Retailers That Ask For Customers’ Zip Codes During Credit Card Transactions Do Not Violate Consumer Protection Statute

Case: Pineda v. Williams-Sonoma Stores, Inc., Cal. Court of Appeal, Fourth District, Division One, No. D054355 (Oct. 23, 2009)

The One Sentence Summary:
A retailer did not violate the Song-Beverly Credit Card Act of 1971 (Cal. Civ. Code § 1747 et. seq.), nor did it invade its customer’s privacy, when it asked a customer who used a credit card for her zip code, where the zip code was later used to conduct a reverse database search for her address.

What They Were Fighting About:
Plaintiff Jessica Pineda purchased an item with her credit card at a Williams-Sonoma Store in California. The cashier asked for her zip code without informing her what would happen if she declined. Thinking that the information was required, Pineda provided her zip code. The store used this information in a computer program to conduct reverse searches of databases and acquired her address, which it then maintained in its own database.

Pineda filed a putative class action alleging, among other things, a violation of the Song-Beverly Credit Card Act of 1971 (Cal. Civ. Code § 1747 et. seq.). This Act prohibits businesses that accept credit cards from requesting and recording “personal identification information” about the card holder, including the card holder’s address and telephone number. Pineda also claimed that her privacy was invaded when the store requested and recorded her zip code, used this information to obtain her address, and used her address for its own profit.

Court Holdings:
The Court of Appeal affirmed the trial court’s order sustaining Williams-Sonoma’s demurrer and held:

• Relying on Party City Corp. v. Superior Court, 169 Cal. App. 4th 497 (2008), the court held that the Song-Beverly Credit Card Act does not prohibit retailers from asking consumers for their zip codes. The Party City Court reasoned that an “address and telephone number” were specific to an individual, whereas a zip code was a group identifier not prohibited under the Act.
• Using a legally-obtained zip code to acquire and use an address that is public is not “a serious invasion of privacy,” which is a necessary element of a privacy claim. Pineda failed to allege facts showing that her home address was not otherwise publicly available or that she undertook efforts to keep it private.
  
  

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CO-TENANCY RIGHTS HELP SHAVE COSTS

The Summary: In this troubled economy, co-tenancy provisions are playing a critical role in retail leases. The Wall Street Journal recently reported that retail tenants with co-tenancy rights in their leases are “eking out critical savings” to counter the drop in sales.[1] Vendors are offering services that track store closings at shopping centers for purposes of co-tenancy claims. Retailers are seeking reduced rents or even terminating leases when co-tenancy conditions are not satisfied.

As shopping centers reach unprecedented vacancy levels, are you doing everything you can to control costs by asserting co-tenancy rights? If your leases contain co-tenancy provisions or you are in a position to negotiate these terms in the future, the following four steps may help you cut costs in troubled times.

First, review your leases to identify co-tenancy provisions. Record any co-tenancy obligations in an easily accessible format, so that you can refer to these terms periodically to enforce your co-tenancy rights.

Second, investigate the facts to determine whether the co-tenancy conditions in your leases are satisfied. Have the anchor stores closed? Are they occupied by non-retail tenants? What are the vacancy rates at the shopping center? You need to gather the facts to determine whether you are entitled to reduced rent or other remedies based on co-tenancy provisions in the lease.

Third, if the co-tenancy conditions are not satisfied and you are entitled to relief under the lease, make a demand to the landlord. Be persistent. Demonstrate that not only is your claim solid, but you will pursue it if the landlord does not provide the requested relief.

Fourth, use this downturn in the economy to negotiate better co-tenancy terms in your leases. Due to high vacancy levels currently, your tenancy is valuable. This may be the time to use your leverage to negotiate valuable co-tenancy provisions for the future.


Step 1: Review your leases to identify your co-tenancy rights.
The first step in seeking savings based on co-tenancy rights is to read your leases. Identify co-tenancy conditions or obligations and think about what is required to satisfy them. There may be a co-tenancy provision relating to anchor stores. Does the lease require that certain anchor stores be occupied and open for business? Does it identify the tenants for the anchor stores or the type of business? Does it provide a list of alternate anchor stores if the identified stores vacate the property? There also may be a co-tenancy provision relating to occupancy of the remainder of the shopping center.

For example, there may be a condition that “80% of leasable space (excluding the anchor stores) is occupied by retail tenants which are open and operating.” Pay careful attention to the method for calculating the percentage. In determining the denominator, consider what is excluded. If space previously occupied by Mervyn’s now sits vacant, does the vacant space still get excluded as an anchor store? If the space previously occupied by Mervyn’s has been converted to a public library, does the library get excluded as an anchor store? Similarly, consider what is included in the numerator. Does the numerator include all space open for business or only space being used for retail sales? Does it include all leased space regardless whether it is open for business? These questions should be answered based on the lease language.

Once you have identified the co-tenancy conditions in the lease, next determine your remedy if the co-tenancy conditions are not satisfied. The lease may provide that the only remedy is the right to terminate the lease. Or, the lease may provide for reduced rent or the opportunity to “go dark.” Some leases provide that a tenant is entitled to the remedy immediately after the co-tenancy conditions are not satisfied. Other leases provide a grace period for the landlord or require the tenant to “elect” one of the available remedies. It is important to be familiar with your potential remedies and how and when you must assert them.

Step 2: Investigate the facts to determine whether the co-tenancy conditions are satisfied.
It is up to the tenant to investigate whether it has a viable co-tenancy claim against the landlord. Even if your lease provides that the landlord is required to notify you when co-tenancy conditions are not satisfied, you should not sit back and assume the landlord will do so.

There are many methods to investigate a co-tenancy claim. Some co-tenancy information can be gathered by going to the computer and searching the Internet. You often can learn a lot about a potential co-tenancy claim by looking at the shopping center website. A walk-through of the shopping center also can reveal co-tenancy facts. Store management can be asked to report on the tenants of the center and on the vacancies.

However, depending on the co-tenancy terms, in many situations you will have to submit an inquiry to the landlord to determine the facts supporting a co-tenancy claim. This type of request should be in writing. It should be as specific as possible and in most circumstances should include a request for occupancy information for every square foot of the center, including the name of the tenant and its business, the square feet occupied by that tenant and whether the tenant is open for business. If the lease provides that you are entitled to this information, you should cite to the specific provision in your letter. If the lease does not specifically provide for your right to obtain this information, do not be deterred. Ask for it anyway. You are entitled to the facts supporting the obligations under the lease. See PV Properties, Inc. v. Rock Creek Village Associates Ltd. Partnership, 549 A.2d 403, 410 (Md. Ct. Spec. App. 1988) (finding fiduciary obligation to provide backup for lease charges; “Reason and fairness require that the tenant be afforded some means of verifying the charges assessed against it.”).

Further, it is a good practice to regularly ask the landlord for occupancy information on a quarterly basis even if you do not suspect a co-tenancy claim. If the landlord refuses to provide the information in response to your requests, you can later argue that any delay in asserting your co-tenancy rights was a result of the landlord’s improper conduct.

Step 3: Convince the landlord of the strength of your claim and that you will pursue a lawsuit if the landlord does not provide the remedy you seek.
Once you have identified the basis for a co-tenancy claim, you will need to submit the claim to your landlord. State your claim in writing. Be clear about the grounds of your claim and the remedy you seek, and cite to the relevant provisions of the lease. If your lease requires you to “elect” a particular remedy, be clear that you are doing so under the lease. If you have multiple claims based on multiple leases against the same landlord, combine them in a single letter. A landlord may be more responsive if your claim is larger.

Be prepared for push-back from the landlord. The landlord may argue a different interpretation of the co-tenancy provision. See Rathbun v. Cato Corp., 93 S.W.3d 771 (Mo. Ct. App. 2002) (holding the term “similar type and size business” in a co-tenancy provision was ambiguous and its meaning must be determined based on evidence of the parties’ intent outside of the lease). Be prepared to explain your interpretation based on the language in the lease. The landlord also may argue that you waived the co-tenancy rights by waiting too long to assert them. Be prepared with a justification for any delay.

For example, some leases require the landlord to notify the tenant when co-tenancy conditions are not satisfied. In such cases, if the landlord failed to notify the tenant, any delay in asserting a co-tenancy right should not be the fault of the tenant. Even if the landlord ignores your requests or continues to refute your rights to relief, be persistent and continue to state your case. If you do not convince the landlord that you are willing to pursue the issue in court, the landlord may feel no incentive to respond to your demands.

Finally, hiring a lawyer may be the only way to convince a landlord that you are willing to pursue your co-tenancy claim. When a landlord is faced with the prospect of hiring an attorney to defend a legal claim, a landlord may be more willing to negotiate a resolution of the dispute. However, if you threaten a lawsuit, be prepared to follow through. A landlord will remember if you fail to follow through on a legal claim and may be even less responsive to future claims.

Step 4: Look for opportunities to improve co-tenancy provisions in future leases. Because of high vacancy levels at some shopping centers, tenants may have more leverage than before in negotiating favorable co-tenancy provisions. This may be an opportunity to include co-tenancy provisions in new or amended leases or improve them where appropriate.

For example, it is best to put the burden on the landlord when co-tenancy conditions are not satisfied. Avoid language providing that the tenant may “elect” certain remedies. Instead, provide that once the co-tenancy conditions are not satisfied, rent is reduced or some other remedy automatically takes effect. Further, it is optimal to include a requirement that the landlord notify the tenant when co-tenancy conditions are not satisfied. If the landlord fails to send the notice, the tenant has a solid defense for any delay in asserting a co-tenancy claim.

Finally, if you have ever been confused about the language of your co-tenancy provisions or you have noticed ambiguities, this may be a good time to clarify the language so that there is no dispute in the future.

Conclusion
As stores continue to close in shopping centers, now more than ever is the time to pay attention to co-tenancy provisions in retail leases. Review your leases; gather the facts; and submit demands for relief to your landlords if co-tenancy conditions are not satisfied. Enforcing co-tenancy rights can be a significant way to control costs. [1] Elizabeth Holmes, Vanessa O’Connell and Kris Hudson, Empty Mall Stores Trigger Rent Cuts, Wall St. J., July 9, 2009 at B1. ~

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Tenant Entitled to Claim Constructive Eviction Despite No Breach Statement in Estoppel Certificate and "Hell or High Water" Clause

Case: Reliastar Life Insurance Co. of NY v. Home Depot, U.S.A., Inc., 570 F.3d 513 (7th Cir. 2009) (applying New York law)

The One Sentence Summary: A federal court applying New York law holds that a tenant's execution of an estoppel certificate creates no warranties about present or future conditions not known by the tenant at the time of execution; and court holds that constructive eviction relieves a tenant of the obligation to pay rent even where the tenant signed a "hell or high water" clause.

What They Were Fighting About: Home Depot entered into a lease providing that the landlord was responsible for the "building pad." When the original landlord assigned the lease to a subsequent landlord, Home Depot signed an estoppel certificate providing: "Tenant has fully inspected the Premises and found the same to be as required by the Lease, in good order and repair, and all conditions under the Lease to be performed by the landlord have been satisfied; including but not limited to payment to Tenant of any landlord contributions for Tenant improvements and completion by landlord of the construction of any leasehold improvements to be constructed by landlord; . . . As of this date, the Mortgagor, as landlord, is not in default under any of the terms, conditions, provisions or agreements of the Lease and Tenant has no offsets, claims or defenses against the Mortgagor, as landlord with respect to the lease."

At the time of the assignment, Home Depot also signed a Recognition Agreement including the following "hell or high water" clause: "Tenant agrees that notwithstanding anything in the Lease or this Agreement contained to the contrary, until Mortgagee notify [sic] tenant that the Assignment has been released, Tenant shall be unconditionally and absolutely obligated to pay to Mortgagee in accordance with the Assignment all rents, purchases payments and other payments of whatever kind described in the Lease without any reduction, set off, abatement, or diminution whatever."

Two years after the assignment, Home Depot detected cracks in its store walls resulting from a defective building pad. Home Depot vacated the premises, stopped paying rent and claimed constructive eviction. The landlord/assignee filed suit against Home Depot for all moneys owed under the lease.

Court Holdings:

Estoppel Certificate

• Home Depot's execution of the estoppel certificate did not bar its constructive eviction defense because Home Depot had no knowledge of the building pad failure at the time it signed the estoppel certificate. In the estoppel certificate, Home Depot made no warranties about present or future conditions that were not known when it was executed.
• The Court stated that its holding "is consistent with the general purpose of an estoppel certificate, which is to assure one or both parties to an agreement that there are no facts known to one and not the other that might affect the desirability of entering into the agreement, and to prevent the assertion of different facts at a later date." (citing Lawyers Title Ins. Corp. v. Honolulu Fed. Sav. & Loan Ass'n, 900 F.2d 159, 163 (9th Cir. 1990)).

"Hell or High Water" Clause

• Although "hell or high water" clauses are generally enforceable under New York law, Home Depot was relieved of its obligation to pay rent if it was constructively evicted.
• Constructive eviction terminates a lease and relieves a tenant of all obligations under the lease.
  
  

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Retailers Face Limits on Sale of Thermostats in California Starting July 1, 2009

Extended Product Responsibility (EPR) Programs Take Effect and Are Subject of Pending Legislation in California

The Summary: Retailers selling any thermostats to customers in California are expected to check the website of a state agency to see whether particular manufacturers have been listed as failing to comply with a 2008 state law mandating collection programs for out-of-service mercury-added thermostats. Thermostats from a listed manufacturer are banned from in-state sales (following a 120-day notice period). Violation of the sales ban is punishable as a crime, and could subject a retailer to criminal penalties under the state’s hazardous waste law. (Calif. Health & Safety Code sec. 25214.8.12(b), (d)).

Background: California banned the in-state sale of mercury-containing thermostats effective January 1, 2006. Then, following the 2007 adoption of guidance for Extended Product Responsibility (EPR) by the California Integrated Waste Management Board, the California Legislature approved, and Governor Schwarzenegger signed, the Mercury Thermostat Collection Act of 2008. California Health & Safety Code, section 2514.8.10. The new law is part of the state’s statutes governing hazardous waste. Besides requiring manufacturers to have collection programs for out-of-service thermostats, the new law also affects retailers, including retailers who offer private-label merchandise.

"Retailer" is defined in the new law as "a person who sells thermostats of any kind directly to a consumer through a selling or distribution mechanism, including, but not limited to, a sale using catalogs or the Internet."

The main thrust of the Act is to improve programs for the collection and proper disposal of mercury-containing thermostats once they are taken out of service. A retailer may contract with a manufacturer for in-store or out-of-store collection of old mercury-added thermostats. The new law encourages retailers to support and participate with manufacturers to educate consumers on the handling of such thermostats.

The enforcing agency, California Department of Toxic Substances Control (DTSC), has described the obligations of retailers as follows:

A retailer that distributes new thermostats by mail to buyers in California shall include with the sale of the new thermostat, an Internet Web site address and toll-free telephone number with instructions on obtaining a prepaid mail-in label that a consumer may use to send an out-of-service mercury-added thermostat to a collection location.

A retailer is prohibited from selling or offering for sale a thermostat that is manufactured by a manufacturer that is not in compliance with the Act. This prohibition becomes effective on the 120th day after the notice listing the manufacturer is posted on the DTSC’s Internet Web site, and continues until the manufacturer is no longer so listed.

DTSC has issued a Fact Sheet generally covering some of the Act’s highlights.

Lawmakers based the new law on findings that mercury can become toxic in the environment. EPR programs seek to have manufacturers and producers of consumer goods, including retailers of private-label merchandise, not only remain responsible for products when they are discarded, but also to design products and packaging that are less toxic and more durable, reusable, recyclable or biodegradable, in order to reduce waste.

Additional legislation aimed at instituting end-of-life management programs for many more consumer products, based on the EPR guidance, has already been introduced in the current session of the California Legislature. AB 283, the California Product Stewardship Act, is currently pending in the state Assembly. As presently drafted, the bill would amend the state’s Public Resources Code to add provisions on solid waste disposal affecting retailers and others. A version of the proposed bill is Here.

If enacted, the law would, among other things, require producers of covered goods (which would include retailers of private-label goods) to adopt a stewardship plan for the product, and to collect the covered product without charge to the consumer. Sales of covered products would be banned after July 1, 2012, unless the producer or product stewardship organization had submitted a stewardship plan to the state’s Waste Board.

Whether or not AB 283 becomes law, the trend is clearly to have more programs requiring manufacturers and retailers to handle previously sold consumer goods that have reached the end of their useful life and are ready for disposal.

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Tuna "Toxic Warning" Update: California Supreme Court Denies Companies' Request to Depublish Narrow Exemption Ruling

Case: People v. Tri-Union Seafoods, LLC et al., Supreme Court of California, No. S172898 (06/24/09)

Summary: The California Supreme Court on June 24, 2009, denied the requests made by industry trade groups, supported by the tuna canning companies, to "depublish" all or part of the March 2009 lower appeals court decision that narrowed their win at the trial court level (that canned tuna, while containing methyl mercury, is exempt from the state's toxic warning law, Proposition 65).


The Controversy:
Although the California Court of Appeal, in March 2009, upheld the decision by the trial judge that canned tuna was exempt from the toxic warning or labeling requirements of California's "Safe Drinking Water and Toxic Enforcement Act of 1986," commonly called Proposition 65, the ruling was limited to the narrow grounds that in the face of conflicting expert opinion, the trial judge had enough evidence on the question of whether the mercury was man-made or naturally occurring. The Court of Appeals declined to rule on the issue of federal preemption or the issue of the threshold toxicity level. The tuna companies supported the petitions of certain trade associations to the California Supreme Court to depublish the opinion (or at least part of it), and thereby eliminate the opinion as precedent, on grounds that part of the published opinion could encourage more litigation.

The parties who requested or supported depublication included Tri-Union Seafoods, Del Monte Corporation, Bumble Bee Seafoods, LLC, the California Retailers Association, the Grocery Manufacturers Association, the American Herbal Products Association, and the California Grocers Association. The request was opposed by the California Attorney General.

Another Proposition 65 case, dealing with whether warnings about mercury are required for fresh fish, is currently pending at the trial court level.

For more information about the March 2009 canned tuna decision, see the earlier Post [here].

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Landlord Entitled To Liquidated Damages Based On Loss Of Synergy, Goodwill And Patronage Resulting From Closure Of "National Tenant's" Store

Case: El Centro Mall, LLC v. Payless Shoesource, Inc., Cal. Court of Appeal, Fourth District, Division Three, No. G040038 (May 21, 2009)

The One Sentence Summary: In an action by landlord El Centro Mall seeking liquidated damages of $98,000 based on defendant Payless Shoesource's closure of its store before expiration of the lease term, Payless failed to show that the liquidated damages did not represent a reasonable estimate of the actual damages a mall landlord would suffer as a result of a "national tenant" like Payless ceasing operation, and thus failed to rebut the presumption of validity of the lease's liquidated damages provision.


What They Were Fighting About: Defendant Payless Shoesource, Inc. (“Payless”) leased space in plaintiff El Centro Mall, LLC’s (“ECM”) shopping center pursuant to a lease that expired December 31, 2005. The lease provided that Payless was to pay base rent, monthly percentage rent based on a percentage of Payless’ gross sales, and additional rent, which included all other costs such as common area maintenance and taxes. The lease required Payless to continuously operate and conduct business on the premises, and further provided that if Payless failed to continuously operate, the landlord was entitled to collect as liquidated damages (in addition to the base, percentage and additional rents) an additional charge of the greater of ten cents per square foot or $100 for each day of non-operation. The liquidated damages represented “the minimum damages which Landlord is deemed to have suffered, including damages as a result of Landlord’s failure to receive Percentage Rental, if any, under this Lease . . . .”

After closing its store in March 2005, Payless continued to pay the monthly base rent and additional rent through the end of the lease term (no percentage rent was owed), but refused to pay the liquidated damage amount. By stipulation, the trial court decided the case on briefs and stipulated facts, including alternative damage calculations depending on whether liquidated damages were recoverable. The trial court found that Payless did not overcome the presumption of validity of the liquidated damages clause and awarded plaintiff $90,226.80, which was the full amount of liquidated damages less a credit from reconciliation of CAM charges and taxes.


Court Holdings:

• The court first discussed Civil Code section 1671, which provides that a liquidated damages clause is valid unless the challenging party establishes the provision was unreasonable under the circumstances existing at the time the contract was made. The burden of proof on the issue of reasonableness is on the party seeking to invalidate the liquidated damages provision.
• The court held that to the extent the liquidated damages provision was intended to estimate damages for the tenant’s failure to pay percentage rent (as opposed to damages for loss of synergy, goodwill and patronage) during the period of non-operation, it was an unenforceable penalty. Because the lease separately provided the amount of percentage rent to be paid as damages if the lessor terminated the lease based on the tenant’s default, liquidated damages for failure to pay percentage rent were unnecessary except to penalize Payless.
• With respect to damages for loss of synergy, goodwill and patronage, however, the court held that substantial evidence supported the trial court’s decision enforcing the liquidated damages provision, and that Payless failed to meet its burden of proving that the liquidated damages provision was unreasonable under the circumstances existing at the time the contract was made.
• The court found that the evidence presented by Payless (i.e., that ECM allowed Sears, an anchor tenant, to vacate without paying liquidated damages, while other tenants who were not “national” tenants were required to pay liquidated damages) “may give rise to an inference the provision is arbitrary.”
• However, the court found that the evidence did not “conclusively prove the point” because there was no evidence of the circumstances surrounding the other leases, such as whether there was another reason Sears was not required to pay liquidated damages or whether the other tenants (General Nutrition Corporation, Sports Image and The Locker) were or were not “national” tenants similar to Payless.
• The court also noted that Payless failed to present evidence (e.g., expert testimony) that a charge of 10 cents per square foot was not a reasonable estimate of the actual damages the landlord would suffer if a tenant like Payless closed. In contrast, ECM presented an expert declaration stating that (1) in recognition of the fact that “national tenants” such as Payless generate significant foot traffic, landlords customarily require a covenant of continuous operation; (2) landlords also typically require a liquidated damage provision because it is difficult to estimate the damages from the loss of synergy, goodwill and patronage caused by a national tenant’s failure to continuously operate; and (3) the liquidated damage amount is directly proportional to the amount of space occupied by the tenant because larger stores are “likely to conduct more business, generate more goodwill to the retail center, generate more patronage to the retail center, generate more and better complimentary tenants at increased rents and also generate more percentage rent.”

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FTC to Begin Enforcement of the "Red Flags" Rule

The One Sentence Summary: On November 1, 2009, the Federal Trade Commission is expected to begin enforcing its "Red Flags" Rule, which requires many retailers, among other businesses, to develop a written program designed to prevent identity thieves from using information they have illegally obtained.



The Red Flags Rule, 16 C.F.R. § 681.2, requires many businesses and organizations to create and implement a written program to identify and detect the warning signs of identity theft.

FTC staff believe that over 11 million entities are subject to the Rule, which affects organizations, large and small, that regularly extend credit to businesses and individuals. In addition to financial institutions, affected business entities also include “creditors,” a term which is defined broadly enough to include many retail businesses. In an Enforcement Policy Statement, the FTC indicated that “any person that provides a product or service for which the consumer pays after delivery is a creditor.” In addition, a retail business is a “creditor” if it issues credit cards, grants loans, arranges for loans or credit, or makes credit decisions. However, simply accepting credit cards for payment (as opposed to issuing credit cards) does not in itself make a retailer a “creditor.”

A retail business that meets the definition of a “creditor” must periodically determine whether it offers or maintain “covered accounts.” There are two types of “covered accounts.” The first is an account that is used primarily for personal, family or household purposes involving multiple payments or multiple transactions. The second is an account for which there is a foreseeable risk of identity theft, such as an account for a small business or sole proprietorship.

A retail creditor that offers or maintains covered accounts must establish a written program designed to detect and prevent identity theft and mitigate the effects of identity theft. Written programs will vary, depending upon the nature of the business and the types of transactions and accounts it maintains. FTC staff say that they will soon issue a model Red Flags Rule policy for small businesses.

Even a business at low risk of encountering identity theft needs to comply with the Red Flags Rule. For a low-risk business, the program can be relatively simple, focusing on how to respond to notifications or information suggesting that a customer’s identity is being misused. In general, the more certain a business is that its customers are who they say they are, the lower the risk of encountering identity theft.

A written program must include four elements.

1. Policies and procedures to identify the warnings (or “red flags”) of identity theft that may arise in the daily operations of a business. Examples of red flags might include notifications from credit reporting companies, documents that appear altered, documents with information that is inconsistent with other information, an address or telephone number that has been used by many other people, an account that is used in a way that is different from the established pattern, information about unauthorized charges, and notices from law enforcement or a victim of identity theft.


2. Policies and procedures to detect the warnings that have been identified. Examples of policies to detect red flags might include verifying customer identification when accounts are established, authenticating customers who access existing accounts, monitoring transactions, and verifying change-of-address requests. It may be appropriate to incorporate some of an organization’s existing practices, such as fraud detection practices, into the written plan.
   


3. Policies and procedures to respond to the warnings that have been detected. Examples of appropriate responses to red flags might include monitoring an account, contacting the customer, changing passwords or security codes, and notifying law enforcement. Covered entities may also determine that no response is necessary if, under the circumstances, there is a reasonable basis to conclude that a particular red flag does not evidence a risk of identity theft.
   


4. Policies and procedures to keep the program up to date, by evaluating it periodically and modifying it to reflect changing circumstances, such as changes to the business, changes in technology, and changing tactics used by identity thieves.

Organizations must administer their written programs. The initial written program must be approved by the board of directors or a committee of the board. In an organization that does not have a board of directors, a senior management employee must be designated to approve the program. The board, or a board committee, or a senior management employee, must be involved in administration of the program. Staff must be trained to implement the program. And there must be oversight of service providers who open or manage accounts or bill customers or collect debts.

In addition to the written program requirements set forth under 16 C.F.R. § 621.2, the FTC issued special rules that are likely to apply to many retailers, and that became effective November 1, 2008. First, under 16 C.F.R. § 621.3, issuers of credit cards must develop policies and procedures to assess the validity of a request for a change of address that is followed closely (i.e. within approximately 30 days) by a request for an additional or replacement card. The FTC does not interpret the rules to apply to gift cards or similar prepaid card products. In addition, under 16 C.F.R. § 621.1, users of consumer reports must develop reasonable policies and procedures to apply when they receive a notice of address discrepancy from a consumer reporting agency.

FTC enforcement actions can lead to civil penalties for non-compliance of $3500 per violation. FTC staff says that the FTC is willing to resolve compliance issues informally if businesses make good-faith efforts to comply. States are authorized to enforce the Red Flags Rule, too: they may seek injunctive relief, $1000 for each willful or negligent violation, and attorneys’ fees and costs. Under some circumstances, private plaintiffs may be able to sue for violations of the Red Flags Rule.

The FTC has delayed enforcement of the new identity-theft rules three times, this time explaining that it will provide additional resources and guidance to clarify which businesses are covered by the rule and what must be done to comply. The current November 1, 2009 deadline is intended to give financial institutions and creditors more time to review the FTC's guidance and implement a written program.

For more information, see the resources available on the FTC's web site here

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FTC to Begin Enforcement of the "Red Flags" Rule

The One Sentence Summary: On August 1, 2009, the Federal Trade Commission will begin enforcing its "Red Flags" Rule, which requires many retailers, among other businesses, to develop a written program designed to prevent identity thieves from using information they have illegally obtained.



The Red Flags Rule, 16 C.F.R. § 681.2, requires many businesses and organizations to create and implement a written program to identify and detect the warning signs of identity theft.

FTC staff believe that over 11 million entities are subject to the Rule, which affects organizations, large and small, that regularly extend credit to businesses and individuals. In addition to financial institutions, affected business entities also include “creditors,” a term which is defined broadly enough to include many retail businesses. In an Enforcement Policy Statement, the FTC indicated that “any person that provides a product or service for which the consumer pays after delivery is a creditor.” In addition, a retail business is a “creditor” if it issues credit cards, grants loans, arranges for loans or credit, or makes credit decisions. However, simply accepting credit cards for payment (as opposed to issuing credit cards) does not in itself make a retailer a “creditor.”

A retail business that meets the definition of a “creditor” must periodically determine whether it offers or maintain “covered accounts.” There are two types of “covered accounts.” The first is an account that is used primarily for personal, family or household purposes involving multiple payments or multiple transactions. The second is an account for which there is a foreseeable risk of identity theft, such as an account for a small business or sole proprietorship.

A retail creditor that offers or maintains covered accounts must establish a written program designed to detect and prevent identity theft and mitigate the effects of identity theft. Written programs will vary, depending upon the nature of the business and the types of transactions and accounts it maintains. FTC staff say that they will soon issue a model Red Flags Rule policy for small businesses.

Even a business at low risk of encountering identity theft needs to comply with the Red Flags Rule. For a low-risk business, the program can be relatively simple, focusing on how to respond to notifications or information suggesting that a customer’s identity is being misused. In general, the more certain a business is that its customers are who they say they are, the lower the risk of encountering identity theft.

A written program must include four elements.

1. Policies and procedures to identify the warnings (or “red flags”) of identity theft that may arise in the daily operations of a business. Examples of red flags might include notifications from credit reporting companies, documents that appear altered, documents with information that is inconsistent with other information, an address or telephone number that has been used by many other people, an account that is used in a way that is different from the established pattern, information about unauthorized charges, and notices from law enforcement or a victim of identity theft.
2. Policies and procedures to detect the warnings that have been identified. Examples of policies to detect red flags might include verifying customer identification when accounts are established, authenticating customers who access existing accounts, monitoring transactions, and verifying change-of-address requests. It may be appropriate to incorporate some of an organization’s existing practices, such as fraud detection practices, into the written plan.
   
3. Policies and procedures to respond to the warnings that have been detected. Examples of appropriate responses to red flags might include monitoring an account, contacting the customer, changing passwords or security codes, and notifying law enforcement. Covered entities may also determine that no response is necessary if, under the circumstances, there is a reasonable basis to conclude that a particular red flag does not evidence a risk of identity theft.
   
4. Policies and procedures to keep the program up to date, by evaluating it periodically and modifying it to reflect changing circumstances, such as changes to the business, changes in technology, and changing tactics used by identity thieves.

Organizations must administer their written programs. The initial written program must be approved by the board of directors or a committee of the board. In an organization that does not have a board of directors, a senior management employee must be designated to approve the program. The board, or a board committee, or a senior management employee, must be involved in administration of the program. Staff must be trained to implement the program. And there must be oversight of service providers who open or manage accounts or bill customers or collect debts.

In addition to the written program requirements set forth under 16 C.F.R. § 621.2, the FTC issued special rules that are likely to apply to many retailers, and that became effective November 1, 2008. First, under 16 C.F.R. § 621.3, issuers of credit cards must develop policies and procedures to assess the validity of a request for a change of address that is followed closely (i.e. within approximately 30 days) by a request for an additional or replacement card. The FTC does not interpret the rules to apply to gift cards or similar prepaid card products. In addition, under 16 C.F.R. § 621.1, users of consumer reports must develop reasonable policies and procedures to apply when they receive a notice of address discrepancy from a consumer reporting agency.

FTC enforcement actions can lead to civil penalties for non-compliance of $3500 per violation. FTC staff says that the FTC is willing to resolve compliance issues informally if businesses make good-faith efforts to comply. States are authorized to enforce the Red Flags Rule, too: they may seek injunctive relief, $1000 for each willful or negligent violation, and attorneys’ fees and costs. Under some circumstances, private plaintiffs may be able to sue for violations of the Red Flags Rule.

For more information, see the resources available on the FTC's web site here

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Tuna Exempt From "Toxic Warning" Labels Under California's Proposition 65

Court narrowly upholds trial court ruling favoring tuna canners, finding that mercury in ocean fish is naturally occurring, not from manmade sources.

Case: People v. Tri-Union Seafoods, LLC et al., Cal. Court of Appeal, First District No. A116792 (3/11/09)

The One Sentence Summary: Retailers need not monitor canned tuna for health warnings, at least for the time being, based on today’s court ruling that mercury in tuna is “naturally occurring,” and thus exempt from California’s Proposition 65.


What They Were Fighting About: Even though all canned tuna distributed in California has traces of methylmercury, a known toxic substance that can cause birth defects, the Court of Appeal affirmed the trial court’s judgment favoring the tuna canning companies in their litigation to block the State of California from requiring that health warnings be given to consumers. “We affirm the judgment on the narrow ground that substantial evidence supports the trial court’s finding that methylmercury in tuna is naturally occurring, thereby removing the Tuna Companies from the reach of Proposition 65.” (Slip Opinion at 2.)

California’s Proposition 65 law (Safe Drinking Water and Toxic Enforcement Act of 1986, CA Health & Saf. Code § 25249.5 et seq.) requires companies, including retailers and manufacturers of consumer goods, to give warnings if products expose consumers to cancer-causing substances or reproductive toxins. Methylmercury has been listed as one of the substances that can trigger such warnings. Commonly seen consumer warnings, on product labels or on signs retailers must post, typically read: “This product contains a chemical known to the State of California to cause cancer and birth defects.”

Court Holdings:

• The court discussed at length the evidence in the lower court on whether methylmercury in the oceans results from human activities. Noting that there were conflicting expert opinions, the court concluded that the lower court's ruling was based on substantial evidence that the methylmercury present in tuna is not from manmade sources. As such, the chemical, even if present in canned tuna, is exempt from the warning requirement.

• The appellate court specifically narrowed its holding to address only one of the arguments made by the tuna companies in support of their position that warnings are not required under Proposition 65. The court did not affirm on the other two grounds relied upon by the trial court. These were (1) that federal law preempted the application of state law to the tuna companies, and (2) that the amount of mercury in canned tuna did not meet the threshold level triggering the warning requirement. The decision accordingly does not provide guidance in other Proposition 65 situations where these defenses may be at issue.

• The court emphasized the narrowness of its decision. In addition to expressing the limitations on the grounds for upholding the lower court’s judgment, the court also stated that “there are potential scenarios that could possibly lead to a renewed Proposition 65 claim against the Tuna Companies or similar companies that would survive res judicata and collateral estoppel challenges.” Ongoing scientific research on sources of methylmercury might also result in a renewed basis for claims against the companies.

The prosecution was led by the Office of the California Attorney General, after an earlier case had been filed by a nonprofit environmental organization, the Public Media Center. The respondent companies were Tri-Union Seafoods, LLC; Del Monte Corporation; and Bumble Bee Seafoods, LLC.

Given the prominence of the litigation, and the State’s ongoing regulatory effort around applying health warning laws to food, the likelihood that the State will take an appeal is high.

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Toxics in Food: California Rulemaking Process Pushes for Warnings by Retailers

The Summary:
Who is mainly responsible for providing warnings - retailers or manufacturers – if food products expose consumers to chemicals listed as toxic under California’s Proposition 65? Grocers, members of the public, and California regulators will be discussing this topic and the proposal for new rules on the methods and content of warnings for food products in a conference call on March 14, 2009.


Under California’s Proposition 65 (Safe Drinking Water and Toxic Enforcement Act), state regulators have initiated a project to investigate amending the regulations that require warnings to be given to consumers when there are exposures from food to chemicals listed by the state as causing cancer or birth defects.

An informal conference call, set for March 14, 2009, is the latest step in a rulemaking process begun over a year ago by the Office of Environmental Health Hazard Assessment (OEHHA). The agency announcement is here.

In stakeholder meetings and public workshops, various groups have offered suggestions for improvements in the food warning rules. For consumer products, including food, existing regulations under Proposition 65 place the initial responsibility of labeling products on the manufacturer. The thinking goes: Manufacturers are in the better position to know the ingredients in their products, and it is efficient for them to put labels on products if needed. (“To the extent practicable, warning materials such as signs, notices, menu stickers, or labels shall be provided by the manufacturer, producer, or packager of the consumer product, rather than by the retail seller.”) However, other businesses in the supply chain besides manufacturers have not been immune from enforcement actions where the claim is failure to warn. Retailers in particular have been targeted by private enforcers.

Retailers, who directly interface with consumers, have noted that adopting regulations for a fair and flexible “safe harbor” warning method will provide an efficient way for retailers fulfill their legal obligations. However, an association of private party enforcement groups and law firms has objected to one such “safe harbor” regulation because they think it would go too far to insulate retailers from Prop. 65 liability.

Sorting out these various interests while coming up with food warnings consistent with Proposition 65, all within in the context of difficult times for the economy, is the challenge OEHHA faces. We will be monitoring developments.

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Costco Allowed to Protect Its Suppliers' Identities as Trade Secrets In a Manufacturer's "Unauthorized Retailer" Action

Case: Citizens of Humanity, LLC v. Costco Wholesale Corp., Cal. Court of Appeal, Second District No. B204117 (2/11/09)

The One Sentence Summary: In a manufacturer's suit challenging Costco's sale of high end jeans intended for sale only at authorized retailers, Costco was allowed to keep secret the names of its suppliers as a trade secret.


What They Were Fighting About: Citzens, a manufacturer of high fashion jeans sold only in exclusive retailers, learned that some of its jeans were being sold at Costco. After buying the jeans at Costco, Citizens learned from tags on the jeans that the Costco jeans must have come from three to five of Citizens' authorized retailer customers. Citizens surmised that the jeans must have been stolen, and sued Costco for selling stolen goods.

Citizens sought discovery from Costco identifying the suppliers of the jeans to Costco. Costco refused to identify its suppliers, claiming that the identity of its suppliers was a valuable trade secret. The trial court ordered Costco to provide discovery about the transactions where it obtained the jeans, but granted a protective order allowing Costco to remove the names of its suppliers from the production.

After discovery, Citizens amended its complaint to allege sale of stolen goods, conspiracy to commit fraud, and unfair competition. The trial court sustained a demurrer to the amended complaint, and Citizens appealed.

Second District Court of Appeal Holdings:

• The court began by characterizing this case as a form of "unacceptable retailer" claim where a manufacturer attempts to prevent discount retailers or other types of outlets from selling the manufacturer's products. Noting that California courts had not ruled upon "unacceptable retailer" cases, the court surveyed cases from other states, identifying the "hurdles" that a manufacturer faces:

  As a general rule, our society favors competition. Once the manufacturer has sold its goods to a distributor, the manufacturer can have no control over the retailers to whom the distributor resells the goods. If the manufacturer wishes to retain this control, it can best do so by means of its contract with its distributors. Even then, the manufacturer’s remedy is generally against its distributor for breach of contract; the manufacturer can only pursue the retailer if the retailer maliciously induced the breach.

  (Slip Opinion at 12). The court observed that plaintiff Citizens attempted to bypass these rules by avoiding tort claims for interference with contract or trademark. Rather, Citizens claimed that Costco knowingly sold stolen goods or conspired to commit fraud to obtain the jeans through misrepresentations.
• The court next affirmed the trial court's ruling that allowed Costco to keep secret the identities of its suppliers of Citizens' clothing. Costco had shown that the identity of its suppliers was a trade secret, i.e., valuable information not known to Costco's competitors that Costco took reasonable measures to protect.
• Citizens did not establish that it needed disclosure of the trade secret identities of Costco's suppliers in order to prove its claim that the jeans were stolen. Citizens did not need information from Costco because tags on the jeans identified only a small number of authorized retailers to which Citizens supplied the jeans, and Citizens could inquire of those retailers whether a theft had occurred.
• The appellate court ruled that the trial court should not have sustained the demurrer dismissing plaintiff's claim alleging knowing sale of stolen goods.
  
• The court rejected Costco's causation argument that Citizen's injury was not related to the alleged theft of the jeans, but rather to Costco's sale at a warehouse store rather than at a high end retailer. In rejecting this argument, the court noted that the purpose of section 496(c) of the Penal Code was to allow anyone harmed by the sale of stolen goods to bring a civil action.
• The court rejected Costco's argument that harm to Citizens' goodwill from the discount sale of its jeans could not be "actual damages" under section 496(c) of the Penal Code.
• The court affirmed dismissal of Citizens' fraud claim because Citizens failed to allege with particularity who made what misrepresentations or failures to disclose, and whether those misrepresentations were express or implied. Citizens had control of the information necessary to allege fraud because it knew which of its authorized retailers had received Citizens' jeans, and Citizens therefore knew what representations were made as to resale of the jeans.
• The court affirmed dismissal of Citizens' statutory unfair competition claim under section 17200 of California's Business and Professions Code because Citizens lacked standing. The court held that standing to bring a suit under section 17200 is limited to those who have lost money or property that could be restored by an order of restitution. Because harm to goodwill cannot be the basis of restitution, Citizens did not have standing under section 17200.
  
  

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Patent Claims for Candle Design Which Prevented Scorching Were Invalid Due to Obviousness

Case: Ball Aerosol & Specialty Container, Inc. v. Limited Brands, Inc., Bath & Body Works, Inc., et al., Fed Cir. No. 2008-1333 (2/9/09)

The One Sentence Summary: Patent claims for a candle which prevented scorching by having feet on the base of the candle holder and having these feet rest on a cover used as a stand were invalid because the invention was obvious.





Federal Circuit Holdings:

• The district court properly construed the claim language in determining that the "seating" of the candle on the cover did not require locking or engaging.
• The district court should have found that the claimed invention was obvious in light of prior art disclosing a cover used as a stand and feet on the bottom of the candle to minimize scorching.
• The district court erred in finding infringement on summary judgment just because the accused object was capable of having the cover used as a stand. Capability to infringe was not enough. The plaintiff failed to show actual infringement by putting the candles in the infringing configuration.
  
  

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Preparing for a Tenant's Opportunities from the Potentially Bankrupt Landlord

The Coming Challenge: Major commercial landlords may be on the brink of bankruptcy due to the current financial environment and the credit crunch. See, for example, the continuing news coverage of the struggles of General Growth Properties, such as General Growth Properties Seeks Further Loan Extension (Reuters).

What A Tenant Should Do: Prepare Now!

Tenants should prepare in advance of landlord bankruptcies to protect themselves and their locations, with the bankruptcies in fact presenting opportunities to compel landlords to make recompense for past overcharges and other breaches.


The United States is likely to experience bankruptcies of major commercial landlords in the coming year. Although most financially troubled landlords have managed to cope with their debt burdens sufficiently to avoid bankruptcy filings as of year-end 2008, the tight credit market and declining real estate values strongly suggest that 2009 will see bankruptcy filings by commercial landlords.

Because a landlord bankruptcy can dramatically impact a retail tenant, tenants should take steps to protect themselves in advance of any bankruptcy filing by a landlord. Most importantly, a tenant can prepare so that the bankrupt landlord will be required as part of the bankruptcy proceeding to correct breaches of a lease—such as overcharges or violations of the landlord’s covenants about the quality of the shopping center.

What should a retail tenant do to protect itself in the event of a landlord bankruptcy and to see that past landlord breaches are addressed?

First, a retail tenant should understand the landlord’s and the tenant’s rights and obligations under bankruptcy law in the event of a landlord’s bankruptcy.

Second, before a landlord files for bankruptcy protection, a retail tenant should assess its critical leases to document existing breaches that may be affected by a landlord bankruptcy. The protections that will be offered by a bankruptcy court to the tenant of a bankrupt landlord will vary depending on how thoroughly a tenant can demonstrate an existing breach of the lease.

Third, a retail tenant should prepare for how little time it will have to respond to actions in a landlord bankruptcy. A retail tenant should take steps to ensure it gets prompt notice of events in a landlord’s bankruptcy proceeding.

1. A Tenant Should Understand How Bankruptcy Law Will Affect the Rights of Landlords and Tenants in a Landlord Bankruptcy.


It is important for a tenant to a lease to understand how bankruptcy law will affect its rights and obligations in the event of a landlord bankruptcy. When a bankruptcy is commenced by a landlord, each of its unexpired leases is subject to “assumption” or “rejection” under Bankruptcy Code § 365.

The business dynamic for bankrupt landlords makes it unlikely that a landlord will seek to reject its existing retail leases. First, in today’s economic climate, a landlord likely will want to keep an existing lease and keep the tenant on the premises and paying rent. After all, leases entered before the downturn likely provide for rents that would be above market today. Second, the law provides that a landlord cannot use rejection to evict tenants from properties and establish a more profitable lease. However, rejection does generally terminate the landlord’s duties to perform under the contract, such as the obligation to pay for tenant improvements or to maintain the shopping center.

Thus, rejection is most likely to occur where the bankrupt landlord has determined that it cannot operate, or sell, a shopping center at a profit. In such a situation, it may seek to “sell” the shopping center to its secured lender for nothing more than a release of liability. It may also abandon the center and allow the secured lender to foreclose. In either circumstance, the lender will reject the lease so that it is not required to perform its obligations under the lease. In these circumstances, the “subordination, non-disturbance, and attornment” or “SNDA” agreements between a tenant and its landlord and the landlord’s lenders will control the situation. To prepare for these circumstances, a tenant should make sure it has easy access to its SNDA agreements and related provisions of its leases—and that the tenant has complied with any formal requirements of those agreements or provisions.

In the declining real estate market, it is more likely that a landlord seeking to reorganize itself under the Bankruptcy Code’s Chapter 11 will choose to assume leases that were entered before the recent economic downturn. The ability to control profitable leases will be central to the landlord’s attempt to re-create its business through the bankruptcy so that it will be successful going forward.

When a lease is being assumed, a retail tenant has a unique opportunity to force a landlord to come into compliance with a lease and even to obtain payment for overcharges and other remedies. Specifically, before the bankruptcy court will approve a landlord’s assumption of a lease, the bankrupt landlord is required to bring itself into compliance with the terms of the lease. The bankrupt landlord’s obligations for assumption fall into three groups.

• First, it must “cure” existing defaults—for example, pay back overcharges that constitute a default of the landlord’s obligations, or clean up a shopping center that has fallen out of “first class condition.”


• Second, it must “compensate” for pecuniary losses from the defaults.


• Third, it must demonstrate “adequate assurance of future performance”—that there won’t be future defaults under the lease. Thus, to keep the lease, the landlord will have to cure and compensate for all overcharges or damages incurred by the tenant. The landlord will be required to do so in the full amount shown by the tenant—and not at the “cents on the dollar” that are usually paid to those who were owed money prior to the bankruptcy filing.

In addition, for assumption, a tenant must pay all past due rent to keep the lease. In addition, a tenant is required to cure any other breaches that the tenant may have caused.

2. Before a Landlord Files For Bankruptcy Protection, A Tenant Should Identify Landlord Breaches to Ensure They Will Be Remedied.

Before a landlord files for bankruptcy protection, a retail tenant should analyze its leases, document the landlord’s overcharges and broken promises, and develop an accounting of the losses that the tenant has incurred as a result. A tenant that is prepared to present a detailed analysis of the breaches will be in a position to request that the bankruptcy court require the breaches be remedied prior to assumption of the lease in bankruptcy. A tenant who instead is prepared only to present general allegations of the landlord’s lease noncompliance will run the risk that the bankruptcy court will allow an assumption based on nothing more than generalized promises of cure from the landlord.
The more specific a tenant can be about existing defaults, the more likely it will be able to obtain protection from the bankruptcy court. Thus, the tenant should aim to present, in advance of the potential bankruptcy, a clear listing of any existing breaches to the potentially bankrupt landlord. In sum, the tenant should:

a. Examine the language of the leases;

b. Marshal facts that support the tenant’s position on the meaning of the lease provisions;

c. Develop facts demonstrating what the Bankruptcy Code calls the “pecuniary losses” arising from the landlord’s failure to keep its promises.

Some obvious “pecuniary losses” that could be asserted by a tenant would be overcharges for rent assessments pursuant to the lease, such as for CAM charges or the tenant’s share of taxes. But pecuniary losses should also be asserted by a tenant when a landlord’s failure to comply with covenants of the lease has resulted in demonstrable damage to the tenant. Examples would be declines in revenues due to the landlord’s failure to comply with requirements for shopping center occupancy rate, tenant mix, or “first-class condition.” Bankruptcy law expressly provides for compensation for such losses before assumption will be permitted.

If a tenant is prepared with this information, a landlord’s bankruptcy will force the landlord to respond to claims of breach. The bankrupt landlord will need bankruptcy court approval to assume the lease. Faced with a prepared tenant’s documented assertion of existing breaches, the landlord will need to address the breaches to get the assumption it needs. It will be required to do so either by agreement with the tenant or by demonstrating to the court’s satisfaction that cure, compensation, and adequate assurance are being provided. The conventional foot-dragging of landlords in responding to such claims of tenants is impossible if they wish to retain the lease and to make the necessary progress toward reorganization.

In contrast, if the tenant is unprepared to assert the specific breaches and the resulting damages, and instead simply tells the court that “the landlord is in breach,” the result likely will be less favorable to the tenant. The bankruptcy court will be far more likely to accept general assurances from the bankrupt landlord that the unspecific breaches will be addressed in the future. A demand presented to the landlord prior to the commencement of the bankruptcy, before the “automatic stay” of bankruptcy takes effect, will make presenting the issue to the bankruptcy court more effective.

3. A Tenant Should Be Prepared to Act Quickly When a Landlord Files For Bankruptcy.

Once a landlord files for bankruptcy, the tenant should immediately take steps to ensure that it will obtain prompt notice of the landlord’s actions in the bankruptcy. The common perception is that bankruptcies are very slow moving, primarily because major Chapter 11 reorganizations may take years to complete. But actions regarding unexpired leases can be much faster because they need not wait for the development of a formal plan for reorganization.

In a landlord’s bankruptcy, a landlord might move for the assumption of key leases in the very early days of the bankruptcy. Major decisions are made in bankruptcy court based on motions that can be heard on ten days’ notice—or less, if the matter is deemed urgent. Absent a request from the tenant, notice of the motions can be provided by first-class mail.

A prepared tenant will see that it is included on the electronic notice lists in the bankruptcy to ensure that it receives immediate notice of developments in the bankruptcy. This will include motions to assume leases. But it will also include other landlord actions that might affect the tenant, such as rejections or motions to sell the subject property to a new landlord. For example, one federal court of appeals recently allowed the sale of a property “free and clear” of existing leases. See Precision Industries, Inc. v. Qualitech Steel SBQ, LLC (In re Qualitech Steel Corp.), 327 F.3d 537 (7th Cir. 2003). The American Bar Association was concerned enough about the decision to write to congressional leaders urging an amendment to the Bankruptcy Code. See November 15, 2007, ABA Letter. While the Bankruptcy Code has a number of protections for a tenant to avoid losing its lease in such a way, a failure to object to such a proposed sale is deemed by some courts to be “consent” sufficient to allow the sale. Timely notice of such a move by a landlord will be essential to avoiding a bad result.

Further, if the lease analysis has not been completed prior to bankruptcy, it should be completed immediately upon receiving notice of a landlord’s bankruptcy filing. Because bankruptcy creates an automatic stay of pending actions involving a bankrupt landlord, once a landlord has filed for bankruptcy protection, any demands or documentations of breach should only be presented through counsel to avoid possible sanctions.

Conclusion: Tenants Should Prepare Now

While it requires a determined effort for a retail tenant to prepare for a potential landlord bankruptcy filing, such an effort will pay off when the prepared tenant successfully minimizes the substantial risks posed by a bankrupt landlord. Under some circumstances, a prepared tenant may in fact turn those risks into remedies for the landlord’s previous breaches.

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New California Plywood/Particle Board Rule Impacts Retailers

Furniture Banned to Curb Formaldehyde Emissions

The Summary: Starting in 2009, retailers in California face unannounced visits by inspectors from the California Air Resources Board (CARB) looking for banned and unlabeled merchandise made from composite wood. Retailers, fabricators, and manufacturers of new furniture (and other goods) made from certain composite wood products are prohibited from selling such goods in the state, unless they comply with a new CARB rule limiting formaldehyde emissions.

Retailers must comply with recordkeeping requirements immediately. Retailers have 18 months (to June 30, 2010) to sell through existing inventories of non-CARB-compliant goods. Under the new rule, unlabeled, noncompliant goods cannot be sold in California beginning on July 1, 2010.

According to CARB’s January 2009 Advisory, “Retailers do not have any additional labeling requirements under the ATCM. Existing labels should not be removed from a composite wood product or finished good.” http://www.arb.ca.gov/toxics/compwood/outreach/labelingadv.pdf
However, the Advisory goes on to clarify that retailers may replace an original label with a label listing their own company name, provided "all of the other original required label information is retained on the new label."

Background on the Regulation

CARB approved a new Air Toxics Control Measure (ATCM) to reduce formaldehyde emissions from composite wood products in April, 2007. The rule applies to panel manufacturers, distributors, importers, fabricators and retailers of certain composite wood panels, and finished goods containing those products, that are sold or supplied in California. The products subject to the rule are hardwood plywood, particle board, and medium density fiberboard. The text of the rule is available at 17 California Code of Regulation, sections 93120 – 93120.12 or here:
http://www.arb.ca.gov/regact/2007/compwood07/fro-final.pdf

(Formaldehyde is used in the production of wood binding adhesives and resins. It has been classified as a cancer-causing agent in humans. In 1992, formaldehyde was designated a toxic air contaminant with no safe level of exposure.)

The rule establishes two phases for reducing formaldehyde emissions. Phase 1 takes effect on January 1, 2009. Phase 2, with more stringent emission levels, begins in January 2010. CARB has estimated the cost to the affected industries of implementing the rule at $19 million for Phase 1, and $127 million for Phase 2. Industry groups have countered that these estimates are too low. The rule has been estimated to increase the per-panel retail price of composite wood products by $3.00 to $6.00 over current prices.

Retailers should know that CARB inspectors policing stores for compliance with the new rule will look for labeling on finished goods, such as tables, cabinets, bookcases and shelving, countertops, flooring, and moldings. Labels must show that any components that are hardwood plywood, particle board, or medium density fiber board have been certified by qualified third parties as compliant with the emissions standards. Labels may also be affixed to boxes, packaging, or other goods containers. The labels should be supplied by the manufacturer or fabricator, unless a retailer has made alternative arrangements for having its own labels.

Recordkeeping Requirements for Retailers

Retailers can be required to show records indicating the source of their stock, indicating the name of the manufacturer and the date of manufacture. Records must be maintained for a minimum of two years, in both hard copy and electronic form. Retailers are not, however, required to conduct product testing. Manufacturers of composite wood panels, and manufacturers of furniture and other products using composite wood covered by the new rule, have the burden of obtaining third-party certification. Online and catalog sellers of wood products delivered into California are also subject to the new rule. Civil penalties may be assessed for noncompliance. The fines can range from $1,000 to $10,000 per day for violations.

In informational workshops about the new rule, CARB has recommended that retailers insist that their suppliers provide CARB-compliant goods. Retailers can demonstrate their good faith efforts to comply with the new rule by having explicit written agreements with their suppliers.

According to CARB staff, the rule does not apply to antiques and used furniture.

Variance Procedure

CARB acknowledges that it has a procedure for issuing variances. Retailers who may want to explore obtaining a variance should contact their legal advisor. Some groups affected by the rule have sought to extend the compliance deadlines, expressing concerns about a number of problems they anticipate in implementing the rule. To date, CARB has expressed the view that delaying implementation is not warranted because progress is being made in qualifying the third-party compliance certifiers and because it has conducted outreach efforts with industry groups.

Other Regulatory and Enforcement Actions for Formaldehyde

Efforts have also been made to expand to the national level the California rule limiting formaldehyde emissions in composite wood products. For example, the U.S. Environmental Protection Agency in 2008 considered a petition to adopt the California ATCM under the federal Toxic Substances Control Act (TSCA) and to extend the scope of the regulation to manufactured housing. EPA rejected adopting the ATCM, but indicated that it would further study both cancer and non-cancer health risk concerns associated with formaldehyde in composite wood products. See http://www.epa.gov/fedrgstr/EPA-TOX/2008/June/Day-27/t14618.htm

Retailers have also been targeted with Notices of Violation under California’s Proposition 65 based on allegations that certain furniture, including baby cribs, release formaldehyde from composite wood components.

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Court Upholds New York Law Requiring Out-of-State Retailers to Collect New York Sales Tax

Case: Amazon.com LLC and Amazon Services LLC v. New York State Department of Taxation and Finance, Index No. 601247/08 (Sup. Ct. N.Y. 2009)

The One Sentence Summary: A New York court dismissed Amazon.com’s suit challenging the constitutionality of a recently enacted New York State law requiring out-of-state companies, including those engaging exclusively in e-commerce, to collect state sales tax on transactions originating from within New York. Amazon.com had argued that the law violates the Commerce Clause of the U.S. Constitution.

New York’s law (available here) requiring out-of-state retailers to collect sales tax took effect in April 2008. Under this law, an online retailer who pays any New York-based organization (such as an internet-based affiliate) compensation based on sales resulting from a referral by that affiliate to the retailer's website, must collect sales tax on any such sale made to a New York resident. (A New York-based organization includes any business that was formed in New York, does business in New York, or has a permanent place of abode in New York.) The fact that the online retailer is not itself located in New York, and does not have any connection to New York, is irrelevant. Retailers who generate $10,000 or less from New York sales in a fiscal year are exempt from the law.

Thus, an e-commerce retailer such as Amazon.com who does not have stores, offices or warehouses in the State of New York, must collect sales tax on each sale that it makes to a New York resident if that sale is a transaction for which the retailer will pay a commission or "revenue share" payment to an online affiliate that is based in New York.

From a practical standpoint, this means that e-commerce retailers who do not have a physical presence in New York and therefore did not previously collect sales tax from sales made to New York residents, must register with the State of New York as a sales tax vendor and track sales to New York residents made through New York-based online affiliates in the same way that they track (and collect tax on) sales to residents of states in which they do have a physical presence.

The decision, which was rendered by New York’s State Supreme Court Justice Eileen Bransten, is subject to appeal. Click here for a link to the text of the full decision.

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New Legal Developments for California Employers

This posting provides a legal update summarizing many new legal developments in employment law for 2009. The update includes summaries of new statutes, case law, and regulations that will impact California (as well as non-California) employers.

Additionally linked is an update regarding the new FMLA (Family Medical Leave Act) regulations issued by the U.S. Department of Labor that went into effect on January 16th. This update summarizes the significant changes in the new FMLA regulations, and also contains a chart at the end of the summary, explaining the differences between the FMLA and the California Family Rights Act (CFRA).

If you have any questions about the application of any of these laws to any particular situation effecting your company, please contact one of us in the Labor and Employment Practice Group.

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The Center is Failing: What Are Your Rights?

The Summary: In today’s financial climate, it is hard to keep up with the changes happening in shopping centers across the country. Retail space in shopping centers is staying vacant for several months or longer. Landlords are converting retail space to non-retail use or closing entire wings or floors of shopping centers. Landlords are even closing operations entirely at shopping centers to redevelop the property. What are a retailer’s rights when a mall begins to fail? Some retailers have favorable co-tenancy provisions in their leases that provide immediate rights under these circumstances. While co-tenancy provisions are the most obvious protection when a shopping center fails, tenants often have other protections under the lease and under the common law.

When faced with a failing shopping center, a tenant should follow three steps to evaluate its rights against the landlord.

First, a tenant should determine whether there is a co-tenancy provision in the lease, and if so, a tenant should monitor the landlord’s compliance with the co-tenancy requirements regularly. In the event of a co-tenancy failure, a tenant should assert its rights under the lease as quickly as possible.

Second, a tenant should evaluate whether there are other provisions in the lease that might offer protection. More general obligations and covenants in the lease may also offer grounds for relief against the landlord.

Third, a tenant should think beyond the lease language. State common law may offer additional protection to a tenant when a shopping center fails.

Step 1: Does The Tenant Have Co-Tenancy Rights Under The Lease?
Some tenants are in a position to negotiate co-tenancy provisions in their leases, such that if certain key stores or a percentage of stores in the center fail to operate, the tenant is entitled to relief. These provisions vary and should be closely scrutinized in this market, so that those tenants that are lucky enough to have them are enforcing them against their landlords.

Enforcing A Co-Tenancy Provision
A typical co-tenancy provision states that if one or more key stores (or anchor stores) at a shopping center is not occupied by the existing tenant or similar tenant, or if a certain percentage of the retail stores are not occupied by retail tenants, the tenant may pay reduced rent (often referred to as “alternate rent”) or terminate the lease. While co-tenancy provisions generally are enforceable, disputes relating to co-tenancy provisions may not be easy to resolve. Language in co-tenancy provisions can be ambiguous, which means that lawsuits regarding these provisions are sometimes subject to a trial rather than more efficient resolution by a judge. See Rathbun v. Cato, 93 S.W.2d 771 (Mo. Ct. App. 2002) (holding the term “similar type and size business” in a co-tenancy provision was ambiguous and its meaning must be determined based on evidence of the parties’ intent outside of the lease); Jo-Ann Stores, Inc. v. Property Operating Co., LLC, 91 Conn. App. 179 (2005) (holding term “first class retail purpose” in a co-tenancy provision was ambiguous).

Issues that often arise with co-tenancy provisions are when and how co-tenancy rights are triggered. For example, does the landlord have an obligation to notify the tenant when the co-tenancy requirements are not met, or is the tenant required to monitor the shopping center to confirm compliance with the co-tenancy requirements? This question is often governed by the specific lease language. For example, the lease may require the landlord to notify the tenant in the event of a co-tenancy failure. If the lease does not require notice, the tenant should periodically request information from the landlord regarding the occupancy of the key stores and other retail space. Even if the landlord provides such information, it is advisable that the tenant conduct its own inspection of the center and record occupancy levels.

“Making An Election” vs. Condition Precedent
Some co-tenancy provisions state that in the event of a co-tenancy failure, the tenant is entitled to “make an election” to pay reduced rent. How does this language affect a tenant’s rights? When the tenant has the right to “make an election” of remedies upon a co-tenancy failure, the landlord will argue that the tenant’s failure to make the election after a co-tenancy failure waives the tenant’s right to reduced rent or reimbursement of overpayments. Where a co-tenancy requirement is based on a certain percentage of leasable square footage, however, a tenant most likely will not be able to determine precisely when a co-tenancy failure occurs unless the landlord provides additional data. While a tenant should be vigilant about monitoring the shopping center’s occupancy and compliance with co-tenancy requirements, a tenant should take the position that it is the landlord’s obligation to provide the tenant with information relating to co-tenancy failure before the tenant is obligated to make an election of remedies.

Other co-tenancy provisions more simply state that if the co-tenancy requirements are not met, then the tenant is not required to pay full rent. This language creates a “condition precedent.” If the condition (the co-tenancy requirement) is not met, the tenant’s rent obligations are reduced automatically. This language is preferable to the “election” language as described above. Where there is a condition precedent, if for some reason the tenant continues to pay full rent after a co-tenancy failure, the tenant has a stronger argument for reimbursement of prior overpayments.

Step 2: Does The Tenant Have Other Rights Under the Lease?
If a lease does not include a co-tenancy provision, a tenant still should closely review the lease to identify other provisions that may provide rights when a center begins to fail. In many leases, the landlord covenants to do something for the benefit of the tenant. For example, the landlord may covenant to maintain common areas consistent with a first class shopping mall; conduct marketing and promotional activities; or provide security or other services. If the shopping center is failing, and as a result, the landlord fails to maintain it properly or comply with its marketing or security obligations, the landlord would be in breach. The lease will often set forth the remedies available in the event of such a breach.

Further, landlords may covenant in a lease to provide certain things to the tenant, such as a first class shopping center or regional retail development. A lease may include a specific description of the shopping center or attach a map of the center and its individual retail stores. If the shopping center no longer fits the description as set forth in the lease, the landlord may be in breach and subject to a claim for damages.

Even language relating to the tenant’s obligations in the lease may be of use when the center is failing. For example, a tenant may agree that its sales practices will be consistent with standards and practices generally acceptable in “enclosed first-class, full-retail-price regional shopping centers.” If the landlord has made changes to the center such that it is no longer operating a “first-class full-retail-price regional shopping center,” the landlord may be in breach of the lease.

These types of provisions and covenants demonstrate that the parties intended the shopping center to be more than the collection of leasable space. Rather, the parties intended the shopping center to be a destination in and of itself, and in entering into the lease, the tenant was agreeing to lease space in the shopping center as it existed at the time of the execution of the lease. A substantial change to the center could be a breach of the lease entitling the tenant to relief.

Step 3: Does The Tenant Have Common Law Rights Outside of the Lease?
Although a tenant typically cannot rely on state common law to assert rights contrary to the language of the lease, a tenant can use common law to bolster arguments based on the lease or to fill in gaps not addressed in the lease.

For example, if changes in a shopping center cause a landlord to breach a specific provision in the lease (e.g., co-tenancy requirements or covenant to provide center with specific characteristics), a tenant can file a lawsuit for breach of contract and seek damages. If the changes to the shopping center are so significant that the tenant cannot operate its store as contemplated under the lease, a tenant may have a right to terminate its lease based on the common law principles of constructive eviction, failure of consideration or impossibility of performance. See Causeway Partners 1, Ltd. v. Kinney Shoe Corp. T/A Foot Locker, No. 01-00-01280 (Tex. App. April 25, 2002) (unpublished) (rejecting landlord’s claim for breach of lease and holding tenant was constructively evicted when mall’s occupancy rate dropped well below 20% and there was no foot traffic). In addition, if the landlord has done something to undermine the tenant’s value in its lease, such as open a competing center nearby, the tenant can argue that the landlord has breached the covenant of good faith and fair dealing, which is a covenant implicit in every contract.

Further, a tenant should identify facts that might support a tort claim against the landlord. A landlord cannot lie to the tenant to induce the tenant to enter into or renew a lease. If a landlord misrepresented occupancy rates or that specific tenants would be leasing space at the shopping center, then the tenant may have a claim for fraud. The tenant should be careful to retain all records relating to the landlord’s representations. Even if the tenant can prove that the landlord misrepresented facts to induce the tenant to lease the space, the tenant will have the additional hurdle of proving that the lease agreement does not supersede any prior promises by the parties.

Conclusion
Retailers cannot avoid entirely the downturn in the economy, but they can take action to assert their rights against landlords when shopping centers begin to fail. First, a tenant should read the lease to determine whether there are specific provisions in the lease that set forth the tenant’s rights when the center undergoes changes. Second, a tenant should review the lease for more general provisions that may be breached by the landlord when the center begins to fail. If the landlord is not complying with its covenants in the lease, the landlord is in breach. Third, a tenant should consider common law claims. If the changes to the center are so substantial that the tenant cannot reasonably operate its store, the tenant may have a right to terminate the lease or seek damages based on constructive eviction, failure of consideration, impossibility of performance, breach of the covenant of good faith and fair dealing or possibly fraud.

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Splintered Decision Fails to Settle Questions About FTC's Burden in Blocking Mergers

Case: Federal Trade Commission v. Whole Foods Market, Inc., No. 07-5276 (D.C. Cir. 11/21/08)

The One Sentence Summary: The Federal Trade Commission sought a preliminary injunction to block the merger of premium supermarket chains Whole Foods and Wild Oats; after the trial court denied the injunction and the merger took place, a sharply divided three-judge panel of the Court of Appeals for the District of Columbia Circuit reversed the trial court's order, possibly signaling a lower threshold for the FTC to obtain a preliminary injunction to block potential mergers.


What They Were Fighting About: There were two key issues in this case: (1) the standard the FTC must meet in order to show it is entitled to preliminary injunction to block a merger; and (2) what role customers' particular preferences play in determining what is a "relevant market" (the market in which competition takes place) for purposes of antitrust analysis.

Before their merger, Whole Foods and Wild Oats were the largest operators of what the FTC called "premium, natural and organic supermarkets" (or "PNOS"). In February 2007, they announced they would be merging, a move the FTC alleged would create monopolies in eighteen cities where Whole Foods and Wild Oats operated the only PNOS. The FTC sought a temporary restraining order and preliminary injunction to stop the merger while it conducted an administrative proceeding to decide whether to block the merger permanently under the federal antitrust laws. The FTC argued that in order to assess the anticompetitive effects of the merger, the "relevant market" included only PNOS. The defendants disagreed, arguing that PNOS compete in a larger market including other grocery stores and supermarkets and, accordingly, that the merger did not pose antitrust concerns.

The U.S. District Court for the District of Columbia denied the injunction, holding that the FTC failed to meet the standard required to obtain a preliminary injunction under the Federal Trade Commission Act, 15 U.S.C. section 53(b). Specifically, the District Court held that because PNOS compete with regular supermarkets and grocery stores, PNOS were not themselves a distinct market in which Whole Foods and Wild Oats would actually have market power. Thus, the District Court reasoned, the FTC was not entitled to an injunction because it could not show that it was likely to succeed on the merits of its case.

Although the merger actually took place in August 2007, the FTC nevertheless appealed to the U.S. Court of Appeals for the District of Columbia Circuit, arguing that the District Court applied the wrong legal standard. On July 29, 2008, a three-judge panel of the Court of Appeals reversed, sending the case back to the District Court for further proceedings. Although it first appeared that there was a majority opinion filed by Judge Janice Rogers Brown, the Court of Appeals subsequently issued an amended opinion on November 21, 2008 that made it clear that Judge David S. Tatel concurred in the judgment only, not Judge Brown's opinion. Thus, although two Circuit Judges formed a majority in reversing the decision of the District Court, there were three separate opinions filed: Judge Brown's opinion, Judge Tatel's opinion concurring in the judgment, and Judge Brett M. Kavanagh's dissenting opinion. Accordingly, it is difficult to know what weight will be given to the decision of the Court of Appeals and its reasoning in future cases.

Both Judge Brown and Judge Tatel stated that section 53(b) set a lower threshold for the FTC to obtain a preliminary injunction than, say, a private litigant seeking an injunction would face. Both also concluded that the FTC will usually be able to obtain a injunction by raising questions as to the merits "so serious, substantial, difficult and doubtful as to make them fair ground for thorough investigation. . . ."

Judge Brown characterized the proper analysis as to whether a merger should be enjoined as a "sliding scale" under which a court should balance the FTC's likelihood of succeeding on the merits of its case against the "equities" resulting from an injunction. Under this sliding scale test, Judge Brown determined that the District Court had erred by underestimating the FTC's likelihood of succeeding on the merits of its case. Specifically, the District Court had considered only "marginal consumers" -- those who would switch to other non-PNOS stores in response to a price increase by PNOS. According to Judge Brown, the District Court should have also considered "core customers" of the PNOS -- those who were committed to natural and organic products, health and ecological sustainability. Judge Brown seemingly concluded that because these core customers were unlikely to switch to standard grocery stores should prices increase, the relevant market could be limited to PNOS. Moreover, the FTC's evidence suggested that although Whole Foods and Wild Oats competed with other grocery stores on prices of "dry goods," they did not compete with regard to the natural and organic perishable goods that made up the bulk of their business.

Judge Tatel relied on evidence presented by the FTC suggesting that customers did not consider the products of PNOS reasonably interchangeable with those of other stores. He also cited evidence that Whole Foods and Wild Oats could sustain "statistically significant non-transitory increase in price," including evidence that indicated that defendants raised their prices when they operated the only PNOS in particular cities.

Notably, the majority rejected defendants' arguments that the issue was moot because the merger had been consummated. The majority noted that if a preliminary injunction issued, the status quo could be preserved (for example, by preventing future actions taken to close additional stores).

Although the majority held that the District Court erred, the Court of Appeals remanded for further proceedings because the District Court had not yet examined the "equities" involved in granting a preliminary injunction. Thus, the Court of Appeals directed the District Court to examine and weigh those equities against the FTC's likelihood of success.

Judge Kavanagh strongly dissented, accusing the majority of diluting the requirement that the FTC show a likelihood of success on the merits. Judge Kavanagh further criticized the majority for relying on older cases such as Brown Shoe Co. v. United States, 370 U.S. 294 (1962) while ignoring more modern cases such as Munaf v. Geren, 128 S. Ct. 2207 (2008), which Judge Kavanagh argued rejected the "serious questions" standard cited by the majority.

On November 21, 2008, the same day the revised opinions were issued, the Court of Appeals denied Whole Foods' petition to have the entire Court of Appeals rehear the appeal en banc. In denying the petition, two Circuit Judges expressly stated that the judgment set no precedent beyond the facts of the case.

Key Points:

• Although there is no majority opinion, both Judge Brown and Judge Tatel suggested that the FTC should be entitled to a presumption (which defendants could rebut) that an injunction should issue if the FTC can establish that there are "serious, substantial, difficult and doubtful" questions as to the merits.
  
• The opinions also indicate that even if a merging businesses compete for customers in a larger market, a court may consider whether they have "core," dedicated consumers that prefer their specialized or premium products even when prices increase.
  
• Because there is no actual opinion of the Court of Appeals stating the bases for reversing the District Court's denial of an injunction, it is unclear what weight the D.C. Circuit, let alone other federal courts, will give to the reasoning set forth in Judge Brown's and Judge Tatel's opinions.
  
  

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State Appellate Court Vacates Class Action Settlement Due to Court’s Failure to Independently Analyze Fairness of Settlement.

Case: Kullar v. Foot Locker Retail Inc., Case No. A119697 (Cal. Ct. App. 11/7/08)

The One Sentence Summary: Approval of a $2 million settlement in a wage-and-hour class action against a retailer was vacated because the trial court failed to independently analyze the evidence and circumstances surrounding the settlement.


What They Were Fighting About: Defendant Foot Locker agreed to settle this class action, which alleged various failures to properly compensate employees for their labor and expenses, for a total of $2 million. A member of the class filed a written objection to the settlement and requested discovery, arguing that the settlement was not fair and class counsel had not completed sufficient discovery to determine the extent of the class loss. At the hearing for final approval, the settling parties argued that information supporting the settlement had been exchanged at the mediation that resulted in the settlement, but that none of the information could be provided to the trial court due to the privilege accorded mediation discussions. The trial court concluded that it could not compel the parties to turn over documents exchanged at the mediation, and approved the settlement on the basis that “circumstantial evidence” indicated it was fair.


Upon the objector’s appeal, the appellate court vacated and remanded for further proceedings. The court held the trial court was required to independently analyze the evidence and circumstances to determine whether the settlement was in the best interests of the class. Although the trial court was not required to attempt to decide the merits of the case, it must at least satisfy itself that the class settlement is within “the ‘ballpark’ of reasonableness.” Accordingly, the trial court was required to examine the relevant data. If certain data were privileged, the parties could be required to provide the trial court with other data that would enable the court to make an independent assessment of the adequacy of the settlement terms. The appellate court further held that the objector should be permitted to renew its discovery requests, within limits.

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Class Action for Deceptive Advertising Was Improper Where Individual Buying Decisions Would Need Proof

Case: Thorogood v. Sears, Roebuck & Co., Seventh Cir. No. 08-1590 (10/28/08)

The One Sentence Summary: Class action certification was reversed because allegations of deceptive advertising in the sale of Sears Kenmore washing machines with stainless steel drums would require individual determinations of whether buyers were deceived, and deception was unlikely where advertisements did not indicate that stainless steel drums prevented rust stains on clothes.


What They Were Fighting About: The district court had jurisdiction over the class action under the Class Action Fairness Act, 28 U.S.C. §§ 1332(d), 1453, 1711-1715. The district court granted the motion to certify the class, and defendant appealed.

Seventh Circuit Holdings:

• The panel explained that the advantage of class actions in enabling the litigation of small claims comes with many downsides.
  
• One downside of class action litigation is conflict between the class members who have small economic interests in the litigation, and class counsel who may receive large fees.
• Class actions also create huge risks for companies because many individual cases are consolidated before a single court that may err in the outcome. Thus, even claims of little merit may be settled to avoid risk.
• Judge Posner's opinion further opined that class actions tend to undermine federalism because a single jury must try to apply an amalgamated law from many states.
• This class should not have been certified by the district court because there was no evidence that anyone other than the named plaintiff was deceived into believing that a stainless steel washer drum would prevent rust stains on clothes.
  
  

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Statutory Implied Warranty Under California UCC of No "Rightful" Claims Is Breached by Nonfrivolous Trademark Infringement Claims

Case: Pacific Sunwear of California, Inc. v. Olaes Enterprises, Inc., No. D051391 Fourth Dist., Div. One. (Oct. 9, 2008)

The One Sentence Summary: Unsuccessful trademark infringement claims asserted against the buyer of "Smile Now, Cry Later" Hot Sauce Monkey shirts supported the buyer's claim that the seller breached the statutory implied warranty of section 2312(3) of the California Uniform Commercial Code to provide goods that were free of "rightful claims."




What They Were Fighting About: Oales sold Hot Sauce Monkey t-shirts to Pacific Sunwear. These shirts depict on the front, a monkey drinking a bottle of hot sauce and, on the back, the same monkey in apparent pain, expelling fire. Centered underneath each of the images is a two-word caption: on the front, the phrase "Smile Now"; on the back, the phrase "Cry Later." SNCL, the holder of a registered trademark for Smile Now, Cry Later, made trademark infringement claims against Pacific Sunwear. In the trademark litigation in Hawaii, the court denied a motion for preliminary injunction, finding there was no likelihood of confusion after which the case settled.

Pacific Sunwear then sued Olaes for breaching the statutory warranty that the Hot Sauce Monkey T-shirts were "free of the rightful claim of any third person by way of infringement or the like." (§ 2312(3).)

The trial court granted summary judgment for Olaes, holding that the underlying claims of infringement were not "rightful claims" in light of the federal court's ruling that there was no likelihood of confusion.

California Uniform Commercial Code section 2312 states as follows:

"(1) Subject to subdivision (2) there is in a contract for sale a warranty by the seller that

"(a) The title conveyed shall be good, and its transfer rightful; and

"(b) The goods shall be delivered free from any security interest or other lien or encumbrance of which the buyer at the time of contracting has no knowledge.

"(2) A warranty under subdivision (1) will be excluded or modified only by specific language or by circumstances which give the buyer reason to know that the person selling does not claim title in himself or that he is purporting to sell only such right or title as he or a third person may have.

"(3) Unless otherwise agreed a seller who is a merchant regularly dealing in goods of the kind warrants that the goods shall be delivered free of the rightful claim of any third person by way of infringement or the like but a buyer who furnishes specifications to the seller must hold the seller harmless against any such claim which arises out of compliance with the specifications."

California Court of Appeal Holdings:

• The phrase "free of the rightful claim of any third person by way of infringement or the like" in California Uniform Commercial Code section 2312 should be interpreted by reference to the commentary to section 2-312 of the Uniform Commercial Code in the absence of other evidence of legislative intent as to the meaning of "rightful claim."
• The commentary to the Uniform Commercial Code makes it clear that the term "rightful claim" as used in the statute is intended to broadly encompass any nonfrivolous claim of infringement that significantly interferes with the buyer's use of a purchased good.
• Other states have interpreted their statutes enacting section 2-312 of the Uniform Commercial Code consistently with the commentary that a rightful claim need not be a meritorious claim.
• Public policy reasons also support interpreting section 2312 to extend to nonfrivolous claims. A merchant regularly dealing in goods of the kind has superior knowledge of potential claims and more incentive to resolve them than a buyer. Additionally, the parties can expressly contract to alter the implied warranty under section 2312.
• The existence of a reverse warranty from buyer to seller in the case of buyer-supplied specifications under section 2312(3) supports the interpretation of section 2312.
• Interpreting section 2312 to extend to nonfrivolous claims provides a clear allocation of risk that provides certainty to parties entering a commercial transaction.
• "[T]he warranty against rightful claims applies to all claims of infringement that have any significant and adverse effect on the buyer's ability to make use of the purchased goods, excepting only frivolous claims that are completely devoid of merit."
• Summary judgment against the plaintiff's warranty claim was inappropriate due to triable issues of fact as to whether the underlying infringement claim was nonfrivolous.
• Triable issues of fact precluding summary judgment also existed as to whether any damages such as Pacific Sun's litigation expenses were proximately caused by Olaes' failure to disclose the potential trademark claims by SNCL. The factual issues include whether Pacific Sun knew of the potential claims.
  
  

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Compliance With State Regulations Provides Protection Against Consumer Claim

Case: Yabsley v. Cingular Wireless, LLC, Case No. B198827 (Cal. Ct. App. 8/18/2008)

The One Sentence Summary: California Court of Appeal holds that compliance with California Regulations relating to retailer’s tax obligations provides safe harbor against claims by consumer for unfair business practices and false advertising under Business and Professions Code sections 17200 and 17500.


What They Were Fighting About: Defendant Cingular Wireless provided a half price discount for the purchase of a cellular phone if the customer also enrolled in a calling plan package. California Regulation 1585 requires that the sales tax be computed based on the full price of the phone, and the seller can pass on the full tax to the customer if it chooses. Plaintiff alleged that when he purchased a phone and calling plan package from Cingular, Cingular calculated Plaintiff’s tax based on the full price of the phone without informing him that it was doing so. Plaintiff brought a putative class action against Cingular for unfair business practices in violation of California Business and Professions Code section 17200 and misleading advertising in violation of California Business and Professions Code section 17500 arising out Cingular’s failure to disclose the sales tax charged.

Court Holdings:

• Although California law prohibits “any unlawful, unfair or fraudulent business act or practice,” it does not apply where specific legislation provides a “safe harbor” for the conduct at issue.
• “California Regulation 1585 has the ‘force and effect’ and the ‘dignity’ of a statute. Therefore, it may, and does, provide a safe harbor to Cingular.”
• No law required Cingular to disclose the amount of the sales tax charged on a sale prior to the sale. Cingular’s disclosure of the amount of the sale tax in the sale invoice was in compliance with the law because Plaintiff had a right to refuse to enter into the contract after seeing the invoice.
  
  

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Even Reasonable and Narrow Non-Compete Agreements Are Barred by California Statute

Employment contracts with non-competition clauses are common outside of California, but a California statute, section 16600 of the California Business and Professions Code, prohibits non-compete contracts outside of a few statutory exceptions. In a decision issued on August 7, 2008, Edwards v. Arthur Anderson, No. S147190, the California Supreme Court held that section 16600 prohibits non-competition contracts even if the non-compete clause is reasonable or imposes only a “narrow restraint.” The Court further held that the employer had engaged in a wrongful act by requiring the employee to sign a release of claims under the non-competition contract.

Background:

Section 16600 provides that

“Except as provided in this chapter, every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.”

Statutory exceptions to section 16600 allow non-compete contracts in certain circumstances, including in connection with the sale of goodwill of a business (§ 16601) and the dissolution of a partnership (§ 16602) or limited liability corporation (§ 16602.5).

In Edwards, the plaintiff Edwards had signed a non-competition agreement as an employee of Arthur Anderson. The agreement barred Edwards from serving within 18 months any Anderson clients with whom Edwards had worked, and barred solicitation of clients of Anderson’s Los Angeles office. After Anderson became embroiled in the Enron scandal, HSBC sought to hire a group of employees including Edwards. HSBC and Anderson required the moving employees to sign a “Termination of Non-Compete Agreement” which released “any and all” claims against Anderson. Edwards refused to sign the termination agreement because he did not want to release indemnity claims against Anderson, and was therefore not hired by HSBC. Edwards then sued Anderson and HSBC for claims including interference with prospective economic advantage. Edwards lost in the trial court against Anderson but won at the California Court of Appeal (click here for a discussion of the lower court decision). The California Supreme Court then took the case.

California Supreme Court Holdings:

• The first question before the California Supreme Court was whether Anderson’s enforcement of the non-competition agreement (by forcing Edwards to sign an agreement terminating it) was a wrongful act. The Court held that enforcing the non-competition agreement was illegal under section 16600 and enforcing it was a wrongful act that could lead to liability for interference with prospective economic advantage. The Court noted that

  section 16600 reflects “a settled legislative policy in favor of open competition and employee mobility, . . . [it] ensures that every citizen shall retain the right to pursue any lawful employment and enterprise of their choice [and it] protects the important legal right of persons to engage in businesses and occupations of their choosing.”



• In light of the broad statutory language of section 16600 and the limited statutory exceptions, the Court rejected decisions of federal courts which had ruled that section 16600 allowed “reasonable” non-compete contracts that imposed only a “narrow restraint” on competition. The Court stated “Section 16600 is unambiguous, and if the Legislature intended the statute to apply only to restraints that were unreasonable or overbroad, it could have included language to that effect.”


• In a second part of the decision unrelated to the non-competition agreement issue, the Court also held that the release sought by Anderson as the employer for “any and all” claims was not unlawful because it could not be interpreted to release non-waivable employee indemnity rights under California Labor Code section 2802(a).
  

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New Fast-Food Restaurants Blocked for a Year in Los Angeles Low-Income Neighborhoods

The One Sentence Summary: An ordinance banning new fast-food establishments for a one-year period has been approved unanimously by the Los Angeles City Council for certain areas in South Los Angeles.


Full Posting:

The moratorium on issuance of building permits for new stand-alone restaurant projects affects a 32-square-mile area in South Los Angeles, including Southeast Los Angeles, West Adams, Baldwin Hills and the Leimert Park community planning areas. The Director of City Planning has discretion to approve a project permit upon the demonstration of a number of factors including size of the project, parking availability, litter control, and absence of a “Drive-through Window”.

Proponents of the measure, Council members Jan Perry and Bernard Parks, hope to use the time to encourage new development, including grocery stores and sit-down restaurants, in their districts. They expressed the hope of encouraging more healthy food alternatives in the area. The measure can be extended for as much as an additional 12 months if the two 6-month extension options are triggered.

“Fast Food Restaurant” is defined in the draft “Interim Control Ordinance” submitted to the City Council as “Any establishment which dispenses food for consumption on or off the premises, and which has the following characteristics: a limited menu, items prepared in advance or prepared or heated quickly, no table orders, and food served in disposable wrapping or containers.” ICO 07-1658.

This updates the earlier blog entry
http://www.retaillawobserver.com/2007/12/proposed-ban-on-fast-food-restaurants.html

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Brinker Restaurant v. Superior Court of San Diego County, et al.

Case: Brinker Restaurant v. Superior Court of San Diego County, Case No.D049331 (Cal. Sup. Ct. 7/22/08)

The One Sentence Summary: On July 22, 2008, the California Court of Appeal issued a ruling on meal breaks and rest periods that may make it easier for California employers to comply with meal and rest break requirements. Because it is likely that the case will be appealed, however, employers should be cautious in relying on the opinion until all appeals are finally concluded, which may take several years.

What They Were Fighting About:

In Brinker Restaurant v. Superior Court of San Diego County, et al., plaintiffs brought a class action complaint against Brinker Restaurants (operator of 137 restaurants in California including Chili's, Romano's Macaroni Grill, and Maggiano's Little Italy) for various alleged violations of California meal and rest break requirements. In vacating the Superior Court's order granting class certification, the Court of Appeal made several significant rulings concerning employers' responsibility for meal periods and rest breaks:

(1) Providing Meal and Rest Breaks: The Court held that while employers cannot "impede, discourage or dissuade employees from taking" meal periods or rest breaks, employers need only provide employees the opportunity to take meal periods and rest breaks, not ensure that employees actually take them.

(2) Scheduling Meal Breaks: The Court overturned the trial court's conclusion that the employer was required to provide meal breaks on a "rolling" five hour schedule-that is, providing a thirty minute break for each five hours worked. Because Brinker allowed its food servers to take meal breaks in the first hour of an eight hour shift (so they could work and earn tips during the busiest part of the shift), plaintiffs had argued that Brinker was required to provide a second meal period within five hours of the first meal break. The Court held that employers need provide only one meal break for employees who work between five and ten hours during a shift, regardless of when the meal period is taken. A second meal break is only required if an employee works more than ten hours.

(3) Scheduling Rest Breaks: The Court also rejected the argument that employees need to take their rest breaks in the middle of each four hour period. The Court found that Brinker did not violate the rest break requirement by allowing employees to take their meal period in the first hour of an eight hour shift and then to take their two rest breaks later in the shift.

What Brinker May Mean to You:

If this case is not overturned on appeal (which we may not know for months or even years), then employers will have more flexibility in scheduling meal periods and will not have the burden of ensuring (and proving) that employees actually take the full meal periods provided. In addition, employers will not have to pay the one hour of premium pay to employees who take an "early lunch," a break at the wrong time, or a break of less than 30 minutes, as long as the employer provided a meal period and the employee did not work more than ten hours total.

In light of the likelihood that this case will be appealed, we recommend that employers do not make changes to meal and rest break policies without consulting legal counsel.

If you have any questions about the Brinker case, and how it may apply to any particular situation effecting your company, please contact one of us in the Labor and Employment Practice Group.

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Foil Balloons May Be Subject to Point-of-Sale Warnings in California

The One Sentence Summary: If legislation proposed by California Senator Jack Scott (D-Pasadena) is enacted, California retailers selling helium-filled foil balloons can no longer use toys or candy as balloon weights, and stores must post information (or use some other means) to warn customers about power outages that can be caused by errant mylar balloons coming in contact with electrical power lines.


Full Posting:

Before it was amended in mid-July, the latest California bill (SB 1499) to seek to regulate helium-filled metallic foil balloons would have completely banned the balloons, and would have subjected violators to increased criminal fines. Now the proposed legislation, if it is approved by both houses of the California Legislature and signed by Governor Schwarzenegger, no longer outlaws the balloons, but puts a greater burden on retailers to educate the public about the dangers runaway balloons can pose for electrical utility lines.

A copy of the legislation, in its current form, can be viewed here: http://www.leginfo.ca.gov/pub/07-08/bill/sen/sb_1451-1500/sb_1499_bill_20080715_amended_asm_v96.pdf

Under the proposed law, with the new amendments, retailers would have to notify customers by posting signs at cash registers, or giving a notice directly to buyers, informing them about the California Balloon Law. In addition, when retailers supply weights for helium-filled foil balloon, which is already required by current law (California Penal Code section 653.1(a)(1)), the proposed legislation would prohibit using a child’s toy or candy as the weight.

If enacted, the new balloon law would also impose requirements on distributors to educate retailers about the law, and to supply retailers with information about the law in shipments of balloons to California buyers. Manufacturers would be called on to increase the size of the warning on their goods, and the industry would be called on to pay for a study by the University of California to find alternative balloon materials that are less electrically conductive.

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California Seeks to Expand Regulation of Sale of Products With Toxics, Require Take-Back Programs

The One Sentence Summary: A bill now advancing through the California Legislature would significantly expand state regulation of consumer goods to cover all products with certain toxic chemicals, including lead, plasticizers, and “hex chrome,” and would require manufacturers to take back tainted goods for recycling or disposal.


Full Posting:

Proposed legislation (A.B. 1879) would delegate authority to the California Department of Toxic Substances Control (“DTSC”), a branch of CalEPA, to enforce consumer protection laws limiting the content of lead, mercury, cadmium, arsenic, PBDEs, phthalates, and hexavalent chromium. This legislation would expand the relatively new enforcement authority of DTSC to regulate toxic chemicals in children’s products and metallic jewelry.

In addition, the new law, if passed by the full Legislature and signed by Governor Schwarzenegger, would delegate authority to DTSC to require manufacturers to have programs to take back products for recycling or disposal. Such programs being tried by retailers of appliances and consumer electronics could be models. Warning labels on products could also be required by the law. Implementation of the law would have to conform with applicable federal laws and regulations. Violation of the law could be prosecuted criminally.

A.B. 1879 has passed the state Assembly, and was amended in mid-June by the state Senate. A copy of the current version of A.B. 1879 can be obtained here:
http://www.leginfo.ca.gov/pub/07-08/bill/asm/ab_1851-1900/ab_1879_bill_20080617_amended_sen_v96.pdf

As part of its “Green Chemistry” program, CalEPA is including consumer products in its regulatory efforts. Up until two years ago, DTSC focused its efforts on hazardous waste permitting and cleanup. With the adoption of laws in 2006 limiting lead in children’s jewelry and other metallic costume jewelry, and regulating certain toxics in packaging materials, including bags used by retailers, DTSC’s enforcement role has steadily expanded.

Other legislation to ban or limit chemicals in goods sold in the state is also pending. Such bills target bisphenol A and lead in children’s products (S.B. 1713), halogenated flame retardants in consumer products (A.B. 706), and PVC in packaging (A.B. 2502). Another proposed law would have manufacturers list the substances in their consumer products (S.B. 509).

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Retail Lease Tying Rental Rate To Rent Of Competing Tenant Or Its Successor Held Inapplicable Where Competing Tenant Is Defunct

Case: California National Bank v. Woodbridge Plaza LLC, Case No. 05CC03999 (Cal. Ct. App. 6/20/08)

The One Sentence Summary: California Court of Appeal held that a bank’s retail lease providing for an extended lease term at the lesser of the then prevailing rental rate or the latest square foot rental rate of a competing bank in the center or its “successor” in the center is construed to require rent at the then prevailing rental rate where the competing bank was defunct and the space previously occupied by the competing bank was occupied by six non-bank tenants.


What They Were Fighting About: The plaintiff was a bank whose predecessor entered into a 25 year lease in 1979 for retail banking space in the defendant’s shopping center. The lease provided that the plaintiff had an option to extend the term for 10 years at the then prevailing rate, but the rent for the extended term would not exceed the latest square foot rental paid by the competing bank in the center or its “successor” in the center.

Five years later, the competing bank in the shopping center ceased doing business, and the landlord was unable to lease the space to a bank or other single tenant. The landlord remodeled and divided the space previously occupied by the competing bank and leased the space to six new tenants who were not engaged in the banking business. When the plaintiff’s lease term concluded, it claimed a right to extend the lease term at a new rental rate that was the lesser of the fair market rental rate or the blended rental rate charged to the six tenants in the space previously occupied by the competing bank. The landlord contended that since the six tenants were not banks, there was no “successor” to the competing bank in the center. Thus, the landlord asserted a right to rent the space to the plaintiff at the fair market rental rate. A lawsuit was filed to have the court determine the rental rate for the extended lease term.

Court Holdings:

• The appellate court reviewed the trial court’s construction of the lease de novo.


• The court held that the term “successor” in the lease was ambiguous, and therefore, the court looked to the circumstances surrounding the execution of the lease.


• The court noted that when the lease was executed in 1979, the plaintiff and the competing bank in the center were competitors and the two major tenants in the center. Their lease terms were comparable, but rental rates for office space in the center were lower. The court concluded that: “[u]nless the parties anticipated use by a financial institution, there would be no point in tying plaintiff’s rent to rent for those purposes.”
  
• The court rejected the plaintiff’s argument that the landlord’s interpretation of the lease was unfair even though it was the landlord that divided the space previously occupied by the competing bank and leased it to non-banks.
  

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Taxes Under a Lease: Not Just a Simple Pass-Through

The One Sentence Summary: While some view a tenant's obligation to pay taxes as a pass-through from the landlord, this characterization is often inaccurate. Landlords frequently collect more in taxes than they in fact pay, and sometimes they collect less. Courts and juries in deciding what amount of taxes the landlord is entitled to charge a tenant, look not to some notion of fairness or a pass-through, but to the language of the lease. Thus, determining a tenant's obligation for taxes is no different from determining a tenant's obligations for other charges under a lease. The first place to look is the written lease.

Typically, a retail lease will provide a formula for calculating taxes in a form similar to the following:



In examining the lease to determine whether a tenant’s obligations for taxes is calculated properly, a tenant should focus on three main issues.

1. What types of taxes fall into “total taxes paid by landlord”? Taxes from the government can come in various forms, and determining what types of taxes are the responsibility of a tenant typically depends on how the term “taxes” is defined in the lease

2. What parcel(s) can be included in “total taxes paid by landlord”? Is the landlord limited to the parcel on which the tenant’s store is located? Can the landlord include its tax obligations for other tax parcels at the center?

3. Once it is resolved what types of taxes and what parcels can be included in “total taxes paid by landlord,” the next step is to calculate the portion of the taxes that can be charged to the tenant. This is calculated by taking the square footage of the tenant’s space (the numerator) and dividing it by some measure of total square footage of the center (the denominator). While the numerator is typically undisputed, the denominator is often an issue for dispute.

Issue 1: What types of taxes is the landlord permitted to include in calculating the total taxes subject to allocation to the tenant?

It is in the landlord’s interest to classify as many government fees as possible as taxes, so that its tenants will ultimately be responsible for these charges. For example, a landlord may pay a fee to the government in lieu of a tax and then attempt to charge its tenants for a portion of the fee. And, landlords are increasingly attempting to pass through to retail tenants “business license” or “gross receipts” taxes, which typically are taxes imposed by cities based on revenues received by commercial landlords. Since retailers are required to pay their own taxes to the cities, requiring a tenant to pay for the landlord’s share of business license or gross receipts taxes often results in a double tax to the retailer.

Like any lease dispute, the question of what types of taxes can be included in calculating the tenant’s charge for taxes is determined by examining the parties’ intent as expressed by the plain language of the lease. See e.g., Sheplers, Inc. v. Kabuto Int’l (Nevada) Corp., 63 F. Supp. 2d 1306 (D.C. Kansas 1999) (interpreting retail lease dispute based on the plain language of the lease). A retail tenant’s first line of defense to limit its obligations for taxes is to negotiate a narrow definition of what types of taxes can be included in this charge. For example, a tenant can seek to specifically exclude from the definition of “taxes” any business license, gross receipt, income, or franchise taxes, or any charge paid to a governmental authority in lieu of taxes.
If the lease language does not specifically exclude business license or gross receipt taxes or fees paid in lieu of taxes, a tenant may still have a strong argument that the parties to the lease did not intend a particular tax to be the tenant’s responsibility. Again, the definition of “taxes” in the lease is critical. The term may be defined narrowly, such that by its plain language, it does not include the charge being asserted by the landlord. A narrow definition of “taxes,” such as “those taxes and assessments that will during the term of the lease be assessed as a lien on the land, buildings and improvements comprising the real property tax parcel of which the Premises and the building in which the Premises are located are a part . . . .,” simply would not include business license or gross receipt taxes. This language also likely would not include payments by the landlord to a governmental authority in lieu of taxes.

Further, if the provisions of the lease relating to taxes are not conclusive, the tenant may be able to rely on language in other portions of the lease to challenge the landlord’s attempt to pass through other charges as taxes. See Sheplers, 63 F. Supp. 2d at 1313. The tenant will want to look for language in the lease demonstrating that the parties did not intend to include fees in lieu of taxes or business license or gross receipt taxes as part of a tenant’s obligation for taxes.

Finally, if any correspondence or meeting notes relating to the negotiations of the lease support the tenant’s position that the parties intended a narrow definition of “taxes,” this evidence should be identified and used to challenge the landlord’s attempt to use a broader definition.

Issue 2: What parcel(s) are included in calculating the landlord’s total real estate taxes subject to allocation to the tenant?

Since a landlord’s real estate taxes are generally tied to specific real estate, the next question is what parcel(s) can the landlord include when calculating its total taxes that are subject to allocation to the tenant. Centers are sometimes developed on multiple tax parcels. Anchor stores may sit on their own tax parcels or be part of a larger parcel. In addition, tax parcel lines may change over the period of a lease. Portions of a center may be on the same parcel as the tenant’s leased space when the lease is executed but at some point become part of a different parcel. Thus, the question arises: Can the landlord include taxes paid on all parcels in the center in determining a tenant’s tax obligations? Or is the landlord limited to only the parcel on which the tenant’s store is located?

Again, the answer to these questions is governed by the language of the lease. Tenants should be vigilant to confirm that they understand what parcel(s) are being included in the total taxes paid by the landlord, and that the lease provisions support the inclusion of each of those parcels. In some cases, this evaluation is simple – the taxes provision in the lease may specify the parcels that can be included in calculating the tenant’s tax obligations. In other cases, the lease language may not be as clear. For example, it may permit the landlord to include all tax obligations for the “center.” In those cases, the tenant should examine how that term is defined elsewhere in the lease and whether it excludes certain parcels, anchor stores, etc. Further, the tenant should be aware of any changes to the parcel maps in case those changes would result in a reduction of the tenant’s tax obligations.

Issue 3: How are applicable taxes apportioned to the tenant?

Once the parties have agreed to the types of taxes that can be charged to the tenant and the parcel(s) that can be included in the calculation, the next step is to calculate what portion of the applicable taxes will be allocated to the tenant. This is determined by using a fraction in which the numerator is the square footage of the tenant’s leased space and the denominator is some measure of total square footage of the center.

What goes into the denominator is the primary issue of dispute in calculating what portion of the applicable taxes will be allocated to the tenant. It is in the landlord’s interest to keep the denominator as small as possible. In contrast, it is in the tenant’s interest to use the largest denominator possible. Thus, a landlord may want to exclude anchor stores or include only the square footage of the parcel where the tenant’s leased space is located, while a tenant would want to include the total square footage of the entire center, including anchor stores.

Another issue that arises is whether the denominator should include total square footage of all “leased space,” as opposed to total square footage of all “rentable” space. The tenant would prefer to use “rentable space” because it would be a larger number and result in a smaller portion of taxes being charged to the tenant.

Further issues can arise even if the parties agree that the denominator will include total square footage of “rentable space” and they agree to the applicable parcel(s). Suppose a center is experiencing low occupancy and the landlord decides to close an entire wing of the center or convert it to a non-retail use (e.g., a public library), or suppose the landlord closes an area of the center for remodeling. The question arises whether that space is “rentable” square footage under the lease. The landlord may argue that the space is not rentable because it is not being offered for rent. The tenant would argue that it is still “rentable,” despite the landlord’s decision to opt for a different use. Also, in the case of a lease that excludes anchor stores from the denominator, if anchor store space becomes vacant and is no longer used for an anchor store, there is a question whether the anchor store exclusion still applies to that space.

Once again, the tenant should examine the lease to determine the parties’ intent in calculating the proper denominator. See e.g., F.S. Associates, Inc. v. Jandi Realty, LLC, 14 Misc.3d 1204(A), 2006 WL 3718249 (N.Y.City Civ. Ct. 2006) (holding retail tenant was responsible for 100% of real estate tax increases based on plain language of the lease). The tenant should examine the lease provisions regarding taxes as well as the lease as a whole to identify support for the argument that the parties intended to include the total rentable square footage of the center in the denominator (or the largest square footage supportable under the lease). In addition, the tenant should identify communications outside of the lease that may support its interpretation of the lease.

CONCLUSION

A retail tenant should regularly audit what taxes are being charged to the tenant and how they are calculated. The tenant should evaluate what types of taxes can be included in charges to the tenant, what parcel(s) can be included, and whether the tenant’s share is being calculated consistent with the lease and the parties’ intent. A tenant should never assume that it is required to pay all taxes asserted by the landlord as a non-negotiable pass-through. Rather, a retail tenant’s obligations for taxes are governed by the lease and are subject to negotiation and interpretation just like other provisions in the lease.

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Statute Prohibiting Retailers from Requesting Personal Identification Information for Credit Card Purchases Does Not Apply to Merchandise Returns

Case: Absher v. AutoZone, Inc., Case No. B202773 (Cal. Ct. App. 6/26/08)

The One Sentence Summary: California Court of Appeal held that a consumer protection statute (Civil Code section 1747.08(a)) that prohibits retailers from requesting or requiring consumers to provide personal identification information as a condition to accepting a credit card as payment for a purchase does not apply to a refund transaction for the return of merchandise purchased with a credit card.


What They Were Fighting About: Plaintiff Absher purchased a locking gas cap from defendant AutoZone using his credit card. Within five minutes, he returned to the store and requested a credit card refund because the gas cap did not fit his vehicle. In connection with the refund process, AutoZone's clerk requested that he fill out a return voucher form that had lines for his name, telephone number, and signature, which Absher completed. The return voucher was separate from the return receipt showing the reversal of the credit card charge. Two weeks later, Absher filed a class action lawsuit against AutoZone alleging that the company's practice of requiring consumers to write their telephone number on return vouchers violates Civil Code section 1747.08. Each violation of the statute subjects the merchant to penalties not to exceed $250 for the first violation and $1,000 for each subsequent violation. AutoZone successfully moved for summary judgment on that grounds that the prohibitions of section 1747.08(a) on requesting "personal identification information" (defined in section 1747.08(b) as "information concerning the cardholder, other than information set forth on the credit card, and including, but not limited to, the cardholder's address and telephone number") do not apply to a refund of merchandise purchased by credit card. The court of appeal affirmed the trial court's judgment.

Court Holdings:

• The court of appeal rejected plaintiff's argument that the language of section 1747.08(a)(3) regarding "any credit card transaction" makes the statute's prohibitions on requesting personal identification information applicable to a refund during which the merchant reverses the original credit card purchase. Examining the language of section 1747.08(a) and other subdivisions of section 1747.08, the legislative history, and the purpose for the legislation, the court concluded that the statutory prohibitions were only intended to apply to purchase transactions.
• The court concluded that the legislature's purpose in enacting section 1747.08 was to address misuse of consumers' personal identification information by merchants, such as for marketing purposes. The legislature determined that such information should neither be requested nor required of consumers as a condition to accepting a credit card as payment for goods or services.
• However, retailers have a legitimate interest in collecting personal identification information in a return transaction to verify that the return was bona fide and to prevent employees from manipulating returns for their own benefit. Merchants may also need to contact the consumer who made the return if they discover that use or damage of the product occurred prior to its return. Thus, there is a legitimate justification for retailers to request and obtain personal identification information in return transactions relating to goods or services that were purchased with a credit card.
• It is significant that section 1747.08(a) contains no explicit reference to exchanges, refunds, or returns. In contrast, section 1747.09 (which prohibits retailers from printing more than the last five digits of a credit or debit card account number or the expiration date on receipts) is also part of the Song-Beverly Credit Card Act and specifically refers to "an exchange, refund, or return" in subdivisions (a)(2) and (a)(3), which will become effective on January 1, 2009.

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California Court Imposes Duty on Landlord to Inspect Tenant's Premises upon Entry of Unlawful Detainer Judgment of Possession

Case: Stone v. Center Trust Retail Properties, Inc., Case No. B181180 (Cal. Ct. App. 5/30/08)

The One Sentence Summary: The California Court of Appeal held that a shopping center landlord has a duty to inspect a tenant's premises upon the entry of a judgment of possession in an unlawful detainer action, creating potential liability of the landlord to third persons injured in the tenant's premises by a dangerous condition before the landlord actually regains physical possession of the premises.


What They Were Fighting About: Landlord Center Trust Retail Properties owned a mall in which Gumboz Creole Cajun restaurant was a tenant. After the restaurant defaulted on its rent, Center Trust eventually filed an unlawful detainer action and in December 2001 a court entered a judgment for possession by the landlord and issued a writ of possession. In January 2002, before service of the writ of possession by the sheriff, the restaurant continued operating and a party was held there during which plaintiff Stone while dancing slipped on water caused by a leak and fractured her ankle. The landlord knew the tenant had been operating an after-hours dance club in violation of its lease, which permitted only a sit-down restaurant. Plaintiff Stone sued Center Trust and the restaurant, proceeding to trial against the landlord. The jury apportioned fault among the restaurant, Center Trust, and Stone herself and awarded damages to Stone. Center Trust appealed. Although the court of appeal reversed the judgment and remanded the case for retrial of liability only, the court held that the landlord did owe a duty to inspect the restaurant's premises upon the entry of a judgment of possession in the unlawful detainer action.

Court Holdings:

• During a tenancy, the landlord generally can be held liable for a third person's injury due to a dangerous condition of the tenant's premises only if the landlord had actual knowledge of and the right/ability to cure the dangerous condition.
• However, the court of appeal concluded for public policy reasons that once a landlord obtains a judgment of possession to evict a defaulting tenant, a duty to inspect should be imposed on the landlord because it knows that defaulting tenants may neglect to maintain the premises in safe condition. "Upon entry of judgment, a tenant's incentive to maintain a property dissipates because continued maintenance likely benefits only the landlord. To protect the public, the incentive to maintain the property must not be an orphan abandoned by a tenant and ignored by a shortly reoccupying landlord."
• The court held that the landlord's duty to inspect the defaulting tenant's premises "attached upon entry of the judgment of possession in the unlawful detainer action and included reasonable periodic inspections thereafter."
• Because the court of appeal could not determine from the record at what point in time the jury found that the landlord owed a duty to plaintiff Stone, the case was remanded for retrial of liability only. The parties may present evidence during retrial whether inspection upon entry of the judgment of possession or at reasonable intervals thereafter would have discovered the water leak in the premises.
• The dissenting opinion criticized the majority for creating a new legal duty, when the legislature is in a better position to decide whether to expand the landlord's duty and potential liability in order to protect public safety.

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No Irreparable Harm Justifying Writ Relief From Trial Court's Order to Disclose Redacted Version of Letter Prepared By Outside Counsel

Case: Costco Wholesale Corporation v. Superior Court (Cal. Ct. App. 3/27/08)

The One Sentence Summary: Where a redacted version of a letter prepared by Costco's outside counsel detailing a comprehensive factual investigation and legal analysis of the classification of managers within Costco warehouses disclosed only job descriptions of certain managers readily available from other sources, Costco was unable to establish that irreparable harm would result from disclosure of the redacted letter and therefore was not entitled to writ relief from the trial court's order requiring production of the redacted letter.

What They Were Fighting About: In 2000, Costco engaged outside counsel to conduct a comprehensive factual investigation and legal analysis of the classification of managers within Costco warehouses. Outside counsel interviewed two warehouse managers and relied on other information provided to her by Costco, her legal research and experience in preparing a 22 page letter addressing the exempt status of certain Costco warehouse managers in California. In 2001, Costco decided to reclassify ancillary managers (i.e., managers of departments within each warehouse, such as meat, bakery, pharmacy, etc.) from exempt employees not entitled to overtime payments to salaried, non-exempt employees who were entitled to overtime. Plaintiffs then filed a class action against Costco in 2003 alleging it had misclassified ancillary managers as exempt employees and thus unlawfully failed to pay overtime. Plaintiffs sought production of the outside counsel's letter, and Costco objected on attorney-client privilege and work product grounds. The trial court ordered that a referee inspect the letter in camera to determine whether and what information in the document constituted privileged legal advice. The referee issued a recommendation upholding Costco's privileges as to parts of the letter, which he redacted, but found that other factual information about various employees' job responsibilities was not protected and should be produced. The referee found that the factual information was obtained in outside counsel's role as fact-finder rather than attorney and should be disclosed because it amounted to recorded statements of prospective witnesses and/or reflections on a non-legal matter. The trial court adopted the referee's recommendation and ordered the redacted form of the letter produced. Costco filed a petition for writ of mandate, which the appellate court denied, and then filed a petition for review in the California Supreme Court. The Supreme Court granted the petition and transferred the case back to the appellate court. The appellate court requested supplemental briefs, specifically on the issue of whether irreparable harm would result from release of the redacted letter, thus justifying extraordinary relief by writ of mandate. Following a hearing, the court again denied the petition for writ of mandate, thereby upholding the trial court's order requiring production of the redacted letter.

Court Holdings:

• The court's opinion focused primarily on whether disclosure would result in irreparable harm to Costco. Upon examining the redacted letter, the court held that Costco could not establish irreparable harm because the only parts of the letter that were unredacted were "inconsequential and [did] not infringe on the attorney-client relationship." The factual statements describing certain employees' job descriptions did not communicate any legal opinion, analysis or strategy, but merely provided information readily available from other sources that could easily be obtained through interviews, depositions or a document production request.



• Although the general rule in Evidence Code section 915(a) is that a trial court may not require even in camera disclosure of a communication in order to determine whether the communication is privileged, the rule is not absolute and in camera hearings may be held under certain circumstances. For example, in camera review is allowed to evaluate whether waiver exists and when application of a privilege depends on the communication's content (e.g., common interest privilege); or when there is a claim that the attorney was acting in some capacity other than as legal counsel and the dominant purpose of the communication and the attorney's work were not in furtherance of an attorney-client relationship (e.g., communications by insurance company's in-house claims adjuster who was also an attorney). Without in camera hearings, control over the determination of whether a privilege exists would be based solely on the representations of the party asserting the privilege.



• The court upheld the referee's conclusion that the unredacted portions of the letter, which contained factual information about various employees' job descriptions based on non-privileged documents and interviews with two managers, were not privileged. While recognizing that the attorney-client and work product privileges apply to corporations, the court cited the "landmark" California case on corporate attorney-client privilege, D.I. Chadbourne, Inc. v. Superior Court, 60 Cal.2d 723 (1964) for the proposition that not all statements furnished to corporate attorneys are privileged. The court noted that the referee applied the principles set forth by the Supreme Court in Chadbourne in analyzing which portions of the letter were privileged.

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Grocery Retailers Are Invited to Join Stakeholder Workgroup on Warnings for Toxic Chemicals in Food

The One Sentence Summary: The California agency charged with developing regulations to enforce the state’s “Proposition 65” law that requires retailers and manufacturers, among others, to give warnings about exposure to chemicals that cause cancer and birth defects, has just announced the formation of a voluntary workgroup for stakeholders.

Full Posting:

April 18, 2008 is the deadline for membership applications for representatives of several interest groups, including Large Grocery Retailers, Small Grocery Retailers, Food Manufacturers, Environmental Groups, public prosecutors, and private enforcement groups. Meetings of the Food Warning Workgroup are expected to start in April. More information can be obtained by contacting fkammerer@oehha.ca.gov .

The Workgroup will advise the California Office of Environmental Health Hazard Assessment (“OEHHA”) about possible regulatory language on how to provide warnings about chemicals in foods. The Workgroup will also consider issues concerning the content of such warnings.

Among the issues for retailers and other stakeholders are: How best can retailers deliver warnings to customers? Can retailers use alternative methods of delivery, such as brochures and websites?

In addition to retail representatives, the Workgroup may also include staff from the U.S. Food and Drug Administration, the California Department of Public Health, and the California Department of Food and Agriculture.

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US Supreme Court Limits Federal Court Review of Arbitration Decisions

A March 25, 2008 decision by the United States Supreme Court in Hall Street Associates v. Mattel, No. 06-989, limited the ability of contracts with arbitration clauses to provide for enhanced federal court review of the arbitration results. The Supreme Court held that arbitration decisions subject to the Federal Arbitration Act (9 U.S.C. § 1, et seq.) ("FAA") can only be vacated, modified or corrected on the limited grounds set out in the statute such as fraud and corruption.



Many commercial contracts provide that disputes will be resolved by an arbitrator rather than by a judge or jury in court. After an arbitrator has decided the case, the parties can then return to court for enforcement of the judgment.

In considering arbitration, contracting parties are sometimes concerned that an incorrect ruling by the arbitrator will not be subject to appeal. To provide for greater appeal rights, the parties may provide that the court enforcing an arbitration award will be allowed to review whether the arbitrator reached the correct result. For example, in the Hall case, the parties agreed to arbitrate their environmental clean-up dispute, but their contract provided that the district court

shall vacate, modify or correct any award: (i) where the arbitrator’s findings of facts are not supported by substantial evidence, or (ii) where the arbitrator’s conclusions of law are erroneous.

The Supreme Court ruled that this provision was not enforceable because the FAA limits the situations in which a court can change an arbitration award. In particular, 9 U.S.C. § 10(a) provides:

(a) In any of the following cases the United States court in and for the district wherein the award was made may make an order vacating the award upon the application of any party to the arbitration—
(1) where the award was procured by corruption, fraud, or undue means;
(2) where there was evident partiality or corruption in the arbitrators, or either of them;
(3) where the arbitrators were guilty of misconduct in refusing to postpone the hearing, upon sufficient cause shown, or in refusing to hear evidence pertinent and material to the controversy; or of any other misbehavior by which the rights of any party have been prejudiced; or
(4) where the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made.

Similarly, 9 U.S.C. § 11 specifies limited grounds for a court to correct or modify arbitration awards.

The Supreme Court held that in providing the limited grounds for review set out in sections 10 and 11 of the FAA, Congress did not intend to allow a contract to expand review.

The decision in Hall does not affect how a state court applying state law would review an arbitration award.

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Step-By-Step Guide to the San Francisco Health Care Security Ordinance

The San Francisco Health Care Security Ordinance (HCSO) became effective on January 9, 2008. The HCSO requires most San Francisco employers to make minimum health care expenditures for their employees, to track such expenditures, and to confirm compliance. Folger Levin & Kahn LLP has prepared a summary of the HCSO intended to be a step-by-step guide to help businesses understand the basic requirements of the ordinance. If you have any questions about the application of the HCSO to your business, please contact any of us in the Labor and Employment Practice Group.

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New Legal Developments for California Employers

This posting provides a summary of many new developments in California Employment Law for 2008, including summaries of new statutes, case law, and regulations that will impact California employers. If you have any questions about the application of any of these laws to any particular situation effecting your company, please contact one of us in the Labor and Employment Practice Group.

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Food Warnings To Undergo Changes in Method, Content under California’s Proposition 65

The One Sentence Summary: Retailers selling food now have the opportunity to advise a California regulatory agency about making new rules on methods for giving consumers warnings, and the content of such warnings, regarding exposure to chemicals that cause cancer or birth defects, as provided under the state’s “Proposition 65”.


Full Posting:

On February 15, 2008 the California Office of Environmental Health Hazard Assessment (OEHHA), part of Cal/EPA, announced that it is seeking input concerning the content of warnings for exposures to listed chemicals in foods. In particular, OEHHA is looking for language that conveys the required warning message without undue confusion for consumers. Based on input, OEHHA will develop proposals for amending the existing, and rather limited, regulations that dictate options for both the method and the content of warnings for exposures to listed chemicals in foods.

Examples of such input would be ideas about on-product labels, off-product signage, centralized warnings for all affected food products in the store, in-store warning information kiosks, print media warnings or web-based information.

Proposition 65 is a California law requiring that businesses of ten or more employees provide warnings before exposing people to certain listed chemicals that cause cancer or birth defects. Detailed regulations have been enacted regarding specific “safe harbor” language that may be used in the warnings, as well as the methods for providing warnings, such as signs posted at point-of-sale. The law, titled the Safe Drinking Water and Toxic Enforcement Act of 1986, Health and Safety Code section 25249.5, et. seq., has given rise to litigation around chocolate, certain cooked foods, and fish. The law applies to products offered for sale in California, regardless of origin.

The deadline for providing input on better ways to provide consumer warnings about chemicals in food sold by retailers is March 28, 2008. Stakeholders may also participate in a public workshop on March 14, 2008, from 10 a.m. to noon, at the Cal/EPA headquarters in downtown Sacramento, California.

More information is available in the OEHHA announcement at http://www.oehha.ca.gov/prop65/law/regproc021508.html

Retailers will have additional opportunities to comment formally on revised warning methods and language after OEHHA publishes draft proposed rules.

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Landlord Must Provide Tenant with Supporting Documentation of Actual Common Area Expenses Incurred

Case: McClain v. Octagon Plaza, LLC, Case No. B194037 (Cal. Ct. App. 1/31/08)

The One Sentence Summary: Where retail lease requires tenant to pay its share of common area expenses based on landlord's statement of the expenses, tenant is entitled to review landlord's supporting documentation to verify that the stated expenses were incurred and that the amounts are accurate.


What They Were Fighting About: Plaintiff McClain, doing business as A+ Teaching Supplies, entered into a lease for space at a shopping center owned and managed by defendant Octagon Plaza. The lease stated that the leased premises were "approximately 2,624 square feet" and occupied 23 percent of the shopping center. In addition to paying base rent, tenant was required to pay as additional rent 23 percent of the common area expenses within a specified time period after landlord provided tenant with a "reasonably detailed statement" of the actual expenses. After entering into the lease, plaintiff discovered that her unit occupied only 2,438 square feet, or 186 square feet less than stated in the lease and represented by defendant during their lease negotiations. The shopping center was also 965 square feet or 8.1 percent larger than represented by landlord. As a result, plaintiff's share of the common area expenses should have been 19 percent rather than 23 percent. The size differences increased plaintiff's rent and additional rent payments by more than $90,000 during the lease term. The lease contained exculpatory language that any statement of size was an approximation and agreed to by tenant as reasonable and that any payment based thereon was not subject to revision if the actual size were different. Plaintiff filed suit alleging claims including misrepresentation, breach of the implied covenant of good faith and fair dealing, and an accounting. The trial court sustained a demurrer without leave to amend on the misrepresentation and implied covenant claims, and after trial ruled that plaintiff failed to establish her claim for an accounting (or an unrelated claim for alleged violation of the Consumer Credit Reporting Agencies Act). The court of appeal reversed with respect to the claims for misrepresentation and an accounting.

Court Holdings:

• With respect to the accounting claim, the court held that the implied covenant of good faith and fair dealing entitles tenant to review documentation supporting landlord's statement of common area expenses. Because tenant's share of the common area expenses is based on the actual expenses incurred by landlord, tenant is entitled to verify that the expenses listed in landlord's statement were actually incurred and in the amounts shown.
• However, the court emphasized that tenant's right to review supporting documentation was limited. The court permitted landlord to decide whether to provide tenant with copies of the documents or allow tenant to review the originals. Moreover, the court rejected tenant's request to audit landlord's records in order to determine whether certain expenditures were necessary or appropriate. Tenant was only entitled to verify that the stated expenditures were actually incurred.
• The court further held that tenant adequately pled a fraud claim based on landlord's misrepresentations about the size of the leased premises and its percentage of the entire shopping center's square footage. Tenant alleged that had she known the correct size, she would not have agreed to the base rent and share of common area expenses stated in the lease. Landlord's use of the term "approximation" did not preclude liability for a material misrepresentation about size.
• Tenant's fraud claim was not barred by exculpatory language in the lease. Under California Civil Code section 1668, contractual provisions that would protect one against liability for his own fraud are against public policy. Thus, the lease provisions stating that the size approximations were reasonable, agreed upon, and not subject to revision regardless of actual size could not defeat a fraud claim.
  
  

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Under California Constitution, Shopping Center May Not Prohibit Persons from Urging Customers to Boycott a Mall Store

Case: Fashion Valley Mall, LLC v. National Labor Relations Board, Case No. S144753 (Cal. Sup. Ct. 12/24/07)

The One Sentence Summary: Although shopping centers may enforce reasonable time, place, and manner rules to ensure that free speech activities do not interfere with normal business operations, they may not enforce content-based restrictions such as prohibiting speech that urges a boycott of one or more stores in the center.


What They Were Fighting About: Members of a union representing pressroom employees of a San Diego general circulation newspaper distributed leaflets to customers entering and leaving Robinsons-May department store at Fashion Valley Mall in San Diego. The union and the newspaper had been unable to reach a new collective bargaining agreement. The leaflets alleged that the newspaper treated its employees unfairly and stated that the department store advertised in the newspaper. Mall officials required the leafleting to stop because the union members had not obtained a permit to engage in expressive activity at the mall. Under mall rule 5.6.2, a permit applicant must agree to refrain from conduct urging customers not to purchase merchandise or services offered by one or more stores or merchants in the mall. After the union filed charges with the National Labor Relations Board ("NLRB"), an administrative law judge ruled that the union members were engaged in a lawful boycott of the department store and ordered the mall to cease and desist from prohibiting the leafleting. The NLRB affirmed that order, finding that California law permits speech and petitioning activity in private shopping centers subject to reasonable time, place, and manner rules and that rule 5.6.2 was an impermissible content-based restriction. On appeal, the United States Court of Appeals for the District of Columbia Circuit requested that the California Supreme Court decide whether under California law the mall could maintain and enforce rule 5.6.2 against the union.

Court Holdings: The California Supreme Court granted the request for review and held, in a 4-3 decision, that the right to free speech under the California Constitution includes the right to urge customers in a private shopping mall to boycott one or more of the mall's stores.

• In Robins v. Pruneyard Shopping Center, 23 Cal. 3d 899 (1979), the California Supreme Court held that the California Constitution protects speech and petitioning in shopping centers that are privately owned (even though the First Amendment to the United States Constitution does not), subject to reasonable time, place, and manner rules.
• In the present case, the court rejected the mall's argument that its rule prohibiting speech that advocates a boycott of a mall store or merchant is a reasonable regulation to prevent interference with normal business operations.
• The court found that the mall's rule is not content-neutral because it prohibits speech urging a boycott while permitting speech that does not, precluding an entire category of speech. The court concluded that the mall's rule could not be justified by any legitimate concerns that are unrelated to content. Peaceful leafleting that urges a boycott in a mall does not by its nature create disruptive congestion, nor is it inherently intrusive or coercive like some solicitations for monetary donations that may be prohibited. Leaflets urging a boycott may persuade customers not to patronize a store, but the mall's concern over the effectiveness of the speech's message is not a proper basis for prohibiting it.
• Applying strict scrutiny, the court concluded that the mall's interest in maximizing the profits of its merchants was not compelling compared to the union's right to free speech.
• The three dissenting justices advocated the overruling of Pruneyard (which has been rejected by most other jurisdictions) on the grounds that private property should not be treated as a free speech zone. Moreover, they opined that even under Pruneyard, free speech activity must not be incompatible with the normal use of the property, and that speech urging a boycott of businesses at a shopping center is incompatible with the center's purpose of enabling its tenants to do business. "We should not compel shopping center owners to permit activity that interferes with the purpose for the center's existence."

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For Standing, California's Unfair Competition Law Requires Injury in Fact and Causation

Case: Hall v. Time Inc., Case No. G038040 (Cal. Ct. App. 1/7/08)

The One Sentence Summary: Plaintiff could not establish injury in fact or causation required by California's Unfair Competition Law where merchant's alleged scheme to disregard 21-day free preview period did not induce him to pay for book immediately upon receipt or keep a book that he otherwise would have returned.


What They Were Fighting About:

Plaintiff Jeffrey Hall alleged that Time engaged in an unlawful, unfair, or fraudulent scheme in violation of California Business and Professions Code Section 17200 in offering consumers a free preview period for 21 days in which to review a book and return it to Time with no obligation to purchase. The complaint alleged that during the 21-day period, Time sent consumers invoices demanding payment and not referring to a free preview period, so as to deceive consumers into believing that they had an immediate obligation to pay. Hall ordered a book from Time but did not pay during the 21-day free preview period after receiving an invoice. He paid for the book 10 months later after a collection agency sent a demand for payment. The complaint alleged a single cause of action for class action relief under Section 17200. The trial court dismissed the complaint without leave to amend on the grounds that plaintiff received the book that he ordered, at the price and payment schedule that he requested.

Court Holdings: The court of appeal affirmed the dismissal of plaintiff's complaint because he could not meet the standing requirements under California's Unfair Competition Law ("UCL").

• As a result of Proposition 64 enacted in November 2004, a plaintiff suing for violation of Section 17200 must have "suffered an injury in fact" and "lost money or property as a result of such unfair competition" in order to have standing.
• Plaintiff could not allege an injury in fact because he did not expend money due to Time's alleged acts of unfair competition. Hall paid Time $29.51, but he received the book that he ordered in exchange. "He did not allege he did not want the book, the book was unsatisfactory, or the book was worth less than what he paid for it."
• Plaintiff also could not satisfy the second prong of the standing test - that he "lost money or property as a result of" Time's alleged unfair competition. The court held that this language imposes a causation requirement for UCL standing. In the context of a fraud claim, causation means justifiable reliance on the alleged misrepresentation.
• Hall could not allege causation because Time's conduct did not cause him to believe that he did not have a 21-day free preview period and was obligated to keep and pay for the book upon receipt. Moreover, "Hall did not allege he did not want the book or Time's alleged acts of unfair competition induced him to keep a book he otherwise would have returned during the free trial period."

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Proposed Ban on Fast-Food Restaurants Moves Ahead

The One Sentence Summary: The ordinance proposed last summer to ban new outlets of fast food chains from opening in certain areas of the City of Los Angeles has gained approval from the Planning and Land Use Management Committee of the City Council, clearing the way for consideration of the ordinance by the City Council.

Full Posting:

Details of the proposed draft ordinance, sponsored by Councilwoman Jan Perry, are described in the September 26, 2007 post on this blog (see the link below). The ordinance, if adopted as proposed, would institute a one-year moratorium on the issuance of building permits for the targeted establishments. On December 11, the City Council’s Planning and Land Use Management Committee considered the Report from the City Planning Commission on the Interim Control Ordinance. Concerns about the ordinance were aired by other members of the City Council, and objections from the food industry were made. The Committee acted to recommend that the City Council approve the moratorium.

We will continue to monitor this proposed ordinance.

http://www.retaillawobserver.com/2007/09/ban-on-new-fast-food-restaurants.html

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California Retailers Ordered to Pull Children’s Jewelry Containing Lead

The One Sentence Summary: New California laws addressing lead and other heavy metals in consumer products are the basis for stepped up enforcement by the state’s Department of Toxic Substances Control, following investigation and testing of children’s jewelry in several major retailers, including Macy’s, Dollar Tree, and Marshalls.

Summary of Enforcement Action:

On December 12, 2007, the Department of Toxic Substances Control (“DTSC”), part of California’s Environmental Protection Agency, briefed the public on its recent investigation of children’s jewelry items tested from a range of retail establishments. DTSC reported that it recently notified retailers of its testing results and urged them to remove from their shelves the items with lead-levels exceeding regulatory levels. Retailers are being cooperative to identify distributors.

The California Lead-Containing Jewelry Law went into effect on September 1, 2007, and applies to persons who manufacture, ship, sell or offer for retail sale children’s jewelry in California. The scope of the law covers not only stores, but also catalogs, vending machines, and online sites. The law specifies lead content in metallic material in children’s jewelry at 600 parts per million or less.

On March 1, 2008, the Lead-Containing Jewelry Law becomes applicable to all other jewelry, including body piercing jewelry.

The provisions of the new law are found in California Health and Safety Code sections 25214.1 to 25214.4.2.

DTSC Director Maureen Gorsen stressed that the majority of jewelry items tested by DTSC do not exceed the allowable lead levels.

A list of the items found to have lead levels over the allowable limits is posted at the agency’s website, http://www.dtsc.ca.gov/LeadInJewelry.cfm

Gorsen urged parents and caregivers to stay alert when children are wearing or playing with children’s jewelry. DTSC encouraged consumers who have purchased the listed items to return them to the retailers.

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Are Websites Covered By The ADA?

Case: National Federation of the Blind v. Target Corporation: Implications Beyond "Brick-and-Click" Retailers

Summary: Are websites required to be accessible to the blind? A case before the United States District Court for the Northern District of California directly addresses that question, and thus far, the answer seems to be “yes” if you are a business that uses your website to offer goods and services that are available in your “brick-and-mortar” store. The answer may also be “yes” if you are an operator of a website that may be deemed a “business establishment” or a “public place” in California.


Full Posting:

While the concept of providing a website that is accessible to blind persons may sound like an anomaly to some, assistive technology makes it possible for blind and visually impaired persons to surf the Internet. For example, screen reader software can convert text into speech, so long as that the website is designed to allow the use of screen reader software.

In 2006, National Federation of the Blind (“NFB”) filed a lawsuit against Target Corporation (“Target”) (the “NFB v. Target litigation”), alleging that Target’s website, www.target.com, violated the Americans with Disabilities Act (“ADA”), 42 U.S.C. §§ 12101, et seq., and related California statutes, The Unruh Civil Rights Act (the “Unruh Act”), Cal. Civ. Code § 51, and The California Disabled Persons Act (the “Disabled Persons Act”), Cal. Civ. Code § 54.

From the outset, NFB’s ADA claim against Target was limited by the statutory language. Title III of the ADA provides:

"No individual shall be discriminated against on the basis of disability in the full and equal enjoyment of the goods, services, facilities, privileges, advantages, or accommodations of any place of public accommodation by any person who owns, leases (or leases to), or operates a place of public accommodation."

42 U.S.C. § 12182(a) (emphasis added).

In an earlier lawsuit filed by Access Now, Inc., another nonprofit disabled advocacy group, against Southwest Airlines challenging the inaccessibility of the southwest.com website, the court dismissed Access Now’s ADA claim because the claim was premised on the theory that the inaccessibility of southwest.com prevented access to Southwest’s “virtual” ticket counters, which are not actual, physical places of public accommodation. Access Now, Inc. v. Southwest Airlines Co., 227 F. Supp. 2d 1312, 1319-21 (S.D. Fla. 2002).

THE REQUISITE NEXUS BETWEEN target.com AND TARGET STORES

Learning from the Access Now case, the plaintiffs in the Target litigation allege that as a result of Target’s refusal to remove barriers to target.com, blind individuals are being denied full and equal enjoyment of the goods and services offered at Target’s brick-and-mortar stores. In other words, the theory of the case against Target is that the plaintiffs were denied access to the goods and services at Target stores as a result of their inability to access target.com. National Federation of the Blind v. Target Corporation, 452 F. Supp. 2d 946, 952 (N.D. Cal. 2006).

As set forth in the Second Amended Complaint, the features of target.com include:

• a store locator that allows shoppers to find the location and hours of a nearby Target store;


• an online pharmacy, through which customers can place prescription refills for pick-up at a Target store;


• an online photo shop, through which customers can order prints for pick-up at a Target store;


• coupons that may be redeemed at a Target store, and;


• online wedding and baby registries.

In support of their motion for class certification, the proposed plaintiffs’ class members submitted declarations alleging (1) that they were deterred from going to the Target stores because they were unable to find products or product descriptions on target.com, and (2) that their shopping trips to the Target stores took longer as a result of the inaccessibility of target.com, either because they were unable to “pre-shop” or because they had to resort to in-store help. See National Federation of the Blind v. Target Corporation, 2007 U.S. Dist. LEXIS 73547, *19-23 (N.D. Cal., October 2, 2007). For purposes of class certification, the court found these declarants to be sufficient, and certified a nationwide class consisting of:

"all legally blind individuals in the United States who have attempted to access Target.com and as a result have been denied access to the enjoyment of goods and services offered in Target stores."

Id., *66.

INTEGRATION BETWEEN target.com AND TARGET STORES

While limiting the ADA claim, for the time being, to those plaintiffs who were denied access to the enjoyment of goods and services in Target stores as a result of their attempt to access target.com, the court did leave open the door for expanding the scope of the claim if the evidence showed an “integrated merchandising” between target.com and the physical Target stores.

This aspect of the court’s ruling can be found in its original decision denying Target’s motion to dismiss, where the court observed in a footnote that there were questions as to whether “Target treats Target.com as an extension of its stores, as part of its overall integrated merchandising efforts.” 452 F. Supp. 2d at 956, fn. 4. “A broader application of the ADA to the website may be appropriate if upon further discovery it is disclosed that the store and website are part of an integrated effort. Parties may file briefing on this issue later if the court deems it appropriate.” Id.

REASONABLENESS OF ACCOMMODATIONS OFFERED BY TARGET

In certifying the class and in denying Target’s earlier motion to dismiss, the court specifically reserved for another day the question of whether in-store assistance and 1-800 customer service numbers offered by Target may constitute sufficient “reasonable accommodation” under the ADA. Id., *24; see also 452 F. Supp. 2d at 956. In addressing whether Target’s accommodations are reasonable, the court will no doubt take into consideration the nature of burden or hardship – i.e., the relative cost – to be undertaken in making the target.com website more accessible to blind users.

NO NEXUS BETWEEN "BRICK-AND-CLICK" REQUIRED FOR STATE LAW CLAIMS

The potential reach of the NFB v. Target litigation, however, is greater under applicable California laws.

Under both the Unruh Act and the Disabled Persons Act, a violation of the ADA is a per se violation of those acts. A “brick-and click” retailer like Target (i.e., a retailer with both a brick-and-mortar presence and an online presence) faces potential liability under the ADA and the two California statutes if it is found to be denying blind or visually impaired consumers equal access to the website, and thus to goods or services of a place of public accommodation.

The court in NFB v. Target, however, has ruled that neither the Unruh Act nor the Disabled Persons Act requires a nexus between the individual’s online experience and his or her experience at the physical stores. 2007 U.S. Dist. LEXIS, *28. The logical extension of such a rule is that any business doing business in California with a website is potentially subject to liability under these laws for failing to make its website accessible to visually impaired persons.

The NFB v. Target court’s decision was based on its reading of the statutory language. The Unruh Act provides that all persons are “entitled to the full and equal accommodations, advantages, facilities, privileges, or services in all business establishments of every kind whatsoever.” Cal. Civ. Code § 51(b). The Disabled Persons Act guarantees that individuals with disabilities “shall be entitled to full and equal access” to medical facilities, common carriers, telephone facilities, adoption agencies, private schools, hotels, places of public accommodation, and “other places to which the general public is invited.” Cal. Civ. Code § 54.1(a)(1). Based on its finding that the language of the two California statutes is broader than the ADA, the NFB v. Target court defined the California subclass to include “all legally blind individuals in California who have attempted to access Target.com,” regardless of whether those persons attempted to access the physical Target stores. 2007 U.S. Dist. LEXIS, *28-35, *66.

If other courts agree with the NFB v. Target court regarding the breadth of the California laws, then any business that directs itself to California residents, regardless of whether it is a retailer or it has a physical presence in California, faces possible exposure in the event its website is found to be inaccessible.

CONCLUSION

The NFB v. Target litigation is far from over. As of this writing, Target had petitioned the Ninth Circuit Court of Appeals to review the district court’s class certification decision. Target is also challenging the plaintiffs’ Second Amended Complaint. Other issues – such as whether Target has provided reasonable accommodation, and whether the application of the Unruh and Disabled Persons Acts to regulate websites like target.com violates the dormant commerce clause – will no doubt be subjects of heavily contested litigation and appeals.

Additional test cases will follow, as well as potential legislative intervention. Neither the ADA nor advances in assistive technology, however, will fade away. All businesses would be well advised to evaluate their websites in the context of evolving laws and technology to ensure that if it becomes a target of the next lawsuit, it can put its best foot forward to demonstrate the reasonableness of its conduct.

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California Attorney General Sues 20 Retailers and Toy Makers Over Lead Levels in Toys

Case: People of the State of California v. Mattel, Inc., et al.

The One Sentence Summary: Citing recent federal recalls of toys and other consumer goods containing lead at toxic levels, California Attorney General Jerry Brown has filed suit (seeking civil monetary penalties and injunctive relief) against 20 companies, including retailers Wal-Mart, Target, Toys R Us, and Sears, as well as toy makers Mattel, Fisher-Price, and Marvel Entertainment, alleging (1) violations of the state’s “Proposition 65” for exposing people to chemicals known to the state to cause cancer or reproductive toxicity, and (2) violation of the state’s unfair business practices act.


Full Posting:

On November 19, 2007, California State Attorney General Jerry Brown, together with Los Angeles City Attorney Rocky Delgadillo, filed a civil lawsuit based on the California Safe Drinking Water and Toxic Enforcement Act of 1986, otherwise known as Proposition 65, and the state’s unfair business practices act, alleging a claim under Section 17200 of the Business and Professions Code. The case was filed in Alameda Superior Court (Northern California) against 20 companies, including prominent national retailers and manufacturers. The lawsuit was preceded by 60-day notices alleging that the defendants, without giving warnings, were exposing people to listed toxic substances. Prop. 65, which permits private parties to enforce the law under certain circumstances, requires that notice be given to state and local prosecutors, as well as the businesses allegedly in violation of the law, for 60 days before suit can be filed. The notice period allows public prosecutors the opportunity to file suit themselves.

Upon filing suit, Brown’s office announced that “Companies must take every reasonable step to assure that the products they handle are safe for children and their families and fully comply with the law of California. Despite the lengthening global supply chain, every company that does business in this state must follow the law and protect consumers from lead and other toxic materials.”

The lawsuit has significance for retailers operating in California, and for manufacturers of toys or other consumer goods being sold in California. Previous lawsuits brought under Proposition 65 have frequently been settled through the adoption of detailed settlement agreements, which are entered as judgments. Such settlements can impact future testing of products to determine whether they contain threshold amounts of toxic substances. In one recent case, the terms of a 2006 judicially approved settlement involving lead in children’s jewelry became the basis for a new state law governing metallic content of jewelry for both children and others. Health and Safety Code Sec. 25214.1 et seq.

Named in the suit, People of the State of California v. Mattel, Inc., et al., are Mattel, Fisher-Price, Michaels Stores, Toys R Us, Wal-Mart, Target, Sears, KB Toys, Costco Wholesale, A&A Global Industries, RC2 Corporation, Eveready Battery Company, Kids II, Kmart, Marvel Entertainment, and Toy Investments.

Proposition 65 became state law through California’s initiative process when voters approved the measure in 1986. Although the law does not necessarily prohibit businesses from exposing consumers, employees, and members of the public to listed chemicals, provided appropriate warning are given, litigation has sometimes resulted in the reformulation of products to reduce or eliminate the target substances.

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ADA Plaintiff May Challenge All Barriers at Place of Public Accommodation Affecting His or Her Disability

Case: Doran v. 7-Eleven, Inc., No. 05-56439 (9th Cir. Nov. 9, 2007)

The One Sentence Summary: If an ADA plaintiff has encountered or has personal knowledge of at least one barrier affecting his or her disability and thereby has been deterred from attempting to gain access to a place of public accommodation, the plaintiff has standing to challenge all accessibility barriers in that public accommodation that are related to his or her disability.


What They Were Fighting About: Plaintiff Jerry Doran sued for ADA violations at a 7-Eleven store located in Anaheim, 550 miles from his home. Doran is a paraplegic and uses a wheelchair for mobility. His complaint identified nine alleged barriers at the 7-Eleven store including that the store aisles were too narrow and that disabled patrons were denied access to the employees-only restroom. During discovery, Doran's expert conducted a site visit and identified three additional barriers that would potentially impact mobility-impaired persons. The trial court granted summary judgment to 7-Eleven on all of Doran's ADA claims, holding that Doran did not have standing to challenge barriers first identified in the expert report because he did not personally encounter or have personal knowledge of those barriers. The trial court also found that Doran failed to provide any evidence that the nine barriers identified in the complaint had not been removed or violated the ADA. Doran appealed.

Court Holdings:

• The fact that Doran lived 550 miles away from the 7-Eleven store did not preclude him from establishing Article III standing. He personally visited the store on 10 to 20 prior occasions, is currently deterred from visiting the store due to its accessibility barriers, and planned to visit Anaheim at least once a year on annual trips to Disneyland.
• Trial court erred in precluding Doran from suing as to those accessibility barriers related to his disability as a wheelchair user that he did not personally encounter. If an ADA plaintiff knows about at least one violation that deters him or her from attempting to enter the public accommodation again and conduct further investigation of its accessibility, the plaintiff has Article III standing to sue. Discovery may then be conducted as to any other barriers related to his or her disability and those may be included in the claim.
• A rule limiting an ADA plaintiff to challenging only those violations affecting his or her disability that he or she personally encountered or knew about at the time of filing suit would burden businesses with more ADA litigation, encourage piecemeal compliance with the ADA, and interfere with the goal of eliminating disability discrimination in places of public accommodation.
• The dissenting judge expressed serious concern that the majority were improperly expanding Article III standing to plaintiffs who had not suffered an injury. The dissenting opinion presented a hypothetical of a mobility-impaired customer who sued after being unable to find a disabled parking space in a shopping center, and then sought discovery as to ADA violations by all the tenants of the center whose stores he or she never visited after being unable to find parking. The majority distinguished this scenario as involving establishments within the shopping center that were not responsible for the injury to the customer caused by the lack of disabled parking access.
• The Ninth Circuit affirmed the dismissal of alleged ADA violations that Doran failed to prove with any evidence. As to the allegedly narrow aisles in the 7-Eleven store, plaintiff did not present any measurements to show that the aisles did not comply with the 36-inch clearance required by the ADA Accessibility Guidelines. Regarding the lack of access to the employees-only restroom, that is not a place of public accommodation under the ADA because it is not open to the public. Therefore, no violation of the ADA occurred.

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Protection of Consumer Payment Information Remains an Imperative for California Retailers

The One Sentence Summary:
While Governor Schwarzenegger recently vetoed a Bill that would have imposed greater obligations on retailers with respect to protection of consumer payment information, continued legislative efforts are likely and retailers remain subject to data security standards set by the Payment Card Industry.

Full Posting:
On October 17, Governor Schwarzenegger vetoed AB 779, which would have imposed greater responsibilities on retailers with respect to the storage of customer payment data, sending of customer payment data on public networks, and access to customer payment data. In addition, AB 779 would have imposed additional obligations on retailers with respect to notifying California residents whose personal information is acquired by an unauthorized person, and it would have imposed an obligation on retailers to reimburse data owners for costs incurred due to security breaches, including replacing cards and notifying customers.

AB 779 was passed by the Assembly by a vote of 68-0 and by the Senate by a vote of 30-6. In vetoing the Bill, the Governor cited ambiguities in the application of AB 779 and expressed concern that AB 779 could create a conflict with the responsibilities and liabilities already established by the Payment Card Industry (“PCI”), which is composed of the five major credit card brands.

The PCI security standards are minimum compliance and validation guidelines applicable to organizations that accept payment card transactions. They include guidelines for maintenance of a secure network; protection of cardholder data; maintenance of a vulnerability management program; implementation of access control measures; regular monitoring and testing of networks; and maintenance of an information security policy. The PCI standards are not enforced by PCI. Rather, individual payment card companies have the ability to enforce the standards, including by subjecting retailers to fines or revocation of card processing privileges for failure to comply. Additional information regarding PCI compliance can be found at http://www.pcicomplianceguide.org/.

Despite the Governor’s veto of AB 779, he acknowledged the need to protect consumer financial information. The Governor also encouraged the Bill’s author and the credit card industry “to work together on a more balanced legislative approach.”

What does the veto of AB 779 mean for California retailers? First, irrespective of the Governor’s veto, retailers are required to become PCI compliant or they risk fines or suspension of credit card processing privileges. If a retailer is not PCI compliant, efforts to gain compliance should begin immediately. Second, retailers can expect a second attempt by the California Legislature in 2008 at imposing additional obligations on retailers with respect to maintaining and protecting customer payment information. Becoming PCI compliant is an initial step in preparing for potential legislative enactments.

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Entrance Area of Retailer's Store in Shopping Center Is Not Public Forum for Free Speech Activity Under California Constitution

Case: Van v. Home Depot, U.S.A., Inc., Case No. B190831 (Cal. Ct. App. 10/5/07)

The One Sentence Summary: The California Constitution does not protect expressive activity in the area immediately surrounding the entrance of an individual retail store that does not itself possess the characteristics of a public form, even when the store is part of a larger shopping center.


What They Were Fighting About:

Plaintiffs, on behalf of a class of individuals who gather voter signatures for initiatives, referenda and recalls, and register voters, filed suit against defendants Target, Wal-Mart and Home Depot, based on the stores’ refusal to allow plaintiffs to collect signatures in the area outside the stores’ entrances. Plaintiffs alleged causes of action for violation of the right to free speech, violation of Civil Code sections 51 and 52, violation of Business & Professions Code section 17200 and declaratory relief, and sought damages and equitable and injunctive relief. Plaintiffs conceded that their action was directed only at defendants’ stores located in larger shopping centers (not stand-alone stores) and argued that these centers were public fora where expressive activity was allowed. The trial court granted summary judgment to defendants on the ground the defendants’ store entrances, aprons and perimeters were not public fora but were an extension of the store itself, and therefore the societal interest in using the stores for expressive activity did not outweigh the defendants’ interests in controlling the use of their private property. On appeal, plaintiffs argued that the trial court made two errors in granting summary judgment: first, triable issues of fact existed as to whether plaintiffs were gathering signatures on defendants’ private property (as opposed to the shopping center’s property); and second, the trial court erroneously concluded that the area in front of defendants’ stores was not a public forum.

Court Holdings: The Court of Appeal affirmed the judgment on the trial court’s order granting summary judgment and held:

• The undisputed evidence established that the areas where plaintiffs were gathering signatures were private property and that defendants controlled the areas by using them to sell merchandise. The court also rejected plaintiffs’ argument, raised for the first time at the summary judgment hearing, that some of the apron areas actually were owned by the shopping centers and should therefore be considered public fora like a shopping center common area because the argument was inconsistent with plaintiffs’ complaint, which alleged that defendants owned the areas in question.
• The apron and perimeter area of defendants’ stores were not a public forum under the balancing test established by the California Supreme Court in Robins v. Pruneyard Shopping Center (1979) 23 Cal.3d 899, 910, affd. sub nom., Pruneyard Shopping Center v. Robins (1980) 447 U.S. 74 (“Pruneyard”). Pruneyard held that the California Constitution protects expressive activity in the common areas of a large, privately owned shopping center based on a balancing of the competing interests of the private property owner with society’s interest in using the private property as a forum for the expressive activity. Courts applying the balancing test look at whether the private property serves as the functional equivalent of a public forum, considering (1) the nature, purpose and primary use of the property; (2) the extent and nature of the public invitation to use the property; and (3) the relationship between the ideas sought to be presented and the purpose of the property’s occupants. In this case, the nature, purpose and primary use of the property were not designed to encourage patrons to spend time together or be entertained; the extent and nature of the public invitation to use the property was designed to encourage shopping, not congregating; and there was no relationship between the ideas sought to be presented and the purpose of the property’s occupants.
• The court rejected plaintiffs’ argument that the location of some of defendants’ stores as “anchors” in large Pruneyard-type shopping centers bestowed a public nature on the stores’ apron and perimeter areas, and declined to extend the Pruneyard holding to the entrance and exit area of an individual retail establishment in a larger shopping center. The undisputed evidence showed that the apron and perimeter areas of defendants’ stores lacked any public forum attributes and the trial court therefore properly concluded that any societal interest in using the area as a forum for expressive activity did not outweigh defendants’ interest in maintaining control over the use of their stores.

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Consumer Lacks Standing to Bring Claim Under California Consumer Protection Laws Where Product Was Purchased for Litigation Purpose Only

Case: Buckland v. Threshold Enterprises, Ltd., Case No. B192832 (Cal. Ct. App. 9/25/2007)

The One Sentence Summary:
A consumer who buys a product through her attorney for the sole purpose of litigation arising out of deceptive packaging or advertising lacks standing to bring a claim under the Consumers Legal Remedies Act, unfair competition law or false advertising law, and cannot state a claim for fraudulent concealment or negligent misrepresentation because the consumer did not rely on the statements or representations of the defendant and the consumer did not suffer an injury in fact or lose money or property.


What They Were Fighting About:
Katherine Lee Buckland, the Director of the California Women’s Center (the “Center”), and the Center filed a complaint against 30 defendants that market skin lotions and creams, including Threshold Enterprises, Ltd. (“Threshold”). In the Complaint, Buckland brought nine claims as an individual, including fraudulent concealment, negligent misrepresentation, and violation of unfair competition law (Cal. Bus. & Prof. Code § 17200 et seq.), false advertising law (Bus. & Prof. Code § 17500), and the Consumers Legal Remedies Act (Cal. Civil Code § 1750). Buckland alleged that defendants, including Threshold, had not complied with FDA regulations in marketing skin cream products and that the packaging and advertising for the products lacked adequate warnings about the chemicals in the skin creams. Buckland conceded that she had suspected Threshold’s packaging and marketing were false or misleading, and she had purchased Threshold’s skin product for $14.99 through her attorney for purposes of the litigation. The trial court dismissed Buckland’s claims against Threshold on the ground that Buckland lacked standing and failed to allege fraud with specificity, and denied Buckland’s motion for an injunction against Threshold. The claims of the Center were not at issue in the Opinion.


Court Holdings:
The Court of Appeal affirmed the trial court’s order dismissing Buckland’s claims against Threshold and denying injunctive relief, and held:

• Buckland failed to state a claim under the Consumers Legal Remedies Act for misrepresenting “characteristics, ingredients, uses, benefits, or quantities” or misrepresenting the products as “of a particular standard, quality, or grade” on the ground that she had not suffered actual damages caused by Threshold’s conduct. Since Buckland conceded that she suspected Threshold’s packaging and marketing were false or misleading and she bought the products solely to pursue litigation, she did not actually rely on the truth or completeness of Threshold’s representations.
• Buckland lacked standing to state a claim under unfair competition law or false advertising law because she did not suffer the requisite injury in fact or loss of money or property. The amount she paid to purchase Threshold’s product was incurred solely to facilitate the litigation, and thus did not constitute an “injury in fact” or “lost” money or property.
• Buckland failed to state a claim for fraudulent concealment or negligent misrepresentation because Buckland did not actually rely on any false statements or omissions of Threshold. Buckland conceded that she suspected Threshold’s packaging and marketing were false or misleading and she bought the products through her attorney solely to pursue litigation.

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Ban on New Fast-Food Restaurants Proposed for Los Angeles

The One Sentence Summary: A member of the Los Angeles City Council has proposed an ordinance prohibiting all building permits for up to two years for “fast food establishments” in South Central Los Angeles, where worries about an obesity epidemic and an alleged “overproliferation” of fast-food chain eateries are spurring what amounts to “health zoning”.

Summary of Draft Ordinance:

• Councilwoman Jan Perry has proposed a draft ordinance to impose a moratorium on the issuance of permits for building, grading, foundation work, and use permits, for one year (with the possibility of two 6-month extensions) while the City of Los Angeles works to adopt regulatory controls that regulate the establishment of fast food outlets within a specified area of south Los Angeles. The draft ordinance includes an urgency clause, allowing the measure to take immediate effect.
• Hearings have been held at the level of the Planning and Land Use Management Committee of the City Council, to be followed by a hearing on September 27, 2007, before the City Planning Commission. Staff has recommended adoption of the measure, Interim Control Ordinance CPC.2007.3827.
• Objections from the restaurant industry and comments from affected neighborhoods and local businesses may result in modifications to the proposed ordinance, particularly with regard to the definition of “fast food establishment”. The California Restaurant Association is on record in opposition to the action.
• The definition of “fast food establishment” in the draft ordinance does not refer to chain establishments, but sweeps in “any establishment which dispenses food for consumption on or off the premises, and which has the following characteristics: a limited menu, items prepared in advance or prepared or heated quickly, no table orders, and food in disposable wrapping or containers.”
• Exceptions to the building ban listed in the draft ordinance include construction requiring a building permit (1) to comply with a public safety order to repair, remove, or demolish an unsafe building, (2) to rebuild following a natural disaster, fire, or earthquake, and (3) tenant improvements which do not increase the floor area or involve a change in use. A hardship exemption would also be allowed.
• Alternative ways to achieve a greater variety of restaurants could emerge during the legislative process, including the adoption of a conditional use permit system which other cities employ to vary the mix of businesses competing in commercial districts.

Implications for Other Cities and States:

• Land Use Controls regulating property uses in many jurisdictions already affect the number and type of businesses that may operate in particular commercial districts and zones. Examples include ordinances aimed at protecting smaller businesses and limiting “big box” stores, and regulations imposing restrictions on signage and other aesthetic features. Using land use controls as a means for regulating consumer health and for “social engineering” remains rare, but some see in the fast-food restaurant ban a growing trend in this type of governmental activity.
• We will continue to monitor this proposed ordinance.

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A Party Can Be Compelled to Create New Documents From Electronically Stored Information

"You don't need to create any documents to respond to this discovery request - just produce copies of what you have." This common instruction to clients is no longer necessarily true in light of new federal rules governing production of electronically stored information ("ESI").

Applying the new federal ESI discovery rules, a district court in South Carolina recently held that a party can be required to create new documents for a response to a discovery request absent a showing that the information is not reasonably accessible. KnifeSource, LLC v. Wachovia Bank, N.A., 2007 WL 2326892 (D.S.C. Aug. 10, 2007).



In a dispute about whether a defendant bank reasonably accepted misappropriated checks, the plaintiff sought copies of bank statements. The bank objected, claiming that it did not maintain paper copies of bank statements.

The district court granted plaintiff's motion to compel discovery of the electronic statements, noting that electronically stored information is discoverable under Rule 26(b)(2)(B) of the Federal Rules of Civil Procedure unless it was "not reasonably accessible because of undue burden or cost." The bank had not made this showing, so the court ordered it to produce the information that it maintained electronically.

This case illustrates how the new discovery rules for electronically stored information will change common discovery practices and could greatly expand the scope of information that is produced in litigation.

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Consumer May Seek Restitution Under California's Unfair Competition Law From Manufacturer Even Though Product Was Purchased From Retailer

Case: Shersher v. Superior Court (Microsoft Corp.), Case No. B195317 (Cal. Ct. App. 9/10/07)

The One Sentence Summary: To recover restitution under California's Unfair Competition Law, a consumer is not required to have made direct payments to the defendant who is alleged to have engaged in unfair competition or some other act prohibited by the statute or the false advertising law.


What They Were Fighting About: Plaintiff and members of the class he purported to represent purchased from retailers wireless routers, adapters, and other similar products manufactured by Microsoft. Plaintiff alleged that in marketing and promoting these wireless products, Microsoft made false representations on the packaging about the products' capabilities to deliver data transmission rates of up to a certain level of megabits per second. The complaint sought various relief including restitution. Microsoft filed a motion to strike the claim for restitution and any reference to "restitution" on the grounds that such recovery was precluded by the California Supreme Court's decision in Korea Supply Co. v. Lockheed Martin Corp., 29 Cal. 4th 1134 (2003). Microsoft argued, and the trial court agreed, that indirect purchasers - those who purchased from someone other than the defendant - could not obtain restitution under Korea Supply because they paid no money directly to the defendant.

Court Holdings: The Court of Appeal reversed and held that Microsoft's motion to strike should have been denied because:

• The only requirements for recovery of restitution imposed by Korea Supply are that (1) the plaintiff must have had an ownership interest in the money or property sought to be recovered; and (2) the defendant must have acquired the plaintiff's money or property by means of unfair competition or some other act prohibited by the Unfair Competition Law (California Business & Professions Code section 17200) or the false advertising law (section 17500).
• Nothing in Korea Supply requires that the plaintiff seeking restitution have made direct payments to the defendant who allegedly engaged in the acts of unfair competition or false advertising.
• In this case, the plaintiff and putative class members had an ownership interest in the restitutionary relief sought because they purchased Microsoft's products.

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What Makes For A Successful Tenant Overcharge Claim Against A Shopping Center Owner Or Operator

The One Sentence Summary: In successful claim after successful claim, it is the lease language that is most important.

Full Posting:

Every year there are thousands of disputes in which retail tenants claim they are overcharged by owners and operators of shopping centers for CAM expenses, utilities, taxes, marketing fund payments and other charges. The disputes can be for hundreds of dollars or millions of dollars depending on the magnitude of the overcharges, the period over which the overcharges can be collected and the number of leases involved. Some of these disputes are resolved quickly and favorably to tenants, others are dropped, and some result in lawsuits. From a retailer perspective, the overcharge claims that are the greatest success are those that are resolved quickly and for a substantial percentage of what the tenant seeks. The relief can come in the form of cash or other forms of compensation, such as agreements to reduce charges in the future or providing the tenant some other benefit such as closing an underperforming store or extending a lease on favorable terms.

So what are the characteristics of successful tenant claims? Twenty years of representing retailers has shown that the most important characteristic of a successful tenant claim is being able to convince the shopping center owner or operator that the claim has merit (meaning an objective fact finder has a high probability of finding the tenant was overcharged). Even if a tenant claim has merit, a tenant may still have some difficulty resolving a claim if a shopping center owner does not believe a tenant will take action. Under such circumstances action, namely a lawsuit, may be required. The question then becomes what will persuade a court or jury and the issue comes back to what claims have merit.

In evaluating the merits, there are three criteria that come into play. The first and most important is the language of the lease. Does the language support the claim being made by the tenant? The second criteria is whether so-called “extrinsic evidence” supports the position of the tenant regarding the meaning of the lease. Extrinsic evidence is nothing more than information other than the language of the lease itself. The third criteria, once the meaning of the lease is established, is whether there is evidence that the landlord breached the lease.

CRITERIA 1 – THE LANGUAGE OF THE LEASE.

There is no question that the single most important criteria in demonstrating a claim has merit is what the lease says. The ability of a tenant to convince an objective fact finder, or to convince a landlord that an objective fact finder might side with the tenant, will be determined primarily by the tenant’s ability to link its claim to language in the lease. A claim that a tenant is merely overcharged because it is paying more than its “fair share” is not likely to be successful. Rather, a tenant needs to point to lease language that has been violated leading to an overcharge.

In decided case after decided case, what has mattered most is tenant’s ability to link the claim of an overcharge to language in the lease. For example, in Sheplers, Inc. v. Kabuto International (Nevada) Corp., a 1999 decision by a federal district court in Kansas, the dispute focused on whether certain management fees and expenses were properly charged to the tenant as CAM costs. The court rejected the landlord’s argument that the lease permitted it to include in CAM charges any costs associated with managing the shopping center, because the lease specifically stated that common area expenses include “the operating, managing, equipping, lighting, repairing, replacing, and maintaining the common areas.” Therefore, only management costs specifically related to the common areas were properly included in the CAM expenses.

At times, consideration of the language in the lease will involve the application of lease interpretation rules to lease language. The rules of interpretation commonly applied by courts include:

• When the terms of a lease are clear and unambiguous, the intent of the parties should be found within the four corners of the agreement.
• Terms should be given their plain and ordinary meaning.
• Lease provisions should be construed in the context of the entire lease.
• All lease language should be given meaning and effect.
• A practical interpretation should be given to lease language so that the parties’ reasonable expectations are realized.
• And in some states a rule of last resort: Ambiguous language should be construed strictly against the drafter.

Thus, in addition to favorable lease language, the application of a rule of interpretation often makes for a strong claim by a tenant. For instance, the court in Sheplers v. Kabuto emphasized that its interpretation limiting CAM charges to only those expenses related to managing the common areas was supported by other language in the lease, thereby applying the rule of interpretation that lease language should be construed in the context of the entire lease. Other lease language stated that CAM “shall specifically exclude all costs associated with the leasing activity in the shopping center and all capital expenditures.” Therefore, the court concluded that all tenant-specific management activity, including problems with specific tenant spaces and capital expenditures for specific tenants, should not be included in CAM charges.

One of the most common rules of interpretation applied by courts is the principle that the words in a lease are to be given their plain and ordinary meaning. In Dinnerware Plus Holdings, Inc. v. Silverthorne Factory Stores, LLC, a 2004 decision by a state appellate court in Colorado, the court ruled that the lease language meant that the tenant was not obligated to pay any pass-through charges unless other tenants were obligated to do so. The court based this conclusion on the plain and ordinary meaning of the phrase “provided that all other tenants are similarly obligated” in the lease’s language regarding payment of pass-through charges.

CRITERIA 2 – EXTRINSIC EVIDENCE.

While the words of the lease are the most important criteria in determining the meaning of a lease, there are times that other evidence is considered. Other evidence considered in interpreting the meaning of a contract is referred to as “extrinsic evidence” or “parol evidence.” The consideration of such evidence will vary depending on the language of the lease, which may include provisions that state that the language is intended to constitute the intent of the parties and replace any prior statements, and specific state court rules regarding the consideration of such evidence. Some states, such as California, allow the consideration of extrinsic evidence to demonstrate that which would otherwise appear clear on its face is really ambiguous. Other states, such as New York, require that there be a determination first that the document is ambiguous on its face before the consideration of parol evidence is allowed. Regardless, it is almost a certainty that each side will bring up and seek to introduce to the court extrinsic evidence to support their interpretation of contract language.

Rarely is extrinsic evidence from tenant witnesses, actions or documents supporting tenant or extrinsic evidence from landlord witnesses, actions or documents supporting landlord highly persuasive. For example, in South Towne Centre, Inc. v. Burlington Coat Factory Warehouse of Dayton, Inc., a 1995 decision by an Ohio state appellate court, the court considered self-serving extrinsic evidence on whether the parties intended the expense of a new shopping center sign to be chargeable as a CAM cost. The court concluded that the extrinsic evidence – testimony by the landlord’s and tenant’s witnesses about what the parties intended – did not clarify the parties’ intentions, and therefore the extrinsic evidence did not resolve the issue. Ultimately, the court applied the rule of strict construction against the drafter based on the landlord’s failure to specifically include the signage expense in the lease’s list of chargeable CAM costs.

The extrinsic evidence that is most often persuasive is evidence created by one side and used against the other side. Such evidence can be in the form of documents, testimony or actions. An example of such evidence is course of dealing evidence. For example, in Johanneson’s, Inc. v. Kraus-Anderson, Inc., a 1999 decision by a state appellate court in Minnesota, the court in disallowing a 5% management fee relied on the fact that from 1986 through 1995 the landlord had charged the tenant only for its share of actual maintenance expenditures plus the salary and benefits of the shopping center’s manager. Later, starting in 1996 the landlord began charging 5% of the tenant’s gross revenues as a fee for the landlord’s related management company to manage and maintain the common areas. The court seemed persuaded by the prior dealings between the parties that the additional 5% management fee was impermissible and not intended to be a chargeable CAM expense.

CRITERIA 3 – EVIDENCE OF BREACH.

If the tenant has developed a persuasive argument as to the meaning of the lease based on the lease language and rules of interpretation, there still remains a critical step in the process of advancing a strong claim. The tenant must have factual evidence that the landlord has breached the lease provision. In other words, assuming the tenant has shown that the lease means “x,” the tenant must show that the landlord failed to do “x” and did “y” instead.

There are circumstances where there is no dispute as to the facts once the meaning of the lease is established. The strongest tenant claim is one where the undisputed evidence shows there was a breach. However, there are many circumstances where complete evidence is not available to tenant. In some cases, the reason is that landlord has not provided it and in others, it is that center owner and operator never collected the evidence and it will be difficult to reconstruct the relevant evidence.

When information is available but not provided, it is almost always the case it can be obtained through discovery, if a lawsuit is filed. In such circumstances a tenant can consider how likely the evidence will support the claim in making an evaluation and recognize that a shopping center owner would likely provide the evidence if it supported the shopping center owner’s position.

When relevant information was not collected and it is difficult to reconstruct the relevant evidence, tenant may still be able to make a persuasive claim. First, courts apply common sense in evaluating evidence whether or not the landlord has breached the lease. Evidence presented by the landlord of its alleged compliance with the CAM provision in Sheplers v. Kabuto was found to be unpersuasive by the court under a common sense review. The landlord’s property manager testified that 100% of the on-site management costs were related to CAM. The court found “it impossible to believe that 100% of the property manager and her assistant’s work is directly related to CAM” particularly in light of the property manager’s admission that she and her assistant spent time on tenant-specific matters including leasing activity. Second, courts recognize that the landlord often has exclusive control over information needed to establish a breach. The lease in Sheplers required the landlord to provide the tenant with reasonable detail and a breakdown regarding CAM expenses, so the court shifted the burden to the landlord to show that the challenged management costs were CAM-related. The court explained: “Giving the provision such an effect is sound policy because defendant has complete control over all the records related to CAM expenditures.”

The bottom line: In successful claim after successful claim, it is the lease language that is most important. While extrinsic evidence and factual support of breach are also important, the starting point is the language of the lease.

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California Supreme Court Finds That Class Arbitration Waivers in Employment Arbitration Agreements May Be Contrary to Public Policy

Case: Gentry v. Superior Court of Los Angeles Co. (Circuit City Stores, Inc.), No. S141502 (Cal. Aug. 30, 2007)

The One Sentence Summary: The California Supreme Court held that class arbitration waivers should not be enforced if a trial court determines that class arbitration would be a significantly more effective way of vindicating the rights of affected employees than individual arbitration.

What They Were Fighting About: Plaintiff filed a class action lawsuit in superior court against Circuit City Stores, Inc. (“Defendant”), seeking damages for violations of the Labor Code. Plaintiff argued that Defendant had illegally misclassified salaried customer service managers as exempt managerial/executive employees not entitled to overtime pay, when in fact, they were non-exempt non-managerial employees entitled to be compensated for hours worked in excess of eight hours per day and 40 hours per week. When he was hired, however, Plaintiff executed an arbitration agreement with Defendant that precluded class actions. As such, Defendant moved to compel individual arbitration.

Court Holdings:

• The Court held that class arbitration waivers in overtime cases may be contrary to public policy. Specifically, the Court found that “the rights to the legal minimum wage and legal overtime compensation conferred by the statute are unwaivable,” “overtime wages are another example of a public policy fostering society’s interest in a stable job market,” and “overtime laws also serve the important public policy goal of protecting employees in a relatively weak bargaining position against ‘the evil of overwork.’”


• Accordingly, the Court set forth certain factors a trial court must consider when employees allege that an employer has systematically denied proper overtime pay to a class of employees and a class action is requested notwithstanding an arbitration agreement that contains a class arbitration waiver.


• First, the trial court considers the modest size of the potential individual recovery. Second, the potential for retaliation against members of the class. Third, the fact that absent members of the class may be ill informed about their rights. And lastly, other real world obstacles to the vindication of class members’ right to overtime pay through individual arbitration.


• “If [the trial] court concludes, based on these factors, that a class arbitration is likely to be a significantly more effective practical means of vindicating the rights of the affected employees than individual litigation or arbitration, and finds that the disallowance of the class action will likely lead to a less comprehensive enforcement of overtime laws for the employees alleged to be affected by the employer’s violations, it must invalidate the class arbitration waiver....”
  
  

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California Courts Find That Class Action Waivers and Arbitration Clauses in Computer Sale Contracts Were Unenforceable

Two recent Northern California federal court decisions have held that arbitration, choice of law and class action waiver provisions in computer purchase contracts were not enforceable, and that the consumers could proceed with class action claims in federal court against the computer sellers.



In Brazil v. Dell, Inc., (N.D. Cal. No. 5:07-CV-01700 RMW, 8/3/07), the plaintiffs filed a class action claiming that Dell had misrepresented the price of its computers by artificially inflating prices before advertising discounts. Dell moved to stay the action and compel arbitration due to the following clause in the Dell contracts:

Binding Arbitration. ANY CLAIM, DISPUTE, OR CONTROVERSY . . . BETWEEN CUSTOMER AND DELL . . . SHALL BE RESOLVED EXCLUSIVELY AND FINALLY BY BINDING ARBITRATION ADMINISTERED BY THE NATIONAL ARBITRATION FORUM (NAF) . . . . NEITHER CUSTOMER NOR DELL SHALL BE ENTITLED TO JOIN OR CONSOLIDATED CLAIMS BY OR AGAINST OTHER CUSTOMERS, OR ARBITRATE ANY CLAIM AS A REPRESENTATIVE OR CLASS ACTION OR IN A PRIVATE ATTORNEY GENERAL CAPACITY.

Judge Ronald Whyte held in Brazil that:

• Although the purchase contract called for application of Texas law, California law should be applied because application of Texas law would violate a fundamental policy of California law.
• Despite a clause allowing the consumer to rescind the contract if the terms were unacceptable, the purchase contract was procedurally unconscionable because it was a contract of adhesion presented without an opportunity to meaningfully negotiate.
• Substantive unconscionability was also found because there was an allegation of a scheme to cheat large numbers of customers, and small damages would be suffered by many consumers.

In Oestreicher v. Alienware Corp. (N.D. Cal. No. 3:07-CV-00512 MHP, 8/10/07), the plaintiff had filed a class action claiming that Alienware had knowingly sold defective computers. Alienware moved to stay the case and compel arbitration. Judge Marilyn Patel refused to compel arbitration. Like Judge Whyte did in the Brazil decision, Judge Patel found that California law should be applied due to a conflict with the law provided in the contract (in this case, Florida law). Judge Patel concluded that the agreement was procedurally and substantively unconscionable, and that the class action and arbitration provisions should not be enforced.

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Proposed Legislation Would Provide Copyright Protection for Fashion Designs

Proposed Legislation: Senate Bill 1957, Design Piracy Prohibition Act

The One Sentence Summary: The proposed Design Piracy Prohibition Act would provide copyright protection to fashion designs, whereas existing law only protects fashion labels from being copied by counterfeit merchandisers.

Summary of Legislation:

• Senate Bill 1957 would provide copyright protection to a "fashion design," which is defined as "the appearance as a whole of an article of apparel, including its ornamentation."
• The "apparel" entitled to fashion design protection includes clothing (undergarments, outerwear, gloves, footwear, and headgear), handbags, purses, tote bags, belts, and eyeglass frames.
• The period of copyright protection provided would be three years for fashion designs.
• Fashion designs not subject to protection under Senate Bill 1957 include those embodied in a useful article that was made public by the designer or owner more than three months before applying for copyright registration.
• Senate Bill 1957 would also make fully applicable to fashion designs the doctrines of secondary infringement and secondary liability.
• This proposed legislation has sparked considerable debate within the fashion industry. Opponents of the bill, such as the California Fashion Association, contend that it would stifle creativity in the fashion industry and result in more litigation because of difficulties identifying what constitutes a violation of the act. Supporters of the bill, such as the Council of Fashion Designers of America, argue that it would protect against l0w-end knock-offs profiting from fashion designers' creativity.

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Retailer's Calculation of "Gross Receipts" for California Tax Purposes Successfully Challenged by Franchise Tax Board

Case: The Limited Stores, Inc. v. Franchise Tax Board, No. A102915 (Cal. Ct. App. 6/8/07)

The One Sentence Summary: Because national retailer's inclusion of short-term securities' full redemption price as "gross receipts" unfairly represented the extent of its business activity in California, Franchise Tax Board prevailed on challenge to retailer's calculation of California taxes.


What They Were Fighting About:

The Limited, a national retailer based in Columbus, Ohio, filed an action seeking refund of $5.6 million in corporate taxes for the years 1993 and 1994 after California's Franchise Tax Board (FTB) disputed the retailer's methodology for calculating taxes on its California source income. California's Uniform Division of Income for Tax Purposes Act (UDITPA) utilizes apportionment formula to determine the taxes that may be levied on a business that retails within and without California. The "sales factor" of the formula is calculated using a fraction, the numerator of which is taxpayer's total sales (defined only as all "gross receipts") in California and denominator of which is total sales everywhere.

The Limited's treasury department in Ohio invested excess cash flow in short-term financial instruments like commercial paper, certificates of deposit, treasury bills, and money market mutual funds. In calculating the sales factor under UDITPA, The Limited included in the denominator all money received when those investments matured, including return of principal. FTB argued that only income received when the investments matured should be included in the denominator.

Court Holdings:

• Under California Supreme Court authority, taxpayer may treat the full redemption price (including return of principal) from short-term financial instruments held to maturity as "gross receipts" under UDITPA.


• However, UDITPA also contains a provision that enables FTB to require a different apportionment in order to fairly represent the taxpayer's business activity in California.


• FTB has burden to prove by clear and convincing evidence that apportionment provided by standard formula is not a fair representation and that FTB alternative is reasonable. Courts apply two-part test: (1) whether taxpayer's treasury functions are "qualitatively different from its principal business" and (2) whether the quantitative distortion is substantial by including taxpayer's investment receipts in the formula.


• Applying this test, the court held that The Limited's including in "gross receipts" the full redemption price of short-term securities did not fairly represent the extent of its business activity in California.


• First, The Limited's treasury department functions are qualitatively different from its main business, the retail sale of apparel and other merchandise. Second, The Limited's calculation would lead to substantial quantitative distortion of its business activities in California. In the two years at issue, The Limited's short-term investments produced less than 1 percent of its annual income but more than 50 percent of its gross receipts. This distortion was seen in huge disparity between margins for its principal business (46 percent) and treasury functions (less than 1 percent).


• Court concluded that FTB's proposal to included in sales factor denominator only the net income from The Limited's redemptions of short-term securities was reasonable.

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Minimum Price Agreements Between Manufacturers and Retailers Are No Longer Per Se Illegal, Now Subject to "Rule of Reason"

Case: Leegin Creative Leather Products, Inc. v. PSKS, Inc., DBA Kay's Kloset, No. 06-480 (U.S. Sup. Ct. 6/28/07)
The One Sentence Summary: Reversing 96 years of antitrust precedent that made minimum resale price agreements between manufacturers and retailers per se illegal, U.S. Supreme Court held in 5-4 decision that vertical price restraints are to be analyzed under "rule of reason" and not deemed unlawful per se.


What They Were Fighting About:
PSKS, Inc., operating as Kay's Kloset a women's apparel store in Texas, sued Leegin Creative Leather Products, Inc., which manufactures leather goods and accessories, after Leegin stopped selling to Kay's Kloset due to its refusal to agree to a new minimum resale pricing policy. Leegin adopted the policy for its Brighton brand in order to protect the brand's image against what it deemed harmful discounting and to give its retailers sufficient margins to provide a level of customer service that supported the brand. Kay's Kloset had been discounting Brighton products by 20 percent, and it suffered a substantial decline in sales revenues after Leegin stopped selling it Brighton goods.

Jury trial on PSKS's antitrust claims resulted in $3.975 million judgment for the retailer, which the Fifth Circuit affirmed. U.S. Supreme Court granted certiorari to determine whether vertical minimum resale price agreements should still be deemed unlawful per se under Dr. Miles Medical Co. v. John D. Park & Sons, Co., 220 U.S. 373 (1911).

Court Holdings:

• Because vertical minimum resale price agreements can have procompetitive or anticompetitive effects depending on the circumstances, they should no longer be deemed illegal per se under Section 1 of the Sherman Act. Minimum resale agreements should be subject to rule of reason analysis, whereby courts balance procompetitive and anticompetitive effects of a challenged restraint in determining whether or not it violates Section 1 prohibition against unreasonable restraints of trade.


• In reversing Dr. Miles rule that a vertical agreement between a manufacturer and its distributor is unlawful per se, Court relied on economics literature as to two procompetitive effects of minimum resale price agreements.


• First, allowing a manufacturer and retailer to agree on a minimum resale price tends to eliminate intrabrand price competition (that is, competition among retailers selling the same brand), which can stimulate interbrand competition (that is, competition among manufacturers selling different brands of the same type of product). Vertical price restraints by a manufacturer encourage retailers to invest in customer services and promotions that enhance the manufacturer's position relative to that of a competing manufacturer. If vertical price restraints were illegal per se, discount retailers would "free ride" on the efforts of retailers who provide such demand-enhancing services and undercut their price.


• Second, minimum resale price agreements can increase interbrand competition by facilitating entry into the market by new manufacturers and brands.


• Anticompetitive effects may result from minimum resale price agreements in some cases, such as enabling manufacturing cartels or retailer price fixing. Vertical agreements setting minimum resale prices to enable either type of cartel would be unlawful under the rule of reason.


• Court's majority, unlike the four dissenting justices, did not consider stare decisis to be a sufficient reason to continue the bright-line rule against vertical price restraints.


• Dissenting justices believed that applying the rule of reason to minimum resale price agreement would create an unworkable legal regime, lead to higher retail prices to the detriment of consumers, and make it more difficult for small, price-cutting retailers (both online and brick-and-mortar) to compete with major retailers.

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Credit Card Processors Sued for Knowingly Aiding and Abetting Web Site's Illegal Lottery Were Not Entitled to Dismissal

Case: Schultz v. Neovi Data Corp., No. G033879 (Cal. Ct. App. 6/15/07)

The One Sentence Summary: Complaint alleging that credit card processors had knowledge of and provided substantial assistance to web site's operation of illegal lottery, wherein consumers had to make online purchases for the chance to win expensive home electronics products, stated a cause of action for aiding and abetting unfair competition under California Business and Professions Code section 17200.


What They Were Fighting About:

Plaintiff Schultz alleged that defendant EZ Expo operated a web site "matrix" wherein a consumer could receive expensive home electronics products (such as a 50-inch plasma television) for a fraction of the price, if he paid a $150 fee for three "E-books" and if 50 other consumers also joined the same matrix after him. Defendants PaySystems and Ginix allegedly provided credit card processsing and billing services for EZ and were used by matrix customers to pay for their purchases of E-books.

Plaintiff's complaint pleaded, on behalf of himself and as a representative in a class action, an unfair competition cause of action against all defendants pursuant to California Business and Professions Code section 17200 et. seq. Plaintiff alleged that the credit card processors aided and abetted EZ's operation of an illegal lottery or pyramid scheme in violation of California statutes. Trial court sustained demurrers by PaySystems and Ginix (as well as defendants PayPal and Neovi) on the grounds that the complaint failed to state facts sufficient to constitute a cause of action for aiding and abetting unfair competition. Plaintiff appealed.

Court Holdings: Court of appeal reversed the granting of PaySystems' and Ginix's demurrers (while affirming as to PayPal and Neovi) and held that plaintiff had adequately pleaded facts to support aiding and abetting unfair competition. Court reasoned that:

• The elements of aiding and abetting an intentional tort by another are (1) knowing that the other's conduct constitutes a breach of duty, and (2) giving substantial assistance or encouragement to the other to so act. Plaintiff's complaint contained facts satisfying each.


• Plaintiff alleged that PaySystems and Ginix reviewed EZ's web site and recognized that it was an illegal lottery, that it generated substantial revenue, and that it could be very profitable for them as credit card processors. Plaintiff also claimed that PaySystems and Ginix knew that the money being paid by consumers for E-books was for purposes of participation in the lottery. These allegations satisfied the knowledge element.


• As for the substantial assistance or enouragement element, plaintiff alleged that PaySystems and Ginix authorized EZ to configure its web site so consumers could click on their logos and be linked directly to their sites for credit card payment processing. Plaintiff further alleged that they did this with the intent of aiding and abetting EZ's illegal lottery operation and realized that their services would "lend an aura of respectability" to EZ's operation and encourage consumer participation. These allegations were sufficient to defeat PaySystems' and Ginix's demurrers.


• By contrast, plaintiff's conclusory allegations did not plead sufficient facts to satisfy the elements of knowledge and substantial assistance as to defendants PayPal and Neovi.


• Court of appeal remanded the case as to defendants PaySystems and Ginix and instructed the trial court to give plaintiff the opportunity to amend the complain to plead facts satisfying the standing and class action requirements of section 17200 as amended by Proposition 64 in November 2004 (which added injury-in-fact requirement to section 17200 during pendency of plaintiff's appeal).

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California Supreme Court Upholds City's Zoning Ordinance Restricting Retail Sales in Designated Districts

Case: Hernandez v. City of Hanford, No. S143287 (Cal. Sup. Ct. 6/7/07)

The One Sentence Summary: California Supreme Court held that City of Hanford's zoning ordinance restricting the sale of furniture in shopping mall district in order to protect retail furniture stores deemed vital to economic viability of city's downtown commercial district was not unconstitutional.


What They Were Fighting About: The challenged zoning ordinance generally prohibited the sale of furniture in the city's Planned Commercial (PC district) area, which contained a large shopping mall anchored by several department stores. There was a limited exception that permitted department stores with more than 50,000 square feet of floor space in the PC district to sell furniture within a prescribed area of no more than 2,500 square feet. City of Hanford enacted this zoning ordinance in 2003 to protect the economic viability of its downtown commercial district, which featured many retail furniture stores. Plaintiffs were owners of a home furnishing and mattress store in the PC district who wanted to sell bedroom furniture in their store. Their lawsuit asserted equal protection clause challenges to the validity of the ordinance under the United States and California Constitutions. Although the trial court rejected plaintiffs' constitutional challenges, the court of appeal struck down the ordinance.

Court Holdings: In reversing the court of appeal's decision and upholding the city's zoning ordinance, the California Supreme Court held:

• The legislature had two legitimate purposes in enacting the zoning ordinance: (1) protecting and preserving the economic viability of the city's downtown commercial district, by generally prohibiting in the PC district the retail sale of furniture, and (2) attracting and retaining for the PC district large department stores, which typically carry furniture and which the city deemed essential to the viability of the PC district.


• Limiting the exception for sale of retail furniture within the PC district to only large department stores is rationally related to the legislature's second purpose in enacting the challenged zoning ordinance. Rational basis test applies to such economic legislation. Differential treatment of large department stores and other retailers in the PC district was rationally related to a legitimate governmental purpose.


• The Court also rejected the plaintiffs' sweeping challenge to the ordinance as improperly "regulating economic competition." A zoning ordinance is legal despite affecting economic competition so long as its primary objective is to achieve a valid public purpose such as futhering a city's plan for controlled growth or localized commercial development, rather than an impermissible anticompetitive private purpose such as favoring or disfavoring a particular business or individual. A city may divide land into districts and reasonably regulate the uses permitted therein in exercising its policy power.

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California Statutes Prohibiting Use of Misleading Country of Origin Labels on Retail Goods Upheld Against Manufacturer's Legal Challenges

Case: Benson v. Kwikset Corp., No. G030956 (Cal. Ct. App. 6/29/07)

The One Sentence Summary: Judgment for plaintiff enjoining manufacturer's use of "Made in U.S.A." labels pursuant to California statutes was affirmed, assuming plaintiff can amend the complaint to meet the "injury in fact" and class action requirements of California's Proposition 64.


What They Were Fighting About:

Plaintiff sued Kwikset and its parent company Black & Decker for restitution and injunctive relief under California's unfair competition law (Business & Professions Code section 17200) and false advertising law (section 17500). Plaintiff alleged violations of statutory prohibitions against marketing or sale of merchandise with "Made in U.S.A." or "All American Made" labels when the goods contained foreign-made parts or involved foreign manufacture. Some of defendants' locksets included screws and pins made in Taiwan, a latch assembly sub-assembled in a Mexico plant, or both foreign made parts and assembly. Trial court enjoined the use of misleading country of origin labels and ordered defendants to allow retailers to return mislabeled good for refund or replacement.

During pendency of the appeal, California Supreme Court issued its decision in Branick v. Downey Savings & Loan Assn., 39 Cal. 4th 235 (2006), interpreting Proposition 64 enacted by the state's electorate in November 2004. Proposition 64 requires a private plaintiff under sections 17204 and 17535 who sued for injunctive or restitutionary relief to establish that (1) he "has suffered an injury in fact and has lost money or property" and (2) he also meets the class action requirements of Code of Civil Procedure section 382, in order to maintain a representative action. Branick held that a trial court may consider a plaintiff's motion to amend a complaint to allege facts meeting these standing and representative claim requirements for unfair competition law and false advertising law actions. California Supreme Court directed the court of appeal to reconsider its earlier decision vacating trial court's judgment, in light of Branick.

Court Holdings:

• Court of appeal remanded the case to the trial court with directions to allow plaintiff an opportunity to amend the complaint to satisfy Proposition 64 requirements. If plaintiff succeeds in doing so, the remainder of the appellate court's opinion will provide the resolution of the other substantive issues raised by the parties' cross-appeals.


• On the merits of plaintiff's unfair competition and false advertising claims, the court of appeal upheld the trial court's rejection of defendants' constitutional challenges and its determinations that their conduct violated California statutes regarding misleading country of origin labels.


• Section 17200 proscribes any "unlawful, unfair or fraudulent business act or practice" and makes violations of other predicate statutes actionable. Here, defendants were found to have violated two predicate statutes: (1) Business & Professions Code section 17533.7 of the false advertising law, and (2) Civil Code section 1770(a)(4).


• Section 17533.7 makes it unlawful to sell or offer for sale merchandise that is labeled with "Made in U.S.A.," "Made in America," "U.S.A." or similar words when it "or any article, unit, or part thereof, has been entirely or substantially made, manufactured, or produced outside of the United States." Court rejected defendants' freedom of speech and vagueness challenges.


• Court also held that section 17533.7 prohibits "Made in U.S.A." or similar labels on merchandise where (1) it is entirely made, manufactured, or produced outside the United States, or (2) it is substantially so, meaning "where the foreign operation, process, or activity employed to create the merchandise is found to be considerable in either amount, value, or worth." Mere use of foreign raw materials to make a product domestically does not violate section 17533.7.


• More controversial (and prompting dissenting opinion) is the court's holding that "when merchandise consists of two or more physical elements or pieces, section 17533.7 also applies to any distinct component of merchandise that is necessary for its proper use or operation." Thus, section 17533.7 would be violated if a product is labeled "Made in U.S.A." or similar where any distinct component was entirely or substantially made, manufactured, or produced outside United States.


• Applying these legal principles to the facts, court of appeal upheld the trial court's determination that defendants violated section 17533.7 because Kwikset's "Made in U.S.A." locksets used screws and pins made in Taiwan, and part of the lockset latch assembly occurred at its Mexico plant.


• Civil Code section 1770(a)(4), the other predicate statute cited by plaintiff, makes unlawful the use of "deceptive representations or designations of geographic origin in connection with goods or services." This statute is part of California's Consumer Legal Remedies Act.


• Court of appeal held that the trial court properly applied a "reasonable person" standard to section 1770(a)(4) and evaluated the defendants' labeling from the perspective of consumers for whom geographic designation is important. Trial court's application of that standard to find defendants' conduct violated section 1770(a)(4) was upheld.

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Trial Court Rejects Property Owners' Challenge to Condemnation of Land for Brooklyn's Atlantic Yards Arena and Development Project

Case: Goldstein v. Pataki, 488 F. Supp. 2d 254 (E.D.N.Y. 6/6/07)

The One Sentence Summary: District court in Brooklyn rejected property owners' claim that condemnation of property for mixed-use development project consisting of sports arena for New Jersey Nets basketball franchise, housing units, offices, retail space, and a hotel violated public use requirement of eminent domain law.


What They Were Fighting About: Plaintiffs, owners and renters of real estate in Brooklyn on land intended for use in the Atlantic Yards Arena and Development Project, brought lawsuit against New York state's urban development agency, developer Forest City Ratner Companies, city development agency, as well as business, city, and state officials. After the state's urban development agency published its findings and determination to proceed with condemnation to acquire plaintiffs' properties, plaintiffs sought judicial review before the federal district court and alleged constitutional challenges to the condemnation and violation of New York's Eminent Domain Procedure Law (EDPL). Defendants moved to dismiss all of plaintiffs' claims on grounds including that plaintiffs had failed to state a claim.

Court Holdings: In granting motion to dismiss, district court held:

• The takings at issue did not violate the "public use" requirement of the Fifth Amendment's Takings Clause.
• Applying Supreme Court precedent including Kelo v. City of New London, 545 U.S. 469 (2005), district court concluded that a taking fails the public use requirement only if the uses offered to justify it are "palpably without reasonable foundation" such as (1) where sole purpose of taking is to transfer property to a private party, or (2) where asserted purpose of taking is a mere pretext for an actual purpose to bestow a private benefit.
• District court found that neither category of impermissible "public use" justification applied to the Atlantic Yards Arena and Development Project. First, plaintiffs' allegations disputed only the extent of the public benefit to be derived from taking their properties, not the existence of any public benefit. Second, plaintiffs' allegations that the stated purposes of the project were dubious were not sufficient to plead "mere pretext" to bestow a private benefit. Thus, plaintiffs' allegations did not suffice to state a claim for violation of the "public use" requirement of the Fifth Amendment's Takings Clause.
• The court also held that the takings did not violate equal protection or due process. Having dismissed the three federal constitutional claims over which it had original jurisdiction, the court then declined to exercise supplemental jurisdiction over the state law claim alleging a violation of the EDPL, dismissing that claim without prejudice to its being refiled in state court.
• The district court's decision is currently on appeal before the Second Circuit.

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California Court Refuses to Enforce Cell Phone Provider's Contractual Arbitration Provision Waiving Class Action Relief

Case: Gatton v. T-Mobile USA, Inc., Nos. A112082, A112084 (Cal. Ct. App. 6/22/07)

The One Sentence Summary: Class action waiver in arbitration clause of T-Mobile's service agreement was both procedurally and substantively unconscionable and therefore unenforceable.


What They Were Fighting About: Plaintiffs filed class action claims challenging T-Mobile's practice of (1) imposing fee for termination of service agreement before its expiration date, and (2) installing a locking device in T-Mobile handsets that prevented subscribers from switching cell phone providers without purchasing a new handset. T-Mobile's service agreement contained an arbitration provision that included language waiving any right to seek classwide relief. T-Mobile moved to compel arbitration of the plaintiffs' claims pursuant to the service agreement provision. The trial court denied the motion on the grounds that the arbitration provision was unconscionable and therefore unenforceable.

Court Holdings:

• The court of appeal affirmed and held that the arbitration provision waiving class action relief was both procedurally and substantively unconscionable.


• Under the California Supreme Court's decision in Discover Bank v. Superior Court, 36 Cal. 4th 148 (2005), a waiver of classwide relief found in a consumer contract of adhesion will be deemed unconscionable and unenforceable if it is alleged that the party with superior bargaining power cheated large numbers of consumers out of individually small amounts of money. The reason is that a classwide waiver in that situation will operate to exempt the responsible party from liability for its fraud or willful injury to the property of another, in violation of Civil Code section 1668, because individual consumers will not sue for such small amounts.


• Procedural unconscionability focuses on the manner in which the contract was negotiated. Substantive unconscionability focuses on overly harsh or one-sided results.


• The court found T-Mobile's arbitration provision waiving classwide relief to be at least minimally procedurally unconscionable as a contract of adhesion, notwithstanding the consumer's option to obtain mobile phone service from other providers whose service agreements did not contain class action waivers. T-Mobile prepared the service agreement and required its customers to accept it entirely or else forego T-Mobile's service. Despite being a contract of adhesion, if the challenged provision did not have a high degree of substantive unconscionability, it should be enforced.


• However, T-Mobile's class action waiver was substantively unconscionable enough to render the arbitration provision in its service agreement unenforceable. The California Supreme Court's decision in Discover Bank was directly on point in that regard. Trial court properly denied T-Mobile's motion to compel arbitration of plaintiffs' claims.

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Supreme Court Interprets Fair Credit Reporting Act's "Willful" Standard to Include Reckless Conduct

Case: Safeco Ins. Co. of America v. Burr, No. 06-84 (Sup. Ct. 6/4/07)

The One Sentence Summary: The Supreme Court's holding that "willful" violations of the Fair Credit Reporting Act include reckless conduct is relevant to pending lawsuits in California and elsewhere alleging that retailers violated 15 U.S.C. section 1681c(g), enabling consumers to seek statutory damages if electronic receipts for credit or debit card transactions disclose the card's expiration date or more than the last five digits of the card number.


What They Were Fighting About: In Safeco and companion case GEICO General Ins. Co. v. Edo, at issue were the Fair Credit Reporting Act's (FCRA) requirements of sending notification to a consumer when adverse action is taken based on information contained in a consumer credit report. The Supreme Court granted certiorari to resolve a conflict in the federal circuit courts of appeal on whether the FCRA provision, 15 U.S.C. section 1681n(a), permitting statutory damages ranging from $100 to $1,000 against anyone who "willfully fails to comply" with the FCRA reached reckless disregard of FCRA obligations.

Court Holdings:

• The Supreme Court held that reckless disregard of a requirement of FCRA would qualify as a willful violation within section 1681n(a), the statutory damages provision.
• Recklessness is defined as it is understood in the common law: conduct entailing an unjustifiably high risk of harm that is either known or so obvious that it should be known. The Court stated: "It is this high risk of harm, objectively assessed, that is the essence of recklessness at common law."
• The Court distinguished reckless disregard from mere negligence or carelessness, for which the FCRA requires proof of actual damage per 15 U.S.C. section 1681o(a): "Thus, a company subject to FCRA does not act in reckless disregard of it unless the action is not only a violation under a reasonable reading of the statute's terms, but shows that the company ran a risk of violating the law substantially greater than the risk associated with a reading that was merely careless."
• The Court's decision will impact cases pending against retailers for alleged violations of section 1681c(g) of FCRA, which is known as the Fair and Accurate Credit Transactions Act (FACTA) of 2003. FACTA went into effect on December 4, 2006 as to any cash registers already in use before January 1, 2005. FACTA provides that "no person that accepts credit cards or debit cards for the transaction of business shall print more than the last 5 digits of the card number or the expiration date upon any receipt provided to the cardholder at the point of the sale or transaction." This prohibition only applies to electronically printed receipts, and "shall not apply to transactions in which the sole means of recording a credit card or debit card account number is by handwriting or by an imprint or copy of the card."
• Given that retailers had three years to prepare existing cash registers for compliance with FACTA, plaintiffs may be able to prove "reckless disregard" of the law against printing electronic receipts containing more than a credit or debit card number's last 5 digits or the card's expiration date.
• However, a recent decision by a federal district court in California suggests that retailers may be able to defeat class certification for FACTA claims, particularly when the alleged violation involves only the printing of a card's expiration date. In Soualian v. International Coffee & Tea LLC, Judge R. Gary Klausner of the Central District of California denied class certification on FACTA claims in a June 11, 2007 ruling. The court held that a class action was not "superior to other available methods for fair and efficient adjudication of the controversy" under Rule 23(b)(3) of the Federal Rules of Civil Procedure, reasoning that "massive damage awards would be disproportionate to any actual damage caused by the alleged violations."
• In Soualian and another recent decision by the Central District of California, Spikings v. Cost Plus, Inc., the retailers allegedly violated FACTA by including customer credit card or debit card expiration dates on electronically printed receipts. Both decisions found that disclosure of a card's expiration date by itself would be highly unlikely to result in identity theft. Given the availability of statutory damages of $100 to $1,000 for each violation, the courts deemed it inappropriate to certify class actions where damages would be potentially disastrous to the retailer's business and where no harm was actually suffered by the putative class of customers.
• Even if a retailer's violation of FACTA might be deemed "reckless" under Safeco and subject the retailer to statutory damages under FCRA, defeating class certification as in Soualian would seriously disable a lawsuit. Plaintiffs' attorneys will not want to litigate individual claims for statutory damages of $100 to $1,000 on a case-by-case basis.

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Ninth Circuit Affirms Preliminary Injunction for Albertson's Restraining Competing Retail Grocer from Using "Lucky" Trademark

Case: Grocery Outlet Inc. v. Albertson's Inc., No. 06-16380 (9th Cir. 8/9/07)

The One Sentence Summary: Ninth Circuit affirmed the district court's granting of a preliminary injunction to Albertson's, based on the possibility of irreparable injury and the strong likelihood of its prevailing on the merits despite competitor Grocery Outlet's asserted defense of abandonment of "Lucky" trademark by nonuse.


What They Were Fighting About: Grocery Outlet, a competitor of Albertson's in the retail grocery industry, contended that Albertson's abandoned the "Lucky" trademark by publicly announcing after a 1999 merger that "Lucky" stores were being converted to Albertson's stores. Albertson's sought a preliminary injunction for trademark infringement in the Northern District of California to restrain Grocery from using the "Lucky" mark. The district court granted the motion, finding at the preliminary injunction stage that Albertson's legally owned the "Lucky" mark and rejecting Grocery's abandonment defense. Grocery appealed.

Court Holdings:

• Ninth Circuit held that the district court did not abuse its discretion in finding that Albertson's demonstrated a strong likelihood of success on its trademark infringement claim and the possibility of irreparable injury in the absence of a preliminary injunction.
• On appeal, Grocery did not dispute that its use of the "Lucky" mark for retail grocery services was likely to cause consumer confusion. Thus, whether Albertson's was likely to succeed on the merits turned on whether Grocery's abandonment defense would be successful.
• Abandonment by nonuse is a defense under the Lanham Act that requires proof of both the mark owner's discontinuance of trademark use and intent not to resume such use.
• Ninth Circuit concluded that Albertson's offered sufficient evidence of its intent, during the short period of alleged nonuse, to resume use of the "Lucky" mark within the reasonably foreseeable future. Accordingly, the district court did not abuse its discretion in rejecting Grocery's defense of abandonment at the preliminary injunction stage.
• On the standard of proof for the abandonment defense, Grocery adopted the clear and convincing evidence standard in its briefing in the district court. The Ninth Circuit found Grocery to have waived any challenge on this point and decided not to resolve the disputed issue of whether the standard of proof is preponderance of the evidence or clear and convincing evidence.
• Two circuit judges agreed with the court's per curiam opinion but wrote separate concurring opinions to express their divergent views on the standard of proof for an abandonment defense under the Lanham Act. While the court's per curiam opinion did not discuss the issue, the concurring opinions provide future litigants in Ninth Circuit courts with their legal arguments for either a preponderance of the evidence or a clear and convincing evidence standard of proof.

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California's Unruh Civil Rights Act Prohibits Gender-Based Price Discrimination, Whether or not Customer Demands and Is Refused Equal Treatment

Case: Angelucci v. Century Supper Club, 41 Cal. 4th 160 (May 31, 2007)

The One Sentence Summary: The California Supreme Court held that a plaintiff is not required to allege that he or she requested equal treatment and the retailer refused in order to state a claim under the Unruh Civil Rights Act for gender-based price discrimination.


What They Were Fighting About: The plaintiffs were male patrons of a club that offered discounted admission to women, charging $20 admission for men and $15 for women. They paid the male admission price on several occasions and then sued alleging that the club's pricing policy violated California's Unruh Civil Rights Act. Civil Code section 52(a) contains a private right of action to enforce the Act. Section 51.6(b) provides: "No business establishment of any kind whatsoever may discriminate, with respect to the price charged for services of similar or like kind, against a person because of the person's gender." The trial court granted (affirmed by the court of appeal) defendant's motion for judgment on the pleadings on the grounds that plaintiffs' failure to allege that they requested and were refused the discounted admission price precluded any claim for price discrimination.

Court Holdings:

• The California Supreme Court reversed and held that plaintiffs stated a cause of action for unlawful price discrimination based on gender.


• Nothing in the statute requires a customer to specifically demand nondiscriminatory treatment and be denied same by a retailer in order to state a claim for violation of the Unruh Civil Rights Act. The plaintiffs were injured within the meaning of the Act when they presented themselves for admission and were charged the club's nondiscounted male-only price. The defendant's interpretation of the statute would be inconsistent with the Act's policy of eliminating arbitrary discrimination in places of public accommodation.


• While acknowledging there might be some instances in which a compelling public policy justified differential treatment of male and female patrons, the court made clear that a retailer's policy of offering gender-based price discounts would ordinarily constitute unlawful price discrimination.


• The court concluded by stating that nothing in its opinion should be construed as restricting potential equitable or constitutional defenses to any damages sought by a plaintiff under Civil Code section 52(a). This statement was a response to defendant's argument that plaintiffs made repeated unannounced visits to the club on Ladies Day as a "shakedown" tactic to increase the statutory damages they could seek for violation of the Act.

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Retailers Prohibited from Selling in California Athletic Shoes Made with Kangaroo Hide from Australia

Case: Viva! Int'l Voice for Animals v. Adidas Promotional Retail Operations, Inc., No. S140064 (Cal. Sup. Ct. 7/23/07)

The One Sentence Summary: California Supreme Court rejected Adidas' argument that federal law not prohibiting importation of kangaroo products preempted California's ban on products made from any part of a kangaroo.


What They Were Fighting About: California Penal Code section 653(o) prohibits the importation into or sale within the state of products made from kangaroo. Defendants Adidas Promotional Retail Operations, Inc., Sports Chalet, and Offside Soccer (collectively Adidas) are California retailers that sell athletic shoes made from the hides of three kangaroo species that exist only in Australia: the red kangaroo, the eastern grey kangaroo, and the western grey kangaroo. Plaintiff Viva! International Voice for Animals sued Adidas for engaging in an unlawful business practice under Business & Professions Code section 17200, by importing and selling athletic shoes made from kangaroo leather in violation of Penal Code section 653(o). Both the trial court and court of appeal ruled in favor of Adidas, concluding that federal law preempted California's statutory ban.

Court Holdings:

• In a unanimous decision, the California Supreme Court held that the federal Endangered Species Act of 1973 did not preempt California's ban on products made from any part of a kangaroo.


• The court's opinion discussed four types of preemption and found that none existed in this case: express, conflict, obstacle, and field preemption.


• The Endangered Species Act of 1973 established a cooperative federal-state approach to wildlife preservation. Section 6(f) of the Act contains a preemption clause and a savings clause that allow states to enact more stringent regulations regarding endangered or threatened species. The only exception to the preservation of state power is for activities specifically "authorized" by the Act or its implementing regulations.


• California Supreme Court rejected Adidas' argument that the 1995 removal of the three kangaroo species from the Endangered Species Act's list of endangered or threatened species established a federal policy against state regulation. The Act does not preempt state efforts to protect the three kangaroo species by prohibiting importation of kangaroo products. Section 6(f) of the Act only preempt states from prohibiting what is "authorized" under the Act or its regulations, not anything that federal law has failed to prohibit.

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Lost Profits Award for Breach of Franchise Agreement Reversed As Too Speculative By Appellate Court

Case: Parlour Enterprises, Inc. v. The Kirin Group, Inc., No. G036525 (Cal. Ct. App. 6/19/07)

The One Sentence Summary: Lost profits awarded by jury for breach of franchise agreement were reversed due to speculative expert testimony based on unreliable proforma financial projections and market data for other restaurants not shown to be sufficiently similar to plaintiffs' restaurants.


What They Were Fighting About: Defendant Kirin Group bought the trademarks and trade names to Farrell's Ice Cream Parlours in 1996 and entered into written agreements in 2000 giving plaintiff Parlour Enterprises the exclusive right to develop Farrell's subfranchises in California. Parlour would receive some up-front fees as well as royalties based on a percentage of net sales. Unable to find enough investors to finance the opening of the minimum number of California restaurants required by the agreements (only one restaurant had been opened), Parlour set up limited partnerships to fund the construction of additional Farrell's restaurants. Prior to their completion, Kirin terminated the agreements. Parlour (along with the limited partnerships) filed suit alleging causes of action including breach of contract, fraud, negligent misrepresentation, and interference with prospective business advantage. Jury trial resulted in judgment for Parlour and the limited partnerships and a damages award of $6.6 million for lost profits, lost franchise fees, and additional expenses incurred.

Court Holdings:

• Court of appeal reversed all but $130,000 of the jury's $6.6 million damages award on the grounds that the evidence on which it was based was speculative expert opinions that should have been excluded by the trial court. Most significant is the part of the court's written decision regarding lost profits.


• Lost profits for an unestablished business may be recovered if the evidence makes reasonably certain both their occurrence and extent. Expert testimony may provide a sufficient basis for a damages award of lost profits if it is supported by a substantial factual basis rather than mere speculation and hypothetical scenarios.


• Applying these legal principles, the court of appeal concluded that plaintiffs' expert opinions on lost profits were based on unreliable proforma financial projections from an offering circular prepared by Parlour and given to potential investors. Such projections were mere assumptions, not based on operational results of an actual business substantially similar to the lost opportunity.


• In addition to unreliable projections, plaintiffs' expert relied on market data for a dozen smaller ice cream parlours and for the "Friendly's" restaurant chain. However, because both Friendly's and the smaller ice cream parlours had different business models than Farrell's, they were not sufficiently similar businesses upon which to base a calculation of plaintiffs' alleged lost profits.

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Ninth Circuit Reverses Denial of Retailer's Motion for Preliminary Injunction in Trademark Infringement Case

Case: Abercrombie & Fitch Co. v. Moose Creek, Inc., No. 06-56774 (9th Cir. 5/22/07)

The One Sentence Summary: District court erred in denying Abercrombie & Fitch's motion for a preliminary injunction against Moose Creek's use of new marks by (1) misapplying the doctrine of judicial estoppel, and (2) erroneously concluding that the parties' trademarks were more different than similar.

What They Were Fighting About: Abercrombie & Fitch filed suit in August 2005 against Moose Creek for alleged trademark infringement, unfair competition, and false designation of origin under the Lanham Act and various California common law claims, one year after the parties settled a 2004 trademark infringement suit brought by Moose Creek. In the later action Abercrombie contended that Moose Creek's two new logos, a moose silhouette and a moose outline, infringed on Abercrombie's similar marks. Abercrombie moved to enjoin Moose Creek's use of its new marks pending resolution of the lawsuit. District court denied Abercrombie's motion because it concluded that (1) a number of Abercrombie's arguments were contrary to its positions in the prior litigation and therefore barred by judicial estoppel, and (2) differences between the parties' marks outweighed the similarities.

Ninth Circuit Holdings: The Ninth Circuit reversed and remanded the case to the district court for reconsideration of Abercrombie's motion for a preliminary injunction, because:

• Applying the Sleekcraft factors regarding likelihood of confusion, the district court abused its discretion in finding that Abercrombie was judicially estopped to assert arguments about the strength of Moose Creek's marks and the degree of care likely to be exercised by the purchaser.


• The district court also erred in estopping Abercrombie from arguing post-purchase confusion as a ground for trademark infringement.


• Judicial estoppel does not apply where the party's later litigation position is not "clearly inconsistent" with its earlier litigation position.


• With respect to the third Sleekcraft factor - similarity of the marks - the district court clearly erred in concluding that differences between the parties' marks outweighed similarities. District court erroneously relied on comparisons to Moose Creek's marks as they appeared in a catalog, rather than as they appeared embroidered on the company's apparel in the marketplace. Ninth Circuit noted that "marks must be considered in their entirety and as they appear in the marketplace."

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California Court Rejects Claim that Cable Television Provider's Facially-Neutral Policy Violated Americans with Disabilities Act

Case: Belton v. Comcast Cable Holdings, LLC, No. A112591 (Cal. Ct. App. 6/8/07)

The One Sentence Summary: California court of appeal rejected blind customer's claim that Comcast's policy requiring purchase of television cable services in order to obtain cable FM or music services violated the Americans with Disabilities Act, because the plaintiff was not denied access to a place of public accommodation.


What They Were Fighting About: Plaintiff was a legally blind resident of Sonoma County, California and a subscriber to Comcast cable services. Defendant Comcast offered FM or music services to Sonoma County residents only as part of a basic cable package that included television cable service. Plaintiff did not wish to purchase the television cable service, since his blindness prevented him from using it. The complaint alleged various causes of action including violation of California's Unruh Civil Rights Act (Civil Code section 51 et. seq.), based on Comcast's practice of packaging music service together with television programming and refusing to provide music service by itself. A violation of the right of any individual under the Americans with Disabilities Act of 1990 (ADA) also constitutes a violation of the Unruh Act. The trial court granted Comcast's motion for summary judgment on all causes of action.

Court Holdings:

• The court of appeal affirmed the trial court's granting of judgment in favor of Comcast on the Unruh Act claim and all other causes of action.


• Although Civil Code section 51(f) provides that "[a] violation of the right of any individual under the Americans with Disabilities Act of 1990 . . . shall also constitute a violation of [the Unruh Act]," the court held that plaintiff could not establish any violation of the ADA.


• To state a claim under the ADA, plaintiff must show he has been denied access to "a place of public accommodation." The court held that, as a matter of law, cable services are not a place of public accommodation. Because the facts could not establish a violation of plaintiff's rights under the ADA, the Unruh Act claim failed as a matter of law.

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