2006 Holiday Travel & Gift Guide AudioDiscovery Recordings of
PAGE 46
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Los Angeles lawyer EARN MCLE CREDIT Miriam Claire Beezy Attorney advises intellectual Obstruction property owners to of Justice adopt more aggressive page 27 trademark strategies GOOD MARKS- MANSHIP page 20
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20 Good Marksmanship BY MIRIAM CLAIRE BEEZY The entertainment industry should move more aggressively to provide trademark protection for its intellectual property
27 Walk the Line BY MARK MERMELSTEIN AND CHARLOTTE DECKER Even in civil litigation, attorneys must steer carefully between zealous advocacy and obstruction of justice Plus: Earn MCLE legal ethics credit. MCLE Test No. 154 appears on page 29.
34 Franchise Player BY ROCHELLE B. SPANDORF Courts are not hesitant to deem a trademark license to be a franchise agreement when statutory requirements are met
42 Special Section 2006 Holiday Travel & Gift Guide
The magazine of The Los Angeles County LosAngelesLawyerBar Association DEPARTMENTS
10 Barristers Tips 46 Computer Counselor Serving the community as a volunteer New tools in the discovery of sound PVP attorney recordings BY STEVEN I. AWAKUNI BY DAVID FISHEL AND CAROLE LEVITT
12 Practice Tips 52 Closing Argument Discoverability of attorney interview notes To settle or not to settle? BY MICHAELBRENT COLLINGS BY JON D. MEER AND ERIC S. BEANE
15 Practice Tips 49 Classifieds Exercising rescission after commencement of a lawsuit 50 Index to Advertisers BY ANDREW S. WILLIAMS AND VIVIAN I. ORLANDO 51 CLE Preview Cover photograph: Tom Keller LosAngelesLawyer VISIT US ON THE INTERNET AT www.lacba.org/lalawyer E-MAIL CAN BE SENT TO [email protected] EDITORIAL BOARD Chair JACQUELINE M. REAL-SALAS Articles Coordinator CHAD COOMBS JERROLD ABELES DANIEL L. ALEXANDER HONEY KESSLER AMADO ETHEL W. BENNETT R. J. COMER ANGELA J. DAVIS KERRY A. DOLAN GORDON ENG DANIEL A. FIORE STUART R. FRAENKEL MICHAEL A. GEIBELSON To sign up for our free TED HANDEL electronic newsletter JEFFREY A. HARTWICK STEVEN HECHT CASE DEVELOPMENTS LAWRENCE J. IMEL SCOTT KLOPERT IN EMPLOYMENT & JOHN P. LECRONE BUSINESS LAW PAUL MARKS SEAN MORRIS visit our web site at ELIZABETH MUNISOGLU www.socalmediator.com RICHARD H. NAKAMURA JR. DENNIS PEREZ or call us at GARY RASKIN (949) 852-0550 DAMON RUBIN KURT L. SCHMALZ DAVID SCHNIDER HEATHER STERN GRETCHEN D. STOCKDALE TIMOTHY M. STUART KENNETH W. SWENSON CARMELA TAN BRUCE TEPPER PATRIC VERRONE MICHAEL WISE STAFF Publisher and Editor SAMUEL LIPSMAN Senior Editor LAUREN MILICOV Senior Editor ERIC HOWARD Art Director LES SECHLER Director of Design and Production PATRICE HUGHES Advertising Director LINDA LONERO Account Executive MARK NOCKELS Account Executive PATTY MEDINA Marketing and Sales Coordinator VICTORIA PUA Advertising Coordinator WILMA TRACY NADEAU Administrative Coordinator MATTY JALLOW BABY LOS ANGELES LAWYER (ISSN 0162-2900) is published monthly, except for a combined issue in July/August and a special issue in the fall, by the Los Angeles County Bar Association, 261 S. Figueroa St., Suite 300, Los Angeles, CA 90012, (213) 896-6503. Periodicals postage paid at Los Angeles, CA and additional mailing offices. Annual subscription price of $14 included in the Association membership dues. Nonmember subscriptions: $28 annually; single copy price: $4 plus handling. Address changes must be submitted six weeks in advance of next issue date. POSTMASTER: ADDRESS SERVICE REQUESTED. Send address changes to Los Angeles Lawyer, P. O. Box 55020, Los Angeles CA 90055. Copyright ©2006 by the Los Angeles County Bar Association. All rights reserved. Reproduction in whole or in part without permission is prohibited. Printed by Banta Publications Group, Liberty, MO. Member Business Publications Audit of Circulation (BPA). The opinions and positions stated in signed material are those of the authors and not by the fact of publication necessarily those of the Association or its mem- bers. All manuscripts are carefully considered by the Editorial Board. Letters to the editor are subject to editing.
4 Los Angeles Lawyer December 2006
LOS ANGELES LAWYER IS THE OFFICIAL PUBLICATION OF THE LOS ANGELES COUNTY BAR ASSOCIATION 261 S. Figueroa St., Suite 300, Los Angeles, CA 90012-1881 Telephone 213.627.2727 / www.lacba.org ASSOCIATION OFFICERS: President CHARLES E. MICHAELS President-Elect GRETCHEN M. NELSON Senior Vice President DANETTE E. MEYERS Vice President DON MIKE ANTHONY Treasurer JULIE K. XANDERS Assistant Vice President ALAN K. STEINBRECHER Assistant Vice President LINDA D. BARKER Assistant Vice President JOHN D. VANDEVELDE Immediate Past President EDITH R. MATTHAI Executive Director STUART A. FORSYTH Associate Executive Director/Chief Financial Officer BRUCE BERRA Associate Executive Director/General Counsel W. CLARK BROWN BOARD OF TRUSTEES P. PATRICK ASHOURI NICOLE C. BERSHON GEORGE F. BIRD JR. DANIEL S. BISHOP JOHN M. BYRNE JOHN CARSON ANTHONY PAUL DIAZ STACY L. DOUGLAS ALEXANDER S. GAREEB ANTONIO J. GONZALEZ BRIAN S. KABATECK KARL H. KNICKMEYER JR. ROBERT N. KWAN PHILIP H. LAM DAVID A. LASH LAWRENCE E. LEONE RICHARD A. LEWIS CINDY J. MACHO ELAINE W. MANDEL DAVID F. MICHAIL JEFFREY P. PALMER ELLEN A. PANSKY THOMAS F. QUILLING SUSAN ERBURU REARDON ROGER D. REYNOLDS KELLY RYAN DEBORAH CRANDALL SAXE MARGARET P. STEVENS KIM TUNG GAVIN HACHIYA WASSERMAN ERIC A. WEBBER AFFILIATED BAR ASSOCIATIONS BEVERLY HILLS BAR ASSOCIATION BLACK WOMEN LAWYERS ASSOCIATION OF LOS ANGELES, INC. CENTURY CITY BAR ASSOCIATION CONSUMER ATTORNEYS ASSOCIATION OF LOS ANGELES CULVER-MARINA BAR ASSOCIATION EASTERN BAR ASSOCIATION GLENDALE BAR ASSOCIATION IRANIAN AMERICAN LAWYERS ASSOCIATION ITALIAN AMERICAN LAWYERS ASSOCIATION JAPANESE AMERICAN BAR ASSOCIATION OF GREATER LOS ANGELES JOHN M. LANGSTON BAR ASSOCIATION JUVENILE COURTS BAR ASSOCIATION KOREAN AMERICAN BAR ASSOCIATION OF SOUTHERN CALIFORNIA LAWYERS' CLUB OF LOS ANGELES COUNTY LESBIAN AND GAY LAWYERS ASSOCIATION OF LOS ANGELES LONG BEACH BAR ASSOCIATION MEXICAN AMERICAN BAR ASSOCIATION PASADENA BAR ASSOCIATION SAN FERNANDO VALLEY BAR ASSOCIATION SAN GABRIEL VALLEY BAR ASSOCIATION SANTA MONICA BAR ASSOCIATION SOUTH ASIAN BAR ASSOCIATION OF SOUTHERN CALIFORNIA SOUTH BAY BAR ASSOCIATION OF LOS ANGELES COUNTY, INC. SOUTHEAST DISTRICT BAR ASSOCIATION SOUTHERN CALIFORNIA CHINESE LAWYERS ASSOCIATION WHITTIER BAR ASSOCIATION WOMEN LAWYERS ASSOCIATION OF LOS ANGELES
6 Los Angeles Lawyer December 2006 63(&,$/%8//(7,1
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9OUR "OARD HAS VOTED TO ISSUE AN DIVIDEND TO ALL POLICYHOLD ERS OF RECORD AS OF .OVEMBER 4HE DIVIDEND WILL BE BASED ON THE PREMIUM PAID BY THE POLICYHOL DER ON A ONE YEAR POLICY WITH AN EFFECTIVE DATE BETWEEN .OVEMBER AND /CTOBER 6RDUH\RXWKLQNLQJ ´:KHQGR,JHWP\PRQH\"µ )F YOU ARE AN ELIGIBLE POLICYHOLDER OF RECORD AS OF .OVEMBER YOUR CHECK WILL ARRIVE DURING THE $ECEMBER HOLIDAYS )T IS ALSO WORTH REMEMBERING THAT ,-)# HAS BEEN A PROVIDER OF BENElTS FOR SEVERAL DECADES 4XHVWLRQ :KDWGRHV -#,% !S A 3TATE "AR OF #ALIFORNIA APPROVED -#,% PROVIDER WE ARE PI IN LOSS PREVENTION EDUCATION AND OFFER A RANGE OF SEMINARS SEL ONEERS F STUDY AND ONLINE PROGRAMS EXCLUSIVELY FOR OUR MEMBERS AT LITTLE OR NO COST A VALUE OF OVER " #LAIMS &REE $QVZHU ,ONGEVITY #REDITS CAN START AFTER THE lRST YEAR AND h0REFERRED STATUS CAN BE EARNED AFTER JUST CONSECUTIVE YEARS n RESULTING v IN A \HDUVRI OR MORE 0REMIUM #REDIT 'LYLGHQGV !- "ESTS 2ATING OF h!v %XCELLENT WE ARE INSURANCE SPECIALISTS 0ROFESSIONAL ,IABILITY COVERAGE FOR #ALIFORNIA LAWYERS IS THE O NLY PRODUCT WE OFFER 4HROUGH SOUND AND DISCIPLINED UNDERWRITING OUR 3TANDARD 0ROGRA M RATES HAVE BEEN THE SAME FOR OVER YEARS IMAGINE THAT
6ISIT US AT WWW,-)#COM OR CALL /$:<(56·0878$/,1685$1&(&203$1<:HVW(PSLUH$YHQXH%XUEDQN&$ $IVIDENDS ARE PAID AT THE SOLE DISCRETION OF THE #OMPANYS "OARD OF $IRECTORS AND PAST DIVIDENDS DO NOT GUARANTEE THE PAYMENT OF FUTURE DIVIDENDS (310) 849-8653 From the Chair BY JACQUELINE M. REAL-SALAS [email protected]
Karen Natapoff he one thing we lawyers all have in common is that we rely on oth- Divorce Mortgage Specialist ers to deliver our work to our clients. Some of us are fortunate enough to have associates who perform a great deal of our legal work. “It is a rare mortgage broker with the skill T Others have staff members that assist us in whatever we consider to and ability to bring to the dissolution table be secretarial or administrative work. The rest of us, while not so for- the expertise of a mortgage broker in com- tunate as to have our own associates or staff, still rely on help available through ser- bination with an in-depth understanding of related family law matters.” vices offered by our office suites. The assistance we get from others—to whom, for the sake of this column, I will respectfully refer to as “staff”—ranges from doing -Nancy A. Kearson Certified Public Accountant complex work to taking our phone messages. Often, when the staff we rely upon are out of the office, our world stops, or at “She has my highest endorsement, and I best slows down. Many of us do not know how to accomplish the basic tasks involved would recommend her,without reservation, as a professional in her field.” in running a law office. By way of example, and with some admitted shame, I con- fess that I do not know how to operate the mail meter. Therefore, when my always- -Steven Knowles, Esq. willing assistant is out, my mail stays in. In sum, without the people who help us Trope and Trope do our work, we may be lost—at least temporarily. Working with clients and opposing counsel is challenging. But sometimes the real challenge lies in working with staff. There is no law school course that I know of that teaches us how to work effectively with staff—“effectively” meaning getting the best performance from the people we work with. Yet somehow we lawyers seem to Metrocities Mortgage, LLC is a Delaware limited liability company licensed by the California Department of Corporations under CRMLA. Information is sub- find our bumpy way and accomplish all that we need to do, despite the fact that some- ject to change without notice. This is not an offer for extension of credit or a commit- ment to lend. 0706-150B times our own clumsiness undermines our overall productivity. Still, most of us would like to be more productive, and this involves working more effectively with our staff. In today’s business world, where the greatest expense is human capital, getting the most out of our staff can really boost our bottom line. In my role as “person- 20 Years Blue Chip nel partner” in a very small firm, always dreaming up ways to maximize our mod- est resources, I have come to understand that properly delegating assignments Experience translates into getting more for the firm’s money. Having no formal delegating Resolving the skills of my own, I tapped into the knowledge of my husband, a business executive who has read most if not all of the management books ever written. I asked him to World’s Most teach me about the art of delegating. This he did, and even though what I learned is not a particularly novel approach, I am passing his suggestions along for those Complex Disputes of you who, like myself, would like to become more effective. In delegating work to others, ask yourself a series of questions. First, does the person being delegated the assignment have the skills to carry it out? If he or she does not have the necessary skills, can resources to acquire these skills be identified? Second, has the objective been clearly defined? This is a key aspect of delegating work. If the person delegating the assignment is not clear about the objective, the person at the receiving end cannot be expected to deliver. Third, has a quality standard for the expected work product been established? Setting a quality standard will avoid dis- appointment and frustration at both ends of the assignment. Fourth, do adequate Reginald A. Holmes, ESQ. resources for completing the assignment exist? And fifth, has a timeline been set for Arbitrator - Mediator - Private Judge making progress reports and delivering the final work product? It is important to Intellectual Property • Entertainment reach a meeting of the minds about what the assignment entails and whether it can International • Employment be reasonably achieved within the designated time for completion of the work. Business Although there is obviously no need to think through these five steps of delega- THE HOLMES LAW FIRM tion when the assignments are routine tasks, using these steps may help staff com- 626-432-7222 (Phone) plete more elaborate projects in a productive and efficient manner. In turn, a well- 626-432-7223 (Fax) planned delegation process may lead to maximized resources, a better quality work [email protected] product, and a motivated, happier, and less frustrated staff. ■ www.TheHolmesLawFirm.com Jacqueline M. Real-Salas is a partner at Calleton, Merritt, De Francisco & Real-Salas, LLP, Also available through the where she specializes in estate planning, trust administration, probate, and elder law. She Amercian Arbitration Association is the chair of the 2006-07 Los Angeles Lawyer Editorial Board. 213.362.1900 or www.adr.org
8 Los Angeles Lawyer December 2006 Powerful Client Development resources …
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LexisNexis, the Knowledge Burst logo, Martindale-Hubbell and Shepard’s are registered trademarks of Reed Elsevier Properties Inc., used under license. AL9154 Other products or services may be trademarks or registered trademarks of their respective companies. © 2006 LexisNexis, a division of Reed Elsevier Inc. All rights reserved. Barristers Tips BY STEVEN I. AWAKUNI
Serving the Community as a Volunteer PVP Attorney
FOR QUALIFIED BARRISTERS with an interest in representing some As the PVP attorney your first duty is to represent the interests of of our most vulnerable citizens, the Probate Volunteer Panel repre- your client. The relationship with your client can be difficult. In the sents a unique opportunity. The Los Angeles Superior Court appoints case of a proposed conservatee, your client may not have the capac- PVP counsel in a variety of cases, including trust and probate admin- ity to form an attorney-client relationship or may object to the peti- istration, special needs trusts, litigation, Medi-Cal planning, estate tax- tion for conservatorship and your involvement in the case. The level ation, tuberculosis detention, and conservatorship and guardian- of cooperation that you receive from each client and the interested ship. The clients include the elderly, young adults with developmental parties may vary greatly. disabilities, or persons of any age alleged to lack the capacity to care Some matters may not be contested, and you may find that it is for themselves, to manage their finances, or both. To serve as a PVP in the best interests of your client to recommend approval of the peti- attorney, applicants must meet specific experience, education, and con- tion. Other cases may be very contentious and may proceed to trial. tinuing education requirements, described in Appendix E of Chapter 10 of the Los Angeles Superior Court Rules (www .lasuperiorcourt.org/courtrules). Those you help may be facing the loss of the right to control Attorneys who do not have the required number of completed cases to meet the experience requirements may take a train- their finances, make medical decisions for themselves, decide ing class and volunteer to take pro bono guardianship cases. There are also agencies that provide pro bono assistance with con- where to live, vote, or get married or enter into a civil union. servatorships that may offer training or a mentor in exchange for pro bono work. Applicants must complete a training program conducted by the Trust To determine the best interests of the client, the PVP attorney must and Estates Section of the Association. The section works closely with review all pleadings and reports that are filed. Personal interviews with probate court bench and probate department staff to provide education the proposed conservatee, the proposed conservator, and the petitioner and training. Interested attorneys should check the section’s pages on will provide the PVP with valuable insight. Counsel should also the Association site (www.lacba.org) for more information. speak with family members, physicians, caregivers, friends, and Applications for the Probate Volunteer Panel can be obtained by neighbors as appropriate. calling the probate office in the Central Division or by accessing the The PVP attorney is in a unique and often challenging position. Probate section of the Los Angeles Superior Court Web site. Applicants PVP counsel must inform the court of their clients’ desires. After the may request appointment in areas in which they are qualified and have PVP attorney evaluates the issues, he or she must report observations an interest. If you are selected for the panel, you may get a call from and recommendations to the court about what is in the best interest one of the clerks in the probate office or a clerk from one of the branch of the client. PVP attorneys are provided with sample reports in courts. It is important to check for client and calendar conflicts their training manuals. For limited conservatorships, there is an before accepting an assignment. Not only is it important that you online form for PVP attorney reports on the court’s Web site. attend the hearing but that you have time to meet with the person Additional guidance is available. For example, in one article, whose interests you will be representing, conduct the appropriate inves- probate attorney Carmen Alberio discusses drafting readable petitions tigation, and write a report to the court. Probate judges make approx- for court review.1 This article provides insight into how the courts imately 100 appointments per month. According to Ron Cyger, man- review petitions and pleadings that advocates submit. The main ager of the probate department, those appointments account for audience of the PVP report is the court, but a well-written report may approximately a third of the PVP appointments in California. also provide guidance to the interested parties. You may be asked to represent the interests of an individual fac- PVP cases are not for the fainthearted. It can be very difficult work ing the prospect of losing civil rights that we take for granted. Those for which counsel may receive limited compensation. But as PVP coun- you help may be facing the loss of the right to control their finances, sel you may be the only person willing to represent the best interests make medical decisions for themselves, decide where to live (e.g., not of our most vulnerable citizens. ■ in a secured facility), vote, choose social and sexual relationships, or get married or enter into a civil union. Your “client” may be a senior 1 Carmen Alberio, Drafting Readable Petitions for Court Review, CAL. TRUST AND citizen living in a nursing home, a young adult incapacitated by an ESTATES Q., Spring 2004, at 30, available at http://calbar.ca.gov. accident, someone with a developmental disability, or a child in need of a guardian. Clients may be the victims of physical or financial abuse. Steven I. Awakuni is a partner with Torii and Awakuni LLP in Torrance.
10 Los Angeles Lawyer December 2006 My FindLaw Web site is a work of art.
With FindLaw® on my side, I have: Keith P. More Berman & More • Completed my favorite painting Orange County, CA • Secured 12 cases in 12 days www.ocseriousinjury.com • Time to showcase my paintings at local charity auctions • Started collecting vs. paying fees for attorney referrals
“FindLaw has optimized my firm’s process for finding new clients. Instead of depending on attorney referrals, my firm now uses its new FindLaw Web site to attract highly-qualified, potential clients. Like a great painter at the canvas, FindLaw meticulously constructs and designs each Web page based on a comprehensive understanding of the legal industry. I am proud to call my FindLaw Web site a true masterpiece!”
To see more of Keith More’s story, or to learn how FindLaw can help you gain new clients, call 1-866-347-6748 or visit LawyerMarketing.com/CM/Clients/More.asp.
© 2006 FindLaw, a Thomson business 11/06 Practice Tips BY MICHAELBRENT COLLINGS
Discoverability of Attorney Interview Notes
ATTORNEYS ARE MORE THAN MERE LEGAL ANALYSTS. A significant portion of their job involves fact-finding, which may involve poring over thousands of documents produced by opposing counsel or reviewing hundreds of stilted interrogatory responses. Sometimes the investigation involves more private interactions, such as when an attorney interviews percipient witnesses. If those witnesses are clients, the conversations are protected, and the notes of the attorney regard- ing those conversations are rarely discoverable. But the question of discoverability becomes more difficult when an attorney has interviewed nonparty witnesses he or she does not represent. Clearly, such conversations are not protected by an attor- ney-client relationship. So what will happen when an attorney inter- views a nonparty witness and takes notes of that interview? Though the underlying facts of an event are not protected, can the attorney be forced to turn over his or her notes in discovery? And what hap- pens when the attorney interviews two or more people at once? Clearly, this type of interview can provide helpful or even critical infor- mation that interviewing attorneys would prefer to keep to themselves. But can they be forced to turn over their notes of those interviews? The answer is probably not. In Nacht & Lewis Architects, Inc. v. Superior Court,1 employees brought an action against their former employer and others. The plain- tiffs propounded form interrogatories asking for “the identity of and information regarding individuals concerning the incident” and “individuals from whom written or recorded statements were obtained over to counsel their independently prepared statements would concerning the incident.” The defense attorneys issued a reply: have no tendency to reveal counsel’s evaluation of the case. Such “Counsel for the Defendants has conducted interviews of employees a list would therefore not constitute qualified work product. of Nacht & Lewis Architects [a defendant]. The information collected Moreover, unlike interview notes prepared by counsel, state- from the interviews is protected by the attorney-client privilege and ments written or recorded independently by witnesses neither work product doctrine.” reflect an attorney’s evaluation of the case nor constitute deriv- The trial judge granted an order to compel answers to the inter- ative material, and therefore are neither absolute nor qualified rogatories. The appellate court reversed, distinguishing between work product.2 cases in which the attorney merely is collecting information (such as In Nacht, the witnesses interviewed by defense counsel were statements by witnesses who had previously offered written or employees of the defendant. However, the standing or status of a wit- recorded recollections) and those in which the attorney is engaged in ness does not seem to matter in the determination of whether attor- an ongoing evaluation of the case and is interviewing witnesses to aid ney notes are discoverable. An example of this can be found in in that effort. The court stated: Southern Pacific Company v. Superior Court (Shasta County).3 In that The distinction is significant. A list of the potential witnesses case, a defendant railroad in a wrongful death action petitioned for interviewed by defendants’ counsel which interviews counsel a writ of mandate to compel the plaintiff’s answers to interrogato- recorded in notes or otherwise would constitute qualified ries requesting detailed facts regarding the basis of the plaintiff’s work product because it would tend to reveal counsel’s eval- allegations of negligence. The appellate court held that the facts uation of the case by identifying the persons who claimed were discoverable by the railroad. It concluded that the plaintiff’s attor- knowledge of the incident from whom counsel deemed it ney had failed to establish that the information gathered by the important to obtain statements. Moreover, any such notes or attorney or a private investigator employed by the attorney was pro- recorded statements taken by defendants’ counsel would be pro- tected: tected by the absolute work product privilege because they The trial court erred in classifying the information as work prod- would reveal counsel’s “impressions, conclusions, opinions, or uct. The interrogatories did not seek derivative material in the legal research or theories” within the meaning of Code of Civil Procedure section 2018, subdivision (c).… Michaelbrent Collings is a litigation associate at Kamine Ungerer LLP, where
RICHARD EWING On the other hand, a list of potential witnesses who turned he focuses on construction contract disputes.
12 Los Angeles Lawyer December 2006 attorney’s possession such as state- not waive the work product protection. These ney work product protection generally is ments of witnesses, investigative include Laguna Beach County Water District complete and subject only to a waiver. The reports or technical data; did not seek v. Superior Court,7 which held that disclosure court then discussed the differences between the attorney’s legal theories, research of an attorney’s work product operates as a the attorney-client privilege and the work or calculations; did not seek informa- waiver of the work product doctrine only product doctrine, citing a federal case, United tion which would not ultimately be when otherwise protected information is States v. American Telephone & Telegraph disclosed at the trial.4 divulged to a third party who has no interest Company, holding that the delivery of work The inference is that recordings and notes in maintaining the confidentiality of a sig- product documents does not necessarily con- of interviews conducted by the attorney and nificant part of the work product. Similarly, stitute a waiver of the attorney work product not a product of the witness’s own volition are in Eddy v. Fields,8 the court held that an protection.10 afforded work product protection, regardless attorney’s disclosure of work product to an The court of appeal quoted extensively of the witness’s relationship to the lawsuit. attorney who represents a mutual client or a from American Telephone & Telegraph Similarly, the case implies that any attempt to client with common interests does not nec- Company, pointing out that the attorney- ask about the content of the interviews will essarily operate as a waiver of the work prod- client privilege exists solely to protect confi- be seen merely as an attempt to circumvent uct protection as to third parties. dentiality between attorney and client. the protection provided by the work product Tellingly, however, the first line of cases Therefore, “[a]ny voluntary disclosure by doctrine—as if the seeker of the information probably has no application to the issue of the the holder of such a privilege is inconsistent were saying, “Okay, don’t provide the writ- discoverability of an attorney’s notes of inter- with the confidential relationship and thus ings to me, just quote them out loud.” views of one or more percipient witnesses. waives the privilege.”11 Nevertheless, accord- Those cases uniformly deal with a writing that ing to American Telephone & Telegraph The Presence of Third Parties has already been turned over to a third party Company: If an attorney’s interview notes are protected, who has no interest in maintaining the con- [T]he work product privilege does not does the fact that an interview is conducted fidentiality of the writing. But what if the exist to protect a confidential rela- with two people present at the same time attorney has not provided the writing or tionship, but rather to promote the waive the attorney work product protection? recording to anyone? The argument persists adversary system by safeguarding the The answer to this question is maybe. that the mere presence of a third party dur- fruits of an attorney’s trial prepara- This is an issue of first impression in ing the interview is enough to waive the work tions from the discovery attempts of California. Those who wish to argue that product protection. the opponent. The purpose of the work the interview notes are discoverable will state While no California case is directly on product doctrine is to protect infor- that an attorney’s disclosure of work product point, one cites a federal case with helpful lan- mation against opposing parties, rather to a third party operates as a waiver of the guage. In BP Alaska Exploration, Inc. v. than against all others outside a par- doctrine just as disclosure to a third party can Superior Court,9 an oil exploration company ticular confidential relationship, in waive the attorney-client privilege. This argu- brought suit against another for bad faith order to encourage effective trial prepa- ment appears plausible in light of several arising from the defendant’s alleged use of ration….We conclude, then, that while cases in which disclosure of an attorney’s confidential information provided by the the mere showing of a voluntary dis- work product operated as a waiver of the pro- plaintiff in entering into an exploration agree- closure to a third person will generally tection. For example, in McKesson HBOC, ment with a third party from which the plain- suffice to show waiver of the attor- Inc. v. Superior Court,5 a corporation tiff was excluded. The trial court issued a ney-client privilege, it should not suf- involved in the lawsuit was also the target of discovery order compelling the defendant to fice in itself for waiver of the work a government investigation. The plaintiffs produce documents and answer questions product privilege.12 moved to compel the corporation to pro- concerning an internal investigation it per- This rationale appears to be followed by duce an audit committee report and interview formed with respect to the third-party agree- California treatise authority: memoranda, which had been prepared by ment. That investigation culminated in Sharing with others information that attorneys retained by the corporation to per- allegedly fraudulent correspondence and state- is entitled to qualified work product form an internal review of alleged securities ments made to the plaintiff with the intent to protection does not waive the protec- fraud. The corporation had shared the mate- dissuade it from pursuing its legal claims. tion unless the circumstances are incon- rials at issue with the government. The defendant asserted that the communi- sistent with safeguarding the privacy of The trial court granted a motion to com- cations were protected by the attorney-client the attorney’s trial preparations.13 pel the production. The court of appeal held privilege and the work product doctrine. The Thus the compelling question for a prac- that the corporation waived the attorney- trial court, however, granted the plaintiff’s titioner will be whether the circumstances of client privilege and work product protection motion to compel, based on its finding that the witness interviews were inconsistent with with regard to shared documents. The court the plaintiff made a prima facie showing of the intent to safeguard the attorney’s trial stated: fraud and its conclusion that the attorney- preparations. Attorneys would be well- As Merrill Lynch points out, McKesson client privilege and the work product doctrine advised to remember this when conducting did not need to disclose the audit therefore did not apply. their interviews and be prepared to argue report and interview memoranda to The court of appeal granted the defen- that the interviews were conducted in a way prepare its case for trial, and McKes- dant’s petition for a writ directing the trial that was reasonably necessary to the litigation son’s adversaries are not taking undue court to vacate its earlier discovery order, process. For example, attorneys interviewing advantage of [counsel’s] efforts because holding that the crime-fraud exception of two witnesses who were employees of the the documents would have remained Evidence Code Section 956 does not apply to same entity should be able to assert that the protected had not McKesson disclosed materials protected by the work product doc- witnesses had to consult one another to them to third parties.6 trine. The court also discussed the effect of an uncover information requested by the attor- Another line of cases has reached a con- attorney providing work product to the client ney, and thus there was no intent to waive the trary result, stating that mere disclosure will and to others. It pointed out that the attor- work product protection.
Los Angeles Lawyer December 2006 13 Nevertheless, attorneys should seek to avoid interviewing multiple witnesses at once. Otherwise, attorneys face the risk not only of WE ARE A LAW FIRM. finding that the information may be discov- erable but also of losing the essential and WE FORM AND important element of surprise. ■ 1 Nacht & Lewis Architects, Inc. v. Superior Court, 47 MAINTAIN ENTITIES. Cal. App. 4th 214 (1996). 2 Id. at 217-18 (internal citations omitted). 3 Southern Pacific Co. v. Superior Court (Shasta County), 3 Cal. App. 3d 195 (1969). 4 Id. at 198-99 (emphasis added). 5 McKesson HBOC, Inc. v. Superior Court, 115 Cal. App. 4th 1229, 9 Cal. Rptr. 3d 812 (2004). 6 Id. at 1241. 7 Laguna Beach County Water Dist. v. Superior Court, 124 Cal. App. 4th 1453, 22 Cal. Rptr. 3d 387 (2004). 8 Eddy v. Fields, 121 Cal. App. 4th 1543, 18 Cal. Rptr. 3d 487 (2004). 9 BP Alaska Exploration, Inc. v. Superior Court, 199 Cal. App. 3d 1240, 245 Cal. Rptr. 682 (1988). 10 United States v. American Tel. & Tel. Co., 642 F. 2d 1285 (D.C. Cir. 1980). 11 BP Alaska Exploration, 199 Cal. App. 3d 1240, 1256 (quoting American Tel. & Tel. Co., 642 F. 2d THAT’S ALL. 1285). 12 Id. 13 WEIL & BROWN, CALIFORNIA PRACTICE GUIDE: CALIFORNIA CIVIL PROCEDURE BEFORE TRIAL ¶8:263.10 Incorporation (2005). The treatise, however, cites a case of limited use- Service California Incorporation Companies fulness for the purpose of the issue of the discoverability of an attorney’s notes from an interview with two or Determine Name Availability and Reserve Name more witnesses. See Raytheon Co. v. Superior Court, Prepare and File Articles 208 Cal. App. 3d 683, 689 (1989). The majority of the All Secretary of State Filing Fees holding addressed whether the attorney-client privilege Custom Bylaws was waived when information was circulated among Custom Organizational Minutes, authorizing the election of codefendants. In the only part of the decision address- officers and directors, establishment of bank accounts, issuance of stock, and other matters ing the work product doctrine, the Raytheon court Preparation and Issuance of Share Certificates stated: Statement of Information and Filing Fees As for the work product privilege, language in Preparation of 25102(f) Certificate and Filing Fees* at least one California decision strongly suggests that privilege is not waived except by a dis- Prepare IRS Form SS-4 and Obtain Tax Identification Number closure wholly inconsistent with the purpose of Prepare and File IRS Form 2553 to make “S” Election the privilege, which is to safeguard the attor- Ancillary Documents, including Promissory Notes, Medical Expense Reimbursement Plan, Employment Agreement ney’s work product and trial preparation. (See Resident Agent Services for one year Fellows v. Superior Court (1980) 108 Cal.App.3d 55, 65-66 [166 Cal.Rptr. 274]; Follow up to make sure that all documents are properly signed, filed, fees are paid, and formation is properly completed see also 2 Jefferson, Cal. Evidence Benchbook Experienced Attorneys handling every formation and available to (2d ed. 1982) § 41.2 [work product is waived consult on all aspects of the process by disclosure to one with no interest in main- Corporate Kit, Seal, and duplicate Set of Documents on CD-ROM taining its confidentiality]; and see BP Alaska Accountant Copy of All Documents Delivered on CD-ROM Exploration, Inc. v. Superior Court (1988) 199 eMinutes Entity Management System (with online document library, Cal.App.3d 1240, 1261 [245 Cal.Rptr. 682].) real-time monitoring of corporate deadlines) accessible from personalized Online Minute Book via secure web-based interface Normally, disclosure to a litigation adversary would be inconsistent with those policies. But Automatic Enrollment in Annual Minutes System again, because the trial court relied exclusively Cost $1,000 on inapposite authority, there is no evidence *For capitalization up to $100,000 developed in the record by which that court could determine whether work product was here disclosed under circumstances inconsistent with claiming the privilege. There is no detailed description of the nature of the administrative investigation and the various interests each party had at stake during its progress; yet these facts are crucial to determining whether dis- closure could reasonably be made with an expectation of confidentiality. The trial court’s conclusion that mutual disclosure here con- stituted waiver rests on no evidentiary Los Angeles San Diego San Francisco Toll-Free basis. 310.772.7700 858.550.0191 415.876.6210 866.JEFF UNGER Thus, the court never reached the question of whether the work product protection is waived when docu- www.eminutes.com www.ungerlaw.com ments are circulated among codefendants.
14 Los Angeles Lawyer December 2006 Practice Tips BY ANDREW S. WILLIAMS AND VIVIAN I. ORLANDO
Exercising Rescission after Commencement of a Lawsuit
RESCISSION IS AN IMPORTANT and powerful remedy available to select those whom it will insure and to rely upon him who insurers that have issued insurance policies based upon an applica- would be insured for such information as it desires as a basis tion for coverage containing material misrepresentations or omissions. for its determination to the end that a wise discrimination may The effect of a proper rescission is drastic, voiding the insurance pol- be exercised in selecting its risks.12 icy from its inception and thus relieving the insurer of all obligations In other words, an applicant for insurance has an unalterable duty under the policy while simultaneously depriving the insured of the abil- to communicate, in good faith, every fact within his or her knowl- ity to sue the insurer for failing to pay policy benefits. edge that is material to the risk the applicant seeks to insure.13 In California, a unique issue arises when an insurer seeks to Moreover, an insurer is entitled to take an insured’s application rescind an insurance policy after the insured files a lawsuit against the answers at face value in determining whether to issue insurance and insurer based on a failure to pay benefits. With increasing frequency, need not investigate an application to determine if the applicant lied the plaintiff-insured claims that rescission is inappropriate under California Insurance Code Section 650, which provides that an insurer Courts that have discussed Section 650 have not applied it may not exercise its right to rescind after an insured has commenced “an action on the contract.” While, on its face, this statute to deprive insurers of the ability to rescind. appears to present a seemingly insurmountable hurdle for insurers who fail to rescind before being sued, case law demonstrates that a plain- tiff-insured seeking to avoid rescission faces, at a minimum, an uphill or omitted material information.14 battle in precluding an insurer from obtaining rescission that is war- ranted by the facts. Resure v. Superior Court When, after issuing a policy, an insurer discovers that the insured Fueled by the harsh consequences of rescission, insureds are challenging made material misrepresentations or omissions on the application for the timing of the purported rescission with increased frequency. coverage, the insurer may elect to rescind the policy or may continue Relying on Section 650, plaintiff-insureds often argue that rescission coverage and sue for damages.1 An insurance policy may be rescinded is inappropriate after the insured files a lawsuit. Section 650 provides: 1) for material misrepresentations or the concealment of material infor- Whenever a right to rescind a contract of insurance is given to mation made in procuring the insurance,2 2) on any basis for rescis- the insurer by any provision of this part such right may be exer- sion specified in the California Civil Code, including fraud and cised at any time previous to the commencement of an action duress,3 3) for breach of a material warranty,4 or 4) by mutual agree- on the contract. The rescission shall apply to all insureds ment of the parties to the policy.5 under the contract, including additional insureds, unless the con- When misrepresentation is the basis for rescission, rescission is tract provides otherwise. appropriate only when the representation is false in a material way.6 On its face, Section 650 appears to support the argument that an An applicant’s misrepresentation is material if the misrepresenta- insurer may not, under any circumstances, rescind an insurance pol- tion would have resulted in any of the following: 1) rejection of the icy after an insured files a lawsuit to challenge denial of policy (i.e., application, 2) a higher premium, or 3) an amendment of the terms contract) benefits. Accordingly, relying on this language, a plaintiff- of the contract.7 An insurer need not prove that the applicant intended insured will typically claim that unless rescission is effectuated before to deceive in order to rescind.8 A single material misrepresentation the filing of his or her lawsuit, rescission is improper and may not be or omission in an insurance application is ground for rescission.9 raised in conjunction with defending a lawsuit seeking policy bene- In order to effectuate rescission, notice must be given to the fits. In other words, under the plain language of Section 650, the insurer insured, and all premiums must be restored or offered to be restored.10 is barred from rescinding the insurance policy after a lawsuit is filed, When grounds for rescission exist, and the insurer properly exercises even though grounds for a valid rescission might have existed at the its right to rescind or rescission is effectuated by mutual agreement, time the lawsuit was filed or were discovered during the course of lit- the contractual rights of the insured and insurer are extinguished ab igation. initio—it is as if the policy had never existed.11 Nevertheless, presumably recognizing the harsh result of such a The basic rationale underlying rescission was clearly stated in rule on insurers who have a legitimate basis for rescission, and mind- Imperial Casualty & Indemnity Company v. Sogomonian: [A]n insurance company is entitled to determine for itself Andrew S. Williams is a partner and Vivian I. Orlando is an associate in the Los what risks it will accept, and therefore to know all the facts Angeles office of Barger & Wolen LLP. They specialize in commercial litigation, relative to the [risk insured]. It has the unquestioned right to including the defense of insurance companies and healthcare service plans.
Los Angeles Lawyer December 2006 15 ful of the potential that the literal application “an action on the contract,” it does not PERSONAL of Section 650 could result in sanctioning deprive the party entitled to rescind from fraud, courts that have discussed Section 650 defending an action on the contract by rais- INJURY LAW have not applied it to deprive insurers of the ing the grounds for rescission as an affirma- ability to rescind. For example, the Second tive defense or by way of a cross-complaint: GROUP District Court of Appeal in Resure, Inc. v. Established law clearly affords the Superior Court15 rejected a literal interpre- insurer the right to avoid coverage by We pay referral fees pursuant to the tation of Section 650 and, in fact, read and way of cross-claims and affirmative Rules of the California State Bar interpreted the statute to allow insurers to defenses when the insured files an raise rescission even after the plaintiff-insured action on the contract before the wins the race to the courthouse. insurer can file its action for rescis- Areas of specialty: In Resure, the insurance company dis- sion.23 covered facts that led it to suspect that the The Resure court’s affirmation of an insur- • Wrongful Death Claims plaintiff-insureds lied or concealed material er’s right to raise the grounds for rescission • Aviation/Train/Bus Accidents facts in their application for insurance.16 The or seek rescission by way of an affirmative • Dog Bites insurer’s notice to rescind and offer to restore defense to an action on the contract is con- • Spinal Cord/Brain Injuries the premiums were stated only in its com- sistent with case law. For example, in Maddini 24 • Vehicular Accidents plaint for rescission and declaratory relief v. West Coast Life Insurance Company, against its insureds.17 the court of appeal upheld as correct a jury • Pedestrian Injuries In opposition to the insurer’s motion for instruction that provided that the insurer in • Slip and Fall summary judgment, the insureds argued that the case could defend against the insured’s • Premise Liability the insurer’s lawsuit was, in and of itself, an claims on the insurance contracts at issue on “action on the contract,” and therefore, was the basis of material misrepresentations in the barred under Section 650. The trial court insured’s applications. According to that agreed and, citing Section 650, held that court, “[T]hough the insurer had the right to Toll Free 877.999.5529 “since [the insurer] had not noticed or rescind the contracts upon discovery of false attempted to rescind the policy prior to the representations, it was under no obligation to www.personalinjurydefenders.com filing of the complaint,” the action for rescis- do so but might elect to await action upon the sion was barred.18 part of the beneficiary and defend upon that PERSONAL INJURY LAW GROUP The court of appeal reversed, first noting ground.”25 Similarly, the Resure court’s state- that in interpreting the plain language of ment that an insurer can “avoid coverage” by Section 650, the phrase “an action on the con- way of a cross-claim is consistent with the idea tract” was ambiguous, and concluded that it that while Section 650 precludes a separate meant “an action brought at law to enforce or “new” action when the insured files first, expert4law the insurance policy.”19 It also found that it should not prevent the insurer from raising The Legal Marketplace the statute as a whole was ambiguous rescission in a cross-complaint filed in con- because, at the time it was enacted, there nection with the insured’s already-filed con- NEED? were two distinct types of rescission. The tract action. Expert Witnesses ● Investigators court therefore looked to the state of the law This year, a federal court in the Northern Legal Consultants ● Arbitrators at the time Section 650 was enacted to deter- District of California reached a conclusion Mediators ● Private Judges mine the meaning and purpose of the concerning the application of Section 650 Special Masters and other statute.20 that was consistent with that of the Resure legal support service providers When Section 650 was enacted in 1874, court. In Atmel Corporation v. St. Paul Fire the court explained, there were separate & Marine Insurance Company,26 the insured FIND THEM HERE. courts of equity and law, and the distinction filed a lawsuit against its insurer for breach Established in 1996, expert4law–The Legal between an action on the contract at law of contract and breach of the implied Marketplace is the best on-line directory for and an action for equitable rescission was of covenant of good faith and fair dealing.27 finding expert witnesses, legal consultants, litigation support, lawyer-to-lawyer great significance. At that time, equity would The insurer counterclaimed, asserting claims networking, dispute resolution service not assume jurisdiction when a plaintiff had for rescission, breach of contract, intentional providers, law office technology, and research a clear remedy at law.21 According to the misrepresentation/concealment, negligent mis- and publishing. Resure court, “It followed that once an action representation, and breach of the implied to enforce a contract was commenced at law, covenant of good faith and fair dealing. It also This comprehensive directory is the one-stop site for your legal support needs. Available the party holding a right to rescind was asserted rescission as an affirmative defense. 24 hours a day! expected to raise that as a defense rather After the complaint was filed, the insurer than bring a new action in equity” because of also notified the insured it was rescinding the equitable nature of rescission. Thus, the the policy and offered the insured a check for Resure court concluded, the point of Section the premiums it had paid.28 650 “was merely to guarantee that resort to In response, the insured in Atmel raised equity was not needlessly made where the Section 650, arguing that rescission was insurer had ample opportunity to raise the improper. The court concluded that the same issues in defense of the action on the pol- insured was correct that the plain language of icy.”22 The Resure court went on to hold Section 650 precluded the insurer from uni- www.expert4law.org that while the statute precludes a “new” laterally rescinding the policy after the insured action for rescission when one commences filed suit but, relying upon Resure, found
16 Los Angeles Lawyer December 2006 that “although an insurer is precluded from commencement of an action on the contract, seeking rescission earlier, although proving unilaterally rescinding once an insured has that argument is likely to fail based on the waiver is often difficult.34 Likewise, generally filed suit, the insurer may raise ‘the same holdings in cases such as Resure, Maddini, speaking, an insurer’s right to obtain infor- issues’ by asserting rescission as an affirma- and Williamson & Vollmer Engineering. mation of material facts in the application tive defense and counterclaim.”29 Indeed, based on the current state of the law process may be waived “by neglect to make In addition to the fact that Section 650 in California, Section 650 has little or no inquiries as to such facts, where they are dis- does not preclude an insurer from raising value to insureds who file an action on the tinctly implied in other facts of which infor- rescission as an affirmative defense to an contract before the insurer decides to rescind mation is communicated.”35 Thus, an insurer action on the contract initiated by the insured coverage, except that the statute would pre- may be found to have waived the right to dis- or as a cross-claim, case law is clear that an clude an insurer from unilaterally rescind- closure of material facts by its failure to inves- insurer may also raise other affirmative ing outside the context of the lawsuit.33 tigate obvious leads in the application process defenses based on facts that would com- The best approach for plaintiff-insureds that would have disclosed that the application monly support rescission. For example, in when an insurer raises rescission, even though contained misrepresentations or omissions.36 Williamson & Vollmer Engineering, Inc. v. Se- it did not rescind prior to litigation, is to On the other hand, insurers seeking to quoia Insurance Company,30 even though evaluate whether the general requirements rescind an insurance policy after an insured the defendant insurer did not seek rescission, of rescission have been met and to be cog- has filed suit on the policy must plead grounds the court held that the plaintiff’s failure to dis- nizant of asserting any counter-defenses that for rescission through an affirmative defense close material information as requested on the might exist to rescission. For example, the for rescission or by way of cross-complaint if application constituted misrepresentation and insured may want to focus on whether the the facts support what appears to be a legit- concealment of material facts, and that such purported misrepresentations or omissions imate basis to rescind. If facts are discovered misstatements could be raised as a defense to on which the insurer’s rescission argument is during the course of litigation that suggest an action on the contract.31 The court rejected based are, in fact, material to the insured rescission is appropriate, an insurer should, the insured’s argument that the only option risk. He or she should also determine who at a minimum, promptly seek leave from the the insurer had was to seek rescission or took the application for coverage. For exam- court to amend its answer to assert an affir- affirm the contract and sue for fraud.32 ple, if the application was taken over the mative defense based on rescission. As an telephone by an agent for the insurer, and the additional protective measure, the insurer The Practical Impact of Section 650 agent made an error in completing the appli- may also want to seek leave to file a cross- While a plaintiff-insured may choose to focus cation, rescission might be inappropriate. complaint for rescission. Additionally, insur- his or her argument on the plain language of Moreover, depending on the circumstances, ers may assert affirmative defenses for mis- Section 650 to argue that the right to rescind an insured may be able to argue that the representation of fact and suppression of fact a contract can only be exercised prior to the insurer waived the right to rescind by not as permitted by Williamson & Vollmer
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Los Angeles Lawyer December 2006 17 Engineering based on the same facts sup- porting a defense of rescission.37 In asserting these defenses and cross- claims, whether by leave or in the first instance, insurers should rely on the Resure court’s reasoning—that is, the purpose of Section 650 was to guarantee that resort to equity (by the filing of a “new” action) was not needlessly made if an insurer could raise the matter defensively in an already-filed action on the contract.38 In this regard, insur- ers can argue that based on the rationale of Resure, a cross-complaint, which was asserted in the action in response to a complaint, is not a “new” action and is consistent with the Resure court’s analysis of the purpose under- lying Section 650—efficient resolution of – Dale A. Eleniak – contract disputes in one action. An insurer may further wish to note that the Resure Expert Witness/Litigation Analysis court’s reasoning makes sense. If one were to Real Estate/Commercial & Residential accept that Section 650 stripped insurers of the right to raise rescission when they were • Standards of Care, Standards and Practices • Broker Supervison misled into issuing insurance that would oth- • Agency and Disclosure erwise not have been issued, it would result Attorney, RE broker, C.A.R. panel attorney, DRE Approved Instructor, over 3,000 real estate “in absurd consequences which the Legisla- inquiries per year since 1991, author of “The Six Page Deposit Receipt” and over 400 R/E related ture could not have intended.”39 ■ articles published as “Dales Legal Corner.” 1 De Campos v. State Comp. Ins. Fund, 122 Cal. App. TEL 805-579-7834 ■ Dale A. Eleniak, PLC ■ FAX 805-579-7845 2d 519, 527-28 (1954). 633 BRECKENRIDGE PLACE, SIMI VALLEY CA 93065 2 California Insurance Code §§331 and 359, enacted [email protected] in 1935, explicitly authorize an insurer covered by the rules to rescind a policy for concealment or misrepre- sentation in an application. Sections 331 and 359 pro- vide that an applicant’s omission or misrepresenta- tion of material facts entitled the insurer “to rescind the contract from the time the representation becomes false.” See also INS. CODE §332 (noting required dis- closures). 3 De Campos, 122 Cal. App. 2d at 529. 4 See INS. CODE §447. 5 See Stevenson v. Sun Ins. Office, 17 Cal. App. 280, 288 (1911). 6 Thompson v. Occidental Life Ins. Co., 9 Cal. 3d 904, 916 (1973). 7 Imperial Cas. & Indem. Co. v. Sogomonian, 198 Cal. App. 3d 169, 181 (1988). Materiality is determined solely by the probable and reasonable effect that truth- ful answers would have on the insurer. Id. at 916; INS. CODE §334. The fact that an insurer has demanded answers to specific questions in an application for insurance is, in itself, usually sufficient to establish materiality as a matter of law. Thompson, 9 Cal. 3d at 916; Sogomonian, 198 Cal. App. 3d at 179. 8 Cohen v. Penn Mut. Life Ins. Co., 48 Cal. 2d 720, 725 (1957); Thompson, 9 Cal. 3d at 915-16; Telford v. New York Life Ins. Co., 9 Cal. 2d 103, 105 (1937); INS. CODE §331. 9 Old Line Life Ins. Co. v. Superior Ct., 229 Cal. App. 3d 1600, 1604 (1991). 10 CIV. CODE §1691. See also Sogomonian, 198 Cal. App. 3d at 184. Note, however, CIV. CODE §1693: When relief based upon rescission is claimed… such relief shall not be denied because of delay in giving notice of rescission unless such delay has been substantially prejudicial.…A party who has received benefits by reason of a con- tract that is subject to rescission and who in an action of proceeding seeks relief based upon rescission shall not be denied relief because of a delay in restoring or in tendering restoration of such benefits before judgment unless such
18 Los Angeles Lawyer December 2006 delay has been substantially prejudicial to the other party; but the court may make a tender of restoration a condition of its judgment. 11 See, e.g., Sogomonian, 198 Cal. App. 3d at 182; Thompson, 9 Cal. 3d at 916. 12 Sogomonian, 198 Cal. App. 3d at 180-81. 13 Thompson, 9 Cal. 3d at 916; Lunardi v. Great-West Life Assur. Co., 37 Cal. App. 4th 807, 826 (1995). 14 See Robinson v. Occidental Life Ins. Co., 131 Cal. App. 2d 581, 585 (1955); Mitchell v. United Nat’l Ins. Co., 127 Cal. App. 4th 457, 476 (2005). 15 Resure, Inc. v. Superior Court, 42 Cal. App. 4th 156 (1996). 16 Id. at 160. 17 Id. at 161. 18 Id. 19 Id. at 163, 167. 20 Id. at 162-63. 21 Id. at 166. 22 Id. 23 Id. at 162-63. 24 Maddini v. West Coast Life Ins. Co., 136 Cal. App. 472, 476 (1934). 25 Id. at 476-80. 26 Atmel Corp. v. St. Paul Fire & Marine Ins. Co., 416 F. Supp. 2d 802 (N.D. Cal. 2006). 27 Id. at 804. 28 Id. 29 Id. at 805. 30 Williamson & Vollmer Eng’g, Inc. v. Sequoia Ins. Co., 64 Cal. App. 3d 261, 275 (1976). 31 Id. 32 Id. at 274. 33 Generally, an insurer is advised to rescind when it becomes aware of facts supporting rescission. The danger associated with waiting and continuing to col- lect premiums is that the insurer may later be found to have waived the right to rescind. 34 “Waiver requires the insurer to intentionally relin- quish its right to deny coverage.” Monteleone v. Allstate Ins. Co., 51 Cal. App. 4th 509, 517 (1996); Anaheim Employment Dispute Builders Supply, Inc. v. Lincoln Nat. Life Ins. Co., 233 Cal. App. 2d 400, 410 (1965). “To constitute a waiver, there must be an existing right, a knowledge Mediation Center of its existence, and an intention to relinquish it, or con- duct so inconsistent with the intent to enforce the right as to induce reasonable belief that it has been relin- • Flat Fee/Full day mediation quished.” Silva v. Nat’l Am. Life Ins. Co., 58 Cal. • Evaluation of strengths, weaknesses and case value based App. 3d 609, 615 (1976). “The burden is on the party claiming a waiver of a right to prove it by clear and con- upon extensive trial experience. vincing evidence that does not leave the matter to speculation, and ‘doubtful cases will be decided against • No additional charge regardless of time expended a waiver.’” CBS Broadcasting Inc. v. Fireman’s Fund or locale. Ins. Co., 70 Cal. App. 4th 1075, 1085 (1999) (finding no waiver). • All employment matters: discrimination, harassment, 35 INS. CODE §336. While “waiver” and “estoppel” are contract, hour & wage, class claims, 17200, 12940, etc. often used interchangeably, they are different doc- trines. Waiver always rests upon intent: “Case law is • Our office in historic San Juan Capistrano clear that ‘waiver’ is the intentional relinquishment of (adjacent to rail transportation) or your facility. a known right after knowledge of the facts.” Waller v. Truck Ins. Exch., Inc., 11 Cal. 4th 1, 31-32 (1995) • Call to book a session or to receive our brochure (internal quotes omitted). An insurer may be estopped with rates and c/v. to assert a policy right or defense when, by words or conduct, the insurer has caused the insured reasonably • Ask to be added to our mailing and to change its position to its detriment. See EVID. CODE e-mail list. §623; Chase v. Blue Cross of Cal., 42 Cal. App. 4th 1142, 1157 (1996). 36 Old Line Life Ins. Co. v. Superior Ct., 229 Cal. App. 3d 1600, 1605 (1991). This concept is embodied OBERT OVIELLO in the Insurance Code, which prohibits “post-claims R D. C underwriting.” See INS. CODE §10384. 37 Williamson & Vollmer Eng’g, Inc. v. Sequoia Ins. Co., (949) 429-7500 64 Cal. App. 3d 261, 275 (1976). [email protected] 38 Resure, Inc. v. Superior Ct., 42 Cal. App. 4th 156, 166 (1996). For your employment disputes...settle on us. 39 Id. at 164.
Los Angeles Lawyer December 2006 19 by Miriam Claire Beezy
GOODMARKSMANSHIP New technologies require the implementation of creative trademark protection strategies
For the last several decades, the difficulties that arise when protection is ership and control of their rights to their the entertainment industry has essentially left to haphazard registrations, common law properties and combat the unauthorized uses protected only half its valuable intellectual rights, and the unpredictable application of of those properties over the Internet. The property assets. Budget concerns have focused the well-known marks doctrine, the industry cost of building and maintaining a solid trade- the majority of the content-driven industry’s is being confronted with the reality that devel- mark program should be a priority to com- resources on comprehensive copyright regis- oping a comprehensive trademark registration panies as a whole and should not degenerate tration policies while at times giving short policy is crucial to protecting intellectual into budget feuds between company divi- shrift to trademark rights. All too often, property. sions. From counterfeiting and cybersquatting assumptions that common law rights would With another copyright term extension to cobranding and merchandising, trade- provide adequate trademark protection on an unlikely,2 a comprehensive trademark regis- marks remain the key to brand power and are as-needed basis prevailed. The same faith tration policy makes sense from an economic was placed in the protective reach of the standpoint. While copyrights have a fixed Miriam Claire Beezy, a partner in the Los Angeles “well-known marks” or “famous marks” lifespan and will ultimately fall into the pub- office of Foley & Lardner LLP, is chair of the firm’s doctrine1—a part of the Lanham Act and lic domain, trademarks can last indefinitely if Trademark, Copyright and Advertising Practice promulgated worldwide through the Paris properly maintained and provide the cor- Group and cochair of the Entertainment and Media Convention—even though the doctrine is not nerstone for exploitation and enforcement. As Industry Team. She would like to thank Jeffrey A. applied consistently. As digital trends continue new media continue to give rise to new Kobulnick and Brian P. Kinder, associates in Foley’s and the industry’s attention increasingly turns brands, global financial opportunities for Los Angeles office and members of the Trademark, to global branding and merchandising, these exploiting these intellectual property assets Copyright and Advertising Practice Group and companion rights must be given the same will increase as well. As a result, companies Entertainment and Media Industry Team, for their
careful consideration as copyrights. Given need to take appropriate steps to retain own- assistance with this article. RON OVERMYER
20 Los Angeles Lawyer December 2006 Los Angeles Lawyer December 2006 21 certain to play an increasingly central role in Love Lucy design mark was in use since 1951 the mark with the USPTO in 10 International the portfolios and strategic plans of compa- in connection with the well-known televi- Classes for use in connection with an even nies worldwide. sion program, the registration of the mark was wider range of products and services.26 The not extended to goods until the late 1980s and entertainment industry’s attitude toward the Evolution of Entertainment early 1990s.21 Today there are many I Love registration of trademarks has clearly evolved Trademark Use Lucy brand collectibles, and the mark is used over the years and now reflects an under- A review of the history of trademark use in in connection with a video slot machine game standing of the value in protecting trade- the entertainment industry is important to found in some Las Vegas casinos. I Love Lucy mark rights in artistic works. fully understand the range of trademark is a mark protected by broad registrations of rights. There is no question that companies its standard character and stylized logo. Titles and Characters considered trademarks to be valuable assets Where did this merchandising frenzy in the Today, studio and character names as well as long before the Harry Potter character was entertainment industry all begin? Perhaps film and television show titles remain among born—although with 30 federal registrations not surprisingly, many sources attribute credit some of Hollywood’s most valuable marks. and another 10 applications still pending to Walt Disney with the 1937 release of the Companies are not only using these marks in with the United States Patent and Trademark full-length animated film Walt Disney’s Snow more creative ways but also registering marks Office (USPTO), Harry’s still tender age cer- White and the Seven Dwarfs. The Snow that would have otherwise received little tainly has not precluded him from being well White film was a huge endeavor for Disney, attention in years past. The availability of protected as a trademark.3 In the early days taking nearly four years and more than $1.5 “intent to use” applications with the 1989 of show business, however, many companies million to complete and going well over the enactment of the Trademark Law Revision tended to register only the most obvious original budget of $150,000.22 As the film was Act27 also has enabled companies to seek marks, such as their studio names (for exam- nearing completion, Herman “Kay” Kamen, registration of their marks beyond the tradi- ple, Universal Films4 and Paramount Disney’s first licensing representative, made tional entertainment products and services of Pictures5) and logos (such as the lion’s head preparations to launch an aggressive mer- films and broadcasting. New opportunities design mark of Metro Goldwyn Mayer6). chandising campaign unlike anything seen through character image licensing and The subsequent advent of television brought before, including the mass production and celebrity branding continue to emerge. As a about similar trademark registrations for net- release of dolls of Snow White and each of the result, enforcement and expansion efforts work acronyms such as NBC7 and CBS8 as seven dwarfs as well as comic, paint, color- from a trademark perspective—both offen- well as certain early radio and television ing, and picture books. Soon after the film’s sive and defensive—are flourishing. Having shows.9 Walt Disney was particularly pre- release there were millions of collectible char- engaged in battles with opportunistic third scient, as he was one of the earliest, if not the acter items marketed in connection with the parties, the industry is relying less on com- earliest, person to register the name of a char- Snow White mark. From a full line of cloth- mon law and the well-known marks doc- acter when he registered Mickey Mouse for ing to high-end collectible items like porcelain trine and beginning to register marks both motion pictures in 1928.10 and bisque figurines and jewelry sold at earlier and in broader ranges of categories While these early marks were used and Cartier of Fifth Avenue, Kay Kamen took than in years past. registered in connection with core entertain- the concept of merchandising to a whole new Television show titles, for example, which ment products and services such as motion level.23 The mark also was used in connection entertainment companies have traditionally picture films and broadcasting, the exten- with food products—for example, Snow registered as trademarks, are now being reg- sion of branding to merchandise was lim- White sliced bread featured the Snow White istered and enforced on a broader scale. With ited. For example, according to USPTO mark and images of Snow White and all each new popular television series comes records, Warner Brothers began using the seven dwarfs on the packaging.24 The prod- merchandising opportunities using the title as Looney Tunes11 and Merrie Melodies12 marks uct also contained picture cards and end- a mark. The importance of securing early in connection with a series of animated films paper stickers that were collected and traded registration has been underscored in recent in 1929 but did not register either mark for by children. Snow White and Dopey were the years as companies have had to defend actions use with merchandise until almost a half cen- most popular characters in the film, which when popular television shows branched out tury later.13 Likewise, the Bugs Bunny char- explains why they have been seen on more into marketing campaigns. For instance, in acter has been bouncing around in comic merchandise than the other characters from Surfvivor Media, Inc. v. Survivor Pro- books since 1944,14 but the mark was not the film to this day.25 ductions,28 the owner of the registered mark used or registered in connection with much Ever since the first release of Snow White, Surfvivor for beach-themed products brought in the way of merchandise until the 1970s, the flood of animated films that followed in suit against the producers of the Survivor when it was used with vitamins,15 toys,16 its wake has been increasingly accompanied television show, alleging trademark infringe- towels,17 and sleeping bags.18 The Flintstones by similar large-scale merchandising cam- ment resulting from the use of the Survivor mark was not used with vitamins until 1969, paigns and licensing programs. For instance, mark on consumer merchandise. Likewise, in just one year after Hanna Barbera released its in the early 1990s, the merchandising realm Playmakers, LLC v. ESPN, Inc.,29 the Play- Pebbles brand breakfast cereal.19 Even Disney reaped the benefits of another major pro- makers sports agency asserted its registra- did not register the Mickey Mouse mark for motion from Disney’s release of The Little tion for its name against the cable television merchandise until recently.20 Mermaid. The film prompted the launch of an company producing a program with the name The same holds true for other comic char- even more aggressive marketing campaign as its title, alleging a likelihood of confusion. acter favorites such as Superman and Batman than its predecessors and featured products Similarly, when Viacom rebranded the cable (originally The Bat Man), both of which first from cosmetics and food to toys and cloth- channel TNN as SpikeTV, it was met with an appeared in comic books in the late 1930s. ing, all depicting characters from “Under the action for a preliminary injunction by direc- Not until decades later did DC Comics reg- Sea.” Given this growing merchandising tor Shelton “Spike” Lee.30 Although the ister both of these marks for children’s cloth- trend, it was no surprise that soon after Surfvivor and Playmakers suits were decided ing, lunch kits, and various other merchan- Disney released its 60th anniversary edition in favor of the television show producers, dise. Similarly, although the heart-shaped I of Snow White in 1997, it applied to register and the Spike TV action was settled on undis-
22 Los Angeles Lawyer December 2006 closed terms, each of these cases is a reminder than actors in the movie industry, who have online all types of media and merchandise fea- that early clearance and registration are nec- tended to focus on product endorsements. turing their favorite stars. This convenience essary for the protection of entertainment Dolly Parton, for example, registered her has allowed production studios, distribution properties. name in connection with entertainment ser- companies, and licensees to reap huge finan- Indeed, when Twentieth Century Fox first vices in 1982, whereas John Travolta did so cial benefits. However, not all trademark use launched the popular series Buffy the Vampire in 2003. One of the exceptions to this trend on the Internet has been favorable for trade- Slayer in 1997, it did so without filing to is Elizabeth Taylor, who has registered her mark owners, especially those who have not register the television show’s title as a trade- name in connection with numerous products had a policy of registering their marks. For mark for entertainment services, much less once thought to be beyond the realm of the instance, through Uniform Dispute Resolution merchandising categories. Fox waited three entertainment industry. Moreover, there is Policy (UDRP) proceedings, the industry has years before filing an application to register an increasing interest in branding programs contended with third parties who have reg- the show’s title in multiple classes. This is in featuring the names of deceased celebrities, as istered the domain name equivalents of every- stark contrast to the strategy Fox employed demonstrated by currently pending applica- thing from company names and show titles with its recent hit comedy series My Name Is tions and registrations for Marlon Brando and to character and celebrity names. Earl. Fox applied to register the title as a James Dean. Nevertheless, celebrities in the UDRP proceedings have for the most part mark in three classes (entertainment, clothing, music industry seem to be expanding their produced favorable decisions for individual and printed publications) more than five brands through registration of their names as celebrities and the entertainment industry in
With past and present trends as guidance, there is no question that trademarks will continue to be valuable assets. They will also persist as enticing targets for opportunistic third parties seeking to capitalize on the goodwill belonging to others.
months before the show even aired. marks in more classes of goods and services general. The panels in these proceedings have Just as show titles have garnered attention, than actors, as exemplified by singer Justin ordered the transfer of disputed domain so have many of the characters featured in Timberlake, who has four registrations and names to the trademark owner in the major- films. The types of toys and other merchan- four more applications pending for his name ity of cases, such as in one well-known dis- dise on which certain character names have in eight classes of goods and services. pute in 2000 involving the domain name been used as trademarks cover a wide range. In addition to using a single mark in con- juliaroberts.com.33 In that UDRP proceeding, Buzz Lightyear, for example, is a Disney char- nection with a wide variety of goods and the respondent had also registered more than acter that really has gone “to infinity and services, cobranding has afforded even greater 50 other domain names—including beyond” since his debut in the 1995 ani- opportunities to trademark owners in the madeleinestowe.com and alpacino.com.— mated film Toy Story. Consumers can buy a entertainment industry. Examples of cobrand- that incorporated other celebrity names. host of Buzz Lightyear items, from action ing have included Disney collectible figures Fortunately for Julia Roberts, although her figures or Halloween costumes to full bath- made by Lenox and the Disney Rewards Visa name was not registered as a trademark, the room and bedroom sets. Buzz Lightyear joins Card. Another example was the appearances panelist in the UDRP proceeding found that many of his fictional colleagues by having his of Bugs Bunny and Michael Jordan (whose her name was entitled to protection as a ser- name used in connection with various video name is a registered mark)31 in the motion pic- vice mark under common law because it had games and on screen savers and party sup- ture Space Jam and the wide array of con- acquired secondary meaning. plies, including plates, napkins, and cups fea- sumer products in association with that film. That same year, a different UDRP panel turing the star commander. The Buzz A more recent example is the cobranding of came to a similar conclusion in a dispute Lightyear mark also has been registered as a the Motorola and Phat Farm marks. These involving the domain name jimihendrix domain name. Visitors to www.buzzlightyear types of cobranding opportunities allow lesser- .com.34 Like the respondent in the Julia .com are automatically redirected to a Web known marks in the entertainment industry Roberts case, the respondent in the Jimi site for Buzz Lightyear’s Astro Blasters, an to develop a strong presence in a relatively Hendrix dispute had also registered various attraction at Disneyland. short amount of time and also allow already other domain names incorporating celebrity Just as brand expansion based on ani- famous marks to gain even more strength name marks, including elvispresley.com and mated films and their characters has become and visibility.32 jethrotull.com. The respondent also offered well established, so too have celebrity brand- vanity e-mail addresses for sale that included ing campaigns seen tremendous growth. It is Domain Name Issues the jimihendrix.com domain name (such as interesting to note, however, that artists in the The Internet has also provided portals for [email protected]). Recognizing both music industry have been more cognizant of broadening the scope of trademark rights, common law and registered trademark rights trademark rights and branding campaigns with consumers able to search for and order in the Jimi Hendrix mark and concluding
Los Angeles Lawyer December 2006 23 that the respondent had registered and was site still remains accessible through the cations in foreign countries without the need using the jimihendrix.com domain name in domain name fallwell.com. The Lamparello or expense of hiring local counsel. No mat- bad faith, the UDRP panelist ordered the v. Falwell decision is a warning to the enter- ter whether these third-party applications transfer of the domain name to the com- tainment industry of the importance of reg- stand up to formal scrutiny, they will plainant. istering their valuable trademark rights both undoubtedly present obstacles to a company More recently, in July 2006, Tom Cruise with trademark offices worldwide and on seeking to expand the use of its mark. To insu- successfully acquired the tomcruise.com the Internet as domain names. late against this deleterious activity, enter- domain name via a UDRP proceeding, which tainment and media companies should eval- was also based on his common law rights to Strategic Considerations uate and adjust their budgets as needed to his name as a mark.35 Likewise, several Entertainment and media companies will allow for early filing of applications in key domain names—warneremi.org, warneremi continue to face many of the same issues geographic areas worldwide. .net, emiwarnermusic.com, emiwarner.org, they have faced in the past. But with increas- This assumes, of course, that a company and emiwarner.net—were ordered to be trans- ing technological advances and a relentlessly knows which marks will offer the best mer- ferred to Time Warner, Inc.,36 in a UDRP expanding global marketplace, the amount of chandising opportunities at an early stage in proceeding brought by that company and infringement is certain to grow exponentially. the development of an entertainment property. EMI Group. The trademark battlefields will require trade- There are situations, however, in which mer- Those with celebrity status, however, do mark owners and their counsel to grapple chandising opportunities are speculative, such not always prevail in domain name disputes. with disputes of evolving complexity and as when a new series debuts and the host Consider Reverend Jerry Falwell, for exam- geographic scope. With past and present uses a distinctive catch phrase (such as Donald ple. Falwell has recognized common law trends as guidance, there is no question that Trump’s “You’re Fired” from The Appren- rights to Falwell and Jerry Falwell as well as trademarks will continue to be valuable assets. tice). While the filing of national and regional a federal registration for the mark Listen They will also persist as enticing targets for applications worldwide should remain the America with Jerry Falwell. His Web site, opportunistic third parties seeking to capi- standard for a company’s core marks, the located at www.falwell.com, reportedly talize on the goodwill belonging to others. The Madrid Protocol might present a viable solu- receives more than 9,000 hits per day. In best way to ensure ownership and control of tion for these more speculative scenarios, February 1999, Christopher Lamparello reg- these assets is to protect them from their particularly when a company faces budgetary istered the domain name “fallwell.com” and inception and not as a mere afterthought concerns.41 This international treaty does put up a Web site expressly criticizing Falwell’s once copyright registrations are secured. carry significant drawbacks, including require- views on homosexuality. Lamparello was not Trademark protection policies and the ments for a more narrow description of the ordinary cybersquatter in that he did not best practices of companies in the industry goods, the risk of a central attack, and the own any other domain names that featured must keep up with new technological and absence of North and South American acces- names of famous people, did not make com- marketing developments. New merchandis- sion. Nevertheless, these factors may still mercial use of the site, and even included a dis- ing ideas and brand expansion hasten the present a reasonable risk when balanced claimer on the home page indicating that his need to register marks on a larger scale in con- against the decrease in filing costs by as much Web site was not affiliated with Falwell or his nection with a wider array of goods and ser- as 70 percent in some countries if the trade- ministry. The disclaimer was placed next to vices. The reach of the Internet should com- mark is filed under the protocol. By filing a link to Falwell’s site for those who wished pel trademark owners to protect marks online applications around the world at a greatly to visit it.37 and vigorously use mechanisms like the UDRP reduced cost without the initial need to retain Although Falwell successfully asserted his and ACPA to do so. New media and distri- local counsel, companies can provide their rights at a UDRP proceeding, in which the bution channels and a convergence of the assets with a layer of insulation in the event panel found in his favor and ordered the advertising and entertainment industries make that merchandising opportunities later present domain name to be transferred,38 his victory it imperative for entertainment and media themselves. If a company ultimately decides was short-lived. Lamparello filed suit in the companies to register their marks earlier and to move forward with a full-scale merchan- Eastern District of Virginia seeking a declara- with a more worldwide focus than in years dising campaign, broader follow-up appli- tory judgment of noninfringement. Falwell past. cations may be filed. Alternatively, should counterclaimed, and the district court entered Long gone are the days when a company opportunities fail to emerge or not succeed, summary judgment in his favor. The Fourth could test the waters by waiting to see if a then costs can be minimized. Circuit Court of Appeals reversed, finding film, television series, or video game would be Companies need to be selective and tar- that although the fallwell.com domain name successful domestically before launching a geted in their enforcement strategies, from a closely resembled Falwell’s mark, the two trademark filing campaign abroad. Tech- defensive and offensive stance. To accom- Web sites did not look alike in any way. The nologically savvy and legally sophisticated plish this, entertainment and media compa- Fourth Circuit also found that Lamparello’s opportunists will invariably file trademark nies must forge early and strong alliances use of his site was noncommercial and the applications with the hope of tying up mer- between their marketing and legal depart- public was not likely to be confused into chandising rights or extorting settlements. ments to develop sound approaches for pro- believing that Falwell authorized the Web This practice is particularly troubling in most tecting and enforcing trademark rights at an site’s critical content. Moreover, the court foreign countries, which have a first-to-file pri- early stage in the development and exploita- found that Lamparello did not have a bad ority system and may not permit cancellation tion of an entertainment property. faith intent to profit from using the domain on grounds of nonuse for more than five In light of Lamparello, the distinction name fallwell.com and that Lamparello’s years. between cybersquatter and cybergriper—that noncommercial use of the domain name did A growing trend among trademark offices is, the difference between bad faith registra- not violate the Anti-Cybersquatting Protection around the world is to offer online filing. tion and the use of a domain name that incor- Act (ACPA).39 Instead, the court found that Just as the registration of domain names has porates another’s mark and permissible reg- the site constituted protected speech under the become easier over time, the same is true for istration and use, albeit unauthorized, of First Amendment.40 Lamparello’s anti-Falwell opportunists seeking to file trademark appli- another’s mark—will become difficult to dis-
24 Los Angeles Lawyer December 2006 cern. Relying on First Amendment or fair revenue for the entertainment industry, includ- infringement. Among the many developments use42 defenses, sophisticated cybersquatters ing box office sales and associated merchan- that will continue to facilitate infringement are are certain to create visually impressive gripe dise. While many sources indicate that only peer-to-peer file-sharing networks and Web sites in a manipulative attempt to blur the line one film—Lara Croft: Tomb Raider—has sites with user-created content such as between free speech and trademark infringe- achieved more than $100 million in sales, MySpace, Wikipedia, and YouTube. Also, an ment. Moreover, due to the availability of con- the genre will no doubt continue to make increase in the number and breadth of Web fidential or anonymous domain name regis- more appearances in the coming years. 2.045 sites will consume a great deal of tration, it will become more difficult to As the distinctive names and characters in resources earmarked for trademark enforce- determine if the third party has a legitimate video games give rise to trademark rights, ment activities. gripe or is merely a known cybersquatter owners should continue to take steps to ade- Monitoring the unauthorized use of marks with predatory objectives. quately protect their assets and control their has already become a standard expense in Indeed, cybersquatters are already mount- use through technology and by contract. The many budgets within the entertainment indus- ing free speech and fair use defenses. For impulse to register copyrights alone for these try. Indeed, watch services can assist trade- example, in the dispute involving the domain properties should be resisted. Trademark mark owners in keeping track of newly reg- names marthastewartfoundation.com and owners should take steps early to identify, istered domain names and marks worldwide. marthastewardfoundation.org,43 the regis- clear, and apply to register those marks that These services are constantly changing to trant of those domain names contacted will be used on a large scale with merchan- keep up with new technology, but they will Martha Stewart’s company the same day the dise. Perhaps the traditional approach of reg- likely prove to be insufficient in the future names were registered with an offer to sell istering the title of a video game in only one given the sheer volume of user-created con- them. When the company did not purchase International Class of goods (such as Class 9) tent. As a result, some trademark owners are the domain names, the registrant posted a should no longer be followed. A better looking for more creative solutions. Web site listing the political contributions approach may be to file applications in sev- Walt Disney went to work on his first made by Martha Stewart’s company. During eral fields to secure the trademark rights that full-length animated film nearly 70 years ago. the UDRP proceeding that ensued shortly may emerge from the variety of ways that a It is useful to imagine what that film would thereafter, the registrant argued that his use video game will be exploited. Finally, owners look like and how it would be distributed to was protected free speech since he was merely ought to look beyond the obvious, such as the the public if it were created today. Trademark using the Martha Stewart domain names as title of the game, and identify key characters protection strategies must keep pace with part of a Web design school project. Although and other properties with potential mer- technology. Trademark owners must register the panel in the UDRP proceeding acknowl- chandising appeal. their marks for a broader range of goods edged the complainant’s rights to several reg- It may not always be easy to predict the and services and on a global scale. With the istrations for the name Martha Stewart and course of brand extensions, but filing appli- advent of a new generation of trademark use found the registrant acted in bad faith in that cations before actual use and in protected online and in new media, retaining as much case, if the student had not initially offered to areas of expansion will put trademark own- control over trademark rights as possible is sell the domain names the outcome could ers in a better position to avoid potential more crucial than ever. It is a tireless job, have been very different.44 opposition proceedings and resulting litiga- but someone has to do it. Walt would be Another continuing problem is the so- tion costs down the road. Invariably, it is proud. ■ called fan site that is actually used for com- more cost effective to put resources into pro- mercial profit by a domain registrant. For tecting trademarks at an early stage. Since 1 See Lanham Act §43(c). The well-known marks doc- example, in the Tom Cruise UDRP proceed- trademarks are valuable to the entertainment trine is described in Article 6bis(1) of the Paris ing, the respondent claimed it registered the company as a whole and not necessarily just Convention. Under that article, countries that are members of the Paris Union may refuse or cancel a domain name as a fan site notwithstanding one division, the cost of building and main- mark registration and prohibit the use of a trademark the fact that it derived commercial benefit taining a solid trademark portfolio need not that is confusingly similar to a mark considered by the from paying advertisers. To combat the trend fit under one department’s budget. competent authority of the country of registration or toward gripe site and fan site abuses, the The Internet will continue to be a double- use to be well-known in that country as being already entertainment industry must not only regis- edged sword for trademark owners in the the mark of a person entitled to the benefits of the Paris ter the identical domain name equivalents of entertainment industry. As technological Convention and used for identical or similar goods. Though the well-known marks doctrine is law in their marks but as many reasonable variations advances provide increasing sources of rev- many countries, its application is inconsistent among as possible, top level extensions, and country enue, trademark owners will find it more dif- the various jurisdictions. codes. For domain names used only as a por- ficult to monitor the use of their marks online. 2 The most recent copyright term extension, the Sonny tal rather than for hosting the main Web site, Further complicating the issue is the fact that Bono Copyright Extension Act of 1998, was met with companies can decrease the annual expense in many cases it is not always clear whether contention. 3 Those applications and registrations are just for the of these domain portfolios by relying on bulk the use is authorized, a fair use, or one that Harry Potter marks. Warner Brothers also owns numer- registration registrars that offer fewer bells is likely to cause consumer confusion and ous other registrations and pending applications for var- and whistles. Also, companies can reduce thus constitute an infringement. ious Hogwarts and Dumbledore marks, just to name the annual costs by committing to longer Though laws are being amended to a few of the terms introduced in J. K. Rowling’s Harry term registration periods with discounted address these issues, as quickly as the legal Potter book series. 4 Registered June 29, 1915, as U.S. Registration No. rates. landscape changes, opportunists modify their 105,030. Video games will continue to be assets to activities to take advantage of exceptions 5 Registered March 23, 1915, as U.S. Registration No. monitor. Popular films have been made into and loopholes. For instance, within weeks 103,248. video games since the early days of gaming of the Napster decision, new peer-to-peer 6 Though not registered until January 7, 1941, U.S. consoles. Not until the early 1990s, how- file-sharing sites emerged that were entirely Registration No. 384,224 notes the use by predecessors of Metro since July 1916, Goldwyn since about January ever, did a new genre begin to emerge in the passive as a means to circumvent the moni- 1917, and the roaring lion since on or about September opposite direction. Films based on video toring requirement necessary for users to be 9, 1917. games have generated significant amounts of found liable for contributory copyright 7 Registered January 17, 1956, as U.S. Registration No.
Los Angeles Lawyer December 2006 25 619,641, with a date of first use in commerce in 1927. 19 See U.S. Registration Nos. 936,474 and 879,594. exhorting boys and girls to buy bread with the Mickey 8 The current registration for the CBS word mark (U.S. 20 See, e.g., U.S. Registration No. 3011935 (use of Mouse image on the wrapper. Registration No. 2,758,242) was granted only a few Mickey Mouse for various clothing items) and U.S. 25 See HEIDE & GILMAN, supra note 22. years ago in 2003. However it was based on prior Registration No. 3007745 (use of Mickey Mouse for 26 Pursuant to the Nice classification system, goods registrations and use dating back to 1933. jewelry and watches), both of which registered in and services are classified into one of 45 international 9 For example, the Meet The Press (television show) and 2005; see also U.S. Application Serial No. 78/163,587 classes. For instance, U.S. Registration No. 2891463 Sports Eye (radio program) marks were registered in for use of Mickey Mouse in connection with enter- for the Snow White and the Seven Dwarfs design 1954. tainment services. marks includes, among other things, bubble bath, jew- 10 Registered September 18, 1928, by Walter E. Disney, 21 See U.S. Registration No. 1,715,262 (which covers elry, stationery, calendars, party supplies, wrapping U.S. Registration No. 247,156. many types of I Love Lucy merchandise and col- paper, travel bags, backpacks, wallets, luggage, umbrel- 11 U.S. Registration No. 597,341. lectibles). las, glassware, dishes, kitchen utensils, tea kettles, soap 12 U.S. Registration No. 597,342. 22 ROBERT HEIDE & JOHN GILMAN, DISNEYANA: CLASSIC dishes, towels, table linens, sweaters, shirts, pants, 13 U.S. Registration No. 1,081,450. COLLECTIBLES 1928-1958 (Hyperion 1994) [hereinafter footwear, hats, baseball caps, masquerade costumes, 14 See U.S. Registration No. 950,381. HEIDE & GILMAN]. plush toys, action figures, board games, dolls, puz- 15 U.S. Registration No. 1,235,144. 23 Id. zles, golf balls, children’s play cosmetics, coffee, tea, pas- 16 U.S. Registration No. 1,065,358. 24 Id. The sliced bread idea was not new with Snow try, breakfast cereals, candy, chocolates, cookies, frozen 17 U.S. Registration No. 1,280,778. White. Kamen exploited Mickey Mouse in the same dairy desserts, ice cream, pasta, and ready-to-serve 18 U.S. Registration No. 1,280,759. way in 1934, with posters featuring the character meals. 27 Trademark Law Revision Act of 1988, Pub. L. No. 100-667, codified in the Lanham Act, 15 U.S.C. §1(b). 28 Surfvivor Media, Inc. v. Survivor Prods., 406 F. 3d 625 (9th Cir. 2004). 29 Playmakers, LLC v. ESPN, Inc., 376 F. 3d 894 (9th Cir. 2004). 30 Lee v. Viacom, Inc., 2003 WL 22319071 (N.Y. Sup. Ct. 2003). 31 See, e.g., U.S. Registration No. 1487719. 32 Cobranding is particularly useful as it allows pro- duction studios to reach consumers at all levels of sophistication, from low-cost merchandise to higher priced specialty collectible items. For a more in-depth discussion on cobranding, see Miriam Claire Beezy, CoBranding: A Popular Form of Strategic Alliance, in IP VALUE: BUILDING AND ENFORCING INTELLECTUAL PROPERTY VALUE (2005). 33 Julia Fiona Roberts v. Russell Boyd, Case No. D2000-0210 (WIPO, 2000). 34 Experience Hendrix, L.L.C. v. Denny Hammerton & The Jimi Hendrix Fan Club, Case No. D2000-0364 (WIPO, 2000). The complainant in that case, a com- pany formed by Jimi Hendrix’s family, owns the rights to several Jimi Hendrix marks. W 35 Tom Cruise v. Network Operations Center/Alberta Hot Rods, Case No. D2006-0560 (WIPO, 2006). 36 Time Warner Inc. & EMI Group plc v. CPIC Net, Case No. D2000-0433 (WIPO, 2000). 37 Lamparello v. Falwell, 420 F. 3d 309 (4th Cir. 2005). 38 Falwell v. Lamparello Int’l, Claim No. FA0310000198936 (National Arbitration Forum, 2003). 39 The Anti-Cybersquatting Protection Act (ACPA), 15 U.S.C. §1125(d). 40 Lamparello, 420 F. 3d 309. 41 See Paul D. Supnik, Protecting Trademarks under the Madrid Protocol, LOS ANGELES LAWYER, Apr. 2004, at 26. 42 The issue has also plagued other industries, as noted by other cases cited by the Fourth Circuit in Falwell that involved online criticism of homebuilder and land- scaping companies by dissatisfied customers. See, e.g., TMI, Inc. v. Maxwell, 368 F. 3d 433, 438-39 (5th Cir. 2004) (court found use was noncommercial and designed only “to inform potential customers about a negative experience with the company”); Lucas Nursery & Landscaping, Inc. v. Grosse, 359 F. 3d 806 (6th Cir. 2004) (no bad faith intent to profit found when domain name was registered and used to share a consumer’s negative experience with a company). 43 Martha Stewart Living Omnimedia, Inc. v. Josh Gorton, Case No. D2005-1109 (WIPO, 2005). 44 Id. 45 The term “Web 2.0” frequently refers to next-gen- eration Web sites that have made the transition from an isolated information storage model to a source of user-created content and interactive functionality.
26 Los Angeles Lawyer December 2006 MCLE ARTICLE AND SELF-ASSESSMENT TEST By reading this article and answering the accompanying test questions, you can earn one MCLE legal ethics credit. To apply for credit, please follow the instructions on the test answer sheet on page 29.
by Mark Mermelstein and Charlotte Decker
Walk theLine Attorneys will find statutory language of limited use in determining what constitutes obstruction of justice
Some careers are known to be risky, Unfortunately, situations like Christensen’s Should the lawyer obtain a copy of the study but the practice of law typically is not one of are not unique. More typically, civil litigators, from the affiliate and produce it? Alter- them. Yet lawyers are exposed daily to the whose very role some consider to be obstruc- natively, should the lawyer direct an associ- scary risk of criminal consequences for the tionist, are charged with obstruction of jus- ate to send a letter to opposing counsel indi- practice of law. Terry Christensen, a respected tice rather than conspiracy. This is so because cating that the manufacturer possesses no member of the California bar, hired a private under current law, the line between laudable, documents responsive to the subpoena investigator, Anthony Pellicano, for a client’s ethically mandated, zealous advocacy and request? divorce case. Christensen now finds himself criminal obstruction of justice is not always Or consider the situation in which a charged in a criminal indictment, which clearly demarcated. lawyer is defending a corporate client on civil alleges that the investigator conducted illegal Consider a scenario in which a lawsuit fraud allegations. The opposing party has wiretaps and Christensen used information challenges a drug manufacturer’s advance issued a deposition subpoena to an employee gleaned from the wiretaps to secure a litiga- knowledge of risks posed by one of the com- of the corporate client. The corporation’s tion advantage.1 Christensen faces two counts pany’s drugs. A subpoena calls for production of conspiracy and wiretapping.2 Whatever of all studies conducted by the company Mark Mermelstein is associated with the law firm the outcome of the case, Christensen—a civil regarding the drug. The manufacturer’s lawyer of Beck, De Corso, Daly, Kreindler & Harris, where attorney litigating a civil case—has been knows the company created an affiliate com- he specializes in criminal defense and related civil charged with crimes, and the fact that he pany expressly to study the effects of the litigation. Charlotte Decker is a law student at the may be vindicated at trial will do little to drug, and that the affiliate, but not the named University of Southern California and cowrote this remedy the damage to his reputation. party defendant, is in possession of the study. article while a summer law clerk at Beck, De Corso.
Los Angeles Lawyer December 2006 27 lawyer does not realistically think the dards of zealous advocacy. Indeed, in the a privilege, some courts have held attorneys employee has any criminal fraud exposure context of criminalizing attorney conduct, to an even higher standard than other parties and therefore concludes that the employee Justice Antonin Scalia has warned of the dan- in obstruction of justice proceedings, explain- does not need representation separate from gers of chilling legitimate advocacy.8 ing that attorneys possess a “heightened corporate counsel. Later, however, a ques- awareness” of the law and have a “sophisti- tion is posed in the employee’s deposition, the Nuts and Bolts of Obstruction of cated understanding of the type of conduct answer to which may be harmful to the com- Justice Law that constitutes criminal violations of the pany. Should the corporate attorney counsel Criminal practitioners refer to “obstruction law…more so than an ordinary individual.”15 the employee to invoke his Fifth Amendment of justice” as a collective term for a series of Congress recently passed a statute con- right to remain silent and not answer the federal crimes. Conduct by a lawyer may taining a defense uniquely available to attor- question, or even advise the employee of the constitute obstruction of justice in violation neys. Under the statute, attorneys do not existence of that right? of Title 18 United States Code Sections 1503 commit a crime when they “provid[e] lawful, Suppose another attorney is hired by the or 1512, if the following elements are present: bona fide, legal representation services in corporation’s lawyer to represent the 1) The existence of a “pending proceeding.” connection with or anticipation of an official employee and to advise him whether to assert 2) The defendant must know or have notice proceeding.”16 However, this defense suffers his Fifth Amendment right in the deposition. of the proceeding. from the same basic problem as the crimi- The new lawyer’s fees are paid by the cor- 3) The defendant must endeavor to obstruct nalizing statutes—it does not define or enu- porate client. The new lawyer recognizes that justice. merate any specific legal representation ser- if the corporation’s lawyer is pleased with 4) The defendant must act corruptly with vices. This defense requires the legal services his performance, further referrals of busi- the specific intent to obstruct or interfere to be “lawful,” that is, done without cor- ness will likely follow. The witness’s lawyer with the proceeding. rupt intent. Accordingly, if a legal service is also recognizes that his client’s testimony will 5) The defendant’s conduct must have the done with corrupt intent, it cannot be a “law- be harmful to the corporation’s legal interest natural and probable effect of interfering ful legal representation service.” As a result, but his client is unlikely to suffer criminal with the proceeding.9 this defense merely returns the focus of the prosecution. Should the new lawyer advise his No specific methods of obstruction are inquiry to whether the act was done with client to assert his Fifth Amendment right enumerated in the statutes. This means that the requisite intent. and decline to answer? any actions can constitute obstruction if done To understand obstruction of justice as As these scenarios and many others illus- with the requisite intent.10 Indeed, the statutes applied to the legal profession, it is crucial to trate, even lawyers whose practice is limited cover conduct that is otherwise entirely legal. understand that the whole issue comes down entirely to civil litigation may find themselves For example, the First Circuit upheld a con- to the intent element: If the lawyer was act- enmeshed in situations calling for a nuanced viction of an attorney who advised his client ing “corruptly” while practicing law, he or she understanding of criminal law. The legal to invoke his Fifth Amendment right.11 In so is guilty; if the lawyer was acting in good faith, ethics rules in many states are silent or vague doing, the court soundly rejected the notion he or she is not. Looking to how courts have on a number of topics, including the dilem- that for attorneys, a corrupt motive may not defined “corruptly,” neither the Ninth mas posed by these scenarios.3 Compounding be found in the absence of an independently Circuit’s definition—“the specific intent to the problem is the fact that all attorneys are illegal act.12 As a result, no act, not even tra- obstruct justice”17—nor the Fifth Circuit’s ethically required to zealously represent their ditional litigation tasks, are excluded from the definition—“acting with an improper clients.4 As a result, an attorney may, in some realm of prosecutable conduct. motive”18—sheds much light on what con- instances, be ethically bound to approach When lawyers retained to defend a client duct falls within and without the confines of the line between ethical and unethical con- in a civil lawsuit respond to a document sub- the law. For lawyers, the scariest holding was duct. Because most states’ ethical codes are poena, talk to a prospective witness, or advise the one in which the Seventh Circuit stated silent as to the precise location of that line, their client, these actions presuppose a pend- that the fact that an attorney’s actions were or define the line by reference to the criminal ing proceeding and the lawyers’ knowledge of “motivated by his attempt to protect his code, the de facto or de jure ethical line is the proceeding. Because a lawyer’s goal is client from prosecution” was of no signifi- drawn when the attorney’s conduct becomes typically, at least in part, to impede his or her cance because those same actions demon- criminal.5 This may mean that ethically rep- adversary’s search for the truth, and because strate that the defendant-lawyer “clearly resenting a client requires attorneys to strive limiting access to the truth can be seen as intended and corruptly endeavored to obstruct for the best result for their clients using all obstructing justice, almost by definition a justice.”19 Clearly, the definition of the intent methods just short of committing a crime.6 lawyer’s conduct may approach obstruction element leaves something to be desired. A conservative approach advocated by of justice. The critical question is whether the A review of some fact-specific cases sheds some commentators is to never communi- conduct was committed with the requisite a little more light on the definition. In United cate to a nonclient witness anything that intent. Accordingly, there is no lawyerly con- States v. Cintolo, during a grand jury inves- could be perceived as legal advice.7 That duct, no matter how “traditional,” that is, ab tigation an attorney advised his client to approach, however, leaves unresolved many initio, clearly exempt from the purview of invoke his Fifth Amendment right and suffer questions for a corporate attorney like the one criminal obstruction of justice law. contempt charges even though he had immu- in the second scenario, defending a corporate Given the fine line between zealous advo- nity.20 The First Circuit found that the attor- client and pondering how to counsel a cor- cacy and obstruction of justice, attorneys ney’s advice was motivated not by a desire to porate employee witness, unless he or she is facing criminal prosecution have advocated protect his client but for the purpose of shield- prepared to recommend that the corporate for a special privilege due to the unique nature ing other individuals—those who would be client hire an attorney for every potential of their ethical duty.13 Courts have resound- inculpated by the client’s testimony.21 As a employee-witness in the lawsuit. In addition, ingly rejected such arguments, holding that as result, the First Circuit affirmed the finding adopting a conservative approach to chal- long as an attorney acts with the requisite that the attorney-defendant had acted cor- lenging ethical questions may result in the intent, he or she can be prosecuted for ruptly and was therefore guilty of obstruct- lawyer’s representation falling below the stan- obstruction of justice.14 Far from recognizing ing justice.22
28 Los Angeles Lawyer December 2006 MCLE Answer Sheet #154 MCLE Test No. 154 WALK THE LINE
The Los Angeles County Bar Association certifies that this activity has been approved for Minimum Name Continuing Legal Education legal ethics credit by the State Bar of California in the amount of 1 hour. Law Firm/Organization
1. The crime of obstruction of justice is limited to spe- 11. A lawyer engaged in a state litigation can be held Address cific behaviors, such as threatening a witness or dis- liable for federal obstruction of justice. City carding documents. True. State/Zip True. False. E-mail False. 12. It is possible for a lawyer to be charged with obstruc- Phone 2. Attorneys are no longer at risk for being charged with tion of justice for conduct that is otherwise entirely State Bar # obstruction of justice because Congress passed 18 legal if the lawyer has the requisite intent. USC Section 1505(c). True. INSTRUCTIONS FOR OBTAINING MCLE CREDITS True. False. 1. Study the MCLE article in this issue. False. 2. Answer the test questions opposite by marking 13. Who bears the burden of proof at trial regarding the appropriate boxes below. Each question 3. Courts have recognized a special privilege for attor- mens rea in an obstruction of justice case? has only one answer. Photocopies of this neys in obstruction of justice law. A. The defendant. answer sheet may be submitted; however, this True. B. The government. form should not be enlarged or reduced. False. 3. Mail the answer sheet and the $15 testing fee 14. For a lawyer to be found guilty of obstruction of jus- ($20 for non-LACBA members) to: 4. In some circumstances an attorney can counsel a tice, the lawyer must know about or have notice of a fed- Los Angeles Lawyer client not to testify even if it would result in the sup- eral proceeding. MCLE Test pression of evidence. True. P.O. Box 55020 True. False. Los Angeles, CA 90055 False. Make checks payable to Los Angeles Lawyer. 15. Attorneys who advise their own clients to invoke 4. Within six weeks, Los Angeles Lawyer will 5. The court in United States v. Rasheed defines “cor- their Fifth Amendment rights are safe from prosecution return your test with the correct answers, a ruptly” in relation to obstruction of justice as “acting for obstruction of justice. rationale for the correct answers, and a with an improper motive.” True. certificate verifying the MCLE credit you earned through this self-assessment activity. True. False. False. 5. For future reference, please retain the MCLE test materials returned to you. 16. Attorneys whose sole motive is to protect their 6. Attorneys in California have a duty derived from clients from prosecution are always shielded from ANSWERS case law to zealously advocate for their clients. obstruction of justice charges. Mark your answers to the test by checking the True. True. appropriate boxes below. Each question has only False. False. one answer.
7. In United States v. Cueto, the Seventh Circuit upheld 17. Obstruction of justice charges for a civil attorney 1. ■ True ■ False attorney Cueto’s conviction because he: require a parallel criminal investigation. 2. ■ True ■ False A. Counseled his client to invoke his Fifth True. ■ ■ Amendment right. False. 3. True False B. Entered into a business transaction with his 4. ■ True ■ False client. 18. California law defines obstruction of justice as 5. ■ True ■ False C. Gave legal advice to a nonclient. “misleading conduct with the intent to obstruct or hin- 6. ■ True ■ False D. A and B. der…justice.” 7. ■ A ■ B ■ C ■ D True. 8. A prosecution for obstruction of justice is based False. 8. ■ True ■ False exclusively on an attorney’s conduct in a criminal pro- 9. ■ True ■ False ceeding. 19. In the Third Circuit, 18 USC Section 1515(c) is: 10. ■ True ■ False True. A. An element of the crime alleged in the 11. ■ True ■ False False. indictment. B. An affirmative defense. 12. ■ True ■ False 9. A literal truth defense to obstruction of justice 13. ■ A ■ B charges is uniquely available to attorneys. 20. Encouraging witnesses to invoke their Fifth 14. ■ True ■ False True. Amendment right in return for a benefit is legal under 15. ■ True ■ False False. federal obstruction of justice statutes. ■ ■ True. 16. True False 10. In obstruction of justice law, a corrupt motive may False. 17. ■ True ■ False not be found in the absence of an independently ille- 18. ■ True ■ False gal act. 19. ■ A ■ B True. ■ ■ False. 20. True False
Los Angeles Lawyer December 2006 29 In United States v. Cioffi, an attorney interests, he or she must not be acting in the Lastly, it is important to bear in mind advised a nonclient witness to invoke his best interests of the attorney’s client and is that the government can secure an indict- Fifth Amendment right in an SEC investiga- therefore acting corruptly. ment of a lawyer without alleging that the tion and suggested that some benefit—the There are other significant factors in deter- lawyer was not providing legal services.42 forgiveness of a loan that a third party had mining whether a situation poses a risk of an Even if the lawyer was in fact providing law- made to the witness or avoidance of harm to obstruction of justice charge for a lawyer. ful legal services, that fact alone cannot the witness’s wife—might flow to the wit- First, a lawyer is not shielded from obstruc- achieve dismissal of an indictment. ness if he did so.23 Even though the evidence tion of justice liability merely because the Accordingly, even an attorney who is vindi- could be interpreted as the attorney inquiring proceeding in which a corrupt act takes place cated at trial has nonetheless suffered the of the status of the cancer-stricken wife of the is civil or because the government is not a stigma of public indictment. witness rather than threatening the wife’s party to the proceeding.29 A lawyer who demise, the Second Circuit not only affirmed destroys documents responsive to a subpoena Applying the Law the attorney-defendant’s conviction for issued in a civil lawsuit is clearly in violation In the scenario in which an attorney is faced obstruction of justice but also rejected the of obstruction statutes. Moreover, while much with a decision whether, in response to a notion that advising a nonclient witness to ink has been spilled regarding the type and document subpoena, to produce a document invoke his Fifth Amendment right is pro- duration of the pending proceeding that is in possession of a corporate affiliate, the eth- tected conduct.24 required as an element of a federal prosecu- ical code does not address the issue other In contrast, the Fifth Circuit perceived no tion for attorney obstruction of justice,30 it is than in the general duty of an attorney to be impropriety in an attorney’s contacting coun- clear that a postcomplaint prejudgment civil a zealous advocate. The constraint on this sel for a codefendant to impress upon him the lawsuit constitutes a pending proceeding.31 duty, found in criminal law, dictates that it is danger of his client’s testifying and to remind Second, although the violation of federal a crime to conceal or destroy documents the attorney of his client’s Fifth Amendment criminal obstruction of justice law requires an responsive to a document subpoena.43 So right to remain silent.25 Also, the Supreme endeavor to obstruct a federal proceeding, a how do these rules operate in conjunction Court has firmly established that in appro- lawyer engaged in a state litigation can still with one another? priate circumstances it is permissible for attor- be liable for federal obstruction of justice if The threshold question asks whether the neys to offer such advice to their client, even his or her conduct has the collateral effect of document is responsive to the subpoena. If, if the advice to invoke the Fifth Amendment undermining, for example, a federal investi- on the one hand, the document is not respon- right would inevitably lead to less informa- gation.32 By contrast, obstructing a California sive to the subpoena (that is, because there is tion being supplied and, consequently, justice state litigation that has no bearing on any fed- no such study in possession of the company), being obstructed.26 eral investigation33 would be prosecutable, if then there is no affirmative obligation to pro- In United States v. Cueto, the Seventh at all, under California state law. California duce the study. A narrow reading of the sub- Circuit affirmed the obstruction of justice state obstruction of justice law is much nar- poena may reach this result. If the attorney conviction of an attorney who, during a pend- rower than federal law. California law makes concludes that despite the fact that the study ing covert federal investigation, obtained a criminal only certain discrete acts such as is not technically responsive to the subpoena, state court injunction barring an undercover subornation of perjury,34 solicitation of per- it is relevant to the proceedings and produces federal investigator from interfering with his jury,35 and obstructing a police officer during it, this attorney may have violated his ethical client’s business operation and requested that the performance of his or her official duties.36 duty to zealously represent his client and the state attorney’s office criminally prosecute In California there is no crime defined as may have exposed himself to malpractice the agent.27 Although this conduct is osten- general obstruction of justice; however, con- charges. In the absence of an affirmative sibly legal (independent of obstruction of spiracy to obstruct justice is a crime under obligation to produce the document, the justice) and motivated, at least in part, by a California law.37 attorney is barred from harming the client. desire to protect his client, the Seventh Circuit Third, it is not necessary for a lawyer’s act Thus, if the document is not responsive to the upheld the attorney’s conviction because the to actually obstruct justice. Even if, for exam- subpoena, it probably cannot be produced attorney, in addition to his role as advocate ple, the lawyer who destroys a subpoenaed even if the attorney believes that some sense for his client, had also entered into a business document delivers another copy of the doc- of justice requires it. relationship with his client and personally ument to the propounder of the document If, on the other hand, the document is benefitted from his client’s continued business subpoena, a prosecution for obstruction of responsive to the subpoena, must the attor- operations.28 In other words, the court was justice could still lie. That is because the ney produce it? To be sure, it is a crime for satisfied that Cueto’s actions were “corrupt” crime punishes mere “endeavors” to obstruct the attorney to conceal or destroy the docu- because he personally benefitted from them justice.38 An “endeavor” encompasses a ment. However, the Ninth Circuit was clear as opposed to his client being the sole bene- broader range of action and includes any that mere failure to produce documents, with- ficiary. effort that has the natural and probable effect out more in the way of actions or conduct, The common theme derived from these of interfering with justice.39 does not constitute an intent to obstruct the cases is that courts appear to find corruption Fourth, a lawyer who engages in “mis- proceeding in which the documents were when there is a departure from the tradi- leading conduct” may be found to obstruct subpoenaed.44 Indeed, the U.S. Supreme tional role of a lawyer advising a client for the justice.40 Federal law provides that mislead- Court reversed a contempt conviction of an benefit of only that client. Cintolo was pro- ing conduct toward a possible witness to attorney who had counseled his clients not to tecting a third party, Cioffi was giving legal “influence, delay or prevent” testimony or to respond to a subpoena duces tecum because advice to a nonclient, and Cueto was pro- withhold, alter, or destroy a “record, docu- the attorney acted in good faith.45 So one tecting himself. Courts first seem to distinguish ment or other object” is a felony. Misleading could imagine some response to the sub- between an attorney acting in the best inter- conduct includes 1) omitting information so poena that does not involve the production ests of a client and an attorney acting in that a part of a statement is misleading, 2) cre- of the document but also does not constitute someone else’s interests and then reason that ating a false impression, or 3) creating a false active concealment or destruction. if an attorney is acting in someone else’s document.41 Assuming the lawyer is not going to pro-
30 Los Angeles Lawyer December 2006 duce the document requested by the sub- ing in the best interest of someone other than still have committed obstruction of justice? poena, the lawyer would presumably have an the nominal client), it may be enough to tip That is, if Cioffi had merely met with the wit- associate communicate that fact to opposing the scale in favor of prosecution. Although the ness and encouraged him to invoke his Fifth counsel. This would typically be accomplished rule of lenity—in an ambiguous statute an Amendment right, would that have been via a letter stating there is no document action that is not clearly prohibited is legal47— enough to sustain a conviction? There does not responsive to the subpoena. The danger in this offers some solace, it is of little comfort to appear to be a case on point, but the Third action is that if a lawyer directs an associate practicing attorneys who must risk indict- Circuit has recognized that the language of 18 to write a letter omitting material informa- ment to fulfill their ethical duties to their USC Section 1512 is broad enough to encom- tion—that there is a document on point but clients. pass criminal responsibility for a lawyer advis- not in possession of the subpoenaed corpo- The second scenario tackles the issue of a ing a nonclient witness to invoke his or her rate entity—the lawyer has arguably engaged lawyer for a corporate party dealing with Fifth Amendment right.49 Given this case in misleading conduct toward another person the corporate client’s employee, who is a wit- law, the prudent lawyer would be wise to with intent to cause or induce a person to ness. In preparation for the witness’s upcom- avoid advising nonclient witnesses to invoke
Once one recognizes that the lawyer may have committed the actus reus of a crime, the question becomes has the lawyer done so with the requisite mens rea? If the lawyer is acting corruptly, he or she will be found to have obstructed justice; if the lawyer is acting in good faith, he or she will not. To complicate matters, most, if not all, of the evidence of good faith will lie in the attorney’s own mind.
withhold a document from an official pro- ing deposition, perhaps the corporate lawyer their Fifth Amendment right. ceeding in violation of 18 USC Section has reviewed his correspondence and has Attorneys who “merely inform” witnesses 1512(b). It is important to remember that any debriefed the witness. The lawyer may not of the existence of their Fifth Amendment conduct can be construed as obstruction of think the witness has any personal exposure right as opposed to advising its invocation justice, so the fact that the lawyer’s state- but is aware of conduct by the employee that could also face exposure, particularly if the ment is literally true (there is in fact no com- may be harmful to the lawyer’s corporate “mere information” would be interpreted by pany study responsive to the subpoena) is client. a reasonable person as advice to assert the not a defense. Unlike the crime of perjury in Practitioners facing this situation must Fifth Amendment right. Attorneys should bear which literal truth is an affirmative defense,46 be aware of criminal obstruction of justice in mind that courts have deemed that “what- there is no literal truth defense to obstruction law, which provides that intimidation or mis- ever the contours of the line between traditional of justice. leading conduct toward a possible witness to lawyering and corrupt intent may be, they Once one recognizes that the lawyer may “influence, delay or prevent” testimony is a must inevitably be drawn case-by-case.”50 As have committed the actus reus of a crime, the crime. Given these parameters, lawyers could a result, with no case law on this point, attor- question becomes has the lawyer done so very well face obstruction of justice liability neys in this situation must risk indictment in with the requisite mens rea? If the lawyer is if they mislead a witness into thinking that it order for a court to determine whether their acting corruptly, he or she will be found to is in the witness’s best interest to invoke his behavior was zealous or criminal. have obstructed justice; if the lawyer is act- or her Fifth Amendment right when, in fact, Ultimately, the best solution for lawyers in ing in good faith, he or she will not. To com- the lawyers are counseling the witness to this situation is to ensure that another attor- plicate matters, most, if not all, of the evidence invoke the Fifth Amendment in order to pro- ney is involved in the case exclusively to rep- of good faith will lie in the attorney’s own tect their client. resent the interests of the witness. Case law mind. The Section 1515(c) good faith defense Knowledge of the Cioffi case is crucial. protects an attorney who conveys an encour- offers little protection because it essentially Attorney Cioffi was convicted of obstruc- agement to invoke a Fifth Amendment right inquires into the nature of the attorney’s tion of justice for meeting with a witness, through the filter of an attorney representing thoughts. While there do not seem to be any encouraging him to invoke his Fifth the witness.51 Apparently, if the witness in the prosecuted cases of attorneys under this the- Amendment right, and offering the witness a second scenario has his own counsel, the cor- ory, the defense is seemingly weak. If some benefit—forgiveness of a $25,000 loan—and porate client’s lawyer may be able to per- other evidence were to surface (for example, avoidance of some detriment—harm to his suade the witness to invoke his right while if the lawyer had a personal stake in the out- wife—if the witness invoked his right.48 If knowing the witness will get the benefit of come of the litigation or the lawyer was act- Cioffi had not offered the benefit, would he independent legal advice.
Los Angeles Lawyer December 2006 31 This scenario posits that the corporate ment or harm to the lawyer’s reputation. M. NAIR, M.D. client’s lawyer enlists the aid of another lawyer There are situations in which the line Board Certified: to represent the witness, the newly retained between zealous advocacy and obstruction of – Psychiatry lawyer recognizes that his legal fees are being justice is hazardously vague and relies on – Child Psychiatry paid by the corporate client, and the corpo- invisible evidence of the inner thoughts of a – Forensic Psychiatry rate client’s lawyer is a good source of future practicing attorney. Because the distinction in – Psychopharmacology referrals. The corporation and its lawyer will obstruction of justice law between criminal – Addiction Medicine be pleased if the employee asserts his Fifth and legal is so fine, and the repercussions so – Harvard and UC Trained Amendment right. Can the newly retained severe, civil litigators must acknowledge that lawyer thus counsel the witness to invoke if they are not aware of the law of criminal Consultations • IME • Deposition • Record Review Second Opinion • Trial Testimony • Civil Litigation the Fifth Amendment on these bases? The obstruction of justice, they may be doomed answer is, of course, no. The lawyer must put to violate it—or come perilously close. ■ 562.493.2218 ■ psychiatryforensic.com State Bar Approved MCLE provider the personal benefits of the invocation out of mind and focus solely on the best interests of 1 United States v. Pellicano, Case No. 05-1046(C) 433 N. Camden Dr., Suite 600, Beverly Hills, CA 90210 the client. The newly retained lawyer may RMT (pending U.S. Dist. Ct., Central Dist. of Cal.), advise the client to invoke the right or not, but Indictment, at 54. 2 Id. at 54, 61. the advice must be based solely on what will 3 To the extent that state ethical rules do address these TRUST DEED FORECLOSURES most benefit the lawyer’s client. issues, it is through incorporation by reference of a “Industry Specialists For Over 18 Years” If a witness’s lawyer allows external moti- state’s criminal laws. For example, the ABA Model t Witkin & Eisinger we specialize in the Non-Judicial vations to influence his or her counsel, the Rules of Professional Conduct forbid lawyers from A Foreclosure of obligations secured by real property lawyer is no longer acting with good faith, “unlawfully obstruct[ing] another party’s access to or real and personal property (mixed collateral). since the advice is based on factors other evidence.” MODEL RULES OF PROF’L CONDUCT R. 3.4(a). 4 See, e.g., MODEL RULES OF PROF CONDUCT R. 1.3 When your client needs a foreclosure done profession- than the best interests of the client. On the ally and at the lowest possible cost, please call us at: cmt (“A lawyer should act with commitment and ded- other hand, if the lawyer does not allow 1-800-950-6522 ication to the interests of the client and with zeal in external motivations to influence his or her advocacy upon the client’s behalf.”). In California, We have always offered free advice to all attorneys. thinking and considers only the best interests case law recognizes the same duty. See, e.g, People v. of the client, although the lawyer is not guilty McKensie, 34 Cal. 3d 616, 631 (1983). In the crimi- WITKIN nal context, zealous representation may be constitu- of obstruction of justice, the lawyer still may tionally mandated by the Sixth Amendment. EISINGER, LLC not be in the clear. Most crimes, and obstruc- 5 Bruce A. Green, Zealous Representation Bound: The & ◆ RICHARD G. WITKIN, ESQ. CAROLE EISINGER tion of justice is no exception, are prosecuted Intersection of the Ethical Codes and the Criminal based on the actus reus of the crime, not the Law, 69 N.C. L. REV. 687 (Mar. 1991). It is outside mens rea, because it is impossible for a pros- the bounds of a lawyer’s ethical duties to engage in or counsel criminal conduct. See MODEL RULES OF PROF’L ecutor to know with certainty what goes on CONDUCT R. 1.2(d). CALIFORNIA in another’s head. The scenario in which the 6 See United States v. Moran, 2000 WL 33981888, at lawyer considers motivations extraneous to *5 (Jury Instructions as cited in Reply Brief for the SOCIAL SECURITY the best interests of the client may, from the United States). prosecutor’s vantage point, look exactly the 7 See, e.g., Mary Spearing, Obstruction of Justice and ADVOCATES Attorneys Who Work on Civil Fraud Cases, 456 same as the scenario in which the lawyer PLI/LIT. 521, 532 (PLI Mar. 1993). We specialize in handling claims from the initial application does not consider such motivations. Both 8 Hubbard v. United States, 514 U.S. 695 (1995) level through the hearing before the Social Security scenarios posit a lawyer with a personal finan- Administration and Office of Disability Adjudication and (Scalia, J. concurring). See also United States v. Cueto, Review. cial interest advising his or her client to invoke 151 F. 3d 620, 631 (7th Cir. 1998). the Fifth Amendment right and the client 9 United States v. Aguilar, 515 U.S. 593 (1995). 10 Our specialties include: does so, resulting in evidence being sup- Cueto, 151 F. 3d at 631 (“[I]t is not the means employed by the defendant that are specifically pro- • Social Security Disability Claim pressed. As a result, the virtuous lawyer may hibited by [18 U.S.C. §1503] but is, instead, the defen- still be charged even though he or she has not dant’s corrupt endeavor which motivated the action.”). • Supplemental Security Income Claim (SSI) committed a crime. 11 United States v. Cintolo, 818 F. 2d 980 (1st Cir. • Retirement Benefits Nevertheless, there are some steps lawyers 1987). See text, infra. 12 can take to create exculpatory evidence Id. • Social Security Spouse Benefits 13 See Cintolo, 818 F. 2d at 992. regarding virtuous intent and thereby reduce 14 See, e.g., Cueto, 151 F. 3d at 631-32; Cintolo, 818 • Social Security Death Benefits the likelihood of being charged. One option F. 2d at 996 (The court emphatically rejected “the • SSI/RSDI Overpayment Defense is to draft a memo to file detailing a lawyer’s notion that a law degree, like some sorcerer’s amulet, thinking at the time of counseling the client can ward off the rigors of the criminal law.”). • SSI Fraud Protection 15 to invoke his or her Fifth Amendment right. Cueto, 151 F. 3d at 631-32. 16 18 U.S.C. §1515(c). Another option is to consult a legal ethicist. 17 United States v. Rasheed, 663 F. 2d 843, 852 (9th We pay referral fees pursuant to the If an ethicist sanctions a lawyer’s conduct, Cir. 1981). Rules of the California State Bar then the lawyer may have both a defense and 18 United States v. Haas, 583 F. 2d 216, 220 (5th Cir. a witness to testify on his or her behalf. 1978). Unfortunately for the practicing attorney, 19 Cueto, 151 F. 3d at 633. On the other hand, accord- Toll Free 866.325.4529 obstruction cases against attorneys turn on ing to the Eleventh Circuit, if there is a “fair doubt” that the lawyer-defendant did not act, at least in part, very fine lines—and some of them involve an www.socialsecuritylawattorney.com with a “corrupt motive,” the doubt must be resolved inquiry into the lawyer’s thinking. in the defendant’s favor. United States v. Brand, 775 Exculpatory evidence will help a lawyer avoid F. 2d 1460, 1465 (11th Cir. 1985). According to the CALIFORNIA SOCIAL SECURITY ADVOCATES conviction but will not necessarily avoid Supreme Court, the “corruptly” component of the indictment or the accompanying embarrass- crime must in some way limit the class of defendants.
32 Los Angeles Lawyer December 2006 Arthur Anderson v. United States, 544 U.S. 696, 706 (2005) (The inclusion of “impede” and exclusion of “dishonestly” from the definition of “corruptly” ren- dered the 5th Circuit’s jury instructions “flawed.”). 20 United States v. Cintolo, 818 F. 2d 980 (1st Cir. 1987). 21 Id. at 994. 22 Id. 23 United States v. Cioffi, 493 F. 2d 1111 (2d Cir. 1974). 24 Id. 25 McNeal v. Hollowell, 481 F. 2d 1145 (5th Cir. 1973). 26 Maness v. Meyers, 419 U.S. 449 (1975). 27 United States v. Cueto, 151 F. 3d 620 (7th Cir. 1998). 28 Id. at 633. 29 See, e.g., United States v. Barfield, 999 F. 2d 1520, 1525 (11th Cir. 1993); Sneed v. United States, 298 F. 911, 912 (5th Cir. 1924). 30 But see United States v. Veal, 153 F. 3d 1233, 1250 (11th Cir. 1998) (“By its wording, §1512(b)(3) does not depend on the existence or immanency of a federal case or investigation but rather on the possible existence of a federal crime and a defendant’s intention to thwart an inquiry into that crime.”). 31 See, e.g., United States v. Lundwall, 1 F. Supp. 2d 249 (S.D. N.Y. 1988); Bruce E. Yannett & David A. Weinstein, Civil Discovery Missteps Invite Criminal Sanctions; Once Almost Unheard Of, Prosecution for Perjury or Obstruction of Justice Arising from Civil Discovery Is Now More Common, NAT’L L. J., Feb. 22, 1999, at 26 (collecting cases). 32 See, e.g., Cueto, 151 F. 3d at 631. 33 PENAL CODE §127. 34 PENAL CODE §653f(a). 35 PENAL CODE §69. 36 Business and Professions Code §1628 makes any attorney guilty of a misdemeanor who “is guilty of any deceit or collusion, or consents to any deceit or collu- Quo Jure Corporation 1-800-843-0660 sion, with intent to deceive the court or any party.” www.quojure.com 37 PENAL CODE §182(5) (“If two or more persons con- [email protected] spire to commit any act injurious to the public health, LAWYERS’ WRITING & RESEARCH to public morals or to pervert or obstruct justice, or the due administration of the laws, they are punishable as When you can’t do it yourself, but you still need a brief or follows….”). memo done—and done well, by experienced attorneys who 38 See, e.g., United States v. Brady, 168 F. 3d 574, 580 (1st Cir. 1999). See also Arianna Berg & Jeffrey are skilled writers—turn to Quo Jure Corporation. Levinson, Obstruction of Justice, 37 AM. CRIM. L. REV. 757, 765 & n.53 (Spring 2000). Quo Jure provides premium legal writing and research services 39 United States v. Aguilar, 515 U.S. 593, 599 (1995). to practicing attorneys. Our work has contributed to million- 40 118 U.S.C. §1512(b)(1)-(3) prohibits the use of mis- dollar settlements and judgments. Oppositions to motions for leading conduct with the intent to affect another per- summary judgment are our specialty. Call for a free analysis son or object in relation to their participation in a and estimate. The Winning EdgeTM legal proceeding. 41 Id. 42 United States v. Kloess, 251 F. 3d 941, 949 (11th Cir. 2001). 43 18 U.S.C. §§1505, 1510(a), 1512(b)(2)(A)-(B). 44 United States v. Rasheed, 663 F. 2d 843, 852 (9th Cir. 1981). 45 Maness v. Meyers, 419 U.S. 449 (1975). 46 Bronston v. United States, 409 U.S. 352 (1973). 47 See United States v. Bass, 404 U.S. 336, 348 (1971). 48 United States v. Cioffi, 493 F. 2d 1111 (2d Cir. 1974). 49 United States v. Davis, 183 F. 3d 231, 248 (3d Cir. 1999); Cole v. United States, 329 F. 2d 437 (9th Cir. 1964). 50 United States v. Cintolo, 818 F. 2d 980, 995 (1st Cir. 1987). 51 It is not a federal crime for a defense lawyer to per- suade a witness to assert his or her Fifth Amendment right as long as the witness is represented by his or her own attorney. McNeal v. Hollowell, 481 F. 2d 1145 (5th Cir. 1973).
Los Angeles Lawyer December 2006 33 by Rochelle B. Spandorf
FranchisePlayer Trademark licensees need to carefully consider the three-prong test for franchise agreements
Gentis v. Safeguard Business Systems,1 the defendant retained commissioned sales agents to solicit orders, follow leads, and provide customer service. The agents did more than just take orders, but lacked authority to enter into binding sales contracts with customers, never took title to or paid for goods, seldom made deliveries, and did not handle billing or collection. When the relationship between the agents and Safeguard soured, the agents Insued Safeguard for violations under California’s Franchise Investment Act. In one of the few reported appel- late decisions interpreting the statute, the court of appeal found that the relationship between the sales agents and Safeguard did constitute a franchise. In Gabana Gulf Distribution Ltd. v. Gap International Sales, Inc.,2 the defendant authorized a United Kingdom company to distribute its Gap brand merchandise in markets outside the United States, reserv- ing control over the distributor’s customers. The manufacturer terminated the distribution agreement with- out cause as permitted by the parties’ contract in order to pursue a different international distribution strat- egy. The distributor sued for wrongful termination in violation of California’s Franchise Relations Act even though the parties’ contract disclaimed a franchise relationship. When Gap moved to dismiss the claim, the court denied the motion. Both cases involve typical distribution arrangements for the offer, sale, or delivery of branded goods or services identified by the seller’s trademark. In neither case did the agent pay cash upfront or any type
Rochelle B. Spandorf is a partner in the Los Angeles office of Sonnenschein Nath & Rosenthal LLP, specializing in franchise and distribution law. KEN CORRAL
34 Los Angeles Lawyer December 2006 of monthly payment based on gross receipts for the distribution ing plan variation” element). rights. Nor did the parties intend to form a franchise relationship. 3) Payment of a required fee (the “franchise fee” element). Neither seller expected to end up defending franchise allegations. A franchise finding hinges entirely on whether a commercial Yet, these situations arise with considerable frequency. Manu- arrangement fits the applicable statutory definition. If any one statu- facturers, suppliers, and other trademark owners overlook a possi- tory element is missing from the arrangement, the relationship is not ble franchise connection when they enter into continuing commercial a franchise. The legal analysis considers the parties’ actual practices, relationships with independent third parties to sell their branded oral as well as written promises, and course-of-dealing evidence.9 A products or services. Embedded in these distribution arrangements party cannot avoid a franchise relationship simply by disclaiming its is a de facto trademark license. While not every trademark license cre- existence.10 It is immaterial what the parties call themselves. ates a franchise, every franchise contains a trademark license. While federal and state jurisdictions that regulate franchises share Knowledge of California’s franchise laws may not be enough.3 common definitional approaches, each jurisdiction has its own def- Given the interstate, national, and even international scope of so many initional subtleties and mix of exclusions and exemptions. What franchise networks today, California lawyers need to know about qualifies as a franchise under the federal franchise sales law may not potentially applicable federal, state, and foreign franchise laws.4 qualify under state law definitions, or vice versa. What is a franchise Sorting franchises from nonfranchise licenses can be a highly in one state may not be a franchise in all the regulating states in which uncertain process. The quality controls that trademark owners must the franchisor operates. retain over a licensee’s trademark use closely resemble the marketing Business owners and their advisers are not the only ones confused. controls that are characteristic of a franchise. Yet, from a regulatory Irreconcilable legal precedents reflect misperceptions among regula- viewpoint, nonfranchise and franchise licenses are as different as tors and the judiciary about the legal concept of a franchise. As a result, day and night. legislators, regulators, judges, and practitioners alike all suffer from Nonfranchise licenses are unregulated private consensual arrange- uncertainty about the exact kinds of commercial arrangements ments. Franchises, by contrast, are highly regulated. Franchise sell- intended to be regulated as franchises.11 ers must obey elaborate federal and state presale disclosure and reg- In advising companies that manufacture and distribute products istration laws; nonfranchise licensors do not. Many states restrict the or services or that license business methods, technology, or trademarks conditions under which a franchise may be terminated or not renewed. to independent operators, practitioners should, as a preliminary, Some states dictate substantive terms for the franchise relationship. consider the possibility of unwittingly creating a franchise. In so A franchisee cannot waive the statutory protections of franchise doing, they should consult the franchise statutes, judicial opinions, laws even if it wants to. A terminable-at-will contract clause cannot and administrative guides of each jurisdiction in which the parties be enforced in a jurisdiction that requires good cause to terminate a reside or intend to do business before their client offers an opportu- franchise agreement—even if the franchisee’s attorney actively nego- nity involving an express or implied trademark license or takes steps tiated the contract. to modify or end the relationship. Franchise law violations carry significant penalties even if the On the federal level, franchises are governed by the Federal Trade inadvertent franchisor never knew about the law or had no intent to Commission rule, which describes three general types of franchises: violate it. Not only is it a felony to sell a franchise without comply- package, product, and business opportunity franchises.12 The first two ing with franchise sales law,5 but federal and state franchise agencies are best known and involve the presence of the three basic elements. have broad powers to punish franchise law violators and may freeze The package franchisee adopts the franchisor’s business format and assets, order restitution, issue cease and desist orders, ban violators identifies its independent operation by the franchisor’s trademarks, from selling franchises, and recover substantial penalties. Franchisees in exchange for which the franchisee pays the franchisor a fee. The have private remedies for state franchise law violations.6 Besides franchisee’s operating methods are subject to significant control by compensatory damages and, in some states, attorney’s fees, an injured the franchisor or, alternatively, the franchisor renders significant franchisee may 1) rescind a franchise agreement for disclosure and assistance to the franchisee in day-to-day operations. Fast food, con- registration violations, including fraud in connection with a franchise venience stores, and real estate services are examples of package sale, 2) obtain an injunction to enjoin a wrongful termination or non- franchises. The product franchisee distributes goods identified by the renewal of a franchise, and/or 3) recover damages or restitution. franchisor’s brand manufactured by, or for, the franchisor. The fran- Furthermore, state franchise laws impose personal, joint and sev- chisee pays a fee for the distribution rights above the wholesale price eral liability on the franchisor’s management and owners even when of the goods. As with package franchises, the franchisor exercises sig- the franchisor is a legal entity.7 Finally, lawyers who overlook fran- nificant control over, or provides significant assistance to, the fran- chise laws may be guilty of malpractice and potentially liable to vic- chisee. Automobile and gasoline dealerships and delivery route dis- tims of their client’s wrongdoing.8 tributors are examples of product franchises. The third type, business opportunity ventures, encompasses read- What Is a Franchise? ily distinguishable lower-cost investments such as vending machine Most people think they know a franchise when they see one. In routes and work-at-home programs.13 truth, franchising is a method of distribution, not a particular indus- State law franchise definitions largely resemble the FTC rule’s pack- try. There is no uniform definition of a franchise. As consumer pro- age and product franchise definitions in that most also require the com- tection statutes, courts give franchise laws a sweeping scope. bination of the three basic elements.14 The trademark and fee elements Consequently, a broad variety of unsuspecting commercial arrange- are fundamentally the same as the FTC rule. However, states laws dif- ments may qualify as franchises. fer by requiring either 1) substantial assistance or control (the fed- At the most basic level, a franchise is defined by the coexistence eral standard), 2) a marketing plan prescribed in substantial part by of three elements: the franchisor, or 3) a community of interest. A few state laws define 1) A grant of rights to use another’s trademark to offer, sell, or dis- a franchise by a two-prong test that either omits the marketing plan tribute goods or services (the “grant” or “trademark” element). or the payment of a required fee.15 2) Significant assistance to, or control over, the grantee’s business, which may take the form of a prescribed marketing plan or what is The Trademark Element more broadly described as a “community of interest” (the “market- The grant of rights to associate with another’s trademarks in offer-
36 Los Angeles Lawyer December 2006 ing, selling, or distributing goods or services is not only a common absence of one of the other two definitional elements. element of every franchise definition but also the easiest definitional element to meet. Absent an express prohibition against use of the licen- The Marketing Plan Variation Element sor’s trademark, a right to use the mark will be inferred even if the A handful of states follow the FTC rule’s approach and require the mark is, in fact, never used.16 For this reason, every franchise involves licensor to furnish significant assistance or impose significant controls an express or implied trademark license of some sort. over the licensee’s entire method of operation. Significant assistance Franchise definitions vary from requiring a “license to use” the exists when the licensor provides formal sales, repair, or business train- licensor’s mark to requiring a “substantial association” between the ing programs; site location assistance; management, marketing, or per- grantee’s business and the licensor’s trademark. Under the “license to sonnel advice; promotional support requiring the licensee’s partici- use” approach, an express contract authorizing trademark use will pation or financial contribution; or operating advice such as by support a franchise relationship even if the mark is not part of the furnishing a detailed operating manual. Significant controls exist if licensee’s trade name—for example, Smith’s Appliances, an authorized Brand X Service Center. Permission to display a manufacturer’s logo in deal- ing with customers satisfies this ele- ment. Even without explicit contract authority, longstanding use of a licen- sor’s trademark in dealing with cus- tomers may be enough to establish a trademark license. Courts have found a requisite de facto trademark license in the fol- lowing situations: • A distributor sold uniquely config- ured branded goods which consumers readily associated with a particular manufacturer in an exclusive terri- tory.17 • A dealer was entitled to identify itself as an authorized dealer of the manufacturer’s products in Yellow Pages advertising.18 • A distribution agreement imposed a duty to use best efforts to promote the sale of branded products.19 the licensor approves or restricts the business location or sales terri- • A distributor was required to wear uniforms and add the licensor’s tory, specifies design or appearance requirements, prescribes operat- logo or name on delivery vehicles or store windows.20 ing hours, establishes production methods or standards, restricts the States following the “substantial association” approach, such as customers a licensee may serve, mandates personnel policies or prac- California, have also found the requisite trademark element satisfied tices, or dictates mandatory accounting practices. Under certain cir- when branded products or services account for a significant per- cumstances, any one of these factors may be enough to constitute sig- centage of the independent operator’s overall sales.21 In fact, California nificant control or assistance. Significant promises of assistance, even courts have shown a willingness to stretch the definitional elements if unfulfilled, will satisfy this element. However, merely providing point- to achieve desired results. In one California appellate decision, a of-sale advertising and media support may not be enough.23 substantial association with the licensor’s mark was found even The franchisee’s reliance on the franchisor’s experience influences though the licensee was forbidden to use the licensor’s brand name whether the licensor’s control or assistance is significant. The fran- and, in fact, never used it.22 The court was swayed by evidence chisee’s general business experience, knowledge of the industry, rel- showing that a building owner had relied on the brand name in ative financial risk in light of its total business holdings, and the extent renting space to the licensee to operate a cafeteria in the building, which to which the controls or assistance go beyond normal industry prac- satisfied the substantial association test. tices each bear on the reliance factor. The Licensor’s Dilemma.The fact that an agreement lacks an California and a number of other states define a franchise as a trade- express trademark license does not prove the trademark element is mark license in conjunction with a marketing plan. The marketing missing. As noted, a de facto license is part of the rights granted to plan element is composed of four distinct components, all of which an independent third party who is authorized to sell branded prod- must coexist: 1) a marketing plan, 2) prescribed, 3) in substantial part, ucts or services accounting for more than an insignificant percentage 4) by the licensor. Each component has been separately analyzed by of the third party’s overall sales. Since the trademark element’s pres- judicial and administrative authority.24 ence may depend on the extent of the licensee’s branded sales, con- Determining whether a marketing plan exists is inherently subjective tract drafting cannot save a license from being a franchise. A contract and, consequently, difficult to dodge in a written agreement. While that expressly denies a trademark license may leave the licensor, judged by the presence of various facts, no interpretative and judi- manufacturer, or supplier with the worst of both worlds: an agree- cial opinion suggests a minimum number or combination of facts that ment that is subject to various franchise laws, but does not contain inherently guarantee a marketing plan’s presence. The parties’ con- the protections that a well-drafted trademark license should contain. tract, course of dealing, and industry customs are all relevant. The Therefore, whether an arrangement lacking an express trademark term “prescribed” has been interpreted to mean something less than license is, indeed, a franchise will most likely turn on the presence or mandatory.25 Consequently, a marketing plan may be prescribed by
Los Angeles Lawyer December 2006 37 implication when it is outlined, suggested, recommended, or other- business and brand, it may risk abandoning its trademark rights. wise originated by the licensor, even when making use of the plan is not obligatory.26 The Required Fee Element Courts differ in the degree of franchisor involvement in a fran- The required fee element captures all sources of revenue paid by a fran- chisee’s daily business activities that are necessary to support a mar- chisee to a franchisor for the distribution rights or license. The element keting plan. Some require significant control, such as confining sales is deliberately expansive, encompassing lump sum, installment, fixed, to assigned territories, imposing sales quotas, establishing mandatory fluctuating, up-front, and periodic payments for goods or services, how- sales training, or supplying detailed instructions for customer selec- ever denominated, whether direct, indirect, hidden, or refundable.34 tion and solicitation. Other courts have found a marketing plan Under federal law, imputation of a franchise relationship can be based on far less—for example, a promoter’s recommendations, avoided by following the FTC rule, which requires a minimum pay- advice, or suggestions even when there is no obligation on the fran- ment of $500 or more before or during the first six months of oper- chisee’s part to observe them, such as suggesting resale prices and dis- ations.35 By deferring required payments exceeding $500 for at least counts, providing demonstration equipment or advertising materials, six months, a licensor will not be deemed a franchise under federal recommending or screening advertising materials, or providing prod- law even if the licensee signs a nonnegotiable, secured promissory note uct catalogs. (with no acceleration clause) promising to pay the money after six What courts identify as a “marketing plan prescribed in sub- months. While this exemption offers interesting structuring oppor- stantial part” may actually be basic to most distributorships.27 For tunities for franchises sold in states without franchise laws, it has no example, a marketing plan was found to exist when: counterpart in California or in any other state with franchise sales or • Dealers were required to advertise the manufacturer’s products inten- relationship laws. Deferral of fees, therefore, is not a universal solu- sively, conduct a variety of promotions, and carry the manufactur- tion for avoiding franchise status. er’s array of accessory sales devices.28 All jurisdictions exclude payments that do not exceed the bona fide • Distributors marketed products pursuant to a comprehensive wholesale price of inventory if there is no accompanying obligation advertising and promotional program developed by the supplier, to purchase excessive quantities. To qualify, the payment must be who reserved the right to screen and approve all promotional mate- entirely for goods for which there is a ready market.36 Most prod- rials used by distributors.29 uct distribution arrangements rely on the bona fide wholesale price • Distributors were required to perform warranty services in accor- exclusion to avoid structuring a distributorship or dealership program dance with the manufacturer’s warranty policy, send representatives as a franchise. In addition, only required payments count, not optional to sales meetings, complete the manufacturer’s factory service train- ones. Nevertheless, calling something optional is not necessarily con- ing program, maintain minimum inventory levels, hire an extra sales- trolling. Payments, though nominally optional, will be deemed man, and provide periodic sales reports to the manufacturer.30 required if they are essential for the successful operation of the busi- • A promoter promised to provide a marketing plan but failed to ness.37 Finally, to be classified as a required fee, the payment must be deliver on its promise.31 made to the licensor or its affiliate, or for its benefit, as the quid pro Administrative and judicial opinions try to forge a distinction quo for the licensing or distribution rights. For this reason, com- between production-type controls (which do not result in a market- missions paid by a licensor to a licensee are not franchise fees.38 ing plan) and marketing controls (which do), but the distinction There is some lingering confusion about whether ordinary busi- between the two has never been well articulated.32 A marketing plan ness expenses paid to third parties to establish or maintain a business can exist even when the controls or advice do not relate to advertis- qualify as a required fee. All jurisdictions that have considered the issue, ing or marketing matters, such as when a manufacturer provides except Indiana, have held that franchise fees are confined to payments detailed instructions and advice regarding operating techniques and to the franchisor (or an affiliate, or for the benefit of either) and exclude skill training that make independent businesses appear as if they are payments to third parties.39 Thus, while a franchise fee—direct or indi- centrally managed and follow uniform standards. rect—is generally a prerequisite for application of federal and state Several states follow the community of interest model, rather franchise sales laws, it is not a prerequisite for the application of sev- than the marketing plan or assistance/control approach, but differ in eral franchise relationship laws regulating termination, nonrenewal, how they define this element. However, all these states agree that a and other substantive conditions of the parties’ relationship.40 community of interest exists when parties derive fees from a common The Licensor’s Dilemma. For the trademark licensor trying to source—a standard that potentially encompasses every distributor- avoid a de facto franchise agreement, the fee element is the easiest of ship and license.33 the three definitional prongs to avoid. A manufacturer or supplier of The Licensor’s Dilemma. Because the trademark element of a fran- branded goods that limits its compensation from a distributorship or chise is so easily established, trademark licensors may be tempted to dealership to the difference (markup) between its cost of goods and avoid the imputation of a franchise by eliminating the second defin- the bona fide wholesale price at which it sells the goods to its dis- itional element—some form of assistance to or control over the tributors or dealers can lawfully avoid the franchise laws in all juris- licensee’s business. This creates a dilemma because the federal Lanham dictions that use a three-prong definition. This is true regardless of Act imposes an affirmative duty on licensors to control the quality how closely the licensor, manufacturer, or supplier controls the dis- and uniformity of goods and services associated with their federally tribution process or how much the supplier’s markup is.41 registered trademarks. Failure to do so may result in abandonment Often a trademark owner is in a position to collect a premium from of trademark rights. those who want to affiliate with its brand. A manufacturer or sup- As a practical matter, it is often impossible to distinguish trade- plier may impose innocuous payments for noninventory materials or mark quality controls from the factors identifying substantial control, support services, like sales manuals, demonstration kits, point-of-sale a marketing plan, or a community of interest. It may also be inad- materials, or bookkeeping services, not suspecting that these payments visable to try to avoid the reach of franchise laws by eliminating or may be enough to constitute a franchise fee. modifying contractual provisions designed to protect product or ser- Some branded affiliations do not involve the purchase of inven- vice quality or set operating standards that identify the licensee with tory, like service businesses and technology alliances. In these rela- a larger branded network. A licensor that eliminates or reduces qual- tionships, the bona fide wholesale price exception is not available, and ity controls may not only sacrifice important core values vital to the all payments that flow from the licensee to the licensor are potentially
38 Los Angeles Lawyer December 2006 franchise fees. opinion to a client that an arrangement does not contain at least some Frequently, licensors, manufacturers, and suppliers do not awake indicia of a franchise. The key is knowing how many factors are to the reality of the franchise relationship until years after it is formed enough to tip the scale. when they seek to end the relationship pursuant to an at-will termi- Counsel should never rely on contract terminology or disclaimers, nation provision in their contract. If there is no breach of contract neither of which will defeat deemed franchise status. But contract by the licensee, the licensor cannot end the relationship absent good drafters are not without tools. When a license or distribution contract cause. Because franchise laws cannot be waived, once a fee is paid any- is deliberately structured to avoid a franchise definitional element or time during the parties’ affiliation, a licensor may be foreclosed from takes advantage of a statutory exemption or exclusion, the drafter reverting to nonfranchise status even if the licensor offers to refund should express these facts in the contract. While self-serving and cer- the unintended franchise fee.42 Efforts to have the licensee waive the tainly not bulletproof, the plain language will certainly aid, and pos- franchise laws are unhelpful. Thus, the trademark licensor’s dilemma sibly influence, the fact-finder’s analysis of the franchise claim. is that, in order to escape franchise regulation, licensors may be Structural solutions may save some commercial relationships required to leave dollars on the table. from the reach of franchise laws, but often they come at the price of Every U.S. jurisdiction regulating franchises has its own mix of def- sacrificing essential marketing concepts, economic objectives, or initional exclusions and exemptions, offering a complicated and competitive opportunities. The regulatory burdens of being deemed often confusing maze of structuring opportunities and limitations for a franchisor should be kept in perspective. Numerous franchisors com- companies considering regional or national expansion. Some exclu- ply with federal and state franchise laws every day and sustain and sions and exemptions are common to most, or all, jurisdictions. For grow successful and viable businesses. They compete in the market- example, transfers by franchisees are not regulated by federal or place while complying with presale disclosure and annual registra- state franchise sales laws if the licensor’s involvement in the transfer tion duties, close franchise sales while honoring rules restricting is confined to approving the buyer’s qualifications. Other exclusions promises about future earnings and obeying disclosure document deliv- and exemptions are unique to a particular jurisdiction, reflecting ery rules, and manage franchise relationships while respecting state special local lobbying efforts.43 laws requiring good cause for termination or nonrenewal. Accordingly, individual statutes must always be checked. For In the long run, the costs associated with franchise avoidance, be example, California law, the FTC rule, and a few other states exclude they added business risks or extra legal expenses, may be more pain- or exempt arrangements, referred to as fractional franchises, in which ful than franchise law compliance. Companies are short-sighted if their less than 20 percent of the licensee’s revenue is derived from sales of overwhelming desire to avoid legal regulation as a franchise drives the licensed brand.44 their business decisions about their overall strategic objectives. ■
Accidental Franchises 1 Gentis v. Safeguard Bus. Sys., 60 Cal. App. 4th 1294 (1998). Because branding is an increasingly important factor in consumer pur- 2 Gabana Gulf Distribution, Ltd. v. Gap Int’l Sales, Inc., 2006 U.S. Dist. LEXIS 59799 chasing decisions, accidental franchises occur more frequently today (N.D. Cal. 2006). The court held that the complaint adequately pleaded the exis- tence of a franchise. While the early stage ruling on the pleadings did not reach the than when franchise laws were first enacted in the 1970s. Accidental merits, it illustrates the nuisance cost of the accidental franchise dragnet. franchises occur because franchise laws poorly articulate the dis- 3 California has two general franchise laws: the California Franchise Investment Act, tinction between nonfranchise licenses and franchises. CORP. CODE §§31000-31506, and the California Franchise Relations Act, BUS. & Every branded distribution arrangement involves an implied, if not PROF. CODE §§20000-20043. Enacted in 1970, the California Franchise Investment an express, trademark license. Strategic affiliations between brand own- Act was the first law of its kind to require franchisors to make presale disclosures ers, with each owner giving the other the right to affiliate publicly with and register with a state agency before offering or selling franchises in the state. While other jurisdictions later modeled their franchise sales laws after California’s, little the other’s brand, are, at a minimum, de facto licenses. With few excep- regulatory uniformity exists. California enacted the California Franchise Relations tions, the brand owner’s equity stake in a joint venture will not save Act in 1980, requiring franchisors to have good cause to terminate, not renew, or the joint enterprise (a distinct legal entity) from being classified as a cancel a franchise. franchisee. 4 Franchise sales in the U.S. are subject to dual regulation at the federal and state Each time a license, distributorship, strategic trademark alliance, or level depending on where the parties reside or intend to do business. The federal fran- chise sales law, formally titled Disclosure Requirements and Prohibitions Concerning other type of branded joint venture or marketing affiliation is formed, Franchising and Business Opportunity Ventures, 16 C.F.R. §§436.1-3 (1978) [here- the cornerstone of a franchise potentially is laid. Given the prevalence inafter FTC Rule], regulates franchise sales in all 50 states, including wholly of technology-related licenses and cobranding programs today, that cor- intrastate transactions, and requires presale disclosure, but not registration with a nerstone may be laid more often than brand owners realize. federal agency. California, Hawaii, Illinois, Indiana, Maryland, Michigan, Minnesota, Courts have shown no sympathy for trademark owners that New York, North Dakota, Rhode Island, South Dakota, Virginia, Washington, and Wisconsin have franchise sales laws coupled with some obligation on franchisors defend franchise claims by pleading ignorance of the law or no intent to register the franchise offer with a state agency. Oregon’s franchise sales law does 45 to create a franchise. Modeled after U.S. security laws, franchise not require registration with a state agency but does mandate disclosure and cer- statutes impose strict liability, thereby making a defendant’s intent or tain record-keeping duties. The FTC Rule supplements state franchise sales laws but knowledge of the law irrelevant.46 Franchise laws also have their roots does not preempt them. Roughly half the states also have franchise relationships laws in consumer protection legislation, and, as a consequence, are con- comparable, but not identical, to California’s. 5 CORP. CODE §31410 (“Any person who willfully violates any provision of this strued liberally. law…shall upon conviction be fined not more than one hundred thousand dollars Given the serious consequences flowing from an accidental fran- ($100,000) or imprisoned in the state prison, or in a county jail for not more than chise, lawyers should suspect a franchise whenever an express or de one year or be punished by both.…). facto trademark license presents itself. Strategic branding alliances, 6 There is no private right of action for FTC rule violations, which only the FTC may joint ventures, and technology licenses should be viewed suspiciously enforce. 7 as hidden franchises and closely inspected to see if money is being paid, Spahn v. Guild Indus. Corp., 94 Cal. App. 3d 143 (1979). 8 See Courtney v. Waring, 191 Cal. App. 3d 1434 (1987). directly or indirectly, by one party for the right to associate with the 9 The FTC rule excludes purely oral agreements from its franchise definition, but other’s trademarks. most state franchise definitions apply to oral and written contracts. Certain aspects of the franchise definition, like the marketing 10 People v. Kline, 110 Cal. App. 3d 587 (1980) (partnership agreement held to be plan, community of interest, and substantial assistance and control franchise). 11 elements, are so inherently imprecise that it is difficult to render an Stephen C. Root, The Meaning of “Franchise” under the California Franchise
Los Angeles Lawyer December 2006 39 Investment Law: A Definition in Search of a Concept, 30 MCGEORGE L. REV. 1163, 1188 (1999). Seeking an Experienced 12 Federal Trade Commission, Interpretive Guides to Franchising and Business Opportunity Ventures Trade Arbitrator/Mediator? Regulation Rule, 44 Fed. Reg. 49,966 at 49,968. 13 California regulates “seller assisted marketing plans,” arrangements comparable to business opportunities, under the Contracts for Seller Assisted Marketing STEVEN R. Plans, which has its own disclosure and registration requirements. CIV. CODE §§1812.201-1812.221. SAUER, ESQ. 14 California’s franchise definition is a fairly typical three-prong definition, although it is somewhat broader in scope than other three-prong definitions in that it expresses the right to offer, sell, or distribute goods or COUNSELOR AT LAW • SINCE 1974 services, in the disjunctive. Gentis v. Safegaurd Bus. Sys., 60 Cal. App. 4th 1294, 1300 n.1 (“By using the word ‘or,’ the Legislature intentionally broadened the scope “He is truly a master of the statute.”). in his art.” 15 Arkansas, Connecticut, Delaware, Missouri, Nebraska, New Jersey, Wisconsin, Puerto Rico, and the U.S. Virgin Islands have franchise relationship laws that 6,000 define a franchise without reference to payment of a Settled over 5,000 Federal & required fee. 16 The California Department of Corporations, which State Litigated Cases oversees the California Franchise Investment Law, elaborates on California’s franchise definition in often- cited Release 3-F, When Does an Agreement Constitute a “Franchise”? (rev. June 22, 1994), available at http: 323.933.6833 TELEPHONE //www.corp.ca.gov/commiss/rel3f.htm [hereinafter Release 3-F]. Regarding the trademark grant, it says: E-MAIL [email protected] “Therefore, if a franchisee is granted the right to use the franchisor’s symbol, that part of the franchise def- 4929 WILSHIRE BOULEVARD, SUITE 740 inition is satisfied even if the franchisee is not obligated LOS ANGELES, CALIFORNIA 90010 to display the symbol.” Other jurisdictions have cited Release 3-F to interpret their own statutes. 17 Lobdell v. Sugar ‘N Spice, 658 P. 2d 1267 (Wash. App. 1983). 18 American Bus. Interiors, Inc. v. Haworth, Inc., 798 F. 2d 1135 (8th Cir. 1986). 19 Cassidy Podell Lynch, Inc. v. Synder Gen. Corp., 944 F. 2d at 1139 (3d Cir. 1991). 20 Cooper Distrib. Co., Inc. v. Amana Refrigeration, Inc., 63 F. 3d 262, 272-73 (3d Cir. 1995). 21 There is no universally recognized minimum per- centage of branded product sales that qualifies as a “substantial association” with a supplier’s trademark. JACK TRIMARCO & ASSOCIATES The FTC rule, California, and a number of other states have their own version of an exemption for “fractional franchises,” defined generally as multiline distributor- POLYGRAPH/INVESTIGATIONS, INC. ships in which sales of any one brand make up less than 20% of the distributor’s total sales. States lacking this exemption do not construe “substantial association” uni- formly or necessarily view 20% as a minimal threshold. 22 Kim v. Servosnax, Inc., 10 Cal. App. 4th 1346 (1992). 9454 Wilshire Blvd. 23 Release 3-F, supra note 16. 24 Release 3-F, supra note 16, provides a comprehen- Sixth Floor sive explanation of the individual components of the marketing plan element and identifies numerous factors Beverly Hills, CA 90212 indicating a marketing plan. 25 Release 3-F, supra note 16. (310) 247-2637 TEL 26 Id. 27 Steven D. Wiener, Gentis v. Safeguard Business (310) 306-2720 FAX Systems, Inc., Liberal Construction of Remedial Statutes: What Is a Franchise?, 17(4) FRANCHISE L.J. 115 (1998). Jack Trimarco - President 28 Boat & Motor Mart v. Sea Ray Boats, Inc., 825 F. Former Polygraph Unit Chief 2d 1285 (9th Cir. 1987). Los Angeles F.B.I. (1990-1998) email: [email protected] 29 Meadow Fresh Farms, Inc. v. Sandstrom, 333 N.W. CA. P.I. #20970 www.jacktrimarco.com 2d 780 (N.D. 1983). 30 Carlos v. Philips Bus. Sys., Inc., 556 F. Supp. 769 (E.D. N.Y. 1983), aff’d in part and rev’d in part, 744 Member Society of Former Special Agents Former Polygraph Inspection Team Leader F. 2d 287 (2d Cir. 1984). Federal Bureau of Investigation Office of Counter Intelligence 31 U.S. Department of Energy People v. Kline, 110 Cal. App. 3d 587. 32 Whether know-how controls, such as those common to patent licenses, are enough to turn a nonfranchise license into a franchise may depend on whether the
40 Los Angeles Lawyer December 2006 know-how affects just an aspect of the licensee’s oper- ations (e.g., production) or are more pervasive. 33 See, e.g, Instructional Sys., Inc. v. Computer Curriculum Corp., 826 F. Supp. 831 (D. N.J. 1993). 34 FTC Rule, §436.2(a)(2); Release 3-F, supra note 16. 35 FTC Rule, §436.2(a)(3)(iii). 36 Boat & Motor Mart v. Sea Ray Boats, Inc., 825 F. 2d 1285 (9th Cir. 1987). 37 Release 3-F, supra note 16. 38 Thueson v. U-Haul International, Inc., 2006 Cal. App. LEXIS 1736 *12 (2006). The California Court of Appeal, finding no published California authority directly explaining what constitutes a “franchise fee” seized the chance to explain California law on the subject even though the discussion is unnecessary to the holding. The California court, following Wright-Moore Corp. v. Ricoh Corp., 908 F. 2d 128 (7th Cir. 1990) (Indiana law), explained that a “franchise fee” requires a “firm-specific investment in the franchisor,” in con- trast to payments for ordinary business expenses, although it shed no light on when a payment to a li- censor is, and is not, a firm-specific investment. The U- Haul facts, however, showed that the dealer had made RODNEY R. HATTER & ASSOCIATES no payments at all to U-Haul. Rather, U-Haul had deducted from the dealer’s rental commissions expenses for the dealer’s use of a local telephone line, directory listing, and local computer terminal. The U-Haul deci- Franchise Specialists for more than 30 years sion, that commission deductions are not franchise fees, is in line with previous interpretations of California Assists both Franchisors and Franchisees law. See Adees Corp. v. Avis Rent a Car Sys., 157 Fed. Appx. 2 (9th Cir. 2005). Affordable • Experienced • Trained and well-educated 39 See, e.g., Wright-Moore Corp. v. Ricoh Corp., 908 F. 2d 128 (7th Cir. 1990). 40 See supra, note 14. www.californiafranchiseattorney.com 41 Sports Racing Servs. v. Sports Car Club of Am., e-mail [email protected] phone (714) 384-6540 fax (949) 494-3448 131 F. 3d 874, 891 (10th Cir. 1997) (Indiana law). 42 The California Commissioner of Corporations inter- prets a franchise fee to include payments for the right to enter a business that are made during the course of the business, not just at inception. In To-Am Equipment Co. v. Mitsubishi Caterpillar Forklift America, Inc., 152 F. 3d 658, 659-60 (7th Cir. 1998), the Seventh Circuit found that a tractor dealership, which was not a fran- chise at the inception of the parties’ relationship, became one when the dealer’s incremental payments for sales manuals over the course of eight years exceeded $500, Illinois’s statutory threshold. Nothing in California’s statute suggests that an outcome like To-Am could not happen in California, which defines a franchise similarly to Illinois. If any required payment to a supplier over California’s minimum ($100 per year for fees and $1,000 per year for fixtures, equipment, or other tangible prop- erty) is enough to create a franchise in California, then a distribution or licensing program that is not a franchise at inception for lack of a required payment could become a franchise once required payments exceed the minimum in any year. The idea that a nonfranchise agreement could turn into a franchise sometime after the parties execute a contract adds an entirely new level of uncertainty to the status of licensing and distribution arrangements. For additional discussion, generally, on what is a franchise fee, see “point/counterpoint” articles by Jonathan Solish, Unrecoverable Investments Are Critical, 26 FRANCHISE L.J. 1 (2006) and Bruce Napell, State Relationship Laws Are Not Uniform, 26 FRANCHISE L.J. 1 (2006). 43 For example, only Minnesota exempts burglar alarm franchises and arrangements between local and national airlines carriers. 44 CORP. CODE §31108. 45 To-Am, 152 F. 3d at 659-60. The Seventh Circuit admonished inadvertent franchisors everywhere: “Legal terms often have specialized meanings that can surprise even a sophisticated party. The term ‘franchise,’ or its derivative ‘franchisee,’ is one of those words.” 46 Keating v. Superior Court, 31 Cal. 3d 584, 597 (1982).
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HOTELS/MEETINGS/CATERING
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Computer Counselor BY DAVID FISHEL AND CAROLE LEVITT
New Tools in the Discovery of Sound Recordings
RECENT CHANGES to the Federal Rules of Civil Procedure are poised Amendments to the FRCP (and similar provisions in state courts) to move the discovery and analysis of sound recordings out of the realm will soon affect discovery requirements and practices regarding sound of high-profile government investigations and into the everyday recordings. The new rules make it clear that judges and lawyers world of normal litigation. While only a few attorneys currently must understand and manage electronic discovery from the beginning have experience with discovery of small amounts of recordings from of a case. Parties need to decide whether and how to ask for sound voice mail, fewer still have engaged in discovery of hundreds or recordings. In addition, parties should have a reasonable under- thousands of hours of voice mail or call center recordings. The pro- standing of recording and storage systems, put appropriate controls liferation of audio recordings created in the course of business will in place, formulate credible plans for how they will review and pro- make the availability of this kind of evidence more common. Along duce responsive recordings, and decide on the forms in which the with the new rules are new tools that make discovery and analysis recordings will be produced. of this evidence more manageable. On the surface, the challenges presented by hundreds of hours of audio recordings are similar to those presented by any other large Phonetic audio search technology is based on breaking down audio body of potentially relevant materials. Requesting parties must skillfully frame their requests. Responding parties will recordings by analyzing the smallest components of human speech. attempt to limit the scope of requests and to manage the production process as best they can. The tasks are similar to any e-discovery endeavor. Parties are faced The newly revised Rule 34(a) specifically identifies “sound record- with locating, extracting, searching, reviewing, culling, and produc- ings” as “electronically stored information” (ESI). This new term clar- ing responsive recordings, and doing so accurately, cost-effectively, ifies and expands the “documents and data compilations” included and under short deadlines. The primary pitfalls stem from the com- in the earlier version of the rule. The new rule also allows the request- plexity of recording technologies and the sheer size of recorded audio ing party to specify the form in which it wants the information pro- collections, combined with the difficulty of searching them. duced. The stated aim of this provision is production of ESI in a “rea- Audio recordings have long been discoverable and admissible as sonably usable” form. Audio recordings are captured in a wide evidence and have often provided compelling proof in court, but most variety of formats, many of which are proprietary to specific record- lawyers have not yet conducted audio discovery on the massive scale ing systems, so the question of whether a sound recording is reasonably now common for electronic and paper documents. That is about to usable can be expected to arise regularly. The cost and time required change. Recordings can be very good evidence. They provide a per- to convert a large collection of recordings from a proprietary format son’s words in his or her voice. In many cases this might include a tone to a more “usable” one can be significant. It behooves attorneys to of voice, verbal inflection, or snicker that conveys far more information learn about the various audio formats and seek early expert help in than a written transcript ever could. Recordings can contain “smok- making decisions about production issues so that they can be fully ing gun” statements and are very effective when used in conjunction prepared to defend their preferred form of production. with documentary evidence or witness testimony. With the right analytical tools, audio can be used to quantify evidence of specific Amended FRCP Deadline behaviors, such as the number of times a company engaged in a spe- Attorneys are required to do this very quickly. Amended FRCP 16(b) cific prohibited activity. requires parties to hold a scheduling conference to consider electronic Three factors are rapidly transforming discovery of audio evidence: discovery plans within 120 days of the commencement of an action. • Recent amendments to the Federal Rules of Civil Procedure (FRCP) Furthermore, at least 21 days before this scheduling conference, par- expressly identify “sound recordings” as “electronically stored infor- ties must meet to discuss and, if possible agree upon, electronic dis- mation” and impose new requirements for disclosure, case manage- covery procedures for the case. ment, planning, and form of production of all electronically stored Rule 26(f) specifically requires the parties to address “any issues information. relating to disclosure or discovery of electronically stored informa- • The quantity of sound recordings is increasing because of technology tion, including the form or forms in which it should be produced.” advances such as digital storage, regular office and cellular phone voice In relation to audio recordings, this means that parties must be mail, VoIP telephony, and unified messaging systems that deliver knowledgeable about the relevant recording and storage systems, audio voice mail as e-mail. • New tools are making it feasible to find, extract, convert, search, David Fishel is a litigator and senior director and technology counsel for and produce audio recordings. Nexidia. Carole Levitt is president of Internet For Lawyers.
46 Los Angeles Lawyer December 2006 formats, and other production issues, and discovery could now include voice mail must formulate their electronic discovery attachments. KENT GIBSON plans within the first 100 days of the life of In the past, voice mail recordings were a case. Following the Rule 16 scheduling generally kept in a central location, with FORENSICAUDIO.ORG conference, the court may issue a scheduling strict limits on the number of messages each “Justice may be blind, but she isn’t deaf.” order that sets forth how electronic discovery user could save and how long a message Kent Gibson, forensic audio specialist, will proceed. By the time of that order, par- could be stored. A single person’s mailbox was (Emmy and Grammy Award winner) ties should make certain that the court is easy to identify and could only contain a few - audio enhancement, restoration, fully informed of any issues regarding ESI, minutes of recordings. As businesses switch expert witness, audio/video evidence - including audio evidence. to unified messaging, the same problems that Featuring the new Cedar Cambridge have vexed e-mail discovery—duplicates, the Forensic System Discovering Audio propensity of users to retain e-mail, and mail- Los Angeles New digital recording technologies have box archives that are not under the direct con- 323-851-9900 rapidly increased the ability to record speech trol of system administrators—will arise for Kent @ForensicAudio.org and to store vast amounts of those recordings. voice mail. Voice mail was previously sought More recordings are being made, and since in hope that a particular message may have the new technologies are digital (that is, cre- been saved, but now a company’s entire voice ated and stored on computerized systems mail system may be considered to contain M. NAIR, M.D. rather than analog tape), the growth is potentially relevant information. For exam- Board Certified: enabled by the same factors that brought ple, an employment suit may seek evidence of – Psychiatry about the recent explosion of electronic mes- a pattern of behavior or practice in a com- – Child Psychiatry saging and documents. pany’s voice mail archive. – Forensic Psychiatry “Sound recordings” means voice mail to – Psychopharmacology many attorneys, but voice mail is not the Tools to Meet the Challenge – Addiction Medicine only variety of audio evidence. Collections of With the advent of e-discovery of large – Harvard and UC Trained recordings may include audio archives from amounts of audio comes the need to fully Consultations • IME • Deposition • Record Review corporate call logging systems, Web confer- process them as discovery materials, and that Second Opinion • Trial Testimony • Civil Litigation ences, or IP-based conference calls. Businesses includes finding responsive recordings. It is not that routinely record conversations with cus- uncommon for a litigant’s IT and legal staff 562.493.2218 ■ psychiatryforensic.com State Bar Approved MCLE provider tomers and business partners may have huge to have a good grasp on the location of audio stores of potentially discoverable recordings. evidence but to have no idea of the content 433 N. Camden Dr., Suite 600, Beverly Hills, CA 90210 These business recordings are subject to the of the recordings. At present, there are three same requirements for retention, preservation, primary ways of reviewing and searching litigation holds, and production as any other recordings: listening, manual transcription, potentially relevant information. and phonetic search. (A fourth option, speech- EMPLOYMENT Digital recording technology spawns new to-text transcription by computer software, TRIAL ATTORNEYS opportunities and challenges for requesting is widely regarded in the legal field as currently and producing parties. Corporate call centers not sufficiently accurate to produce reliably We specialize in handling Employment & Labor Law Cases from attorney referrals in Los Angeles, Ventura, Santa routinely record conversations between busi- searchable transcripts.) Listening and manual Barbara, San Bernardino, Riverside and Orange County. nesses and their customers for quality assur- transcription are the two most used at present ance. If the issues in a case include, for and can be effective for small collections of A Full Service Employment Law Firm with extensive experience in the following specialties: instance, the number and type of complaints recordings. However, both are very expensive, • Wrongful Termination about a certain product, when a company had slow, and cannot scale up to economically • Age Discrimination notice of alleged problems with a product, or handle the several hundred hours of record- • Race Discrimination how a company treated its customers, that ings that a larger matter might produce. Even • Disability Discrimination information may be found in the thousands for small audio collections, the cost of tran- • Pregnancy Discrimination (or millions) of calls the company received and scribing or listening to recordings can quickly • Sex Discrimination recorded. Many businesses also record trans- become prohibitive. • Sexual Harassment • Violation of Whistling Blowing Laws actional conversations, such as trading or Listening suffers from a number of limi- • Employment Manual Preparation sales calls. This type of recording has proven tations, the greatest of which is the inability • Family Leave Act critical in cases involving energy companies to search the audio content. Having once lis- • Medical Leave Act and commodities traders and is common in tened to recordings, if a new search is needed, • Labor Law Violations financial service businesses. the recordings must be listened to again in • Severance Package Agreements Voice mail itself is changing. Initially, their entirety. Listening costs vary widely. You will be paid a referral fee within the voice mail technology moved slowly from Paralegals or contract attorneys are often Guidelines of the California State Bar the era of the cassette tape answering machine used for the initial review, but attorneys gen- to the PBX. Now, businesses are rapidly mov- erally listen to the potentially relevant record- ing to unified messaging systems in which ings in order to make legal determinations Toll Free 310.826.6300 all messages—voice, e-mail, or instant text— about them. In addition to prohibitive cost www.employmentattorneyservices.com are delivered to the user’s computer desktop and lack of searchability, effective listening and stored along with other message traffic takes much longer than the duration of the EMPLOYMENT TRIAL ATTORNEYS on mail servers. In this environment, voice recordings themselves. Also, attentive listen- Representing Both mail is converted into .wav format attach- ing is difficult to sustain for any long period Employees and Employers ments to e-mail messages. Some routine e-mail of time, and it is difficult to get directly back
Los Angeles Lawyer December 2006 47 to relevant bits of conversation even after they have been located. Manual transcription is similarly slow and expensive. On average, a law firm can expect to spend about $120 per hour of audio recording to produce a usable transcript of audio content. Economical transcription ser- vices can also take a long time, a problem that increases as the size of an audio collection grows. It may require transcribing more than 100 to 200 hours of recordings just to locate a few seconds of audio evidence. (949) 388-0524 Phonetic audio search technology is based on breaking down audio recordings by ana- lyzing the smallest components of human speech, known as phonemes. (There are roughly 40 phonemes used in spoken North American English.) Since 2000, Nexidia (www.nexidia.com) has applied phonetic search technology in the government intelli- gence and commercial call center arenas. More recently, the company began applying the technology to the e-discovery and cor- porate compliance market. The high-speed phonetic audio search approach has two phases: preprocessing and searching. The first phase preprocesses the sound recordings to break the words into their component phonemes. This step pro- duces a phonetic search track and on one processor occurs roughly 60 times faster than real time. Thus, one hour of audio recording can be rendered searchable in about one minute. This means that it is feasible to han- dle collections of thousands of hours of recordings for discovery. Reviewers can run searches against the phonetic index for words and phrases. Search results are linked directly to the point in the original recording where the search term was found, allowing review- ers to jump directly to the point in the record- ing containing potentially relevant terms. This greatly increases the speed at which reviewers can pinpoint their listening to poten- tially relevant passages of the audio. The phonetic approach can be up to 98 percent accurate on recordings with the best quality. Accuracy can be as low as 70 percent when speakers have regional accents or the recording is of poor quality, contains blended words, proper names, slang, code words, or ad hoc usage. Accuracy of other speech recog- nition methods, such as speech-to-text, can drop as low as 50 percent. More lawyers are going to conduct dis- covery of sound recordings. Those who are going to be successful need to understand the technical aspects of audio recording sys- tems, master the rules that govern discovery of audio materials, and use effective tools to find and organize the information. Whether they are requesting or producing sound recordings, attorneys who develop those skills can act with confidence. ■
48 Los Angeles Lawyer December 2006 Classifieds
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Los Angeles Lawyer December 2006 49 Index to Advertisers
Aon Direct Administrators/LACBA Professional Liability, p. 1, Lawyers’ Mutual Insurance Co., p. 7 Tel. 800-634-9177 www.attorneys-advantage.com Tel. 800-252-2045 www.lawyersmutual.com
Lee Jay Berman, p. 4 Lexis Publishing, Inside Front Cover, p. 9 Tel. 213-383-0438 www.leejayberman.com www.lexis.com
Boserup Mediation, p. 17 M. Nair, M.D. and Associates, p. 32 Tel. 310-552-1020 www.Boserup.com Tel. 562-493-2218 www.psychiatryforensic.com
Coldwell Banker p. 33 Arthur Mazirow, p. 33 Tel. 310-442-1398 www.mickeykessler.com Tel. 310-255-6114 e-mail: [email protected]
Commerce Escrow Company, p. 26 MCLE4LAWYERS.COM, p. 33 Tel. 213-484-0855 www.comescrow.com Tel. 310-552-4907 www.MCLEforlawyers.com
Law Office of Robert D. Coviello, p.19 Mesriani Law Group p. 16, 32, 47 Tel. 310-277-7709 www.coviello-law.com Tel. 310-826-6300 e-mail:[email protected]
Creative Dispute Resolution, p. 18 Metrocities Mortgage Inc., p. 8 Tel. 877-CDR4ADR (877-4237) www.adr-fritz.com Tel. 800-464-2484 www.metrociti.com
Greg David Derin, p. 4 Noriega Clinics, p. 49 Tel. 310-552-1062 www.derin.com Tel. 323-728-8268
Dale A. Eleniak, p. 18 Pedersen Law & Dispute Resolution, p.18 Tel. 310-374-4662 Tel. 949-260-1181 www.pedersenlaw.com
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Steven L. Gleitman, Esq., p. 4 Sanli Pastore & Hill, Inc., p. 6 Tel. 310-553-5080 Tel. 310-571-3400 www.sphvalue.com
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Kent Gibson Forensic Audio, p. 47 UngerLaw, P.C., p. 14 Tel. 323-851-9900 www.forensicaudio.org Tel. 310-772-7700 www.ungerlaw.com
Jeffrey Kichaven, p. 19 Verizon Wireless, p. 2 Tel. 213-996-8465 www.jeffkichaven.com Tel. 866-899-2862 www.verizonwireless.com
Laguna Beach Visitor & Conference Bureau, p. 5 Vision Sciences Research Corporation, p. 40 www.lagunabeachinfo.com Tel. 925-837-2083 www.contrastsensitivity.net
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La Quinta Resort & Club, p. 42 Witkin & Eisinger, LLC, p. 32 Tel. 760-564-4111 www.laquintaresort.com Tel. 310-670-1500
50 Los Angeles Lawyer December 2006 CLE Preview
Ethics 2006 COMPUTER HARDWARE ON SATURDAY, DECEMBER 9, the Los Angeles County Bar Association and the AND SOFTWARE Professional Responsibility and Ethics Committee will present a program on FOR ATTORNEYS legal ethics developments of 2006. Speakers Diane Karpman, David Parker, ON THURSDAY, JANUARY 11, the Los John W. Amberg, Stanley W. Lamport, Judge Michael D. Marcus, Joel A. Angeles County Bar Association will Osman, Ellen A. Pansky, Jon L. Rewinski, and Harry B. Sondheim will discuss host a lecture by Russell Jackman the proposed amendments to the Rules of Professional Conduct, a year-end explaining the process of purchasing review of ethics highlights, the ethics of electronic discovery (including and maintaining computer systems for metadata), and limits on a lawyer’s right of self-defense. The program will the law office. This course will teach take place at the LACBA Conference Center, 281 South Figueroa Street, Downtown. Reduced parking is available with validation for $9. On-site what the parts that make up computers registration and the meal will begin at 8:30 A.M., with the program are, why attorneys need to know about continuing from 9 A.M. to 1:30 P.M. The registration code number is 009379. them, what to do if the computer isn’t The prices below include the meal. working, and where to find out more. $75—CLE+PLUS members The program will take place at the $100—LACBA members LACBA Conference Center, 281 South $120—all others Figueroa Street, Downtown. Reduced 4 CLE ethics hours parking is available with validation for Complex Courts Seminar $9. On-site registration and the meal ON SATURDAY, DECEMBER 9, the Litigation Section will host an in-depth study of will begin at 4:30 P.M., with the the complex courts of California. Judge Victoria Chaney, Judge Emile H. Elias, Joe program continuing from 5 to 8:45 P.M. Helfrich, Warren Hernand, Paul R. Kiesel, Judge Carolyn B. Kuhl, Judge Peter D. The registration code number is Lichtman, Judge Anthony J. Mohr, Judge Wendell R. Mortimer Jr., Wayne G. Nitti, 009380. The prices below include the James R. Robie, Ricardo A. Torres, and Carl J. West will address technology in the meal. complex court; complex case designation after January 1, 2007; JCCP $65—CLE+PLUS members applications; checklists; and use of protective orders/sealing of documents. The $100—LACBA members seminar will take place at the Southwestern University School of Law, 675 South $125—all others Westmoreland Avenue, Los Angeles. On-site registration will begin at 8 A.M., 3.5 CLE hours with the program continuing (with a lunch break) from 9 A.M. to 4 P.M. The registration code number is 009554. The prices below include the meal. $75—CLE+PLUS members $150—Litigation Section members $175—LACBA members $200—all others, including at-the-door registrants 6 CLE hours
The Los Angeles County Bar Association is a State Bar of California MCLE approved provider. To register for the programs listed on this page, please call the Member Service Department at (213) 896-6560 or visit the Association Web site at http://calendar.lacba.org/. For a full listing of this month’s Association programs, please consult the County Bar Update.
Los Angeles Lawyer December 2006 51 Closing Argument BY JON D. MEER AND ERIC S. BEANE
To Settle or Not to Settle?
AT SOME POINT, ALMOST EVERY COMPANY doing business in a business that prevails in a claim under the CDPA.7 California will face a meritless lawsuit for alleged “disability An award of attorney’s fees can be a significant deterrent to discrimination.” Increasingly, this occurs when a claim is brought future lawsuits. Courts have granted large attorney’s fee awards to for “accessibility discrimination” under the Americans with Disa- businesses even when the business could have settled the case for bilities Act (ADA)1 and the California Disabled Persons Act an amount much less than the fees incurred. For example, in the (CDPA).2 In these cases, a person with a disability claims that he recent case of Jones v. Wild Oats Markets, Inc.,8 the plaintiff or she was “discriminated against on the basis of disability in the alleged that she had encountered 43 ADA and CDPA violations full and equal enjoyment of goods, services, facilities, privileges, during a single visit to the defendant’s grocery store. After the [or] advantages” in a business that operates as “a place of public plaintiff filed her complaint, she proposed a settlement of $25,000. accommodation.”3 Places of public accommodation include The defendant, however, refused to settle, based on its deter- virtually every business and facility that allows public visitors. Plaintiffs can file discrimination claims under the ADA or CDPA based on a long list of regulations A court has no discretion to deny fees to a business that prevails that covers everything from the number of required handicapped parking spaces to the size of a toilet paper dispenser. in a claim under the CDPA. Frivolous lawsuits under the ADA and CDPA are becoming more common, led by a growing group of parasitic plaintiffs, some of whom have mination that the plaintiff’s claims had no factual support. After as many as 100 cases on file. Rather than seeking merely to resolve approximately 18 months of litigation, the court granted the alleged barriers to accessibility, these plaintiffs also seek monetary defendant’s summary judgment motion, holding that many of the damages and attorney’s fees. Recently, courts have become aware plaintiff’s claims were “frivolous” or “borderline frivolous” under that many of these lawsuits are nothing more than shakedowns. the ADA. Because the defendant was also the “prevailing party” Indeed, in Doran v. Del Taco, Inc.,4 the court noted that ADA under the claims brought under the CDPA, it filed a motion for litigation has created a “cottage industry” whereby unscrupulous attorney’s fees. Ultimately, the court entered a final order for the law firms send disabled individuals to as many businesses as recovery of $198,634.84 in attorney’s fees and litigation expenses. possible in order to generate lawsuits alleging ADA violations. Unfortunately, collecting fees may be difficult, as very few Businesses may find it tempting to settle one of these cases, plaintiffs are likely to have assets to pay a six-figure award. since the plaintiff typically makes a relatively low settlement Businesses may have to go through a lengthy process of wage demand consisting of statutory damages and attorney’s fees. Many garnishments and liens in an effort to collect their money. companies can dispose of these lawsuits with settlement payments However, by not settling frivolous cases, businesses can take solace of under $25,000, since mandatory statutory damages under the in knowing that the same plaintiff or plaintiff’s counsel probably CDPA are $4,000 per visit to the location where the alleged will not sue them again. Sometimes, avoiding future legal expenses discrimination took place. Unfortunately, these settlements are is more valuable than recovering fees already expended. ■ often little more than a quick fix that can lead to more lawsuits in the future, because no settlement agreement can restrict a 1 Americans with Disabilities Act, 42 U.S.C. §12101. plaintiff’s lawyer from filing additional lawsuits. Indeed, some 2 California Disabled Persons Act, CIV. CODE §51.5. 3 plaintiff’s lawyers may even conclude that a company is an easy 42 U.S.C. §12182. 4 Doran v. Del Taco, Inc., 373 F. Supp. 2d 1028, 1030 (S.D. Cal. 2005). target after it pays a quick settlement. 5 42 U.S.C. §12205. Before deciding to settle, businesses should assess the validity of 6 See, e.g., Brown v. Lucky Stores, Inc., 26 F. 3d 1182, 1190 (9th Cir. 2001). the lawsuit. If the business has not violated the ADA or CDPA, the 7 CIV. CODE §55. See, e.g., Goodell v. Ralph’s Grocery Co., 207 F. Supp. 2d business should consider fighting the lawsuit with the potential of 1124, 1126 (E.D. Cal. 2002). recovering its attorney’s fees. Under the ADA, the “prevailing 8 Jones v. Wild Oats Markets, Inc., Case No. 04-cv-1018 WQH (WMc) (S.D. party” may recover its reasonable attorney’s fees, including Cal. 2006). litigation expenses and costs.5 For a business to recover against a plaintiff under the ADA, the lawsuit must be found to have been Jon D. Meer chairs the Los Angeles section of the labor and employment “frivolous, unreasonable or without foundation.”6 The CDPA practice of DLA Piper US LLP. Eric S. Beane, a DLA Piper associate, represents provides for a mandatory award of attorney’s fees to any employers and management in courts and before administrative bodies. “prevailing party.” Thus, a court has no discretion to deny fees to Meer represented the defendant in Jones v. Wild Oats Markets.
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