Mind Your Business: Part Three – Agreements Among Founders and the Entity

There is a nearly infinite number of agreements founders can make amongst themselves and with the business. A few of the most common types are discussed below. Keep in mind that some agreements will not be valid if they contradict a statute that governs the operation of your particular entity type. This article does not take consideration of such statutes. As always, before drafting any agreements that will impact your business, you should consult with a knowledgeable attorney to discuss your goals and the best way to reach them.

Founders’ Agreement

A Founders’ Agreement is a great starting point when you first meet with your fellow founders to get in writing the things you expect from your business. It can also help to solidify your common goals and see the path of least resistance to get there.

The Founder’s Agreement will often include the roles and responsibilities of each founder, the method for decision-making and operation of the business, ownership interest, how contributions will be valued, vesting of interest, and how to handle the voluntary (or involuntary) departure of a founder.

It is important to keep in mind that the Founders’ Agreement is just a roadmap for the business and to be sure all appropriate topics are included in the operating documents of the entity.

Stock Control Arrangements

In some situations it is necessary to give a member or shareholder more voting power than their membership or share ownership percentage would otherwise allow. There are a number of mechanisms by which to accomplish this.

            Supermajority Voting Requirement

In a privately or closely held company, a minority shareholder may require a veto over certain major corporate decisions or actions as a condition of that minority shareholder’s investment. Such a requirement can be included in the articles of incorporation and bylaws.

            Irrevocable Proxies

A proxy gives the holder the right to vote the shares covered by the proxy on matters specified in the proxy. A proxy can be made irrevocable under specified circumstances.

            Voting Trusts

In a voting trust, shares are placed under the control of a trustee who votes the shares as provided in the voting trust agreement. In many states, including California, the length of the term of a voting trust is limited, subject to certain rights to extend the term.

            Dual Classes of Stock

One class of stock can be given substantially greater voting power than any other.

            Cumulative Voting

An agreement can be made in connection with representation on the board of directors through cumulative voting, which allocates each shareholder a number of votes equal to the number of shares times the number of directors to be elected. In California, unlike in Delaware and most other states, cumulative voting is mandated in the case of certain publicly traded, exchange-listed companies.

Buy-Sell Agreements

Buy-Sell Agreements protect the rights of the remaining founders when one founder dies or leaves the company.

This is best illustrated by example. Chris, David, and Matt found DW, Inc. Sadly, Chris passes away, leaving his shares in DW, Inc. to his wife, Rose. Rose then has one-third ownership of DW, Inc. and (in this scenario) the right to elect herself to the board of directors. However, Rose has a different idea of how she wants DW, Inc. to be run and David and Matt don’t want her to have control. If DW, Inc. has a Buy-Sell Agreement, his estate (here, Rose) is obligated to sell Chris’ shares to DW, Inc.

What happens if DW, Inc. anticipates it will not have enough money to purchase the shares from a deceased founder or doesn’t want to spend its money to do so? DW, Inc. should have an Insured Buy-Sell Agreement where either DW, Inc. or each shareholder, buys insurance on the founders to cover the obligation on the company to buy those shares.

Buy-Sell Agreements often include a right of first refusal. A right of first refusal says that if a shareholder wants to sell his shares to a third party, he has to offer them back to the company and if the company passes, they are offered to the shareholders. The Buy-Sell Agreement will often include a provision that says the price offered to the company and then the shareholders is the lower of either the offer price to the third party or the formula basis set forth in the Buy-Sell Agreement. So, if Peter offers Matt $1MM for his shares in DW, Inc. and the formula in the Buy-Sell Agreement values Matt’s shares at $1.5MM, Matt must offer the shares to the company, and then the shareholders, at a price of $1MM.

Purchase can also be triggered on a “triggering event” such as upon a founder leaving the company or on being fired. Sometimes Buy-Sell Agreements will also provide that if one of the founders becomes divorced, the shares, instead of being divided as community property by a court, must be reoffered to the company.

Transfer of Founders’ Technology to the Entity

There are two basic types of agreement that will transfer the technology of a founder to the entity – an Inventor’s Licensing Agreement and an Inventor’s Assignment Agreement.

            Inventor’s Licensing Agreement

In a licensing agreement, the founder/inventor retains ownership of her intellectual property, patents, and trade secrets, but licenses them to the entity in exchange for shares and possible a royalty fee.

For example, if Kaylee licenses the engine she designed to Serenity, Inc. in exchange for shares and a royalty fee, the engine and the associated intellectual property remain hers even after she leaves the company. Serenity, Inc. is merely “borrowing” the information.

            Inventor’s Assignment Agreement

In an assignment agreement, the founder/inventor makes a full transfer of all right, title, and interest in the technology or intellectual property to the company in exchange for shares.

Here, if Kaylee were to assign the engine she designed and all associated intellectual property to Serenity, Inc., she would receive shares in the company, but would not be entitled to royalties or any future interest in that technology.

            Employment Agreements

Employment agreements are used by companies to protect the rights of the employees as well as protect the trade secrets of the business. Employment agreements often include specifics as to the term of employment, benefits, rights to technology of the employee (as discussed above), termination events and compensation payable on termination, and how to resolve disputes. Many employers want to include a covenant not to compete, but in California these will generally not be enforceable, except in connection with the sale of a business.

Conclusion

There are endless variations of agreements among founders and with the company, which is why it is important to consult an attorney regarding what you are seeking to do to find the most efficient means to accomplish your goals.

By Jessica Coffield

Mind Your Business: Part 2 – Initial Financing and Capital Structure

Once you have selected and formed your business entity by filing the necessary documents with the Secretary of State, the next most obvious questions are: how does the company get money and how do I secure my piece of it?

There are a myriad of options for financing your business depending on your particular needs. It is crucial to work with your accountant and attorney to fully understand the implications of the various options. If you have additional concerns, it is prudent to hire an attorney who specializes in taxation to advise.

Interest in the company is referred to as a “security.” There are two basic ways to acquire a security in the company – equity and debt. Equity is basically an ownership interest in the company. In a corporation, equity can be common stock, preferred stock, or a hybrid of both. Preferred stock has a senior position to common stock and has a liquidation preference, meaning the holders of preferred stock get their money out first in the event of dissolution.

Equity

In an LLC, the equity is referred to as “membership interests.” These can have similar characteristics to common and preferred stock with the creation of classes of membership interest (e.g. Class A and Class B).

Partnership equity is the percentage ownership interest a partner has in the partnership.

Anytime you are issuing security to a founder or future investor, you must be sure to comply with the federal and state securities laws. For small businesses and start-ups, there will often be an exemption to registration, but, at least in California, you still have to file a notice of issuance.

The Cheap Stock Problem

Every new company faces the cheap stock problem. To illustrate by example, imagine Carter and Preacher form a fishing company, each investing $500 for 50% each of the company. The value of the fishing company at that point is $1,000. Carter and Preacher then bring in Russell, an outside investor, who will invest $500,000 for 10% of the company. This values the company at $5 million. The problem arises where Carter and Preacher issue their initial stock (the “cheap stock”) at about the same time as they issue the expensive stock to Russell. The IRS has a habit of treating the discount in valuation (the difference between a $1,000 valuation and a $5MM valuation) as services rendered to build up the value and tax it at ordinary income rates.

There are two mechanisms for avoiding this problem. One, have a period of time between the issuance to the founders (here, Carter and Preacher) and the issuance to outside investors (here, Russell) (the longer the better) so the difference in value is not deemed to be taxable. Two, issue a senior security (e.g. preferred stock) to outside investors and common stock to the founders, thereby creating a difference in value.

Debt Securities

In addition to raising additional capital from outside investors to finance the company, it is wise to explore the use of debt to finance. The benefits of using debt are obvious: there is no dilution of the percentage ownership of founders or other existing investors; the debt holder has no ownership interest in the company; the lender has no claim for future profits of the business, only repayment of principal and interest; and the debt is a known equation, meaning the company can budget for it. Additionally, interest on debt can be deductible for tax purposes. Furthermore, raising debt can sometimes be simpler than equity because you don’t have to be concerned with state and federal securities laws.

The disadvantages of using debt to finance the company are equally obvious: debt has to be repaid while common stock does not; debt requires cash flow, so you have to know the company will create enough cash flow to repay debts.

Furthermore, covenants and restrictions built in by lenders can impair the flexibility and ability to conduct business.

Conclusion

The choice of capital structure and how you initially finance your business is of critical importance. Be sure to work closely with a CPA or other financial professional and your attorney to make the choices that will allow your business to thrive.

By Jessica B. Coffield

Mind Your Business: Part 1 – Entity Selection

Starting a new business is one of the most exciting and fulfilling professional experiences a person can have. It is also nerve-wracking, emotional, and sometimes downright scary. The purpose of this three-part series is to provide a basic understanding of the process so you and your attorney can focus on how to best meet your specific business goals. Part one discusses selection of a business entity; part two provides an overview of initial financing and capital structure; and part three discusses agreements founders may want to have among themselves.

There are a number of options that may be available to you when forming your new business. It is helpful to have a basic understanding of the different entities as you begin planning your future business. A qualified attorney can explain in detail how each entity structure would affect your particular business.

The Sole Proprietorship

A sole proprietorship is not actually an entity at all, but is often referred to when discussing business structures. A sole proprietorship means that the owner of the business has full liability of the company. Sole proprietorships are easy and cost effective, but there is no protection for the sole proprietor for any debts or liabilities of the business. Thus, this structure is only advisable where the company has little liabilities, operations or obligations.

The Corporation

A corporation is a fairly rigid entity structure. For instance, it requires articles of incorporation, a board of directors that appoints officers, and officers that generally employ employees. The board of directors is elected yearly by the shareholders (there is a variation on the corporation known as a “close corporation” that can vary this, but that is not discussed in this article). The failure to adhere to formalities (e.g. comingling funds, not conducting meetings, etc.) can lead to personal liability of shareholders for the obligations and liabilities of the corporation.

You may have heard of “C corporations” or “S corporations.” These designations refer to the way the corporation is taxed (named for subchapters C and S of the Internal Revenue Code). In a C corporation, the company itself is taxed on the business profits. The shareholders then pay income tax on the money they received from the corporation (e.g. salary, bonuses, or dividends.) An S corporation, on the other hand, allows the shareholders to enjoy the limited liability of a corporation while being taxed as a partnership. This is referred to as pass-through taxation, meaning the business profits “pass through” to the shareholders in their proportionate share, who are taxed individually. Once the income tax is paid, any amount left that has not been distributed to the shareholders is previously taxed income or PTI, which can be distributed without taxation. The S corporation itself does not pay any income tax. In order to enjoy the status of an S corporation, however, you have to follow certain restrictions, including a limitation on the classes of stock, number of shareholders, and persons who can be shareholders.

If you intend to operate your business primarily as a source of income for the shareholders and plan to pull out all earnings other than necessary for the next year’s working capital, you will likely want a pass-through entity such as an S corporation, a Limited Liability Company (an “LLC”), or a partnership. If you are intending on building up earnings in the corporation to, for example, prepare for a public offering in the future, you may be better suited by selecting a C corporation.

The Partnership

A partnership can be general or limited. A general partnership is formed by two or more persons engaging in business activity. Like the sole proprietorship, nothing is filed with any government entity. Further, no partnership agreement is necessary (although it is prudent to have one). Anything not covered by an agreement is covered under the Uniform Partnership Act. The major distinction from corporations and LLCs is that limited liability is not available – the partners are liable for all debts, taxes, or tortious liability and the partners’ personal assets can be reached to pay such liabilities.

Like a corporation or an LLC, a limited partnership is formed with a filing. Those partners actively managing the business are referred to as “general partners” while those passively investing are referred to as “limited partners” (so they have limited liability for the debts, taxes, etc. of the business). Limited partners cannot actively participate in the management of the business, otherwise they risk losing their limited liability status.

All partnerships are taxed as pass-through entities – income and expenses of the entity are treated as income and expenses of the investors or owners and the entity is not separately taxed, avoiding the double taxation issue of a C corporation.

The Limited Liability Company

An LLC is basically a corporation that is taxed like a partnership. A shareholder in a corporation is generally not liable for debts of the corporation, except for his investment. This is the same for an LLC. Income and expenses of an LLC pass through to owners, like in a partnership and S corporation. However, an LLC has the option to be taxed as corporation or partnership. Perhaps the most attractive feature of an LLC is its flexibility. For instance, in general the failure to comply with statutory formalities does not jeopardize the limited liability status. If you are considering forming an LLC, it is important to discuss this with an attorney as recent changes to the laws governing LLCs have created new default provisions to the operations of LLCs.

Conclusion

A qualified attorney can work with you to choose the appropriate entity and help you file the appropriate documents with the state and draft the operative documents you will need to run a successful business.

By Jessica B. Coffield

Surfrider Foundation Blocks Billionaire’s Attempt To “Drop In” On The Public’s Use Of Martins Beach

With A Recent Decision By The San Mateo Superior Court, The Surfrider Foundation Blocks Billionaire’s Attempt To “Drop In” On The Public’s Use Of Martins Beach

Public access to California’s 840 miles of coastline has been a point of contention between groups attempting to preserve historic access and private landowners for decades.  One ongoing controversy is access to the northern California surf spot of Martins Beach.  Access to Martins Beach, an ideal surfing spot, secluded and protected from wind by jutting cliffs on either end, is only available by way of Martins Beach Road, an offshoot of the Pacific Coast Highway.  The road traverses 53 acres of land owned by billionaire Vinod Khosla, a co-founder of Sun Microsystems.  Khosla does not own a home on the land and has indicated no intention to build one.  At the edge of Martins Beach Road lies a low-slung gate.  For a time, the public was occasionally allowed access by Khosla’s property manager, but, in 2010, Khosla allowed the gate to be closed permanently, despite the receipt of a letter from the county demanding the gate remain open every day.

Khosla’s property manager, Steve Baugher, testified it was his decision to close the gate and stated he had even hired security guards to “deter trespassers.”  In October 2013, five surfers marched past the guards to proclaim their right to the beach.  These surfers, known as the “Martin’s 5,” were arrested, but the District Attorney declined to prosecute, leading other surfers to hop the fence for access to the beach.

Public access to California beaches is protected by the public trust doctrine, the principle that certain natural and cultural resources are preserved for public use, and that the government owns and must protect and maintain these resources for the public’s use.

The Surfrider Foundation claimed that under the 1976 Coastal Act, which gave a statewide Coastal Commission jurisdiction over beachfront land, Khosla would need to apply for a development permit in order to close the gate to Martins Beach Road.  In practice, the commission will generally only grant such a permit, typically in order to build a structure, if the public is given an easement to access the beach.  Judge Barbara Mallach of the San Mateo Superior Court agreed, ruling on behalf of the Surfrider Foundation. Though Surfrider was seeking fines against Khosla as well, the Court did not go so far, stating that the closing of the gate was done in good faith by those who believed they had a right to do so.

In an earlier case, a group called Friends of Martins Beach attempted to sue Khosla based on a clause in the California Constitution that declares that no entity “shall be permitted to exclude the right of way to such water whenever it is required for any public purpose.” (Cal. Const., Art. 10, Sec. 4.)  The judge in that case found for Khosla, due to Martins Beach having been part of a land grant that settled the Mexican American war in 1848, prior to the adoption of the constitution.

Aside from the ongoing litigation, other avenues are being pursued to bring resolution to this matter.  California Senator Jerry Hill has proposed a bill, Senate Bill 968, that would require the State Lands Commissioner to consider purchasing Martins Beach Road.  The bill initially centered on eminent domain, mandating the state to take the land if negotiations with Khosla failed.  The bill has been revised now, however, to remove references to eminent domain and would mandate only the commission to negotiate with Khosla.  In addition, the Coastal Commission has been requesting testimony from people about how they have used the area in the past.  This could be used to prove a historic right of access that the Attorney General could sue to restore.

While the end of this dispute appears to be far from over, the Surfrider Foundation is lauding this decision as an important step in the fight for the public’s beach access rights.

8/15/17 UPDATE: The First District Court of Appeals unanimously ruled that Khosla violated state law when he blocked the public from accessing Martins Beach and ordered the access road be opened. The decision also requires Khosla to pay nearly half a million dollars in attorney’s fees. (Read the full decision here and a timeline of the events leading up to it here.)

In the meantime, Senator Hill continues to press forward a bill to accept funding through donations to purchase 6.4 acres of Khosla’s property through eminent domain. San Mateo County has pledged up to $1M for the acquisition. However, Khosla and the State Lands Commission have failed to agree on the price. The official estimates for the portion of land values it at $360,000 while Khosla demands $30M. (Khosla purchased the entire 53 acres of land in 2008 for $37.5M.)

By: Jessica Coffield

The information presented in this article is intended for general educational purposes. It is not intended to be legal advice. Every company or person’s situation is different and requires individual analysis by competent counsel before legal advice can be rendered. If you are confronted by a legal issue retain competent legal counsel to advise you immediately. This article is not a substitute for legal advice from an attorney licensed to practice in your jurisdiction.

Calculating Past Medical Special Damages in Personal Injury Cases

The primary objective of an award of damages in a personal injury case is to compensate an injured party for that party’s loss.  A fundamental concept in tort law is that a plaintiff is entitled to be placed in the same position, at least from a monetary standpoint, that he or she would have been if the injury in question had not occurred.

In theory, calculating damages related to a plaintiff’s past medical treatment should be a relatively straightforward task.  Let’s examine a hypothetical scenario where a plaintiff (we’ll call him “Bob”) was involved in a car accident and had to get back surgery which cost $100,000.  In this scenario, Bob is entitled to recover $100,000 in damages, right?  It turns out that the answer is not quite so simple and requires looking into the complex relationship between healthcare providers, insurance companies and medical finance companies.

Scenario 1: Bob has no health insurance.

The first factor to consider is whether Bob had health insurance that covered the cost of his back surgery.  If Bob didn’t have insurance and ended up paying a medical provider $100,000 in cash for his surgery, then he would be able to recover the full $100,000 assuming that this amount represented the “reasonable value” of the medical services he received.  What constitutes “reasonable value” is arguable and is generally proven by expert witnesses who are familiar with how much certain procedures typically cost.

Scenario 2: Bob has health insurance.

Things get a little more complicated once we begin to take insurance into account.

Generally, California’s “collateral source rule” provides that an injured party cannot recover less in damages merely because that injured party was already compensated by his or her insurance company.  An underlying reason behind the rule is that a “[d]efendant should not be able to avoid payment of full compensation for the injury inflicted merely because the victim has had the foresight to provide himself with insurance.”  (Helfend v. Southern Cal. Rapid Transit Dist. (1970) 2 Cal. 3d 1, 10.)

However, in Howell v. Hamilton Meats & Provisions, Inc. (2011) 52 Cal.4th 541, the California Supreme Court found that the collateral source rule did not apply in situations where medical providers contracted with insurance companies to accept as full payment, an amount less than what they might normally charge.  For example, a physical therapist might normally charge $200 for a therapy session but will contract with an insurance company to provide that same session to one of their insured patients for only $80.  Medical providers may agree to accept this reduced price in order to gain other commercial benefits such as the guarantee of prompt payment or the potential increase in the volume of business in the form of patients from the insurance carrier.

In this type of situation, a medical provider’s bills will typically state both the full “undiscounted” price of a particular procedure as well as the lesser amount that has been accepted by the provider as payment in full.  The Court in Howell reasoned that because the full undiscounted price was never actually incurred, a plaintiff’s recovery was limited to only the lesser amount that was actually accepted by the medical provider.  (Id. at 548.)  This would be true even if the full undiscounted sum represented the reasonable value of the medical service provided.  The Court in Howell stated that “a plaintiff may recover as economic damages no more than the reasonable value of the medical services received and is not entitled to recover the reasonable value if his or her actual loss was less. [Citations.]” (Id. at 555, emphasis in original.)  In essence, in order to be recoverable, a medical expense has to be both incurred and reasonable. (Id. at 555.)

With respect to our hypothetical scenario, if Bob did have health insurance and if his medical provider had agreed to accept only $75,000 as full payment for a procedure that would typically cost $100,000, then at most, Bob could only recover $75,000 pursuant to Howell.  This would be true even if the $100,000 price represented the reasonable value of the medical service provided.

Scenario 3: Bob and the medical finance company.

Things become even more complicated when we deal with entities known as “medical finance companies.”  These companies have emerged to fill a very niche role in personal injury cases involving uninsured plaintiffs.  Let’s revisit our scenario with Bob to get a better understanding at how these companies operate.

Let’s assume that Bob does not have any health insurance and that he doesn’t have the $100,000 in cash to pay his medical provider for back surgery.  Even if Bob doesn’t have this money, he may still be able to get this procedure done on a lien basis.  A medical provider, knowing that Bob has a pending personal injury lawsuit, may agree to provide medical services in exchange for a $100,000 lien against any recovery Bob might obtain in his lawsuit.  If Bob wins his case, the medical provider gets paid directly out of the recovery.  If Bob loses, the medical provider doesn’t get paid at all.  This arrangement, while pretty good for Bob, represents a significant financial risk to the medical provider.  This is where medical finance companies come in.

Medical finance companies typically get involved in situations where a plaintiff sustains an injury and needs medical treatment, but has no health insurance.  In our scenario, a medical finance company would work with both Bob’s attorney and Bob’s medical provider.  Prior to treatment, Bob’s medical provider would ask the medical finance company to evaluate Bob’s case to determine whether it would be willing to purchase the medical provider’s lien in Bob’s lawsuit.  Next, the medical finance company would contact Bob’s attorney to gather information about the case to determine whether Bob’s claim against the tortfeasor would be worth the investment.  If Bob’s claim meets with the medical finance company’s approval, it would notify Bob’s medical provider to let them know that it would be willing to purchase the lien rights.  After the surgery, Bob’s medical provider could turn around and sell his lien to the medical finance company for a reduced price in exchange for immediate payment.

In our scenario, Bob’s medical provider might agree to sell the $100,000 lien to the medical finance company in exchange for an immediate $50,000 payment.  If Bob wins the case, the medical finance company stands to collect the full $100,000 from the lien which will essentially net the company $50,000 in profit after taking into account the initial cost of purchasing the lien.  If Bob loses his case, the medical finance company will lose the $50,000 that it paid Bob’s medical provider for the lien.

After all of this, what is Bob entitled to recover in his lawsuit?  Is he entitled to recover $100,000 in damages based on the full “undiscounted” price of the surgery similar to that of an uninsured person paying out of pocket?  Or, pursuant to Howell, is Bob only entitled to recover the $50,000 that the medical finance company actually paid the medical provider for the lien?

The court recently dealt with this issue In Moore v. Mercer (2016) 4 Cal.App.5th 424.  In Moore an uninsured plaintiff was involved in a motor vehicle accident and subsequently underwent back surgery.  Plaintiff’s medical provider agreed to do the surgery in exchange for a lien on plaintiff’s recovery in the lawsuit.  After the surgery, plaintiff’s medical provider sold its lien to a medical finance company.

The defendant in Moore argued that there was no distinction between a typical insurer and a medical finance company and as such, pursuant to Howell, plaintiff’s medical damages were capped to the amount the medical finance company paid plaintiff’s health care provider for the lien.  The Court of Appeal flatly disagreed and was unwilling to extend Howell to include medical finance companies.  The Court stated that “evidence of what a third party was willing to pay for an account receivable or lien depends on a wide variety of factors bearing no relevant to the reasonable value of the services when rendered such as the probability of achieving a sizable jury verdict, the skill of the lawyers, and the strength of the evidence.”  (Moore, supra, 4 Cal.App.5th at 442.)  The Court went on to state that “evidence of the amount the provider was willing to accept is equally divorced from the reasonable value of the services delivered and may be related to financial pressures on the provider or managing the cash flow of the operation.”  (Id. at 442-443.)

With respect to our hypothetical scenario, it’s clear that Bob’s recovery is not automatically capped at the $50,000 that the medical finance company paid for the lien and Bob may be entitled to recover up to full $100,000 from the back surgery if it represents the reasonable value of this medical service.

Introducing Evidence of the Sale of a Lien

It is important to note that while the Court of Appeal in Moore was clearly worried about the possibility of litigating collateral issues associated with the sale of liens, the Court did concede that this evidence was discoverable because it had some probative value in determining the reasonable value of the medical services provided.  (See Moore, supra, 4 Cal.App.5th at 447-448.)  As such a defense attorney should not necessarily be dissuaded from seeking such evidence but should look to the Court’s decision for guidance as to what facts might possibly overcome an Evidence Code § 352 objection.

One fact that is easy to establish and appears to relate strongly to probative value is the date on which the medical finance company actually purchased the lien.  In Moore, the Court was unconvinced by arguments that the market value of a lien months or years after a service was rendered determined the reasonable value of the medical service as the time the injured patient was treated.  (Moore, supra, 4 Cal.App.5th at 444.)  Accordingly, evidence that a lien was purchased immediately after medical services were rendered is more likely to overcome a section 352 objection as one that was bought years later.

By Raymond Tuason

Firm Successes in 2016

2016 was a busy year for MCAQ.  It was so busy we forgot to report some of our noteworthy successes on behalf of our clients.  Here is a recap of the year:

January 2016 started out great with a jury verdict in favor of a municipal utility client in a case alleging power theft and breach of contract.  Stephanie L. Quinn and Mariel Covarrubias tried the case to a Sacramento County jury.  Representing the plaintiff, Ms. Quinn and Ms. Covarrubias successfully established that the defendants were responsible for damages arising out of the unlawful diversion of power from a home in Sacramento County that was used to grow marijuana. The trial lasted 7 days.

In February 2016, Douglas Alliston and Suzanne M. Nicholson obtained summary judgment against the California Insurance Guarantee Association in a case where CIGA had declined to pay the obligations of an insolvent insurer once the insurer was discharged in its liquidation proceeding. Ms. Nicholson, a certified appellate specialist, is currently defending against CIGA’s appeal.

The firm had another trial success in March 2016.  We received a statement of decision and judgment on a residential real estate case in which the plaintiff sued our clients alleging nondisclosure of defects in a high-end Granite Bay residential property sold to the plaintiff. In the closing brief the plaintiff claimed damages of $1,659,000. The trial of that case began on August 5, 2015 and concluded nineteen days later on August 24, 2015. The judge ruled in our client’s favor on all causes of action and thereafter entered judgments directing the plaintiff to pay $59,000 in costs and $371,000 in attorney fees. Both of those judgments were paid in full in August 2016.  Mark A. Campbell was lead trial counsel in the case.

In the Spring, Mark A. Campbell and Mariel Covarrubias obtained dismissals for a foreign company and one of its directors, in a case alleging trademark infringement, unfair competition and breach of contract.  They successfully argued that the California court did not have personal jurisdiction over the defendants on a motion to quash service of the summons.  The case was venued in Ventura County.

In July, Stephanie L. Quinn and Raymond Tuason obtained a victory in a Federal Employers’ Liability Act case on behalf of a railroad company.  The case was brought by a railroad employee who alleged she suffered a career ending back injury as a result of her employer’s negligence.  The court granted our motion for summary judgment, dismissing the case.  The court found that as a matter of law, the plaintiff could not establish that the employer was negligent or that its negligence was the cause of her injuries.  The case was venued in the U.S. District Court for the Eastern District of California.

The firm had two other noteworthy summary judgment victories in 2016 in cases handled by George E. Murphy and Suzanne M. Nicholson.  One involved a contract dispute over who was responsible to pay medical expenses incurred by employees of the other party. Mr. Murphy and Ms. Nicholson also obtained summary judgment plus attorneys’ fees for an owner of commercial property based on breach of contract.

November brought another trial victory for the firm.  Stephanie L. Quinn and Mariel Covarrubias obtained a defense verdict in a 12 day jury trial in Placer County Superior Court.  The firm represented a railroad company who was being sued by a locomotive engineer for violations of the Federal Employers’ Liability Act, the Locomotive Inspection Act, and various federal regulations. After deliberating less than two hours, the jury returned a verdict for our client on all causes of action.

Mariel Covarrubias, who has been with the firm since 2012, was also selected by Super Lawyers as a Rising Star in 2016.

In addition to trial victories, our attorneys have been successful in resolving cases short of trial.  This past year, George E. Murphy was successful in obtaining a six figure settlement in a personal injury case on behalf of a client.  Susan A. DeNardo, in our employment group, has strategically handled employment law cases in front of the Equal Employment Opportunity Commission and Department of Fair Employment and Housing, bringing about resolutions for our clients that allowed them to avoid the grave expense involved in litigating employment law cases in California.

One of our firm’s specialties is insurance coverage disputes.  2016 brought successes in this arena as well.  George E. Murphy was successful in persuading multiple insurance companies to provide coverage to our clients in cases where the carriers had originally denied coverage, leaving their insureds out in the cold. In representing a large apartment complex, we convinced an insurance company to provide coverage for our client whose property sustained significant damage when a large truck spilled gallons of oil on pavement throughout the complex. The insurance company originally denied coverage, but ended up paying substantial sums to repair the damage.

We also represented a real estate broker and were successful in convincing the broker’s insurance company to assume our client’s defense in a lawsuit alleging breach of contractual and legal duties in the context of a real estate transaction. The insurer originally denied any coverage obligations, but ended up paying to settle the case on behalf of our client. In representing a commercial tenant and business owner who sustained significant water damage to his premises and inventory, we convinced the landlord’s insurer to pay for damages suffered by our client, after the insurer originally refused to pay any amounts for repair.

The firm ended the year on a high note. In December, our appellate team, George E. Murphy and Suzanne M. Nicholson, obtained a huge victory on behalf of a municipal client in a case alleging that the City of Atwater was liable for the dangerous condition of an intersection where a pedestrian was killed by a motorist.  The California Court of Appeal for the Fifth Appellate District issued a published opinion, overturning a $3.2 million dollar jury verdict from Merced County.  The Court of Appeal determined that the design immunity defense immunized the City from liability for any dangerous condition of the intersection.  The decision in Gonzalez, et al. v. City of Atwater, can be found here:  Gonzalez, et al. v. City of Atwater Decision

By Stephanie L. Quinn

April Showers Bring Employment Empowers

April is not only the month for Californians to fixate on taxes but this year it has been an active month of change in the employment arena. Changes have occurred that many Californians deem as socially necessary and morally correct, but will no doubt place a heavy burden on small businesses in the state.  California legislators proposed a $15 minimum wage initiative called “Fair Wage Act of 2016” (#15-0032) and alternative legislation was proposed to this bill, Senate Bill 3, which Governor Jerry Brown signed into law this month.  The signed alternative legislation still raises California’s mandatory minimum wage to $15 an hour but allows for an additional year to complete the task by the year 2022.  New York is the only other state to commit to such an increase to the minimum wage.

Even the Governor appeared to question the economic rationale of his commitment but stood by this decision based on the fact that it morally made sense, indicating that individuals should be able to support their families based on the minimum wage. The legislation amends  Labor Code Section 1182.12 to now designate each incremental escalation for employers who employ 26 or more employees to increase the minimum wage by January 1, 2017 to $10.50. By January 1, 2018, the minimum wage would be increased to $11 and each January 1st until the year 2022 the wage would increase in one dollar increments. (Labor Code Section 1182.12(b)(1)(A)-(F).)  Employers with 25 or fewer employees have an additional year to begin the increase with the first increase to $10.50 commencing on January 1, 2018. By January 1, 2019, the wage would increase to $11 dollars and continue to increase in one dollar increments until the year 2023. (Labor Code Section 1182.12(b)(2)(A)-(F).)

The amendments to this Labor Code section tie the raises to inflation and also carved out the ability to allow the Governor to delay minimum wage hikes in the event of an economic decline.  Each July 28th the Director of Finance must make a determination and certify to the Governor and Legislature whether enumerated conditions are met in order to annually ensure that economic conditions in California can support a minimum wage increase. (Labor Code Section 1182.12(d)(1).) The Governor is left with the ability to temporarily suspend the minimum wage increases scheduled for the following year.

Another empowering change for employees this month happened in the City by the Bay.  San Francisco became the first city to approve fully paid parental leave.  California’s parental leave scheme allows employees to receive 55 percent of their pay from employee-paid public disability insurance for 6 weeks for employees who contribute to the California State Disability Insurance fund. (Unemployment Insurance Code Section 3300 et seq.)  San Francisco’s Board of Supervisors unanimously passed a law requiring full pay for parental leave with employers paying the gap of 45 percent in pay. The ordinance will amend the Police Code to add Article 33H to require employers to provide supplemental compensation to employees who receive State paid family leave for the purposes of bonding with a new child. (Board of Supervisor’s File No. 160065.) The intention of the ordinance is to supplement the California Paid Family Leave partial wage replacement by providing compensation that in combination will total 100 percent of an employee’s weekly salary.

The city ordinance will go into effect on January 1, 2017 for companies that have 50 or more employees. The law will go into effect on January 1, 2018 for companies that employ 20 or more workers. The legislation applies to both parents.  The law also applies to both births and adoptions. The city ordinance is for both part-time/temporary and full time employees who work at least 8 hours of work per week within San Francisco. The ordinance contains rebuttable presumptions that a wage decrease or a termination within 90 days of an employee having made a request or application for California Paid Family Leave was done to avoid the covered employer’s supplemental compensation obligations under article 33H. That presumption must be rebutted with clear and convincing evidence that the actions were taken solely for reasons other than avoiding an obligation to pay supplemental compensation, otherwise the employer will be obligated to pay the employee’s supplemental compensation during the leave period even if terminated. One protection for the employer is a provision that requires an employee who voluntarily leaves work within 90 days of the end of the leave period to reimburse the employer for the full amount of the supplemental compensation the employee received. The employer should ensure that the employee signed a form prescribed by the Agency as a precondition of receiving supplemental compensation and the employer must make a request for reimbursement in writing.

The economic effect of these changes will undoubtedly have the most significant impact on small businesses as the increased costs of maintaining a workforce grow.  These changes will either result in an increase in consumer costs and prices or a large increase in unemployment as businesses may be forced to cut the workforce and cut costs by reducing hours or laying off employees. Companies would likely only keep the most productive employees at the higher minimum wage rate. Only time will tell what the economic effects will be on businesses and the workforce in California from these changes in  the employment arena.

By Mariel Covarrubias, Esq.

Critical Steps to Follow Upon Receipt of an Accusation

I Received an Accusation, Now What?

If you are a licensed medical professional, you may, at some point during your career, receive a “Notice of Accusation.”  A “Notice of Accusation” should not be ignored or taken lightly. An Accusation is the vehicle by which your licensing agency (the California Medical Board) initiates a disciplinary proceeding against you, the licensee. Upon receiving an Accusation, it is incumbent on the licensee that the Accusation is read carefully. The Accusation lays out the charges sought by the agency and must specify the statutes and rules the licensee is alleged to have violated. (Gov. Code. § 11503.)

 

 

If you have received an Accusation the following has already occurred:

  1. A Complaint was filed with the Medical Board;
  2. The Medical Board investigated said Complaint; and,
  3. The Medical Board found a violation of the Medical Practices Act.

Note: Up to this point, the complaint and Investigation are not public information. However, this information becomes public once an Accusation has been filed.

If a violation of the Medical Practices Act is found, the Medical Board may pursue disciplinary actions against the licensee following the Administrative Hearing.  Such actions include:

  1. Revoking of the medical license;
  2. Suspension of the license for up to 1 year;
  3. Placing the license on probation, restricting the license, or limiting the scope of practice permitted under the license;
  4. Imposing additional requirements such as psychiatric treatment, require additional clinical training, or practice under supervision; or
  5. Issue a public reprimand.

While the purpose of regulating licensed medical professionals is not to discipline them, but rather to protect health care consumers, enforcement of any of the above disciplinary actions can have deleterious effects on one’s practice and reputation, thus necessitating the proper handling and resolution of an Accusation. So, what do you do you ask?

FIRST:

  • Locate the date on the proof of service.  You have 15 days from this date to file the accompanying “notice of defense.”

Accompanying the Accusation, you will find a “Notice of Defense.”  It is equally important to not ignore the Notice of Defense. Signing and returning this notice to the agency is your acknowledgement of receipt of the accusation and provides the agency notice of your intent to defend against the accusation.

SECOND:

  • File the “notice of defense” within 15 days of receiving the Accusation.

(Note: You do not need an attorney to file this, however, due to the complex nature of Administrative Proceedings, it is advised that one consult with a legal professional.)

Filing a notice of defense allows the licensee to do any of the following: 1) request hearing; 2) challenge the accusation; 3) admit the accusation in whole or part; and 4) present new information to the agency. Once the Notice of Defense is filed, the licensee is entitled to a hearing.

CAUTION: failure to submit a “Notice of Defense” can result in waiver of certain rights.

Once the notice of defense is filed, this lets the agency know you will be defending against the Accusation. At this point, discovery begins. Discovery is the process by which the parties request and obtain information about the accusation. The information obtained can be used during the hearing and in any pre-hearing motions.

Following the hearing, the Administrative Law Judge will render a decision which is then sent to the Medical Board.  The Medical Board will review said decision and make the final decision.  In this decision, the Medical Board will state what, if any, disciplinary actions will be imposed. As discussed above, the disciplinary actions range in severity from a public reprimand to a revocation of your license.  Given the range in severity of disciplinary actions, it is recommended that legal counsel be sought.