According to recent news reports, a $1 million reward was being offered for information leading to the capture of Christopher Dorner, the former LAPD police officer who is suspected of killing 3 people and wounding 2 people in Southern California during the early part of this month.  The $1 million reward has been raised from private donations, police unions, businesses and city and county governments.

Over 700+ tips were made regarding the whereabouts of Christopher Dorner before the ultimate shootout in Big Bear on February 12, 2013.  Most notably are the tips from Jim and Karen Reynolds, the couple that was briefly held hostage by Dorner after he broke into their condo, bound and gagged the couple on Tuesday, before stealing their vehicle and fleeing the scene. Karen called 911, the Los Angeles Times explains, setting “in motion the chain of events” and adding “new details about some of Dorner’s movements in the apparent final hours of his life” that led to Christopher Dorner’s shootout with a state Fish and Wildlife warden and then later the standoff at the cabin that eventually went up in flames.

Since the presumed death of Christopher Dorner, there has been plenty of discussion regarding what is being considered the gigantic loophole in the payout of the reward, namely the necessity of capture. According to CBS News, LAPD Officer Alex Martinez says it’s unlikely anyone can claim it because the reward referred to Dorner’s capture and conviction.

Assuming the reward was to be paid to the Reynolds’ or any of the other tipsters, how much will they really receive? Notably, payments of this nature will likely come with a heavy tax due to Uncle Sam and California. Subject to a few minor exceptions, rewards are income.

Internal Revenue Code (“IRC”) § 61 defines gross income as income from whatever source derived.  IRC § 74 provides generally all prizes and awards are gross income unless it’s: (i) a qualified scholarship or (ii) transferred to a charity.  The charity exception includes additional requirements such as: (i) the prize or award is in recognition of religious, charitable, scientific, educational, artistic, literary, or civic achievement; (ii) the recipient did  not have to perform services; and (iii) the recipient was selected without any action on his or her part.

The current IRC definition of gross income is the result of the 1955 seminal case, Commissioner of Internal Revenue v. Glenshaw Glass Co., in which the Supreme Court held a taxpayer has gross income when he has “an accession to wealth, clearly realized, and over which the taxpayers have complete dominion.”  Thus the inclusion of reward money in the definition of gross income clearly fits within the rubric of Glenshaw Glass; a recipient has an accession to wealth by receipt of the reward.

Income is much broader than wages earned from employment; income is any gain or net benefit to the taxpayer.  For example, if someone pays a bill for you or discharges your debt, these too are included your gross income.  The recipient realizes a net benefit, the accession to wealth, by not having to pay out money for these items.  The receipt of a prize or a reward is no different.  The recipient does something, could be anything such as entering a name in a drawing, and then receives some cash or non-cash prize or reward in return.

Income is taxable unless it can be offset by deductions and/or credits.  If someone accepts a reward, it is reported on their Federal and California Income Tax Returns and the recipient must pay tax on whatever marginal tax bracket it might bump them into.  Be wary, Federal and California marginal tax rates increased for 2013.

Just because you have income, it does not follow that you must pay tax on the total amount of the income.  Sometimes, certain taxpayers can deduct certain expenses.  Could a reward recipient deduct expenses associated with the production of information leading to the reward?  Like most tax questions, the answer is: it depends.  If the taxpayer’s job is bounty hunting or being a private detective, then the taxpayer can probably deduct his or her production of information leading to the capture of Christopher Dorner expenses as business expenses.  After all his or her efforts would be ordinary and necessary and lead to the production of income. However, most residents of Southern California are not in the business of finding suspects for the police. Thus, even if you spent the day looking for Dorner, the reward money would be a hobby, which can’t be deducted.  That means that if Private Eye got the reward, he or she would be able to partially offset the $1 mil. Nice gig.

What might be more alarming to taxpayers, it not loophole to be eligible to  receive the reward payment, but the cost to find Christopher Dorner which was lead by the joint task force made up of Los Angeles, Irvine and Riverside police, the FBI, and US Marshal’s office.  The Press Enterprise reports the joint task force had been working around the clock. Just how much has the manhunt cost the taxpayers?  According to reports in the Los Angeles Times, there is an L.A. tax measure that could help pay for raises for city employees, but what about all of the overtime for the work around the clock. Why increase tax, if the Christopher Dorner reward is not being paid to the Reynolds’ or any other tipster, the reward money should be used to offset the taxpayer’s cost of the around the clock police presence.  After all most of the money should have come in the form of donations and if there is no tipster, the joint task force should be considered the only ones who led to the demise of Dorner.

If the reward did go to the joint task force, the more interesting question is, would this reward be income to the officers?   Would it be double compensation to the officer because the officer is already getting paid to investigate?  The reward would be income to the officer but that the officer would not be able to deduct any of his business expenses.  First and foremost, the officer’s expenses should be covered by his or her job and if the officer did have additional expenses, they would likely be akin to a hobby. After all it’s difficult to devote your time and attention to two full time jobs.  Second, it’s not really double compensation, it’s not being paid by his or her employer it’s being paid by the Christopher Dorner reward fund that arguably has nothing to with the officers’ employment.  Thus, it would be compensation and reward which would collectively become part of the officer’s gross income.  Plus, no one complains about having too much income, we only complain about double taxation!

Before you accept any huge rewards, we suggest you consult with a tax professional in California.

When a plaintiff wins a judgment or reaches a settlement, the tax man will be lurking to get his share.  There are two main issues in the taxation of litigation.  This blog will focus on a plaintiff in a non-business litigation situation, such as personal injury or discrimination.  The first issue is the tax treatment of any amounts received in a judgment or settlement with a defendant.  The second issue is what costs of the litigation, primarily attorney fees, are deductable to the plaintiff.  A plaintiff in the process of finalizing a settlement would be wise to consult with a qualified tax attorney to determine how the settlement should be structured to avoid unnecessary taxation.

 Recoveries

In general, only physical personal injury recoveries are nontaxable under the income tax laws. The rationale behind this result is that a taxpayer should not be taxed on the receipt of money damages, which are merely intended to make him whole from physical injury.  Where the underlying claim (basis of lawsuit) may be based on a tort or tort-like rights, the crucial inquiry is whether the amount received by the plaintiff was paid on account of the physical injury or physical sickness. To ascertain the basis of the lawsuit, the IRS and courts will usually look to the underlying complaint.

If the amount is paid on account of the physical injury or physical sickness, all damages (other than punitive damages) flowing from that injury or sickness (e.g., lost wages, pain and suffering, emotional distress) are excludable from gross income.  If a plaintiff asserts that the recovery or settlement was compensation for a personal injury claim when the basis of the underlying complaint is solely in contract, the taxpayer will probably be unsuccessful in having the amount received treated as tax-free.

The simplest way to characterize a settlement or judgment payment for tax purposes is to specify in the appropriate documents the precise allocation of the payments. Although The IRS is not bound by such an allocation, and may look behind the documents to the evidence introduced at trial or the information elicited and disclosed during recovery and develop its own allocation, typically the IRS gives deference to the allocation.  In addition, absent any allocation, a court will be bound to accept the IRS’s allocation (which is presumptively correct), unless the taxpayer can provide evidence to the contrary.  Therefore, a plaintiff, when appropriate, must be sure to include physical damages in any complaint filed and properly allocate any physical damages in the final settlement.

Costs

Litigation is expensive with attorney fees usually the main expense.  Unfortunately, for non business litigation, the plaintiff is only entitled to deduct legal fees as a miscellaneous itemized deduction limited by the 2% of adjusted gross income floor. This rule is exacerbated when a plaintiff pays his attorney fees under a contingency basis, because under California law, contingent attorney’s fees are includable in the plaintiff’s gross income. The reasoning is that contingent legal fees are effectively paid by the plaintiff to the attorney after the plaintiff has received, and included in gross income, the settlement or judgment.  Therefore, we can have a situation where a plaintiff reached a settlement of $1,000,000 and under a contingency fee agreement his attorney is entitled to 50% of the settlement, or $500,000.  In this case the plaintiff is taxed on the full $1,000,000 and not the $500,000 he is allocated under the contingency fee agreement.  Taking into account both federal and California tax rates, the plaintiff will owe $300,000 in taxes.  In addition, there is no withholding on the settlement; therefore the plaintiff may have a nasty surprise come filing time.

Plaintiffs in a class action lawsuit usually are exempt from of these harsh income tax rules.  The rationale is that, in class action lawsuits, it is a single class representative who hires the class attorney and the other class members may receive a benefit from the litigation, but no express contractual liability for a fee exists between them and litigating counsel. Therefore, in such opt-out class action lawsuits, the attorneys’ fees generally are not includable in a class member’s gross income.

Given these potential harsh tax rules of litigation, it is very important to consult a tax attorney who understands these rules and can minimize the plaintiff tax liability.  After all, litigation is ultimately about money and proper tax planning can make a lot of difference for the plaintiff’s bottom line.

Although attorneys commonly believe that unpublished opinions cannot be cited, the judicial notice statute allows citations to the records of any court of this state. In this conflict, the judicial notice statute should take precedence, and courts should allow unpublished opinions to be cited as persuasive authority.

A. The Non-Citation Rule Bars Citation of Unpublished Opinions

Many attorneys and judges instinctively believe that unpublished opinions of the California Court of Appeal cannot be cited in any court (subject to very narrow exceptions, i.e. res judicata or attorney discipline). The generally cited authority for this proposition is California Rules of Court, Rule 8.1115(a), which states that:

[A]n opinion of a California Court of Appeal or superior court appellate division that is not certified for publication or ordered published must not be cited or relied on by a court or a party in any other action.

Although there may be reasons for unpublished opinions to not be considered binding authority, this rule seemingly goes ever further. Specifically, it prohibits unpublished opinions from being “cited or relied on” in any way, meaning they are not to be considered persuasive authority. In other words, cases from other states may be cited as persuasive, a law review article may be cited as persuasive, or an op-ed from the New York Times may be cited as persuasive. However, an opinion from the California Court of Appeal that is directly on point to the facts in a particular case cannot be cited as persuasive authority by a party or a court.

Interestingly, when applied to federal law, California Courts have held just the opposite: that “unpublished federal decisions can be cited as persuasive but not precedential authority.” Dimon v. County of Los Angeles (2008) 166 Cal. App. 4th 1276, 1283 (citing Pacific Shore Funding v. Lozo (2006) 138 Cal.App.4th 1342, 1352, fn. 6).

One 2012 opinion recognized, but seemingly ignored, the no-citation rule, stating “[w]e are aware of the legal rule barring citation to or reliance upon a depublished California case. (Cal. Rules of Court, rule 8.1115.) We nonetheless mention this recently depublished decision in order to accurately describe the current state of law with respect to the scope of [Corporations Code] section 2010.” Robinson v. SSW, Inc. (2012) 209 Cal. App. 4th 588, 596, n. 7, review granted, depublished by Robinson v. Ssw, Inc. (Cal., Dec. 12, 2012) S206347, 2012 Cal. LEXIS 11722.

B. Judicial Notice Allows Citation of Unpublished Opinions

While the non-citation rule prohibits citation to any unpublished opinion, judicial notice pursuant to California Evidence Code section 452(d)(1) may be made as to the “[r]ecords of any court of this state . . . .” On its face, this statute allows judicial notice of any opinion of the Court of Appeal as a record of a court of this state.

One California Court of Appeal recognized the conflict with Rule 8.1115(a), stating that “[a]lthough [a] Court of Appeal opinion . . .  is not published, we may take judicial notice thereof as a court record pursuant to Evidence Code section 452, subdivision (d)(1).” Gilbert v. Master Washer & Stamping Co. (2001) 87 Cal. App. 4th 212, 218, n. 14.

While there appears to be no appellate case law discussing the conflict between the no-citation rule and the judicial notice statute, it has received some attention.

C. The Conflict Between the No-Citation Rule and Judicial Notice

In deciding the conflict between Rules of Court, Rule 8.1115(a) and Evidence Code section 452(d)(1), the California Constitution suggests that the statutory evidence code must take precedence.

Specifically, California Constitution Article VI, § 6(d), which provides the authority of the Judicial Council to promulgate the Rules of Court, states that the “council shall . . . adopt rules for court administration, practice and procedure, and perform other functions prescribed by statute.  The rules adopted shall not be inconsistent with statute.” (Emphasis added.)

In 2011, one Hastings College of Law student dedicated their law review article to unpublished opinions. Applying California Constitution Article VI, § 6(d), the article concludes that “[i]n this battle between the no-citation rule and judicial notice, the statute overrides the rule. Inconsistency between the no-citation rule and the judicial notice statute is fatal to the former.” Rafi Moghadam, Judge Nullification: A Perception of Unpublished Opinions, 62 Hastings L.J. 1397, 1400 (2011).

Thus, the Rules of Court, including the no-citation rule, may not be inconsistent with the Evidence Code, a statutory scheme. As such, judicial notice should be granted as to unpublished opinions.

With the rise of online legal research (West, Lexis, etc.), attorneys and paralegals have access to voluminous case law, including unpublished opinions. The Judicial Council reports (at p. 51) that only 9% of majority opinions were published in 2011. It should come as no surprise that researchers may find that there are more unpublished than published opinions interpreting a particular area of law. Prohibiting the citation to unpublished opinions as persuasive authority under the no-citation rule is contrary to the conflicting judicial notice statute. Parties should be free to cite unpublished opinions as persuasive, while not binding upon the court. The opposition is free to distinguish these persuasive authorities or argue that they were wrongly decided. Reference to unpublished opinions will aid in the development of the law.

On September 30, 2012, Assembly Bill No. 2103 was signed into law, amending Labor Code Section 515 to require that non-exempt salaried employees (exempt employees are defined as executive, learned professionals, administrative, outside sales and physicians) be paid overtime for any hours worked in excess of 40 hours per week. This Assembly Bill has the practical effect of overriding the 2011 California Appellate Court decision in Arechiga v. Dolores Press, Inc. (2011) 192 Cal.App.4th 567.

The plaintiff in Arechiga worked as a janitor for Dolores Press. His written employment contract specified he was paid $880.00 per week. After Arechiga was fired, he filed suit, claiming he was entitled to overtime wages for the three last years of his employment because he worked on average 66 hours a week. The trial court dismissed the claim based upon Labor Code Section 515(d), which at the time validated a private agreement for a fixed salary, including regular and overtime pay. The Court of Appeal in Arechiga affirmed the trial court’s decision, holding that Labor Code Section 515(d) authorized employment agreements which provide for a total compensation amount, including regular wages and overtime wages.

Assembly Bill 2103 takes away the ability of an employer to include overtime wages in the salary of a non-expemt employee and has the effect of overruling the holding in Arechiga. Assembly Bill 2103 clarifies that “payment of a fixed salary to a non-exempt employee shall be deemed to provide compensation only for the employee’s regular, non-overtime hours, notwithstanding any private agreement to the contrary.”

The lesson to take for employers from Assembly Bill 2103 is that payment of a salary to a non-exempt employee is not an effective way of limiting exposure for overtime wages. Therefore, there is no practical benefit for using a salary based wage payment for non-exempt employees and hourly rates should be utilized. On any concern whether or not an employee is exempt or non-exempt, you should contact an attorney.

Identity theft is on the rise and is a frustrating process for victims. Some studies estimate that over nine million persons a year are victims of identity theft.  One major aspect of identity theft is dealing with the various taxing authorities, particularly the Internal Revenue Service (“IRS”), when someone uses your identity for criminal gain.  This blog discusses the basic procedures for dealing with the IRS when someone is a victim of identity theft.  However, if you are a victim of identity theft you may want to consult with a professional, such as a tax attorney, before contacting the IRS.

Identity theft occurs when someone uses someone else’s personal information such as name, Social Security number (“SSN”) or other identifying information, without their permission, to commit fraud or other crimes.  An identity thief can use a legitimate taxpayer’s identity to fraudulently file a tax return and claim a refund. Typically, the identity thief will use a stolen SSN to prepare a tax return and attempt to get a fraudulent refund early in the filing season.  Therefore, a victim may be unaware that this has happened until after they file their return later in the filing season and discover that two returns have been filed using the same SSN.

Given the fact that anyone can be a victim, it is important to be on alert for IRS notices or letters that may indicate that identity theft has happened.  Such IRS notices can include a notice that more than one tax return for a taxpayer was filed, a notice that there is a tax balance due, a notice that collection actions has been taken against a taxpayer for a year he did not file a tax return, and IRS records indicating that a taxpayer received wages from an employer unknown to him.

A taxpayer has the burden of proving that he or she was a victim of identity theft.  Therefore, if you or someone you know receives notices from the IRS the taxpayer should respond immediately by responding to the name and number printed on the notice or letter. A taxpayer will probably also need to fill out a Form 14039 (IRS Identity Theft Affidavit) to straighten out the tax mess.

Being proactive may be the best way to deal with identity theft.  If a taxpayer’s tax records are not currently affected by identity theft, but there is reason to believe it may be at risk due to a theft, questionable credit card activity or credit report, a taxpayer should contact the IRS Identity Protection Specialized Unit.  In addition, the California Franchise Tax Board also should be contacted if identity theft is suspected.  A taxpayer should contact the FTB ID Theft Resolution Coordinator if they believe that their tax records have been affected by identity theft

Lastly, a taxpayer should take precautions to minimize the chance that identity theft will occur.  Common precautions include:

• Do not carry your Social Security card or any document(s) with your SSN on it.
• Only give a business your SSN when it is required.
• Check your credit report every 12 months.
• Protect your personal computers by using firewalls and virus software.
• Do not give personal information over the phone or the internet.

One more important precaution is to always file your tax returns timely.  If you fail to file your tax returns for a few years you may be a victim of identity theft without knowing it as the IRS sends notices and correspondence to the address on the last return filed.  Identity theft is on the increase. A taxpayer must take a diligent role it its prevention, exposure and mitigation.

With the economy starting to show signs of life, many homeowners are beginning to perform previously delayed construction projects. However, finances can still be a major issue, which is one reason why some homeowners elect to forego hiring a general contractor and instead act as an “owner-builder.”

When a property owner chooses to act as an owner-builder, he or she is assuming all of the responsibilities that would usually be handled by a general contractor. This may prove challenging if the owner-builder has limited experience in construction. It is up to the owner-builder to hire subcontractors, schedule and supervise their work, as well as to pay for all necessary materials and supplies. The owner-builder must obtain all building permits and arrange for building inspections. The owner-builder is also responsible for ensuring that the project passes all relevant building codes.

It is possible for a homeowner to become an owner-builder without ever intending to do so. Some unlicensed contractors may attempt to have property owners obtain owner-building permits without alerting the property owner of the permit’s significance. If a property owner obtains a building permit as an owner-builder, they assume responsibility for all aspects of the project. Obtaining such a permit in the property owner’s name will place the property owner at risk if any unlicensed workers are injured while on the property. A property owner should carefully review its own insurance coverage before agreeing to act as an owner-builder.

Furthermore, if an owner-builder hires anyone other than a California licensed contractor or a family member to perform the work, then the owner-builder may be considered an employer. As an employer, the owner-builder must register with both state and federal governments. Additionally, the owner-builder would be responsible for providing state and federal taxes, social security taxes, workers compensation insurance, and unemployment compensation contributions.

Property owners can avoid this responsibility by hiring licensed California contractors and having them obtain all building permits in their names. However, property owners still risk the filing of a mechanic’s lien if they fail to pay their contractors promptly. A mechanic’s lien can complicate the future sale of any property.

There can be benefits to acting as an owner-builder. However, there are many issues and perils which the property owner must take into account. Reid & Hellyer has many years of experience representing both homeowners and contractors and can provide guidance for any type of construction project.

Holiday gift exchanges commonly extend into the commercial and professional realm with professionals giving token presents to clients and professional acquaintances in the spirit of the season.  Quite often, our clients give us gifts of bottles of wine, fruit baskets and other thoughtful presents.  Those gifts from clients are proper within the scope of the Rules of Professional Conduct and specifically Rule 4-400.  Likewise, a client’s gift to an attorney as a show of appreciation for a job well done does not violate the Rule.

However, Rule 4-400 does prohibit an attorney from inducing a client into making a substantial gift to the attorney, unless the client is related to the attorney.  Rule 4-400 does not define the terms “induce” and “substantial gift”.  The following factual scenario presented in State Bar Formal Opinion no. 2011-180 (available on the State Bar’s web site) provides some guidance to attorneys in attempting compliance with Rule 4-400:

An attorney represented a client in litigation concerning the client’s rental property in Santa Barbara.  The client normally rented the house for $5,000.00 a week.  The attorney wanted to vacation for a week at the client’s Santa Barbara property, but she could not afford the $5,000.00, rent.

The attorney told the client that the attorney had “earned a break and needed to re-charge her batteries and dive back into the case after relaxing a week at the client’s property.”  While the client was financially strapped and could not afford the week’s free rental of her property, the client reluctantly allowed the attorney to spend a free week at her property because the client was deeply invested in the litigation.

The Ethics Opinion found that this attorney violated Rule 4-400.  By telling her client that she needed to re-charge her batteries to get back into the client’s litigation, the attorney had induced her client into providing her with a rent free vacation worth $5,000.00.

The Opinion discusses several factors to consider in determining if such a gift is substantial.  Two factors were applicable here.  The gift of the week’s free rental was substantial from the perspective of the client, because the financially strapped  client lost the $5,000.00 rental fee for the property.

The second applicable factor was that the gift of the $5000.00 free rental was substantial from the perspective of the attorney, because she could not otherwise afford to have a week’s vacation at the property.

A violation of Rule 4-400 requires the two elements of client inducement by the attorney and substantial value of the gift. 

There may come a time in your career when your wealthy client gives you a gift of  substantial value as a show of appreciation, without any suggestion or inducement on your part. If that ever happens, I suggest two alternative approaches.  You should write the client a “Thank You” note, including the statement that the gift was unexpected and a total surprise to you.

 Or,  you can politely refuse to accept the substantial gift, citing the Rules of Professional Conduct.  Because you never know when, and under what circumstances, the grateful gift-bearing client will turn on you and complain to the State Bar that you induced him to make the gift.

Striking your neighbors dog with a bat may allow your neighbor to recover emotional distress damages according to a 2012 California court ruling. In this case, the emotional distress damages totaled $127,000.

This decision follows the 2011 ruling of the California Court of Appeal that authorized the recovery of $36,000.00 in monetary damages for costs associated with treating a cat injured after a neighbor shot the cat. (Kimes v. Grosser (2011) 195 Cal.App. 4^th 1556.)

In Plotnik v. Meihaus (2012) 208 Cal.App.4th 1590, the plaintiff sued his neighbor alleging that the neighbor had engaged in a pattern of harassing behavior that culminated in intentional injury to the plaintiff’s dog. As part of a pattern of harassing behavior, the neighbor struck the plaintiff’s dog with a bat after the dog came into his yard and then threatened the plaintiff with the bat.

The case proceeded to trial by jury and the jury awarded the plaintiff damages for trespass to personal property, the trespass being the striking of the dog, and the dog being the personal property. In addition, the jury awarded damages against the neighbor for both intentional and negligent infliction of emotional distress.

The court of appeal in Plotnik affirmed the award of damages for the injuries to the plaintiff’s dog. The court observed that pets are generally regarded as personal property, and that the claim for economic damages related to the dog’s injuries therefore was compensable under the theory of trespass to personal property. The court then determined that damages for emotional harm relating to the dog’s injuries should also be allowed under the trespass theory of liability. However, the court refused to allow those same damages for negligent infliction of emotional distress, finding such an award to unduly expand the concept of duty and to be duplicative of the award of emotional distress under the trespass theory.

Finally, the court found that the neighbor’s conduct in injuring the dog could rise to the level of outrageous conduct that would support an award of damages for intentional infliction of emotional distress. Nevertheless, because emotional distress damages had already been awarded under the trespass theory, the court determined that the additional award of emotional distress damages under this theory was duplicative.

The lesson to be learned from the holding in Plotnik is that emotional distress damages are available to a pet owner when a pet is injured by the intentional actions of another.

As mentioned previously in this space, over the last several years California courts have narrowed an employer’s ability to restrict employee activities after termination, culminating with the California Supreme Court’s decision in Edwards v. Arthur Andersen LLP (2008) 44 Cal.4^th 937.  In Edwards, the Supreme Court announced the general rule that all covenants not to compete were void, subject to limited statutory exceptions.  Recently, a California appellate court looked at one of the statutory exceptions, Business and Professions Code section 16601’s sale-of-business exception.

 In Fillpoint, LLC v. Maas (2012) 208 Cal.App.4^th 1170, the court considered whether an employment agreement containing a covenant not to compete is permissible when executed contemporaneously with a stock purchase agreement.   As part of a stock sale of his company “Crave Entertainment Group, Inc.”, the Defendant employee (Maas) agreed to a three-year covenant not to compete with the buyer.   Maas also agreed to stay on and work for Crave after the stock purchase and signed an employment agreement containing a one-year covenant not to compete that was not operative until he ceased working for Crave.  Three years after consummating the stock purchase, Maas resigned from Crave and six months later began working for a competitor of Crave.  Crave’s subsequent purchaser, Fillpoint, then sued Maas for breaching his employment agreement not to compete for one year following the termination of his employment with Crave.

 Although the Fillpoint court agreed with Fillpoint (Crave) that the stock purchase agreement and the employment agreement must be read together, the court pointed out that by their very nature, the restrictions in covenants not to compete in a stock purchase agreement were different from those in an employment agreement.  Whereas the “purchase agreement’s covenant was focused on protecting the acquired goodwill for a limited period of time,” the “employment agreement’s covenant targeted an employee’s fundamental right to pursue his or her profession.”  Accordingly, Fillpoint held that the employment agreement’s covenant not to compete did not fit within the limited exception contained in Business and Professions Code section 16601’s sale-of-business exception, and was, therefore, unenforceable. 

 Fillpoint serves as a reminder that courts will strictly construe employment agreements containing covenant’s not to compete, even when they are executed in the context of other events.  As such, employers should be mindful that such covenants will rarely, if ever, be upheld, and then only in the narrowest of circumstances.

While most law firms would not consider hiring a disbarred or suspended attorney, there may come a time when a close colleague or friend looses his or her law license and your impulse is to help that person by hiring him or her as a law clerk. Your first consideration is to learn why this person was disbarred. Do not rely on what that person tells you. It’s human nature to downplay the gravity of our wrongdoings and blame others. The State Bar web site is an easy and quick way to confirm the facts and circumstances resulting in this person’s disbarment or suspension.

 If the offense involves theft of client funds or other law related dishonesty, and your friend fails to show the requisite remorse, then I suggest that you not hire this person. If the person shows remorse and accepts full responsibility for his or her misconduct, then you may wish to hire this person in a very limited capacity with the understanding that this person’s presence in the firm will be closely monitored. 

 Rule 1-311 of the Rules of Professional Conduct sets forth the limited tasks that can be performed by the disbarred or suspended member. Essentially, this person can only function as a law clerk and/or clerical assistant. Additionally, the employing firm must report to the State Bar and the affected clients the fact of the employment of the disbarred member as a law clerk. The exception to this reporting requirement is where the disbarred or suspended attorney will only be hired to perform support activities, such as equipment maintenance, courier services, or as a receptionist.

 After you decide that this person is an acceptable candidate for hire, you should determine if this person will be able to adapt to the lesser role of law clerk within the firm and not insist upon being a self-appointed supervisor to the other firm employees, including associate attorneys. Will this person’s ego allow them to accept and strictly follow the instructions from the firm’s associate attorneys?  Will this person be able to resist the urge to advise and counsel clients?

 These are some of the tasks that Rule 1-311 prohibits being performed by disbarred and suspended members. Obviously, you should review Rule 1-311 in its entirety before deciding to hire a disbarred or suspended member.

Your friend has already lost his or her license to practice. Any breach of the proscriptions of Rule 1-311 by your friend becomes your violation of the Rule for which you can be disciplined. The desire to assist a disbarred or suspended friend or colleague is commendable. But when your law license can be put at risk, charity begins at the office with your clients and your law firm being the primary consideration.

Recently, one of our clients was sued by an allegedly negligent third party that injured one of its employees.

The employee received workers compensation benefits because he was injured in the course and scope of his employment.

However, the employee also filed suit against the third party, alleging  that the third party was negligent. Such a complaint is indeed proper.

However, the third party, in turn, sued the employer (our client) for indemnity because the third party claimed that the employer should have obtained consent and agreed to indemnify the third party before allowing the employee to enter onto the third party’s land. In this case, the third party was a city and the client required access to such land to conduct its business.

Leaving aside the obvious absurdities, lawyers in such situations should be aware that indemnity claims of this type would eviscerate the Workers Comp preemption protection that employers enjoy.

Notably, the court in Difko Admin. (US) Inc. v. Superior Court (1994) 24 Cal. App. 4th 126, 133 found that:

 The workers’ compensation system, in its relationship to general tort law, is designed to afford the injured employee a speedy and secure remedy for his injuries. The trade-off is that he may not sue his employer in tort; similarly, a third party defendant cannot directly seek indemnification against the employer if the judgment against it represents more than the third party’s “share” of the damages under comparative fault principles. (Lab. Code, § 3864.) The intent of the statutory scheme is to “insulate the employer from tort liability.” (Privette v. Superior Court (1993) 5 Cal.4th 689, 697, quoting S.G. Borello & Sons, Inc. v. Department of Industrial Relations (1989) 48 Cal.3d 341, 354.) The rules operate to protect the employer not only from actual tort liability, but, as a general rule, from the expenses of that type of litigation.

[A] third party defendant who wishes to establish his right to a Witt v. Jackson offset based on the employer’s concurrent negligence may only do so by raising the issue as defensive matter in his answer, in all cases in which the employer does not seek reimbursement for benefits provided to the employee by an independent action against the third party defendant . . . . The trial court therefore erred in denying [the employer’s] motions to dismiss.

(Id. (emphasis added); see also C.J.L. Construction, Inc. v. Universal Plumbing (1993) 18 Cal. App. 4th 376, 391-92.)

Eventually, the third party accepted the employer’s nominal settlement, apparently realizing the weakness in its claim against the employer.

Employers should seek competent counsel when an employee is injured due to alleged tortious conduct of a third party to evaluate and protect the employer’s rights.

Recently, I had a case where a husband and wife, who were in the process of developing three vacant lots, were sued after their contractor hit and severed a large water main while grading the lots. The severed water main flooded several homes and resulted in six years worth of painful litigation. In the end, the husband and wife deeded the three lots to the plaintiffs as part of a settlement.

The husband and wife were passive defendants (they did nothing wrong – they were sued for the acts of their agent). How could something like this happen to two innocent people? The problem for the husband and wife stemmed from the fact that the grading contractor had an insurance policy that excluded coverage for excavation work (how a grader would have such an exclusion in his insurance policy is whole different story). Moreover, the innocent husband and wife were not named as additional insureds under the contractor’s policy (not that it would have helped, given the excavation exclusion).

How can you avoid this happening to you? When you hire a contractor, make sure you review the contractor’s liability policy carefully. If you are uncertain about your ability to review an insurance policy, hire an attorney to review it for you. You should also investigate the insurance carrier to confirm that it is a reputable company. Make sure none of the work performed would fit within an exclusion in the policy if not performed properly. Above all, do not allow the contractor to commence work without first being provided an additional insured endorsement naming you as an insured under the policy.

An ounce of prevention is worth a thousands of dollars of cure.