Navigating Civil Regulatory Issues: CK&E Presentation Highlights Key Regulations for Beauty Companies Doing Business in California

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Conkle, Kremer & Engel attorneys were featured speakers at the Beauty Industry West presentation “Navigating in Challenging Regulatory Waters:  Updates on California and Federal Compliance.”  About 150 entrepreneurs, consultants, executives and beauty industry professionals attended the event at the Crowne Plaza Hotel LAX in Los Angeles on October 15, 2013, which included a valuable networking session and a post-presentation Q&A.

CK&E’s presentation about legal regulatory issues for personal care product companies doing business in California included an overview of the California Organic Products Act (COPA), Proposition 65 (California’s Safe Drinking Water and Toxic Enforcement Act) and California’s Green Chemistry Initiative including the new Safer Consumer Products Regulations.  Conkle, Kremer & Engel’s materials from the BIW event, including the “Navigating Civil Regulatory Issues” presentation and its “Resource Guide for Regulatory Compliance,” are available for download on CK&E’s Regulatory Compliance web page.

Co-presenter Donald Frey, an industry veteran, regulatory expert and product development and innovation consultant, presented on key regulatory issues from the business perspective, including how to effectively deal with regulators. Mr. Frey has generously agreed to share his presentation, available for download here.

Among the questions and answers covered after the presentation were the addition of titanium dioxide (airborne, unbound particles of respirable size) to the Proposition 65 list of chemicals, responsible entities for purposes of compliance with the Safer Consumer Products Regulations, and the determination of organic ingredients under the National Organic Program standards.

Conkle, Kremer & Engel attorneys are frequent speakers at events of interest to the beauty industry due to their expertise in representing manufacturers, distributors, suppliers, retailers and salons in all aspects of their business, including the challenges of regulatory compliance.

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Conkle Kremer & Engel Presents Brand Protection in Brazil

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Daniel Advogados presenting at CK&E's Brand Protection in Brazil

Daniel Advogados presenting at CK&E’s Brand Protection in Brazil

Conkle, Kremer & Engel recently teamed up with its international correspondent lawyers from the Brazilian intellectual property firm Daniel Advogados, Andrew Bellingall and George de Lucena, to give a presentation about what companies can do to protect their brands in Brazil, including helpful information about doing business in Brazil.  Conkle, Kremer & Engel’s Mark D. Kremer emceed the event and moderated the informative Q&A that followed the presentation.

Brazil is the world’s fifth-largest country in the world in terms of land mass and population.  Brazil is also a founding member of BRICS – the acronym for the five major emerging economies of Brazil, Russia, India, China and South Africa.  Its growing middle class, stable currency, and high demand for its commodity exports have all made Brazil a very desirable place for companies to expand. And it does not hurt that Brazil will host both the 2014 World Cup and the 2016 Olympic games.

Kyle Baker shows his 3Expressions 3D Tablet innovation to John Conkle and George Mendonça de Lucena

Kyle Baker shows his 3Expressions 3D Tablet innovation to John Conkle and George Mendonça de Lucena

Because our clients’ intellectual property and brand protection needs extend beyond the U.S. border, Conkle, Kremer & Engel has established working teams with leading international intellectual property law firms around the world.  It is Conkle, Kremer & Engel’s mission to stay on top of developments in all foreign and domestic markets where our clients currently operate or look to expand.

Conkle, Kremer & Engel wishes to thank all those who attended the presentation, as well as our friends and colleagues from Daniel Advogados, Andrew Bellingall and George de Lucena.   We are pleased to be able to confirm that the presentation was approved by the State Bar of California for 1.0 hour of participatory MCLE credit for all lawyers and paralegals in attendance.  For all questions regarding MCLE credit, please contact Martinique E. Busino at 310-998-9100.

Slideshows from Brand Protection in Brazil:

Daniel Advogados – Doing Business in Brazil

Daniel Advogados – Combating Counterfeiting and Piracy in Brazil

Topics covered in the presentation and the Q&A session included:

Strategies for entering the Brazilian market

  • Exporting goods bearing the owner’s trademark
  • Doing business through a subsidiary
  • Licensing use of trademarks to an unrelated third-party
  • Joint ventures with Brazilian companies
  • Franchise agreements with Brazilian companies

 Protection of trademarks in Brazil

  • Best practices for brand protection
  • An overview of trademark prosecution and enforcement in Brazil
  • Procedures and delays at the Brazilian Patent and Trademark Office
  • Legal remedies available to intellectual property owners
  • Court procedures in Brazil for actions involving intellectual property
  • Registration of domain names in Brazil

The latest developments at the Brazilian Patent and Trademark Office regarding trademarks

  • Issues related to Brazil’s possible adoption of the Madrid Protocol
  • Adoption of multi-class and multiple owner applications

Combating counterfeiting and piracy in Brazil

  • Ramifications of intellectual property infringements, which are crimes in Brazil
  • Using criminal remedies and border control measures as intellectual property protection solutions

 

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A Proposition 65 Reform Bill Becomes Law: California Health & Safety Code Section 25249.7 Amended by AB 227

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On October 5, 2013, Governor Brown signed into law a bill that makes immediate changes to Proposition 65.  The amendments, which passed the California Legislature last month, impose a number of restrictions on private enforcers seeking to enforce Prop 65 against businesses that allegedly fail to provide a warning as required by Prop 65.  The bill that became law is Assembly Bill 227 (AB 227), introduced by Assemblymember Mike Gatto (Forty-Third District of California) in February 2013, and discussed in our March 13, 2013 blog post.

However, as AB 227 was enacted, only limited types of businesses are likely to benefit.  The amendments are very narrow, covering only certain exposures to alcohol or food-related chemicals, vehicle exhaust and tobacco smoke.  Thus, the only businesses that are likely to benefit from the amendments are bars, restaurants, parking garages, and those who own or operate premises where smoking is permitted.

In general, the amendments establish a new “safe harbor”:  AB 227 prohibits a Prop 65 lawsuit from being filed by a private enforcer over an alleged failure to provide a warning concerning one of the specified exposures, if the business takes specified action within 14 days of receipt of the notice of violation.   The targeted business can escape a Prop 65 action if, within 14 days, the business:  (1) actually corrects the alleged violation; (2) agrees to pay a civil penalty of $500 per facility or premises within 30 days; and (3) submits a “Proof of Compliance” notifying the private enforcer that the violation has been corrected.  If the business takes the so-called “safe harbor” action in response to the notice of violation alleging failure to warn about exposure to alcohol or food-related chemicals, vehicle exhaust or tobacco smoke, the private enforcer is precluded from filing a lawsuit or collect additional civil penalties or attorneys’ fees from the business.

These types of piecemeal amendments to Prop 65 may increase public demand and political pressure for additional reform.  In May 2013, Governor Brown proposed sweeping, substantive reform to Prop 65, intended to end decades of “frivolous ‘shake-down’ lawsuits” by Prop 65 bounty hunters and their lawyers.  But by September 2013, those efforts stalled as stakeholders involved in the reform effort were unable to reach the consensus needed to generate the two-thirds majority approval that is required for any amendment of Prop 65 in the Legislature.

Conkle, Kremer & Engel constantly tracks the latest developments in Prop 65 in order to provide expert guidance and counseling to clients.  This latest amendment is a demonstration that businesses who receive a Prop 65 warning should immediately seek qualified legal counsel to help them avoid liability and unnecessary payments to Prop 65 claimants and their lawyers.  In fact, businesses are well advised to consult qualified legal counsel to review their compliance with Prop 65 before an immediate response becomes necessary.

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CKE’s L.A. Daily Journal Article: Treble Damages for Breach of Oral Contract

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The article “Breach of Oral Contract, Treble Damages,” was published in the Los Angeles Daily Journal on August 13, 2013.  The article discusses the importance for manufacturers, distributors and sales representatives of the published decision of Reilly v. Inquest Technology, Inc., 2013 DJDAR 10164 (Cal. App. 4th Dist. July 31, 2013).  The Reilly decision is the first precedent in California to uphold a jury verdict and judgment of treble damages and attorney fees against a manufacturer who failed to pay all sales commissions owed to an independent sales representative.  Eric S. Engel and H. Kim Sim represented Peter Reilly, the sales representative, at trial in Orange County Superior Court.  They obtained a unanimous jury verdict awarding Reilly $2.1 million in unpaid commissions.  Using the Independent Wholesale Sales Representatives Contractual Relations Act, CK&E then obtained an order from Judge Frederick Horn multiplying the jury’s award by a factor of three, for a judgment of $6.2 million plus attorney’s fees and interest.  That judgment was fully upheld by the California Court of Appeal in its July 31, 2013 decision.  The decision provides a template for future cases seeking treble damages for breach of commission contracts made with independent sales representatives, and can serve as a guide to manufacturers and distributors who want to avoid exposure to such liability.

Click here for the full text of the article, “Breach of oral contract, treble damages”:  Reilly v Inquest Daily Journal Article

Click here for the full copy of the California Court of Appeal decision:  Reilly v Inquest Court of Appeal Decision, Case No. G046291 (July 31, 2013)

 

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Naked Juice Labels to be Stripped of "All Natural" and "Non-GMO" Claims in False Advertising Settlement

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PepsiCo has agreed to pay $9 million to settle a class action battle over its use of the words “All Natural” and “Non-GMO” (non-Genetically Modified Organism) on its Naked Juice drink products.  As part of the settlement, PepsiCo agreed to change its labeling.

If approved by the district court, the settlement would resolve five separate class action lawsuits, which were consolidated with the lead case Pappas v. Naked Juice Co. of Glendora, Inc., in March 2012.

The case against PepsiCo stems from allegations that statements on the Naked Juice labels constitute false advertising.  The plaintiffs sued for violation of a number of California statutes – the Consumer Legal Remedies Act (CLRA) and False Advertising and Unfair Competition Laws.

According to the plaintiffs, independent testing revealed genetically modified soy protein in some Naked Juice products.  The plaintiffs also alleged that several ingredients in the Naked Juice products are non-natural, including ingredients like beta carotene and biotin which do occur naturally but are produced synthetically when added as supplements to foods, and a fiber ingredient that is produced by chemically rearranging corn starch molecules.  All of these ingredients are listed in the ingredient panel, but according to the plaintiffs, a reasonable consumer wouldn’t scrutinize the ingredient list for information contradicting the plain, conspicuous statements “All Natural” and “Non-GMO.”

The settlement in the PepsiCo case is likely to lead to many more class action lawsuits against businesses that advertise their products as “natural” or “all natural.”  Unlike use of the word “organic,” use of the word “natural” is not explicitly regulated by federal or state law, leaving the door open for claims of false or misleading advertising by consumers.

What’s the moral of this story?  An ounce of prevention is worth a pound of cure.  It is important to scrutinize health-related language used in advertising, especially on food products, and ensure there is documentation to back up claims.  CK&E routinely works with clients to evaluate the language on product packaging and in advertising as part of a comprehensive risk analysis so they can make informed choices for their businesses.  CK&E also has extensive experience defending clients against consumer false advertising claims.

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CK&E’s Judgment of $6.2 million for Unpaid Sales Commissions Upheld on Appeal

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The California Court of Appeal has unanimously upheld the $6.2 million judgment that Conkle, Kremer & Engel won at trial for a sales representative who had been deprived of $2 million in commissions he had earned.

Peter Reilly was a retired electronics industry executive who agreed to use his extensive contacts in the industry to bring new business to a growing manufacturing company, Inquest Technology, Inc.  After Reilly was not paid commissions for the contacts that he brought to Inquest, he asked Conkle, Kremer & Engel for help.

Reilly-Inquest_Team

Reilly v. Inquest – Plaintiff’s Trial and Appeal Team

CK&E’s Eric S. Engel and H. Kim Sim were the trial lawyers who devised the case strategy.  Key to the strategy was establishing by discovery and summary judgment motion the intricate requirements to impose liability against Inquest under a rarely-used law called the Independent Wholesale Sales Representatives Contractual Relations Act of 1990, California Civil Code section 1738.10 (“the Act”).  The main attraction of the Act is that jury awards for willful violations are trebled by the court and attorneys’ fees are awarded to a successful plaintiff.  Few laws in commercial litigation impose a penalty of three-times actual damages – that is a greater multiplier than most permissible punitive damages awards.

CK&E was able to prove that the sales representative relationship that Reilly had with Inquest met the particular requirements of the Act.  At trial, a unanimous jury found that Reilly procured sales for which he should have been paid $2,065,702 in commissions, based on the testimony of Reilly’s damages expert Thomas Neches.  The trial court then applied the Act’s penalty of treble damages to award Reilly a $6.2 million judgment, plus attorneys’ fees and interest, to enter the Judgment for Peter Reilly against Inquest Technology on Jury Verdict.

Of course, the Defendants appealed the judgment.  On July 31, 2013, the Reilly v. Inquest Technology case led to the first published decision of a California Court of Appeal to uphold a judgment trebling damages and awarding attorneys’ fees under the Act.  Anthony Kornarens was the appellate lawyer for Reilly, with assistance by CK&E.  In a unanimous decision, the Court of Appeal determined that Reilly’s judgment of $6.2 million was well supported by the evidence presented at trial, and that Reilly’s claims for unpaid sales commissions were within the special protections of the Act.

Click here for the full copy of the California Court of Appeal decision:  Reilly v Inquest Court of Appeal Decision, Case No. G046291 (July 31, 2013)

Watch for our future posts about the Act, including how CK&E proved that Inquest’s owners were also liable for the full amount of the $6.2 million judgment even though they were not subject to the Act.

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2012: A Bountiful Year for Prop 65 Plaintiffs and Their Lawyers

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Proposition 65 requires that businesses warn about the presence of chemicals believed by the State of California to cause cancer or reproductive harm.  Private citizens may file lawsuits “in the public interest” against businesses alleging a failure to provide the required warning.  Such lawsuits are often filed by private law firms (sometimes called “bounty hunters”), in the names of repeat-plaintiffs like “Center for Environmental Health,”  after sending Notices of Violation. The apparent primary purpose is to obtain quick cash settlements from bewildered, unsuspecting businesses.

2012 Prop 65 Settlements Bar Chart by Year2012 was a particularly “bountiful” year for Prop 65 private plaintiffs, according to data recently released by the California Attorney General’s Office. In 2012, private plaintiffs settled 397 cases.  The settlements totaled nearly $20.5 million. When combined with the additional settlements by District Attorneys and the Attorney General’s Office, there were 437 Prop 65 settlements during 2012, totaling over $22.5 million.  2012 was the second-highest annual dollar total for Prop 65 settlements since 2000, and shows a clear upward trend in the settlements extracted from businesses that receive Prop 65 Notices of Violation.

It should surprise no one who studies Prop 65 issues that the bulk of the $22.5 million paid in Prop 65 settlements during 2012 went to the plaintiffs’ attorneys:  Attorneys’ fees made up more than $14.5 million, or 71.34% of all private settlements.  Private plaintiffs can also take 25% of any civil penalty assessed as a “bounty”.  In 2012, the civil penalties retained by plaintiffs represented an additional $755,000 or 3.7% of all private settlements.

2012 Prop 65 Settlement Pie ChartA lesser-known fact is that private plaintiffs and their attorneys can and do make even more money from Prop 65 settlements.  A portion of each Prop. 65 settlement is supposed to go toward causes or activities that further the purpose of Prop 65, so Prop 65 allows parties to structure some of their civil penalty allocation as a “Payment in Lieu of Penalties” (aka “PILP”).  Some Prop 65 plaintiffs have kept such PILP recoveries to support vaguely stated causes; some Prop 65 plaintiffs have even argued that funding more private litigation itself is activity that furthers the purpose of Prop 65, justifying PILP recoveries from settlements.  In 2012, PILP money made up 13.88% of all private settlements.  That means almost $3 million landed in the hands of private plaintiffs and their attorneys, in addition to the attorneys’ fees and civil penalty bounties they received.

Statewide, there are only a few active Prop 65 plaintiffs.  Aggregated settlement data can be useful in achieving cost-effective resolutions of Prop 65 claims.  CK&E routinely defends businesses who have received Prop 65 Notices of Violation.  CK&E also works with businesses to develop compliance strategies to minimize the risk that they will be future targets of Prop 65 plaintiffs.

This Blog Post was Co-Authored by Jackson McNeill, Law Clerk, UCLA School of Law, Class of 2014

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Lead in Baby Food? Failure to Warn Leads to Unusual Prop 65 Trial

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Proposition 65 actions are notoriously expensive and difficult to defend.  For that reason, most Prop 65 cases settle.  But a rare case involving allegedly high levels of lead in baby food, packaged fruits and juices is in trial in the Alameda Superior Court.

In September 2011, the Environmental Law Foundation (one of a handful of organizations in California that files Prop 65 actions in the name of the public interest) brought a lawsuit against food companies Beech-Nut Nutrition, Dole, Gerber, Del Monte Foods, and many others.  ELF claimed that the manufacturers made and sold baby and children’s food containing lead, without a warning as required by Prop 65, California’s Safe Drinking Water and Toxic Enforcement Act.

What is at stake in the Prop 65 action is whether baby food and children’s food such as carrot and potato baby food, grape juice and fruit cocktail must include a warning that the foods contain a chemical known to the state of California to cause cancer or reproductive harm.  Naturally, the food manufacturers do not wish to be forced to warn potential consumers that their foods contain harmful chemicals.

The food companies’ defenses are being tried to Superior Court Judge Steven A. Brick.  The food companies claim that their products contain only trace levels of lead that are below the level required for a Prop 65 warning.  They also claim that the lead is “naturally occurring” in the foods and therefore no duty to warn is required under the “naturally occurring” exposure defense to Prop 65.  Finally, the food companies have argued that Prop 65’s warning requirements are preempted by the Food, Drug and Cosmetic Act and the Nutrition Labeling and Education Act.  They contend that the FDA has determined that the baby food and children’s food in question do not pose unacceptable risks to health, so a Prop 65 warning requirement would create a conflict between federal and state law.

This will be a closely-watched case, because the Court’s ruling on these defenses is likely to have a significant impact on the defenses available to businesses faced with Prop 65 actions in the future.  Regardless of the outcome, CK&E’s lawyers will continue to work with businesses to help them develop a plan of compliance so that they can achieve their goal of minimizing the risk of being named as a defendant in a Prop 65 lawsuit.  If a lawsuit is threatened or filed, CK&E’s lawyers apply can create and implement effective and cost-efficient defense strategies to minimize its impact.

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Kirtsaeng Holds Copyright First Sale Doctrine Trumps Importation Rights

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The Copyright Act gives a copyright owner the exclusive right to sell copies of the copyrighted work. But once a genuine copy is sold, a lawful owner of that particular copy can resell or transfer what he bought without infringing the copyright – the copyright owner can no longer use the copyright to control the resale of that particular copy.  This copyright limitation has become known as the “First Sale Doctrine.”

A quirk in copyright law arose because the Copyright Act has a provision that prevents importation of a copyrighted work into the U.S. without the copyright owner’s permission.  (17 U.S.C. 602(a)(1)).  This ability of the copyright owner to prohibit importation seemed to conflict with the First Sale Doctrine when a copy is first sold outside of the United States.

In the 1998 decision Quality King Distributors, Inc. v. L’Anza Research, Int’l, Inc., the Supreme Court held that a copyrighted product manufactured in the U.S., but first sold in a foreign country, was subject to the First Sale Doctrine.  The result was that the copyright owner could not prohibit importation of the copyrighted product into the U.S.  But the question remained whether the First Sale Doctrine also applied to copyrighted works that were both manufactured and first sold outside the U.S.

In March 2013 the Supreme Court answered the question by applying the First Sale Doctrine regardless of where the copyrighted work is manufactured or first sold.  In Kirtsaeng dba Bluechristine99 v. John Wiley & Sons, Inc., the products involved were textbooks manufactured and first sold in Thailand by the copyright owner, then later imported into the U.S. for resale without the copyright owner’s permission.   In a split decision, the Supreme Court held that the Copyright Act requires that the First Sale Doctrine applies to authentic, unaltered products that were lawfully manufactured and first sold by the copyright owner in a foreign country as well as in the U.S.

The Kirtsaeng decision provides no protection for sale of modified, adulterated, pirated or counterfeit copies, regardless of where they were made or sold.  Nor does it insulate parties from participation in fraud, breach of contract, unfair competition or other wrongful acts that are independent of copyright protections.  Conkle, Kremer & Engel has long recommended that its clients take a multi-faceted approach to preventing and remedying product diversion and counterfeiting, so they are able to effectively address the problem no matter where and how the misconduct occurs.

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Closing the Door to Class Actions for False Advertising Claims

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Advertising claims are often the subject of lawsuits in California. Ads, slogans, packaging or even product images are claimed to be “false or misleading.” Plaintiffs make claims under a variety of consumer protection laws, such as California’s Unfair Competition Law (UCL), Business and Professions Code section 17200; False Advertising Law (FAL), Business and Professions Code section 17500; and the Consumer Legal Remedies Act (CLRA), Civil Code section 1750.

But an individual who wants to sue has a problem, because a single person who claims to have been misled into purchasing a product will usually only have purchased one product and therefore has just a few dollars (or sometimes only pennies) of “out of pocket” money damages. It’s usually not realistic for a lawsuit to be pursued for just a few dollars. As a result, plaintiffs’ lawyers sometimes try to make a “class action” claim to join together many people who can each claim a few dollars of damages, which can add up to a great deal of money. In a class action, the plaintiff can assert that similar injuries happened under similar circumstances to a large number of people, and the plaintiff should be allowed to make a claim for all of the damages to that group of people. Further, the lawyers for the class action can make claims for attorneys’ fees that are much larger than they would otherwise be permitted for representing an individual claimant.

To proceed with a class action lawsuit, the plaintiff must show the court that the proposed “class” meets the rules for “certification.” That is a big hurdle in many cases, because it requires that the plaintiff show that all of the proposed class members have similar claims and issues. A recent ruling from the United States District Court, Central District of California shows how hard it can be to prove that there are such common claims and issues. In Mara Chow v. Neutrogena Corp., Case No. CV 12-04624, the plaintiff claimed that Neutrogena had made false and misleading labels and advertising for its “anti-aging” skincare products, including that the products are “clinically proven,” can cause a person to look younger, and can prevent and repair signs of aging within one week. The plaintiff tried to show that she had a proper class action because all of the class members had similar claims. But District Judge Manuel L. Real refused to certify a class.

Judge Real found that too many individual questions existed as to whether the Neutrogena product had worked as advertised for each individual class member. In other words, each member would have to individually show whether the claims were false as to that member. Further, some of the claims required that each class member would have to show that she “relied” on the false advertising when she purchased the Neutrogena product, which also could only be proved individually and not on a class-wide basis. But the news wasn’t all bad for plaintiff – the individual plaintiff was allowed to continue asserting her own individual claim for a few dollars in damages. No one will be surprised when the case is dismissed, because it isn’t worth pursuing.

CK&E’s lawyers have experience handling all aspects of claims of false or misleading advertising under the UCL, FAL and CLRA. CK&E’s lawyers are particularly well-versed in developing methods to reduce the risk of such lawsuits before they are filed. If a claim does arise, it often comes first to a business in the form of a demand letter, and CK&E attorneys are skilled at responding to such demand letters in ways that eliminate or minimize the claim and can lead to a quick and cost-effective resolution.

Update:  The plaintiff filed a petition for permission to appeal the District Court’s Order denying class certification.  On April 23, 2013, the Ninth Circuit Court of Appeals denied the petition for permission to appeal.  The lawsuit was subsequently settled and dismissed with prejudice on June 10, 2013.

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