Retail Law Observer

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

noreply@blogger.com (Emily Kuwahara) — Tue, 17 Nov 2009 22:38:00 +0000

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.

CO-TENANCY RIGHTS HELP SHAVE COSTS

jromano@flk.com (Jennifer Romano) — Sat, 12 Sep 2009 03:39:00 +0000

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. ~

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

jromano@flk.com (Jennifer Romano) — Thu, 20 Aug 2009 18:01:00 +0000

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.

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

mdollbaum@flk.com (Margaret Dollbaum) — Mon, 13 Jul 2009 22:00:00 +0000

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.

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

mdollbaum@flk.com (Margaret Dollbaum) — Wed, 24 Jun 2009 19:00:00 +0000

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].

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

noreply@blogger.com (M. Kay Martin) — Thu, 28 May 2009 22:37:00 +0000

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.”

FTC to Begin Enforcement of the "Red Flags" Rule

noreply@blogger.com (Joel D. Smith) — Mon, 04 May 2009 16:32:00 +0000

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.

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.

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.

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.

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

FTC to Begin Enforcement of the "Red Flags" Rule

noreply@blogger.com (Joel D. Smith) — Mon, 04 May 2009 16:32:00 +0000

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.

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.
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.
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.
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

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

mdollbaum@flk.com (Margaret Dollbaum) — Thu, 12 Mar 2009 19:40:00 +0000

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.

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

mdollbaum@flk.com (Margaret Dollbaum) — Fri, 13 Feb 2009 20:05:00 +0000

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.

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

noreply@blogger.com (Michael F. Kelleher) — Thu, 12 Feb 2009 18:53:00 +0000

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.

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

noreply@blogger.com (Michael F. Kelleher) — Tue, 10 Feb 2009 22:48:00 +0000

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.

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

noreply@blogger.com (Thomas Koegel) — Fri, 30 Jan 2009 18:38:00 +0000

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.

New California Plywood/Particle Board Rule Impacts Retailers

mdollbaum@flk.com (Margaret Dollbaum) — Thu, 29 Jan 2009 22:28:00 +0000

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.

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

noreply@blogger.com (Emily J. Yukich) — Fri, 23 Jan 2009 18:15:00 +0000

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.

New Legal Developments for California Employers

noreply@blogger.com (Nancy Yaffe) — Fri, 16 Jan 2009 18:34:00 +0000

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.

The Center is Failing: What Are Your Rights?

jromano@flk.com (Jennifer Romano) — Mon, 15 Dec 2008 21:51:00 +0000

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.

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

treichmuth@flk.com (Tracy E. Reichmuth) — Mon, 08 Dec 2008 16:47:00 +0000

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.

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

noreply@blogger.com (Sophie Morris) — Thu, 20 Nov 2008 19:00:00 +0000

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.

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

noreply@blogger.com (Michael F. Kelleher) — Mon, 03 Nov 2008 18:01:00 +0000

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.

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

noreply@blogger.com (Michael F. Kelleher) — Fri, 10 Oct 2008 18:59:00 +0000

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.

Compliance With State Regulations Provides Protection Against Consumer Claim

jromano@flk.com (Jennifer Romano) — Fri, 22 Aug 2008 23:48:00 +0000

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.

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

noreply@blogger.com (Michael F. Kelleher) — Fri, 08 Aug 2008 00:55:00 +0000

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).

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

mdollbaum@flk.com (Margaret Dollbaum) — Tue, 29 Jul 2008 23:31:00 +0000

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

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

noreply@blogger.com (Nancy Yaffe) — Thu, 24 Jul 2008 18:17:00 +0000

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.