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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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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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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Deal done? Maybe Not, if it’s a Copyright Sale

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Copyright ownership sales are generally controlled by ordinary state contract laws, but there are some limits when dealing with an agent of the copyright owner. In the recent case of MVP Entertainment v. Frost, a film producer offered to purchase the movie rights to author Mark Frost’s book, “The Match: The Day the Game of Golf Changed Forever.” The purchaser dealt with the attorney for the owner. In response to an email by the purchaser offering purchase terms, the attorney replied by email, “done . . . thanks!” Under many state laws that might have been enough to transfer ownership, but not so under copyright law.

The Copyright Act (17 U.S.C. § 204(a)) says that “transfer of copyright ownership . . . is not valid unless . . . a note or memorandum of the transfer, is in writing and signed by the owner of the rights conveyed or such owner’s duly authorized agent.” An attorney is an agent, so the attorney’s email saying the deal is “done” should be enough, shouldn’t it? Not quite, said the California Court of Appeal in MVP, because the owner disputed that his attorney had the owner’s actual authority to sell the copyright. In other words, the attorney was not the “owner’s duly authorized agent” for that purpose.

But the purchaser claimed it was led to believe that the attorney had authority, which is a theory known as “ostensible agency.” Under California law, a property owner can be bound by the acts of another person (the “ostensible agent”) whom the owner “intentionally or by want of ordinary care, causes or allows” another (the purchaser) to believe had the owner’s authority. Contracts can be created by “ostensible agents” in many circumstances. But the MVP decision held that copyright transfers cannot be done by “ostensible agents.” Copyright law requires that the purchaser deal directly with the owner, or with an agent expressly and “duly authorized” to act on behalf of the owner, with the goal that copyright interests are not inadvertently given and there is no uncertainty about what rights were transferred.

The takeaway from MVP is, when buying copyrights it’s wise to get the owner’s signature.  CK&E lawyers routinely guide clients through transfers and licensing of intellectual property including copyrights, trademarks and patent rights. As well, when a client’s rights in intellectual property are threatened, CK&E lawyers respond with effective enforcement.

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Facebook Status Update: I’ve Been Served

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Social media is entering a new legal realm:  At least one court has recognized that a Facebook message can be used to serve a defendant with documents in litigation.  Historically, service of process has been most often accomplished by serving papers in person, or sometimes by U.S. Mail, to assure the court that a party has received due notice and an opportunity to respond to the legal proceedings.  But service of process is not always accomplished by such old fashioned means.  In a new twist, in Federal Trade Commission v. PCCARE247 Inc., United States District Court, Southern District of New York, Case No. 12 Civ. 7189 (PAE), Judge Paul A. Engelmayer ruled that the FTC could serve legal papers on defendants who were located in India by a combination of email and Facebook messages.  Service by email has been recognized in limited circumstances by other courts, and Judge Engelmayer emphasized that service of process by Facebook message would not be appropriate in every circumstance.  The court noted that the FTC had shown that the particular email and Facebook accounts were actively used by the defendants, and the defendants had already appeared in the litigation through counsel that had since withdrawn from representing them.

The rapidly expanding legal importance of social media is illustrated by the fact that less than a year earlier, in Fortunato v. Chase Bank USA, another USDC case in the Southern District of New York, Case No. 11 Civ. 6608, Judge John F. Keenan refused to accept Facebook as a means of service of process on a party.  Observing that “[s]ervice by Facebook is unorthodox to say the least,” Judge Keenan found that Facebook service would violate constitutional due process requirements, in large part because the court had not been shown to reasonable certainty that the Facebook profile actually belonged to the defendant who was being served.

Legislatures have also noticed the increasing legal importance of social media.  In February 2013, Texas State Representative Jeff Leach introduced a bill that would allow substituted service through social media websites.  If enacted, H.B. No. 1989 would allow Texas courts to prescribe as a method of service an electronic communication sent to the defendant through a social media website if the court finds:  (1) the defendant maintains a social media page on that website; (2) the profile on the social media page is the profile of the defendant; (3) the defendant regularly accesses the social media page account; and (4) the defendant could reasonably be expected to receive actual notice if the electronic communication were sent to the defendant’s account.  The Texas bill is the first of its kind, and it is likely that other states will consider similar legislation.

It seems safe to say that email and Facebook messages will not be the only technological methods by which service of process will be permitted in the future.  As Judge Engelmayer observed, “history teaches that, as technology advances and modes of communication progress, courts must be open to considering requests to authorize service via technological means of then-recent vintage, rather than dismissing them out of hand as novel.”  While people may not feel ready to be informed they are being sued by messages on Facebook, Twitter or LinkedIn, that day may not be far off.  The cautionary lesson is that email and other electronic means of communication need to be monitored for legal demands, notices or court filings, because a prompt legal response may be required.

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Prop. 65 Reform — Is a Safe Harbor from Bounty Hunters on the Horizon?

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California’s now-infamous Proposition 65 (Prop. 65, Cal. Health & Safety Code § 25249.5) allows a private citizen to file a lawsuit against any business that fails to post adequate warnings about the presence of chemicals known to cause cancer or reproductive harm.  The private enforcer may seek an injunction, penalties of up to $2500 per violation, per day, and an award of attorneys’ fees.

Assembly Member Mike Gatto (43rd District of California)  recently proposed legislation, Assembly Bill 227, that would reform Prop. 65 by providing a “safe harbor” in the form of a 14-day period for businesses to correct alleged violations.  If enacted as proposed, a business who receives a demand under Prop. 65 would have a brief opportunity to demonstrate its compliance with Prop. 65 requirements to the California State Attorney General, or the responsible city attorney or district attorney.  If the business takes advantage of that “safe harbor” then the claimant would be barred from filing a lawsuit against that business.

While the purpose of Prop. 65’s private enforcement provision is to allow private citizens to act on behalf of the public to ensure warnings are properly posted, supporters of AB 227 criticize Prop. 65 as a “bounty hunter” statute that primarily benefits plaintiff’s attorneys.  In 2011, businesses paid a total of nearly $16 million to settle lawsuits brought by  private citizens, of which almost $12 million was paid to the plaintiffs’ attorneys.  In fact, nearly half of the attorneys’ fees were paid to a single firm: The Chanler Group.

AB 227 would give businesses the opportunity to come into compliance with Prop. 65 warning requirements without paying exorbitant settlement fees to prevent costly litigation.  But businesses would have to take swift action.  As CK&E attorneys John A. Conkle, Amy Burke and Mark Riedel discussed in their November 2012 presentation to the Personal Care Products Council, What’s Your Game Plan?, it is important for businesses to develop strategies for ensuring regulatory compliance and for handling notices of violation quickly and efficiently.  AB 227, if signed into law, would be another reason that businesses should prepare contingency plans for the day that they receive a notice of violation from plaintiffs seeking to take advantage of Prop. 65 — a business could avoid being sued at all if it responds quickly and correctly to take advantage of the safe harbor.  CK&E advises clients in regulatory compliance, responding to warning and demand letters, and developing an individualized game plan to suit each client’s needs.

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Keeping "Competition" in California’s Unfair Competition Law

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California’s Unfair Competition Law (UCL) provides broad protections to both consumers and businesses, prohibiting any form of conduct that can be found to be an “unlawful, unfair or fraudulent business act or practice.”  (California Business & Professions Code § 17200)  The UCL is particularly powerful because it can reach conduct that is not specifically illegal under any other law, and can also provide a remedy for any acts or omissions that are prohibited under other state or federal laws even if those laws do not allow private citizens to sue when they are violated.  A recent example is the case of Law Offices of Mathew Higbee v. Expungement Assistance Services, in which a lawyer used the UCL to sue a credit repair service that was not licensed to practice law. The lawyer alleged that he too was in the credit repair business and, as a result of the defendant’s violations of California’s attorney licensing requirements,  the competing lawyer was required to lower his prices and spend more money on advertising, lost clients and revenue, and the value of his law firm had diminished. Ordinarily, the statutes requiring a license to practice law cannot be enforced by private citizens. But here, the UCL was held to “borrow” the statutory violation to show an “unlawful business act or practice” that gave the plaintiff a claim.

Those already familiar with UCL know that it was modified by Proposition 64 in 2004, tightening the standing requirements so that an action could only be brought by a “person who has suffered injury in fact and has lost money or property” as a result of the alleged unfair competition. (B&PC section 17204)  Some courts had struggled with this new requirement, at times suggesting that the plaintiff would have to show that the defendant had directly taken money from the plaintiff as a result of the unfair competition.  Such a requirement would effectively eliminate “competition” out of the Unfair Competition Law:  It is rare that a business competitor could show that it gave money or property directly to a competitor as a result of unfair competition – and if it did happen, the plaintiff would probably have a breach of contract or fraud claim and probably would not need to use the UCL.

But over time it has become clear that Prop 64 did not not eliminate unfair competition claims between competitors.  In the Law Offices of Mathew Higbee case, the Court of Appeal in Orange County held that the UCL does not require that the parties have had direct dealings with each other in order to succeed “in alleging at least an identifiable trifle of injury as necessary for standing under UCL.”  The Court surveyed the law before and after Prop 64, and found the cases supportive of a rule that permitted business competitors to make unfair competition claims.  The standing requirement does not require in every instance that the parties have had direct dealings with each other. The Court emphasized that, provided that the “identifiable trifle of injury” resulting from the acts of unfair competition can be shown, “the UCL does not leave the court hamstrung, unable to even consider an action seeking injunctive relief just because the defendant engages in its purportedly unlawful activity via the Internet and has not had any direct business dealings with the plaintiff.”

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