comments are due October 17, 2018, with reply comments due on October 24, 2018.

If you have any questions regarding the current status of ATDS analysis, the Marks decision, or the FCC’s request for further comment, please contact Matt Foree at [email protected].

 

Arbitrability – Who Decides?

Posted on: September 14th, 2018

By: Ted Peters

The question of arbitrability (i.e., Who decides whether a dispute is arbitrable? The court or the arbitrator(s)?) is as ageless as the conundrum of what came first, the chicken or the egg.  In 2010, the Supreme Court decided Rent-a-Center, Vest Inc. v. Jackson, wherein it concluded that agreements to arbitrate questions of arbitrability are, themselves, enforceable.  That dispute involved an employee who had signed an arbitration agreement that provided for arbitration of disputes arising out of his employment, including discrimination claims.  The agreement expressly provided that the arbitrator, and not a court, had the exclusive authority to resolve any disputes relating to the enforceability of the arbitration agreement.  The Ninth Circuit Court determined that the employee’s argument that the agreement was unconscionable was a matter of fact for the court rather than the arbitrator.  In a split vote, the Supreme Court found otherwise, and concluded that because the employee challenged the agreement as a whole (and not only the delegation provision), the determination had to be made by the arbitrator.

The US Supreme Court will weigh in again on the issue of arbitrability. On June 25, 2018, the Court accepted certiorari in the case of Henry Schein, Inc. v. Archer & White Sales, Inc., a case in which the Fifth Circuit addressed the arbitrability of antitrust claims asserted against a distributor of dental equipment.  The defendants/appellants sought to enforce an arbitration agreement.  The magistrate granted a motion to compel arbitration, concluding that the threshold question of the arbitrability of the claims was vested in the decision of an arbitrator, and not for a court to decide.  The district court, however, reversed, finding that it had the authority to rule on the question of arbitrability and concluded that the claims at issue were not arbitrable.  The Fifth Circuit affirmed finding that submission of the dispute to the arbitrator was not necessary because the assertion of arbitrability was “wholly groundless.”  The appellate court explained that the arbitration clause in question created a carve-out for “actions seeking injunctive relief,” but did not limit the exclusion to “actions seeking only injunctive relief.”  The court reasoned that even though the agreement would allow the plaintiff/respondent to avoid arbitration by simply adding a claim for injunctive relief did not change the clause’s plain meaning.

The decision in Henry Schein underscores that a conflict has developed among the lower courts; some recognizing an exception for “wholly groundless” claims of arbitrability, but others not.  Defendants/appellants seek to have the Supreme Court reject the “wholly groundless” exception, asserting that the Fifth Circuit’s decision cannot be reconciled with the Federal Arbitration Act’s text or its overarching purpose: “to ensure that private agreements to arbitrate are enforced according to their terms.”  The question presented before the Court is simple: “Whether the Federal Arbitration Act permits a court to decline to enforce an agreement delegating questions of arbitrability to an arbitrator if the court concludes the claim of arbitrability is “wholly groundless.”

Oral argument is scheduled for October 29, 2018.

If you have questions or would like more information, please contact Ted Peters at [email protected].

Non-Disclosure Provisions – Who Is Bound?

Posted on: September 5th, 2018

By: Josh Ferguson

A California Appellate Court recently ruled that the non-disclosure and confidentiality terms of a settlement agreement bind only the parties, and not counsel, unless specifically stated otherwise.

The case involved Monster Energy Company suing Bruce Schecter and R. Rex Parris Law Firm for (1) breach of contract, (2) breach of the implied covenant of good faith and fair dealing, (3) unjust enrichment, and (4) promissory estoppel. Monster Energy Co. v. Schechter, No. E066267, 2018 Cal. App. LEXIS 711 (Cal. Ct. App. Aug. 13, 2018).   Those claims were based on Defendants disclosing terms of settlement to a news outlet in violation of the executed settlement agreement.  Monster pointed out that the plain terms of the settlement agreement bound the attorneys to the confidentiality provision. The Court of Appeal of the State of California, Fourth Appellate District acknowledged “ the confidentiality provisions of the settlement agreement did at least purport to bind the Attorneys.” The terms provided, “Plaintiffs and their counsel agree that they will keep completely confidential all of the terms and contents of this Settlement Agreement … .” They also stated, “Plaintiffs and their counsel of record … agree and covenant, absolutely and without limitation, to not publicly disclose” the provisions of the settlement agreement. Finally, the agreement said, “the Parties and their attorneys … hereby agree that neither shall make any statement about the Action … in the media … .”

However, the court ultimately opined that was not the issue.  They stated the issue is not one of contractual interpretation. A party cannot bind another to a contract simply by so reciting in a piece of paper.  No matter how clearly the contract provided that the Attorneys were bound, they could not actually be bound unless they manifested consent. In this case, that did not happen.

The settlement agreement identified the “Parties” as the Fourniers and Monster. The Attorneys then signed under the words, “Approved as to form and content.”  The signature block identified them as “Attorneys for [the Fournier] Plaintiff[s].” The court went on to say that “The only reasonable construction of this wording is that they were signing solely in the capacity of attorneys who had reviewed the settlement agreement and had given their clients their professional approval to sign it. In our experience, this is the wording that the legal community customarily uses for this purpose.”

The moral of the story is that if you want to bind someone to a provision, you need to get them to explicitly agree to same and require their execution.

If you have any questions or would like more information, please contact Josh Ferguson at [email protected].

Despite Causing Wildfires, PG&E Avoids Punitive Damages

Posted on: August 2nd, 2018

By: Carlos Martinez-Garcia

On July 2, 2018, the Third Appellate District of California awarded Pacific Gas and Electric Company (PG&E) its first critical victory in defending itself against fire claims caused by its power lines: Butte Fire Cases, (2018) 24 Cal. App. 5th 1150. In 2015, the “Butte Fire” started after a gray pine came into contact with one of PG&E’s power lines, burning more than 70,868 acres, damaging hundreds of structures, and claiming two lives. The subsequent lawsuits, which were consolidated in a judicial council coordinated proceeding in Sacramento Superior Court, are comprised of 2,050 plaintiffs who sought punitive damages under Civil Code § 3294.

The master complaint alleged that the utility company and two contractors failed to properly maintain the power line and adjacent vegetation, warranting punitive damages. The Third Appellate District disagreed, striking Plaintiffs’ prayer for a punitive damages award.

In California, punitive damages may be recovered under section 3294 “where it is proven by clear and convincing evidence that the defendant has been guilty of oppression, fraud, or malice.” (Civ. Code § 3294) Malice is defined by section 3294, subdivision (c)(1) as “conduct which is intended by the defendant to cause injury to the plaintiff or despicable conduct which is carried on by the defendant with a willful and conscious disregard of the rights or safety of others.”

In seeking summary adjudication, PG&E submitted evidence that it devotes significant resources to vegetation management programs intended to minimize the risk of wildfire, spending more than $190 million per year on vegetation management operations. The operations include routine annual patrols, quality assurance and control programs, and a public safety and reliability program. PG&E also contracted with ACRT, Inc. to conduct inspections and vegetation management, Quantum Spatial, to collect data using LiDAR to identify dead or dying trees, and Trees, Inc. to trim noncompliant trees. No inspections identified the subject tree as a danger.

The Third District was unpersuaded by Plaintiffs’ contention that PG&E’s vegetation management program was “window dressing”, PG&E’s vegetation management methodologies were defective, or that PG&E evinced a cavalier attitude towards public safety evidenced by the infamous San Bruno pipeline explosion and a 1994 “Rough and Ready” fire caused by PG&E.

Plaintiffs failed to demonstrate the existence of a triable issue of material fact that showed PG&E acted despicably, or with willful and conscious disregard for the rights and safety of others. PG&E’s nondelegable duty to safely maintain the power lines does not alter the analysis of punitive damages under § 3294. There was nothing despicable in the utility company’s assumption that contractors were training their employees as required, and any criticisms of PG&E’s methodologies do not amount to clear and convincing proof that PG&E acted with malice. At most, plaintiffs’ evidence showed mere carelessness or ignorance.

If you have any questions, or would like more information, please contact Carlos Martinez-Garcia at [email protected].