Nondisclosure Agreements (“NDA”) are everywhere: a Silicon Valley Don Juan had an NDA ready for every date. However, NDAs are not created equal — what is good for the discloser is not good for the recipient. The “Silicon Handshake” can become a hangman’s noose for the unwary.

Questions to Ask.

Any potential signer to an NDA needs to answer several questions before signing. Those questions are:

1. Whose secrets are being protected? Is the NDA mutual — does it cover the secrets of both parties? If you are presenting an NDA to protect your trade secrets, you may not want to bind yourself to protecting the other side’s secrets. Alternatively, if someone presents you with an NDA, you may want to make sure your own secrets are protected.
2. What secrets are being protected? Is everything discussed to be considered confidential? This can be a trap for the unwary. If someone mentions something in passing, you could be foreclosing future opportunities for your company. Do documents have to be marked as confidential to receive protection under the NDA, or does it cover everything that the recipient remembers? How will the recipient know what is protected and what is not? Obviously, no NDA can specifically spell out in advance all the details of what is being disclosed. But an NDA that is too broad could restrict the recipient’s future operations. What is good for the discloser is not always good for the recipient.
3. Who is covered by the NDA? Does the NDA allow for independent derivation? If your R&D office is, without your knowledge, working on a similar project, has your signature cut off future development of that project? Is there an option for independent development? Have you bound one of your independent partners? Is the protection limited only to those actually signing the NDA?
4. How long does the NDA last? Is the NDA to last into perpetuity? Does it carry over into new companies or ventures that a party may enter into? Is there any way of removing oneself from its provisions, such as returning all documents?
5. What are the exceptions? Are documents otherwise publicly available covered? Is the recipient released from the duty to protect the documents if they later become publicly available? If the recipient receives the information independently, does the duty to protect end?
6. Whose law governs? Jurisdiction and choice of law questions are not excess verbiage designed to keep lawyers employed. They have important consequences, particularly because states often have very different protections. California tends to protect employees’ rights to pursue a livelihood more than other states. If a choice is available, an attorney should review the NDA to see what is best for you.

Advantages v. Disadvantages.

Never is the old saw “where you stand depends on where you sit” more true than when considering an NDA. The discloser’s motives are radically different from the recipient’s: thus, the discloser’s NDA should be different than the one you would be willing to sign as a recipient. An NDA covering mutual disclosures should not resemble that of a one-way disclosure. Good preparation should include having three different NDAs — one for when you disclose documents, one for when you receive documents, and one for mutual disclosure. The mantra to remember is: how does this NDA help me maximize my gains, and minimize my risks?

Strategic Considerations.

NDAs are more than just the latest fashion in attorney make-work, but an integral part of business operations. If someone could use your information to triumph over you, you need an NDA. Alternatively, if you, as the discloser, would not sue someone for using the information being disclosed, an NDA is not necessary. Indeed, by revealing distrust of the other party, it could inhibit the relationship.

A Shield Can Be a Sword. Commonly a shield, NDAs can also be a weapon. An unwary recipient can prevent itself from developing a new line of business that the discloser reveals — and it can even handcuff those in alliances with the recipient. Sometimes two-layered NDAs are appropriate. The first layer is to someone who acts as a gatekeeper, to decide if the information threatens the recipient or its alliances; the second is for a broader, operational distribution.

Keeping Track of NDAs.

Who keeps track of the NDAs your business signs? Does anyone? If your VP of marketing left tomorrow, who at your company would know what NDAs exist that she may have signed, binding the company? Is there anyone at your company who knows enough to gauge whether the NDA your R&D guy is about to sign conflicts with any other project you have? “Gee, I didn’t know . . . “ is usually the prelude to a disaster. With the prevalence of NDAs today, your company needs a firm-wide policy. One person or group should be the gatekeeper of every NDA your company signs. Do not allow your partner — or potential adversary — to dictate the progress of the relationship. Impatience in allowing your general counsel to review the NDA before signing can be a warning signal that you may have more to lose than to gain.

No one wants to repeat the well-known mistake one software company made when it refused to sign an NDA with IBM: IBM instead did business with a young company called Microsoft. However, the more common problem is finding the “silicon handshake” transformed into a noose around your neck.

2013 H-1B Visa Application Start Date

If your firm is seeking to provide a new H-1B visa on or after October 1, 2012, the application season opens on April 2nd. In past years, the maximum number of visas was reached within the first few days of the period, so it will be important to get your application in early. This period is only for new H-1B visas, not renewals, extensions, or for those involved with higher education, nonprofits, or governmental research organizations.

Bay Oak Law does not do any immigration law, but we are happy to recommend Randall Caudle in San Francisco [ randall@caudleimmigration.com ], at 1-415-596-2845.

By Kim Kennedy

Does your business use interns? Are you thinking of hiring an intern or two in the near future? The economy is still struggling, and hiring more employees is a significant expense in payroll costs, as well as in other costs such as health insurance, and training. There are hordes of unemployed recent college graduates who have found the job market unfriendly, and are willing to spend time interning in order to bulk up their resumes. Although internships are typically unpaid, interns gain valuable skills and experience, which will make them more competitive candidates when they enter the job market again.

Sounds good, right?  Well, maybe. Firstly, remember that unless you are a non-profit, your intern is not a volunteer. If you run a for-profit business (even if you are not profitable), you may not utilize the services of volunteers under the Fair Labor Standards Act (“FLSA”).  So what is the difference between a volunteer and an intern, or an employee?

The FLSA states that to “employ” means to “suffer or permit to work.”  However, the Supreme Court in Walling v. Portland Terminal  Co., 330 U.S. 148, 152 (1947), observed that this definition “was obviously not intended to stamp all persons as employees who, without any express or implied compensation agreement, might work for their own advantage on the premises of another.” Based on Portland Terminal, the Wage and Hour Division (“WHD”) has developed six factors to evaluate whether a trainee, intern, extern, apprentice, graduate assistant, or similar individual is to be considered an employee.

1. The internship, even though it includes actual operation of the facilities of the employer, is similar to training which would be given in an educational environment;
2. The internship experience is for the benefit of the intern;
3. The intern does not displace regular employees, but works under close supervision of existing staff;
4. The employer that provides the training derives no immediate advantage from the activities of the intern; and on occasion its operations may actually be impeded;
5. The intern is not necessarily entitled to a job at the conclusion of the internship; and
6. The employer and the intern understand that the intern is not entitled to wages for the time spent in the internship.

If any of these criteria do not apply, the individual is considered an employee, not an intern. The fourth factor states plainly, “The employer that provides the training derives no immediate advantage from the activities of the intern; and on occasion its operations may actually be impeded.” Maybe that intern does not sound like such a good deal anymore!

The worst result for your business would be if an “intern” who did not meet these criteria sued you for violations of wage and hour laws. Last fall, two unpaid interns who worked on the movie Black Swan filed a complaint against Fox Searchlight Pictures. The suit is awaiting a hearing at a federal court in New York. Two weeks ago, a former intern filed suit against Hearst Corp., Harper Bazaar’s parent company, for failing to pay minimum and overtime wages during her internship with that magazine. Her counsel has indicated that they intend to turn the case into a class-action lawsuit, representing other unpaid interns form Hearst Corp.’s many magazines.

In California, penalties for not paying someone can be ruinous – up to thirty days’ pay for each paycheck that should have been paid. If you usually pay twice a month, that effectively triples the amount the intern would have earned. There are also penalties for back payment of state and federal taxes, as well.

Make sure your relationships with employees, interns, independent contractors, and whoever else is involved with your business are well-defined to avoid this type of liability in the future.

Kim Kennedy is a paralegal with Bay Oak Law.

Just as your body needs annual wellness checkups, your business does, too. Much of the simple matters can be done by your office, without an lawyer – but if issues turn up, it may be time to check with counsel.

Corporate Status

❏ Corporate Status. Is your business in good standing with the state? In California, corporations, limited liability companies (LLCs) and limited liability partnerships (LLPs) should check here to verify that the business is in good standing. Make sure you choose the proper entity.
Why you should care: a corporation, LLC, or LLP not in good standing in the State of California cannot bring suit or defend itself in court, according to Cal. Corp. Code § 2205 and Cal. Rev. & Tax. Code § 23301. If your business is not in good standing, even if you never get sued or sue anyone, interest and penalties are mounting up. If the business is suspended, the time to fix it is now.
❏ Statements of Information must be filed by most corporations annually, according to California Corporations Code § 1502. Previously, the state sent the form; now, it only sends a postcard.
Why you should care: The lack of a form mailed to the business can lead some businesses to forget to make the annual statement – a costly mistake, as filing it late results in a $250 penalty – ten times the cost of the form. The good news is that the form is now online, and even simpler to fill out than before; the filing fee can be paid by credit card. Put an annual reminder in your calendar system for the beginning of the month before the business incorporated – if the corporation incorporated in June, select May 1st.

Employees

❏ Wage Protection Act. When you hire new employees that are subject to the overtime rules, California now requires that employers give the new employees forms. Read here for more important information.
Why you should care: Eventually, there will be penalties associated with the failure to provide these documents to employees.
❏ Independent Contractors. Are the independent contractors the firm uses actually independent contractors, or are they employees?
Why you should care: there are new penalties for intentionally misclassifying independent contractors. Even without such penalties, paying back taxes for someone you thought was an independent contractor can devastate the business.

Employee Handbook

❏ Check your employee handbook. Does it cover important issues like:

❏ At-will employment?
❏ Getting an acknowledgment from the employee that your business handles confidential information for both itself and its customers, and the employee needs to protect that information both during and after employment with the company?
❏ Specifying that the information created by the employee belongs to the employer as part of a work-for-hire agreement, and the employee is not entitled to use that information after the employment ends?
❏ An ethics policy about dealing with customers and suppliers, that does not create conflicts of interest for your business or the employee?
❏ A policy on inspecting offices, lockers and common areas of the business for contraband?
❏ Payday and timekeeping requirements?
❏ Leave procedures, including sick leave, pregnancy leave, leaving to care for a family member, and military reserve leave?
❏ Allowable time off, such as jury duty, visiting children’s schools, and the like?
❏ Job evaluation procedures?
❏ An illness and injury prevention program?
❏ Appearance policies, including casual Fridays (if offered)?
❏ Harassment investigation procedures?
❏ Internet, email and telephone use procedures – including personal usage and ownership of email accounts, web pages, Twitter, Facebook, and other social media accounts [ http://www.bayoaklaw.com/who-gives-a-tweet-about-who-owns-a-tweet/ ]?
❏ Job termination procedures?

Why you should care: a good employee handbook protects the business by specifying procedures in advance. It reduces uncertainty and the potential for trouble down the line.

Insurance

❏ Make sure your insurance is up-to-date, including:

❏ Worker’s Compensation Insurance (required for all employees);
❏ Disability Insurance for officers not covered by worker’s compensation, and which can be broader in coverage than worker’s compensation;
❏ Health Insurance, with the great changes to the health care system occurring during the next few years, it may be a good time to shop around for a better policy;
❏ Life Insurance for Owners, so that should an owner die, his or her estate can be paid the value of the ownership interest without destroying the company’s future;
❏ General Business Liability Insurance – make sure that all locations are covered, as well as all assets in question. Is there enough coverage? Is there too much coverage? When a firm reduces size, sometimes it forgets to inform the insurer, and they end up paying for what the firm doesn’t need.
Why you should care: While many people pay lip service to insurance issues, there is an aspect of “out of sight, out of mind” to worrying about the issues insurance is designed to cover. Few can afford to over-insure these days, but under-insuring can be disastrous.

Contracts

❏ Sales Contracts. Make sure the following is in your customer contracts:

❏ Attorneys’ Fees: It is far more likely that a customer will breach their contract with you, than you fail to do the work – and if you fail to do jobs for clients, you are not going to be in business for very long, anyway. Thus, every contract or invoice that you provide your customers should have an attorneys’ fees clause, so that if the contract has to be enforced, the prevailing party will receive reasonable attorneys’ fees and costs.
❏ Jurisdiction. The contract is to be interpreted according to the law of your jurisdiction. You know, for better or for worse, your jurisdiction’s laws – you don’t always know the other jurisdiction’s laws.
❏ Integrated. The contract is “integrated” – meaning that the written contract is the complete contract. This prevents alleged oral modifications like “she said that we don’t have to pay until . . . “ from easily being incorporated into the contract (good attorneys might know how to get them in).

Assets

❏ Inventory. Has the business inventoried its physical assets? This is especially important for assets that can easily “walk away” like cell phones and laptops. All such assets should be marked with the name of your business and a landline telephone number. Programs are available to track mobile devices by GPS or other means. An inventory should be kept for insurance and tax purposes. Track, at the least, the model of the inventory, purchase date and purchase value.

Why you should care: Cell phones and laptops have confidential business information, and those who lose them are often afraid to mention it. Marking these devices improves the chance they are returned. Keeping an inventory in a safe place can be good for insurance purposes.

❏ Marking Physical Assets. All substantial physical assets – especially those that can easily walk away –should be marked with a non-removable tag with the business name and phone number. Two places among many to buy such tags is here or here. (Bay Oak Law doesn’t endorse or vouch for these companies; their presence is illustrative).

❏ Marking Intangible Assets. It is easy to understand the importance of marking physical assets like computers, but it is also vital to mark as “Confidential” intangible assets like company information. Every balance sheet, every accounts receivable list, every customer list – every document that, if it falls into the hands of your competitors, could hurt or destroy your business, should be marked as “Confidential.” It is easy to add titles and footers to the firm’s regular forms that are regularly used, so that they get copied into future documents. Send a company-wide email quarterly, reminding everyone of the importance of keeping such information secret.

❏ Software. Does the business have licenses to use all of the software on all the computers in the office? Do you have the registration numbers for all the licenses in a safe place, so that should your office burn down, you do not have to buy more software?

Why you should care: If licenses are missing, it is cheaper to handle this now than after a software developer contacts you and demands thousands of dollars.

❏ Trademarks. On a rainy day when people are sitting around, go through your promotional materials, brochures, website, business cards and the like. Have you registered trademarks for your business name, all your logos, slogans and the like? A typical trademark registration costs less than $2500 – should anything have a trademark registration? Even if you decide not to, run a search on an internet search engine using any word mark that you are using – make sure that your firm is not infringing someone else’s mark – and make sure someone isn’t infringing yours. For each trademark, use the proper marking: “®” for registered marks, and “™” for unregistered marks. Tivo has a good webpage on how to use trademarks properly (hint: you can never “tivo” “Desperate Housewives” – or anything else.)

❏ Copyright. If you produce copyrighted works like books, films, video games or the like, you need to register your copyright. It is easy to do, and takes only a few minutes. Even if you do not, every brochure, white paper, or website you have should have “© 2012, [Name of Company]” on it. While the owner of a copyrighted work has rights as soon as it is published, it doesn’t hurt to remind people of that. Also, make sure that you always have the right to use the works of others on your works, like photographs.

Due Process and Trade Secret Misappropriation
Cal. Civ. Proc. Code § 2019.210

by: Andrew K Jacobson
The Fifth Amendment to the US Constitution guarantees due process of law. One type of due process is knowing the details of the accusations in a court of law against you. But in trade secret misappropriation cases, the trade secret owner has a good reason not to put the details of the trade secret in the complaint: as a public document, anyone can see it. Some trade secret owners use this secrecy as a way of bashing former employees, by preventing the trade secret defendants from knowing what they are alleged to have stolen. How do courts balance the interests of the trade secret owner in preventing the trade secret from being generally known, and the interest of the defendants in knowing what they are being accused of taking?

In California, Cal. Civ. Proc. Code § 2019.210

“was enacted to curb unsupported trade secret lawsuits routinely commenced to harass competitors and former employees. The California legislature understood that plaintiffs in trade secret cases are often unable to identify any trade secrets, even after months of extensive discovery. Trade secret claims are especially prone to discovery abuse since neither the court nor the defendant can delineate the scope of permissible discovery without an identification of plaintiff’s alleged trade secrets. By restricting a plaintiff’s ability to engage in discovery until it identifies its trade secrets “with reasonable particularity,”[Cal. Civ. Proc. Code § 2019.210] strikes a balance between a plaintiff’s right to protect its trade secrets and a defendant’s right to be free from the burdens associated with unsupported trade secrets claims.”

Computer Economics, Inc. v. Gartner Group, Inc., 50 F. Supp. 2d 980, 992 (S.D. Cal. 1999). (Cal. Civ. Proc. Code § 2019.210 was known as Cal. Civ. Proc. Code § 2019(d) before it was renumbered effective January 2005. 33 Cal.L.Rev.Comm. Reports 825 (2004).)

“Reasonable Particularity.” Cal. Civ. Proc. Code § 2019.210 requires that plaintiffs disclose with “reasonable particularity” the trade secrets defendants are alleged to have misappropriated. Until this occurs, plaintiffs cannot start discovery – including written interrogatories, requests for documents, and depositions. Defendants can use this Cal. Civ. Proc. Code § 2019.210 as a shield to slow down the blitzkrieg that trade secret cases often start with.

Background. The roots of what is now Cal. Civ. Proc. Code § 2019.210 date back almost 50 years. In Diodes, Inc. v. Franzen, 260 Cal. App. 2d 244, 253 (1968), the appellate court recognized the due process rights of the defendant, and held that a plaintiff must “describe the subject matter of the trade secret with sufficient particularity to separate it from matters of general knowledge of those persons who are skilled in the trade, and to permit the defendant to ascertain the boundaries within which the secret lies.”

The trend in California is far greater particularity than ever before. It is not enough to claim general categories: a Cal. Civ. Proc. Code § 2019.210 designation requires identifying the exact trade secret misappropriated. The case of Perlan Therapeutics, Inc. v. Superior Court, 178 Cal. App. 4th 1333 (2009) squarely rejects the typical trade secret plaintiff move of making a tremendously overbroad attempt to designate everything a trade secret. In Perlan, plaintiff provided four pages of “trade secrets,” but “[m]uch of the text simply repeats the narrative available in the publicly filed second amended complaint and provides additional technical detail that is nonetheless publicly available. . . . Despite the highly technical language used, it is apparent that this description does not provide specific identifications of the peptides or reagents used in the process.” Id. at 1338-1339. The Perlan appellate court upheld requiring the plaintiff to identify the alleged trade secrets misappropriated with far more particularity.

While Cal. Civ. Proc. Code § 2019.210 is a California state discovery statute, federal district courts have substantively applied the statue in federal actions dealing with misappropriation of trade secrets. See, e.g., Advante Int’l Corp v. Mintel Learning Tech., No. C-05-01022, 2006 WL 3371576, at * 3 n. 4 (N.D. Cal. Nov. 21, 2006) (Cal. Civ. Proc. Code § 2019.210 “provides an appropriate guide in the absence of specific provisions in the federal rules governing trade secret discovery.”)

In Computer Economics, above, the Southern District of California held that federal courts cannot carve Cal. Civ. Proc. Code § 2019.210 out of the California Uniform Trade Secrets Act (“CUTSA”) “without frustrating the legislature’s legitimate goals and disregarding the purposes of [Erie R.R. Co. v. Tompkins, 304 U.S. 64 (1938)].” Computer Economics, 50 F. Supp. 2d at 992. Failing to apply Cal. Civ. Proc. Code § 2019.210 “would entitle a plaintiff to virtually unlimited discovery, enhancing its settlement leverage and allowing it to conform misappropriation claims to the evidence produced by the defendant in discovery.” Prohibiting these tactical abuses is the precise reason that Cal. Civ. Proc. Code § 2019.210 requires identification of the alleged trade secrets with particularity before discovery of the alleged misappropriator can commence. The Computer Economics court noted that Cal. Civ. Proc. Code § 2019.210 serves several purposes: “(1) it promotes investigation of claims prior to suit and discourages the filing of meritless trade secret complaints; (2) it prevents plaintiff from using the discovery process as a means to obtain the defendant’s trade secrets; (3) it frames the appropriate scope of discovery; and (4) it enables the defendant to form complete and well-reasoned defenses.” Computer Economics, 50 F. Supp. 2d at 985.

The Ninth Circuit’s opinion in Imax Corp. v. Cinema Technologies, 152 F.3d 1161 (9th Cir. 1998) illustrates how Cal. Civ. Proc. Code § 2019.210 transforms into a tool of substantive law. In discovery, the plaintiff identified the trade secrets as, among other things, “the design of the cam unit, including every dimension and tolerance that defines or reflects that design.” Id. at 1166. The defendant moved for summary judgment on the grounds that the plaintiff had failed to specifically identify the trade secrets at issue and, therefore, had not demonstrated that such information constituted trade secrets. Id. The court agreed, holding that plaintiff’s failure to identify the precise numerical dimensions and tolerances of the purported trade secret rendered its claim fatally defective. Id. at 1166-68; see also Universal Analytics. Inc. v. MacNeal-Schwendler Corp., 707 F.Supp. 1170, 1177-78 (C.D.Cal. 1989).

This concern is particularly important where a plaintiff is unfairly trying to claim ownership not of a trade secret, but of former employees’ skill, experience, and general knowledge. See Diodes, 260 Cal. App. 2d at 250. “The concept of a trade secret does not include a man’s aptitude, his skill, his dexterity, his manual and mental ability, and such other subjective knowledge he obtains while in the course of his employment … the right to use and expand these powers remains his property.” SI Handling Systems, Inc. v. Heisley, 753 F.2d 1244, 1255 (3rd Cir. 1985).

Lessons for Defendants: As soon as a defendant is served in a trade secret action, it should serve a demand for identification of trade secrets under Cal. Civ. Proc. Code § 2019.210. Until plaintiff complies, plaintiff cannot proceed with any discovery. Crafty defendants take advantage of the initial delay of discovery by plaintiffs to serve plaintiffs with discovery, for which they are often unprepared.

Lessons for Plaintiffs: Trade secret plaintiffs must avoid being lulled into complacency. While the trade secrets at issue cannot be inserted into the complaint itself in any detail, the plaintiff should prepare a designation of trade secrets under Cal. Civ. Proc. Code § 2019.210 in as much detail as possible, and be prepared to serve it once a protective order is in place.

Trade secret misappropriation cases are usually sprints, not marathons. Plaintiffs hope to catch defendants off-balance, while defendants seek to wear down plaintiffs. Cal. Civ. Proc. Code § 2019.210 levels the playing field.

It depends.

By:  Andrew K Jacobson

You’re a business owner, not a Kardashian. You’ve never tweeted in your life, even if that is all your teenager does. But now the resident young wise@$$ in your office has started tweeting about your business – and shockingly (to you), new clients are contacting you because of it. You don’t care – you’re just happy that the goofball is finally productive. But you may lose your good luck if your business doesn’t protect it.

The New York Times reports that this is just what is happening in the Northern California District Court, as a company seeks to recover the 17,000 followers of a twitter account originally called “@phonedog_noah.” PhoneDog “ is a highly interactive mobile news and reviews resource that attracts a community of more than 2.5 million unique visitors each month. . . . [I]t offers up serious editorial content and video reviews that users rely on to make important decisions about their next mobile purchases.” The South Carolina company features up-to-the-minute news about almost all mobile platforms in the US. PhoneDog hired current Oakland resident Noah Kravitz to be a freelancer in the mobile industry; he soon began appearing on behalf of PhoneDog in various media outlets discussing mobile phones, and operated a free Twitter account called “@PhoneDog_Noah.” The Twitter account soon had 17,000 followers. Kravitz left in October 2010, and soon demanded back pay and a percentage of PhoneDog’s revenue. He renamed the Twitter account “@noahkravitz” and excluded PhoneDog from possession of the account.

[Phone]Dog Bites Man. PhoneDog has attacked with a federal court complaint, claiming that Kravitz took PhoneDog’s secrets – apparently, the Twitter followers – and interfered with PhoneDog’s prospective economic advantage. PhoneDog alleges that there “are many details of PhoneDog’s relationships with . . . its Twitter followers . . . that are not generally known or readily accessible to the public or PhoneDog’s competitors.” (First Amended Complaint, ¶ 13). Kravitz has yet to present his side of the story in court, but one likely avenue of attack regarding the Twitter followers is that they are publicly known; as of the writing of this sentence, 24,382 people follow “@noahkravitz,” along with 969 lists.

If the identity of the followers is not a secret, can PhoneDog lay claim to the list itself, when the “list” is in the possession of Twitter and viewable by anyone? The simplest way of resolving this question is by including in the employee handbook a clear statement that all media created during the employment belongs to the employer – and that includes information like lists, followers, statements, videos, and any other media presentation. The First Amended Complaint, above, does not allege any such statement. PhoneDog can still allege that Kravitz “converted,” i.e., stole, the followers, because they were enticed to follow “@PhoneDog_Noah” with content that PhoneDog paid Kravitz to create, and such intellectual property is a work-for-hire that belongs to the company that paid for it.

How Much Are You Worth, Tweetee? PhoneDog’s complaint (¶ 19) values each Twitter follower at $2.50 a month – for 17,000 followers, that means they are worth $42,500 a month, more than $500,000 a year. PhoneDog cites “industry standards” for the valuation, but does not provide any further details of the value of the followers of a free service. A critical look at how to value social media can be found here. The media revolution of the last 20 years will continue well into the future, and new issues will arise that few will think about in advance. Small businesses can save themselves huge expenses in protecting their media outlets by updating their employee manuals so that it is clear from the outset of employment that these new media channels belong to the employer, not to the employee.

The litigation is still only in the earliest pleading stage, but PhoneDog must realize by now that by not closing the door (with explicit statements in a contract or in its employee manual), PhoneDog cost itself a lot of money. This case is likely one hound that won’t hunt.

by Andrew K Jacobson

Once again, the turn of the new year brings new laws into existence. The newspapers focus on cross-cultural clashes like the banning of new sources of shark fins or partial bans on checking job applicants’ and workers’ credit reports. California has also created new penalties if a company willfully misclassifies someone as an independent contractor. However, a new California law called the “Wage Theft Protection Act of 2011″ requires that employers give most new employees a form at the beginning of employment. The laudable intent is to give valuable transparency to employees about their wages and about worker’s compensation. However, the form released by the Labor Commissioner has a provision that is not required by the Labor Code and could lay the groundwork for lawsuits attacking at-will employment.

The Wage Theft Protection Act of 2011 is modeled after a similar bill in New York State. Governor Jerry Brown signed the bill into law on October 9, 2011, and it became effective on January 1, 2012. New California Labor Code § 2810.5 requires a non-governmental employer to provide a form to every new employee subject to the overtime rules, in the language commonly used at work, with the following information:
1. Rates of pay (whether by hour, shift, day, week, etc.), including overtime rates;
2. Any allowances claimed as part of the minimum wage;
3. The employer’s regular designated payday;
4. The employer’s name (including dba’s);
5. The employer’s physical address for the main office or principal place of business, including any mailing address;
6. The employer’s telephone number; and
7. Information about the employer’s worker’s compensation insurance carrier.
The Legislature directed the Labor Commissioner to “prepare a template that complies” with the above requirements, and the Labor Commissioner did so. However, the form includes a provision that the Legislature did not require, requesting that the employer identify the “agreement” as being written or oral.

At-Will Employment. Few employees subject to the overtime rules have written contracts – but that does not mean that their agreements are “oral.” Rather, the employment is “at-will” – either the employer or the employee can end the employment without notice or cause; see Cal. Lab. Code § 2922: ”An employment, having no specified term, may be terminated at the will of either party on notice to the other. Employment for a specified term means an employment for a period greater than one month.”

The trouble with marking the box for an “oral” agreement is that then there is the question of what the terms of the oral agreement are – and those terms could include no termination unless for good cause. See, e.g., Foley v Interactive Data Corp., 47 Cal. 3d 654, 677 (1988): “Labor Code section 2922 establishes a presumption of at-will employment if the parties have made no express oral or written agreement specifying the length of employment or the grounds for termination. This presumption may, however, be overcome by evidence that. . . the parties agreed that the employer’s power to terminate would be limited in some way, e.g., by a requirement that termination be based only on ‘good cause.’”

The possibility of oral limits on at-will employment eviscerates employers’ diligent attempts to keep employment at-will. At the very least, the employer is opening itself to the threat of litigation in the event of a termination that requires an expensive severance; the employer could also end up on the losing end of a lawsuit.

The Legislature did not require this information, and it is unclear why the Labor Commissioner added it. The form needs to be modified to make it clear that the employment is at-will – not oral, not written. The “Wage Theft Protection Act” should not be allowed to be used to destroy the presumption of “at-will”" employment; otherwise, a better title would be the “Wage Theft Guarantee Act.”

By Andrew K. Jacobson

In an era of ultra-tight budgets, getting something for less is appealing. One such temptation is hiring someone to be an independent contractor, instead of as an employee. The Legislature and Governor Brown, however, have added to the downside of that calculation.

Hiring someone as an independent contractor instead of as an employee has its advantages: the employer doesn’t have to withhold taxes, and doesn’t have to pay the employer’s portion for medicare (1.45% of a paycheck) or social security (6.2% of a paycheck, up to $108,600 annually). They are also less subject to labor regulations, like minimum wage, twice-monthly paychecks, overtime and the like. The California government discourages independent contracting, because independent contractors are far less reliable in paying taxes, while being far more vulnerable to employer abuses.

The California Labor Commission frequently upholds claims of independent contractors who contend that they should have been classified as employees. This results in back taxes paid by the employer, plus penalties. Businesses required to pay thousands of dollars in back taxes and penalties for each worker are frequently crippled, in some cases, permanently. However, the Legislature and the Governor felt that a heavier penalties were needed, and passed new Labor Code sections 226.8, and 2753, effective January 1, 2012.

Willful Misclassification Prohibited. Cal. Labor Code § 226.8 prohibits an employer from willfully misclassifying someone as an independent contractor, charging civil penalties of $5,000 to $15,000 per violation, and those with a pattern of violating the independent contracting rules can be subject to civil penalties of $10-25,000 each. Further, the Contractors’ State License Board can initiate disciplinary actions, up to disbarment, against general contractors who have been found to have willfully misclassified workers as independent contractors. Cal. Labor Code § 2753 provides that non-attorneys who conspire with an employer to misclassify workers as independent contractors can be jointly and severally liable for these penalties.

What is an Independent Contractor? California common law defines an independent contractor as someone who is responsible to the employer only for the results of the work, and not how the work is done. When Bay Oak Law needs plumbing services, we leap to the phone to call our favorite plumber and let them to the work. We don’t stand over them, telling them what wrench to use, or how deep a hole to dig: we trust their expertise. That is a true independent contractor: temporary assignment, using the contractor’s own tools, doing something that is not the regular business of the employer, but is the specialty of the independent contractor.

Using a set of tests from a case called S.G. Borello & Sons v. Dep’t of Industrial Relations, 48 Cal. 3d 341 (1989), an employer can guess whether a worker would qualify as an independent contractor:

1. Is the worker engaged in an occupation or business different from that of the employer?
2. Is the work different from the regular business of the employer?
3. Does the worker supply the tools, and the place where the work is done?
4. Does the worker have an investment in the equipment or materials required?
5. Are there special skills required in the worker’s occupation?
6. Is the work usually done by a specialist without an employer’s supervision?
7. Can the worker profit depending on his or her managerial skill?
8. Is the work limited in time?
9. Is the method of payment per job, or a part of the job?
10. Do the employer and the worker believe they are not creating an employer-employee relationship?

An answer of “no” to one or two of these questions is not likely to result in a finding that the worker is an employee; plumbers, for example, usually work where the plumbing is, but they are still usually classified as independent contractors. California law recognizes that “individual factors cannot be applied mechanically as separate tests; they are intertwined and their weight depends often on particular combinations.” Borello, 48 Cal. 3d at 351. However, the more negative answers to the checklist above, the more likely the worker is to be found to be an independent contractor.

A useful rule-of-thumb for California employers is that independent contractors should be the exception, not the rule. The costs of a mistake are much higher come January 2012, as the California government’s addition of penalties of willful misclassification has raised the stakes.

By Laura Koch

Three years after granting review, the California Supreme Court finally held oral arguments last week in Brinker Restaurant Corp. v. Superior Court. I attended the oral arguments in San Francisco because of the importance of this decision to small business owners like our clients. Two important issues that have been awaiting resolution are whether under California law there is a duty to enforce the taking of meal breaks, and how breaks must be timed.

Fired for Working Through Lunch?

Eight years ago, employees of Brinker Restaurant Corporation, which operates Chili’s restaurants, sued the company for depriving them of required meal and rest breaks.
The main issue in Brinker is the interpretation of California Labor Code § 512, which requires an employer to provide a 30-minute meal break for a work period of more than five hours.

The employees, challenging a holding by the Fourth District Court of Appeal, take the position that the term ‟provide” imposes an affirmative duty on employers to ensure that employees take meal periods. During oral arguments on November 8, 2011, the plaintiffs’ attorney acknowledged under grilling by the justices that under the plaintiffs’ interpretation, an employee could be subject to an employer’s progressive discipline policy for not taking a required break. The plaintiffs’ attorney equated this situation with unauthorized overtime, where the employee gets paid but is also subject to discipline.

Several justices appeared dissatisfied, questioning whether the plaintiffs’ interpretation is the most protective of workers. Justice Joyce Kennard also challenged the practical ability of an employer with hundreds or thousands of employees to ensure that they are all taking required meal breaks. When the plaintiffs’ attorney responded that employers have many workable options for scheduling and ensuring the taking of meal breaks, Justice Goodwin Liu jumped in with a concern that this could be ‟kind of coercive.”

Pointing out that the hallmark of a meal period is the employer’s suspension of control over the employee, Justice Liu appeared troubled by the idea that a worker who chose to work through breaks because of loving his or her job could be subject to discipline, or even fired. Justices Carol Corrigan and Marvin Baxter expressed similar concerns. The attorney  attempted to direct the justices to the textual support for the plaintiffs’ interpretation and to analogize to other situations where employers exercise control over hours worked; however, the justices were more focused on the pitfalls of enforcement of breaks.

According to the plaintiffs’ attorney, unless employers are held accountable for ensuring breaks, many of the most vulnerable workers in our state will not get meal periods, despite the importance of these breaks to the health and welfare of workers. Although the justices did not respond to this argument at the time, the written opinion needs to address this issue directly. (more…)