Medicare & Medicaid Mandatory Reporting Requirements – Are you a Responsible Reporting Entity?

Article authored by Jonathan Corr and Heath Langle

Starting today anyone who could potentially make a third party payment to a Medicare-eligible beneficiary in a liability setting is now mandated to supply detailed information regarding that claim to the Centers for Medicare and Medicaid Services (CMS). These new requirements are simply a way for CMS to stop their financial bleeding after years of non-repayment of conditional benefits payments and to ensure their interests are taken into account in future settlements which involve payment to a Medicare beneficiary. CMS has created a mechanism to track payments made to Medicare-eligible beneficiaries and has also created penalties severe enough to ensure compliance in reporting those payments.

The enactment of section 111 of the Medicare, Medicaid and SCHIP Extension Act of 2007 (MMSEA) creates new reporting requirements for all Responsible Reporting Entities (RRE). The act’s definition for RRE’s identifies qualifying plans, including liability insurers, self-insurers, no-fault insurers and workers’ compensation insurers to report detailed information to CMS regarding Medicare beneficiaries. The new reporting requirements can be found at 42 U.S.C. 1395y(b)(8). Failure to comply with the mandatory reporting requirement will result in a $1,000.00 per day per-claimant penalty.

CMS now requires a RRE to provide electronic submissions regarding all claimants who are Medicare eligible. The reports are to be generated quarterly during a designated seven-day period assigned to a RRE by CMS, and will include all pending claims, whether or not they have been reduced to final judgement or settlement, if the claim involves a Medicare beneficiary.

The initial file submissions must report all claims, in which the injured party is/was a Medicare beneficiary, that are resolved or partially resolved by settlement, judgment, award or other payment on or after July 1, 2009. Property-damage-only claims and one-time payments for a defense medical evaluation do not mandate a reporting duty. There is also no reporting requirement in situations where there has been a defense verdict or judgment indicating no money is owed for the injury in question.

CMS is requiring all Responsible Reporting Entities to register with CMS beginning May 1, 2009 through June 30, 2009 in order to obtain an ID for quarterly reporting purposes. A RRE is deemed by CMS as the entity making payments to a claimant or beneficiary which includes liability insurers, self-insurers, no-fault insurers and workers’ compensation insurers.

There will be a six-month testing period for submissions to CMS through their Coordination of Benefits Secure Website (COBSW) from July 1, 2009 to December 30, 2009. CMS wants ample time to ensure RREs are able to properly and timely report. Live production files will be required in the first quarter of 2010 from January 1, 2010 to May 31, 2010. In order to facilitate smooth registration and reporting processes, CMS has set up a series of Computer Based Training sessions (CBT) available through the CMS website. The CBTs are extremely user-friendly and will guide each RRE through the process of registration and submission of data files. To register for the free CBT sessions contact the Coordination of Benefits Contractor EDI Department at (646) 458-6740, or contact this office and we would be happy to set up a time for you or your staff to come to our office to participate in the CBT sessions.

Keep in mind the existing Medicare law regarding conditional payments has not changed. Pursuant to 42 U.S.C. 1395y and 42 C.F.R. section 411.20, Medicare does not have to assert a lien to recover conditional payments made on behalf of a Medicare beneficiary. Additionally, all parties, whether an insurer, self-insurer or third party administrator who are, or should be, aware Medicare made a conditional payment have a duty to notify Medicare of a settlement. To give teeth to Medicare’s recovery rights, the statute and regulations give Medicare the ability to seek payment from practically anyone who knew or should have known about its payments but failed to protect Medicare recovery rights. The law gives Medicare a great deal of flexibility in deciding which party or parties should be responsible for repayment. In the event that Medicare’s interest is not repaid, anyone who could have protected Medicare’s interest may be liable for repayment. This could also mean payment of double damages if Medicare has to initiate legal action. The new reporting requirements are designed to make it easier for CMS to identify potential recovery resources and, where necessary, initiate recovery actions under existing law.

The new mandatory requirements have also generated a great deal of discussion regarding Medicare Set-Asides (MSA) in liability cases. The MSA is a mechanism by which a party or parties can protect themselves from Medicare’s broad powers of recovery by taking into consideration Medicare’s recovery interests. While some have opined these set-asides are mandatory, there is nothing in the statute that makes MSA’s an absolute requirement. However, it may be the best and only way to demonstrate CMS’s interest in a settlement was protected and thereby avoiding a recovery action being initiated. Because the MSA issue is separate from the new mandatory reporting requirements, additional information will follow in a separate alert.

Urban Legend – Medicare Set-Asides for Third Party Liability Cases

Article authored by Carl Fessenden, Norm Prior and Heath Langle

Since the Centers for Medicare and Medicaid Services (CMS) introduced mandatory electronic reporting requirements for all liability carriers, there has been a well-founded concern that CMS will now aggressively act to ensure its interests are protected in third-party liability settlements. Uneasiness, and confusion, has been created due to the lack of clear direction from CMS as to how parties to a settlement should act to protect Medicare’s interest. You may have heard about Medicare Set-Asides (MSAs). However, MSAs are not required in liability cases.

CMS has long recommended MSAs as a means of protecting Medicare’s interests in workers compensation (WC) settlements. The parties to a WC settlement allocate a portion of the settlement to cover projected future medical costs related to the claimed injuries that would otherwise be covered under Medicare. Typically future care projections are calculated by an MSA vendor or other MSA allocation professional. The parties may then administer the MSA account directly or arrange for professional third-party administration. Once an MSA is established, Medicare is only obligated to cover medical care after the required MSA funds have been exhausted.

Some fear MSAs are currently required in liability cases. This is an urban myth. Currently MSAs are not required, and probably not even available for review by CMS in liability cases. In fact, there is no mention of MSAs anywhere in CMS policies, and California CMS representatives have confirmed they are not reviewing MSAs in liability cases. The question then becomes how do you protect Medicare’s interests, as the law requires to avoid very significant penalties.

It is required that liability settlements paid to Medicare beneficiaries adequately protect Medicare’s interest as it relates to potential future care. (42 U.S.C. 1395y(b)(2); 42 C.F.R. 411.46(b)-(d); 42 C.F.R. 411.47) This can be a very difficult issue to address, especially in cases involving multiple defendants, disputed liability, or comparative fault. As an example, are you adequately protecting Medicare’s interest if you only set aside 50% of projected future care because you believe this is a case of 50% comparative fault? The answer may be no, as the position of CMS is that it is not bound by comparative fault allocations the parties use in a settlement agreement.

A Medicare-eligible client that runs out of settlement money for future medical expenses may turn to Medicare to cover his or her healthcare costs. CMS may deny these claims if the expenses should reasonably have been covered by the settlement, leaving the client with no medical coverage. If Medicare does pay for future treatment and Medicare believes its interests were not adequately protected, Medicare may take action against the parties to the settlement to recover the money Medicare believes was not appropriately reserved for future medical expenses.

Here are five suggestions on how to address Medicare’s interests in a settlement agreement in a liability case:

1. Allocate money in the settlement agreement for future care and have Plaintiff expressly promise to use that money for future care only.

2. Add Medicare as a payee on the settlement check and attempt to force CMS to approve the settlement agreement (including money specifically allocated for future treatment).

3. Set up blocked account for use regarding future medical expenses only.

4. Set up a Trust for future medical care.

5. Try to get Medicare to approve MSA even though they don’t actually have a mechanism in place for doing so.

If a settlement agreement contains express language allocating money for future care and Plaintiff signs off, then it can be argued a liability carrier has taken reasonable steps to protect Medicare’s interests. The language of the agreement or release should clearly state the basis upon which the amount set aside was determined. The obvious problem is that the Plaintiff may not keep the money “set -aside,” and if that occurs, Medicare may seek to collect future payment from the parties.

By adding Medicare as a Payee to a settlement check, you can attempt to force Medicare to approve the money the parties propose to allocate. Generally, if there is going to be future care, there was likely past care. If there was past care, there is a lien that must be satisfied. By making a condition of negotiating the check that Medicare approve the settlement terms, you can possibly argue that CMS cannot later claim the money allocated was not appropriate.

A blocked account or trust can also serve in demonstrating a liability carrier’s reasonable efforts to protect Medicare’s interests. These devices are appealing because of the limitations imposed regarding withdrawal of funds. The blocked account or trust can be set up so that a Plaintiff would not be able to use the money for purposes other than medical care related to injuries suffered in the lawsuit being settled. If the plaintiff exhausts the funds in the account or trust for purposes of related medical care, it is more likely Medicare will not deny future claims for related care.

Lastly, parties can submit an MSA to CMS for specific approval. However, since there is no mechanism or procedure currently in place for doing so CMS may or may not approve your proposed MSA. Moreover, it is anticipated there will be significant delays in getting a CMS response which could wreak havoc in trying to settle cases involving Medicare beneficiaries.

Understanding MSAs is important, not necessarily because you may have to create one as part of a settlement, but because of the policy underlying the existence of MSAs. If there is future care anticipated, the settlement with a Medicare eligible plaintiff must adequately take into consideration Medicare interests. That means, some mechanism must be created to have some money allocated or perhaps even set aside for future care. In the workers compensation arena, that is done by an MSA. In a liability case, it is not clear how best to accomplish the task of protecting Medicare’s interests.

The fact remains, the law is clear you must act to protect Medicare’s interest. What is not clear is how to go about protecting Medicare’s interest. Should you not adequately protect Medicare’s interest, its powers to seek reimbursement are broad and complex and can be applied to not only the Plaintiff and Plaintiff’s counsel but to Defendants, their counsel and their insurance companies.

Proving Medical Negligence

Article authored by Jon Corr and Sara Sayles

Generally, negligence is the failure to exercise the care that a reasonable person would exercise under similar circumstances. In the medical context, a health care provider is negligent if he or she did not comply with the standard of care, or did not use the “reasonable degree of knowledge and skill ordinarily possessed by other members of his profession in similar circumstances” in the provider’s treatment of a patient. To prevail in a case alleging medical negligence against a nurse, a plaintiff must provide expert testimony that the nurse’s actions fell below the standard of care and, therefore, that he or she was negligent. However, expert testimony is not required to prove negligence of a nurse where the nurse’s negligence would be obvious to laymen.

In a recently published case, Massey v. Mercy Medical Center Redding, the Third District California Court of Appeals held that expert testimony may not be required to prove a case of negligence against a nurse for failing to guard against the fall of a patient identified as a fall risk. ((2009) 180 Cal.App.4th 690.) In Massey, plaintiff Carl Massey, age 65, underwent bi-femoral bypass surgery. After the procedure, nurses caring for him noted that he was a substantial fall risk and implemented a fall protocol including use of walker and stand-by assistance. Three days after his surgery, plaintiff used his call light to summon a nurse to help him go to the bathroom. A nurse arrived, assisted him to a walker, and then told plaintiff he would be right back. After waiting for 15 minutes, plaintiff tried to use the walker without assistance, fell, and suffered a compression fracture to his back.

Plaintiff sued the nurse and his employer, Mercy Medical Center, for medical negligence. The trial court found that plaintiff’s expert was unqualified to testify. Following opening statement by plaintiff’s counsel, defendants moved for nonsuit on the grounds that without an expert, plaintiff could not prove the nurse’s alleged negligence. The motion was granted and the case was dismissed.

Plaintiff appealed on the grounds that the trial court erroneously required expert testimony to establish the nurse’s negligence. Defendants argued that an expert opinion was required to determine whether plaintiff had the ability to be out of bed, to independently use a walker, and whether he required constant assistance to use the walker.

To reach its decision, the Court of Appeal reviewed the facts: nurses caring for plaintiff noted the plaintiff to be a fall risk and implemented a fall prevention protocol where plaintiff was to use a walker and needed assistance to ambulate. Plaintiff fell when he attempted to use the walker without assistance. After reviewing the facts, the Court concluded the fall in this case was similar to the case of Stevenson v. Alta Bates, Inc.where a patient recovering from a paralyzing stroke to her left side was being assisted in walking by a nurse on each side and fell when the left sided nurse released the patient’s arm to prepare the chair for the patient to sit. ((1937) 20 Cal.App.2d 303.) On these facts, the Stevenson Court concluded that the application of the common knowledge exception was “well founded.” (Id.)

The Massey Court followed the ruling in Stevenson and concluded that, because the nurse was performing a routine, non-technical task of assisting a fall-risk patient to the bathroom, plaintiff could pursue his negligence action against defendants without expert opinion testimony on the standard of care and breach. The judgment of the trial court was reversed, and plaintiff was awarded his costs on appeal.

Under the ruling in Massey, a plaintiff patient can may pursue a medical negligence suit based on insufficient attendance by nursing staff without using expert testimony. This ruling, therefore, makes it easier for patient plaintiffs who have fallen to prove cases of medical negligence. Additionally, because expert testimony may not be required in fall cases, plaintiffs in such cases could potentially make the argument that theirs is a case of general rather than medical negligence, and therefore, that the provisions of the Medical Injury Compensation Reform Act (MICRA) do not apply. The California Supreme Court addressed the general versus medical negligence issue in Flowers v. Torrance Memorial Hospital Medical Center and held that, with respect to substantive law, medical and general negligence constituted one cause of action and only altered the standard of care applicable to the care provider’s actions. ((1994) 8 Cal.4th 992.) However, the Court declined to address the potential statutory ramifications in a case where the care provider’s actions are analyzed under a general, rather than a professional, standard of care. If you have questions regarding how the Massey decision may affect your organization, contact our office at any time. For clients looking for experienced litigation counsel, Porter Scott is the clear choice.

Howell Case Expanded to Include Future Damages

Article authored by David Melton, Lindsay Goulding and Colleen Howard

Recently, the California Court of Appeal for the Second Appellate District issued its opinion inCorenbaum v. Lampkin. In that case, Defendant Dwight Lampkin collided with a taxicab and caused injuries to Plaintiffs Corenbaum and Carter, who were passengers in the taxicab. Corenbaum and Carter sued Lampkin for compensatory and punitive damages. The jury awarded Corenbaum $1.8 million and Carter $1.4 million for past and future medical care, as well as noneconomic damages based on evidence of the full amounts billed for past medical care.  The trial court excluded evidence of the lesser amounts accepted by the medical providers as full payment.

On appeal, Lampkin argued that the trial court erred in admitting evidence of the full amounts billed for plaintiffs’ medical care when the amounts accepted by their medical providers as full payments was less than the amount billed. The appellate court agreed with Lampkin, and reversed the trial court’s ruling, explaining that the full amount billed was a fictitious number which bore no relationship to the amount actually paid to satisfy the bill.  Only the amount accepted as full payment for past medical expenses is recoverable, and therefore those values are also relevant and admissible.  The reverse is also true: since the full billed amount is not recoverable, that amount is not relevant and thus not admissible at trial.

The court expanded its reasoning to future medical expenses.  It explained that admitting evidence of the amounts paid for past medical expenses while allowing the full billed amounts to evaluate future medical expenses would only serve to confuse the jury and suggest the existence of collateral source payments, which is contrary to the collateral source rule.  Since there was no relationship to the past amounts billed and the value of future medical expenses, evidence of the amounts billed are also irrelevant for evaluations of future medical expenses, and similarly inadmissible.

The court also extinguished any possibility of using an expert to circumvent the inadmissibility of the full billed amounts of medical expenses to evaluate future medical expenses.  Some plaintiffs may have their experts use evidence of the amounts billed to reach their opinion about the reasonable cost of future medical expenses.  The court explained that an expert’s opinion must be based on matters which provide a reasonable basis for the opinion offered; opinions based on sheer conjecture or speculation are inadmissible.  Expert opinions formed by evaluating the full amounts billed for past medical expenses are formed with no reasonable basis to support the opinion, and thus are irrelevant and inadmissible.

As for noneconomic damages, the court noted that these awards are not easily calculated like economic damages.  Juries are tasked with the difficult position of placing monetary value on something which cannot be quantified.  At best, these awards are arbitrary allowances.  Without analyzing the rationale behind it, the court noted that lawyers have long used economic damages as a launching point for the determination of noneconomic damages.  There is no justification for allowing the jury to rely on otherwise inadmissible evidence, like the full billed amounts of medical expenses, to determine noneconomic damages.

Corenbaum will affect all cases where medical expenses are at issue.  Our attorneys would be happy to assess your litigation strategy in light of Corenbaum, and discuss how it may affect the total value of your case.

Recent Supreme Court Decisions Extend Liability for Discrimination Suits

Article authored by Michael Pott and David Burkett

Suits Against Employees of Educational Institutions

On January 21, 2009, the United States Supreme Court created an avenue for employees of educational institutions to be sued as individuals for sex based discrimination. Fitzgerald v. Barnstable School Committee, No. 07-1125. This decision has significant consequences for educational institutions and their employees.

Title IX of the Education Amendments of 1972 prohibits sex-based discrimination at educational institutions that receive federal funding. Under Title IX, only institutions, not individuals, may be sued. As a result, students often use 42 U.S.C. Section 1983 to sue employees of educational institutions as individuals. In the past, courts have dismissed Section 1983 lawsuits against individual employees on the grounds that Title IX provides the sole protection against sex discrimination in educational institutions. See Bruneau ex rel. Schofield v. South Kortright Central School Dist. , 163 F.3d 749 (2nd Cir. 1998); Waid v. Merrill Area Public Schools 91 F.3d 857 (7th Cir. 1996). The Supreme Court's decision in Fitzgerald rejects these lower court rulings by holding that Title IX does not preclude sex discrimination suits under Section 1983 against individual school employees.

Another difference between 42 U.S.C. Section 1983 and Title IX is that Section 1983 allows for punitive damages whereas Title IX does not. Since sex based discrimination claims are now recognized against individual employees under Section 1983, the individual employee may be held liable for punitive damages. As a result, educational institutions can expect Section1983 claims against individuals to be a standard component of sex discrimination lawsuits.

If a Section 1983 claim is asserted against an individual in conjunction with a Title IX claim against an entity, there are still some legal tools that can be used to defend individual employees in Section 1983 suits. For example, qualified immunity may be used to protect an employee from a suit when the allegation does not involve a clearly established right. This is an important tool that can be raised early, and many times, be used to resolve a Section 1983 case before incurring the costs of discovery or facing the risks of trial. Educational institutions are encouraged to seek legal counsel for advice on what legal tools can best address individual employee and punitive damage exposure that their employees may face as result of the Fitzgerald decision.

Retaliation Claims

The United States Supreme Court also recently decided a case dealing with retaliation lawsuits against employers. Crawford v. Metropolitan Government, No. 06-1595. Title VII of the Civil Rights Act of 1964 forbids an employer from retaliating against an employee who "opposes" race or gender discrimination in the workplace. Typically, retaliation claims are based on an adverse action suffered by the employee after the employee initiates an allegation of unlawful discrimination.

The Supreme Court held that employees are protected from employer retaliation when the employee did not initiate the discrimination allegations but instead relayed information that could be considered opposition to discrimination during an internal investigation. In Crawford, Metro conducted an investigation into allegations of sexual harassment by its employee relations director (Hughes). Crawford, a school district employee who was questioned during the investigation, was asked whether she had witnessed "inappropriate behavior" by Hughes. Crawford told the investigator about several instances of Hughes' inappropriate behavior. Crawford was subsequently fired on allegations of embezzlement. The Court held that Crawford was entitled to Title VII retaliation protection even though she was not the employee who initiated the sexual harassment allegations.

It should be noted that the Court's holding in Crawford is limited to situations where the employee testifies about unlawful conduct during an internal investigation.

For additional information on these and other employment law updates, employers are encouraged to seek legal counsel.

Privette Doctrine Strengthened – Duties Owed By Hirer Of Independent Contractor Further Restricted

Article authored by Chad S. Tapp and Matthew R. Day

California law has long held that when employees of independent contractors are injured at the workplace, the employee cannot sue the party that hired the independent contractor.  (Privette v. Superior Court (1993) 5 Cal. 4th 689.)  A recent California Supreme Court decision further extends the protections afforded to the hirer of independent contractors even when the hirer fails to comply with safety regulations set forth by Cal-OSHA.

In SeaBright Insurance Co. v U.S. Airways, Inc., U.S. Airways hired an independent contractor to repair and maintain the baggage conveyor system.  An employee of U.S. Airways’ independent contractor was injured during his inspection of the baggage conveyor system.  The employee received workers’ compensation benefits for the injuries he sustained.  The workers’ compensation insurance company and the injured employee then sued U.S. Airways, arguing that U.S. Airways owed a duty, under tort law, because the conveyor system lacked safety guards required by regulation.  The Supreme Court rejected the argument that “the tort law duty, if any, that a hirer owes under Cal-OSHA and its regulations to the employees of an independent contractor is non-delegable.”

The Supreme Court held that when U.S. Airways hired an independent contractor to maintain the conveyor, U.S. Airways presumptively delegated, to the independent contractor, any tort law duty of care which U.S. Airways may have had under Cal-OSHA to ensure workplace safety for the independent contractor’s employees.  More plainly stated, the Supreme Court held that an employer’s duties under Cal-OSHA and its regulations are delegable and are presumptively delegated to independent contractors.

While workplace safety should always be at the forefront for all parties, this recent Supreme Court decision strengthens the defenses offered to those who hire independent contractors when the independent contractor’s employee is injured at the workplace.  The decision also places a greater onus on independent contractors to ensure that the workplace is safe for its employees.  The implication for plaintiffs is that workers’ compensation will be the exclusive remedy for injuries sustained at the workplace, even when safety regulations have not been met by the hirer of the independent contractor.

For more information about how this doctrine may affect you, please contact our office.

California Mechanic’s Lien Laws – What You Don’t Know Will Hurt You

Article authored by Chad Tapp and Gwen Scott

As any well informed contractor, subcontractor or supplier already knows, the California Constitution gives you the right to a mechanic’s lien for the value of labor and materials provided for the improvement of real property. The California Constitution also authorizes the Legislature to provide for the speedy and efficient enforcement of these liens, which it has done by allowing foreclosure on a home with an unpaid lien.

However, the path for recovery through a mechanic’s lien is filled with pitfalls and traps for the unwary.  That is because California’s mechanic’s lien laws are hyper-technical and if all of the procedures are not carefully followed, you will lose your right to use a mechanic’s lien as a way of getting paid for your services.  Thus, it is particularly important to stay abreast of changes to the procedural requirements.   By understanding how to navigate lien rights, contractors, subcontractors and suppliers will stand a much better chance of recovering and not falling victim to procedural error.

Changes to Mechanic’s Lien Requirements

On January 1, 2011, two important changes to California’s mechanic’s lien laws will become effective.   First, as of January 1, 2011, California Civil Code sections 3084 and 3146 are amended to require service of a mechanic’s lien on the owner of the property at the time the mechanic’s lien is recorded.  If for some reason the owner cannot be served with the mechanic’s lien, then the original contractor or the lender can be served in the owner’s place.  This provides owners with notice that a mechanic’s lien has just been recorded on their property and it gives them an opportunity to quickly address the situation.

In addition, the form of the mechanic’s lien document itself is also amended to include a “Notice of Mechanic’s Lien,” which provides a brief explanation of the nature of the mechanic’s lien and what the property owner might do to address the situation.  Specifically, this Notice must contain language, as dictated by Civil Code section 3084, advising the owner that a lien may lead to the foreclosure sale of the affected property within 90 days and/or may affect the owner’s ability to borrow against, refinance, or sell the property.

Finally, as part of these changes, county recorders will not accept a mechanic’s lien for recording unless it is accompanied by a proof of service affidavit evidencing that the required notice has been served.  Service must be made by registered mail, certified mail, or first-class mail, evidenced by a certificate of mailing.

Failure to serve the mechanic’s lien, including the new Notice, as prescribed by the new law shall cause the lien to be unenforceable as a matter of law.  Thus, the new law establishes another legal hoop for contractors to jump through, and makes available another defense to owners and lenders challenging the validity of a lien.

Changes to Lis Pendens Requirements

Second, as of January 1, 2011, where a lawsuit is filed to foreclose on the mechanic’s lien, a “Notice of Pending Action” (lis pendens)  must be recorded at the local County Recorder’s Office within 20 days after the filing of the mechanic’s lien foreclosure action. The lis pendens provides notice to potential property purchasers, lenders and others that a lawsuit has been recorded in relation to the property and that the property may be sold in foreclosure to pay the underlying debt.

In addition, Civil Code section 3146, as amended, goes on to state that purchasers and lenders for the property will be deemed to have notice of the lawsuit only from the time of recording.  Consequently, it appears that a contractor, subcontractor or supplier who delays filing the lis pendens runs the risk of losing the security for his payment claim if the property is sold or encumbered after the owner is served with notice of the action to enforce the lien, but before the required lis pendens has been recorded.

Under the current law, the filing of the lis pendens is permissible but not mandatory.  Therefore, the change to the lis pendens requirements are designed to provide clear notice to all parties that there is a cloud on title as a result of the action to foreclose on a mechanic’s lien.

Practice Tip

The forms currently available for filing a California mechanic’s lien will be out of date as of January 1, 2011.  Therefore, contractors and suppliers should pay close attention to ensure the forms they use comply with new laws.  Ignoring these new changes will have a serious impact on your ability to get paid.  It is better to start thinking about them now, rather than kicking yourself for not remembering them after it is too late.  Please contact us if you have any questions or need help putting together a 2011-compliant Mechanic’s Lien form or recovering funds for work you performed.

California Supreme Court Alert

Article authored by Chad Tapp and Gwenn Scott

On July 21, 2008, the California Supreme Court decided an important case regarding a subcontractor's duty to defend a general contractor in a construction defect lawsuit. Although this case was decided in the context of the construction industry, the implications of the decision are much broader than the construction field, as the holding may apply to the contractual duty to defend in all non-insurance contracts.

In this case, Weather Shield subcontracted with general contractor JMP to manufacture and supply windows for 122 homes in a residential subdivision. The subcontract agreement between Weather Shield and JMP contained an indemnity clause with the following pertinent language: "[Weather Shield] shall indemnify and save [JMP] harmless against all claims for damages...loss....and/or theft growing out of the execution of [Weather Shield's] work and at [Weather Shield's] own expense shall defend any suit or action brought against [JMP] founded upon the claim of such damage...loss...or theft." Following trial, the jury returned a general verdict in favor of Weather Shield, finding that Weather Shield was not negligent in the manufacture of the windows. The jury also returned a general verdict against JMP in the amount of $1 million. The court subsequently decided JMP's cross-complaint against Weather Shield seeking indemnity and cost of defense.

On the cross-complaint, the trial court ruled that the duty to defend was separate and distinct from the duty to indemnify. While the duty to indemnify only arises if the subcontractor is found negligent, the duty to defend arises as soon as a claim is filed, in so far as those claims concern the negligent work.

Can Witness Statements be Withheld from Opposing Counsel Under Work Product Protection?

Article authored by Chad S. Tapp and Matthew R. Day

You are the owner of a popular gourmet grocery store, and take pride in maintaining a clean and safe establishment. One day, you hear a thump and see a customer lying in a puddle of an unknown liquid.  The customer immediately starts yelling about suing you for having water on the floor.  You know the aisles are checked regularly, and that your employees are instructed to immediately clean up spills. You have the assistant manager take statements from other customers and store employees. One year later, the customer who claims he slipped files a lawsuit against you, and his attorney attempts to obtain the statements.  Can the attorney do this? The answer is, it depends.

There is a strong body of California law that protects attorneys’ work product so they can prepare their cases thoroughly, and investigate the favorable and unfavorable aspects of the issues pertaining to their clients.  Lower courts have given broad protection under the theory of attorney work product.

Under California law, an attorney’s work product is protected from disclosure to the opposing party. Written materials that reflect “an attorney’s impressions, conclusions, opinion, or legal research or theories” are given absolute protection, meaning that a court cannot force the attorney to hand his or her work over to the other side.  Other work product is given qualified protection.  Qualified work product is not discoverable unless the court determines that the denial of discovery will unfairly prejudice the opposing party or will result in an injustice.  Witness statements can be an integral part of the defense strategy that may be entitled to absolute protection, qualified protection or afforded no protection.

In a recently published case entitled Coito v. The Superior Court of Stanislaus County, the California Supreme Court looked to reign in the Superior Court’s application of the attorney work product doctrine.  The Court concluded that witness statements obtained as a result of an interview conducted by an attorney’s agent at the attorney’s request, are entitled to qualified work product protection.  Additionally, witness statements may be entitled to absolute protection if disclosure of the statement would reveal the attorney’s tactics, impressions, or evaluation of the case.

The Supreme Court further held that the identity of witnesses who provided statements is not automatically entitled to either absolute or qualified protection.  In order to invoke absolute protection, the court must be persuaded that disclosure would reveal the  attorney’s tactics, impressions, or evaluation of the case.  To persuade the court that there is at least a qualified privilege, the party must show that disclosure would result in the opposing attorney receiving an undue advantage because of the other lawyer’s work or efforts.

What Does This Mean for Business Owners, Their Insurance Carriers, or Other Entities?
Witness statements taken by an employee or investigator at the request of a business, public entity or an insurance carrier prior to the filing of litigation are generally not considered to be attorney work product.  An investigator’s observations are not protected under any privilege if the investigation is not performed at the request or direction of an attorney.  If statements are later provided to an attorney, they do not automatically become attorney work product. The work must originate with the attorney or the attorney’s agents.  The work product rule is designed to satisfy an attorney’s requirement for privacy.  In the case of the grocery store, the assistant manager may have been told by witnesses that the customer who allegedly fell seemed intoxicated, had been stumbling and had been carrying a beverage cup from which liquid spilled prior to his fall.  In our example, witness statements taken by the assistant manager will not be protected because there was no forethought and the simple question “What happened?” was asked.

Even if the investigation is conducted and statements are collected at the direction of an attorney, those statements will not be guaranteed absolute protection.  In the case of the grocery store, if the statements were taken at the direction of counsel, with specific and targeted questions, the statements may be protected.

How Can Businesses and Other Entities Protect Their Investigations?
A business should take time to plan an investigation strategy with counsel.  Interviews will be absolutely protected when the witness’ statements are “inextricably intertwined” with explicit comments or notes by an attorney or agent for the attorney stating impressions of the witness, the witness’ statements, or other issues in the case.  However, an interview that reflects no particular foresight, strategy, selectivity, or planning and does not reveal anything significant about the attorney’s/agent’s impressions, conclusions, or opinions of the case, will not be protected.

Specific Tips for Protecting Your Investigation
It is important to be selective in who is interviewed, and the timing of the interview is crucial.  Counsel should be consulted immediately where there is a potential liability exposure.  Where potential exposure is less of a concern, an investigation strategy pre-developed with counsel, may be utilized.

In cases involving multiple witnesses, the decision to obtain statements from a select number of witnesses may reflect the evaluation or conclusion regarding which witnesses are important.  The very fact that the attorney or attorney’s agent has decided to interview a particular witness may sometimes reveal important tactical or evaluative information, particularly in cases where there are a large number of witnesses.

It is also important to be selective in which questions are asked.  Simply asking a witness “What happened?” does not demonstrate any particular impression or conclusion.  A series of questions tailored to the particular accident and witness is more likely to be protected as  specific questions  provide insight into the attorney’s  theory of the case or the evaluation of what issues are the most important.

Documentation of efforts is key.  Sometimes it takes significant effort to track down a witness or to determine which witness to interview (i.e., locating documents to determine the identity of a witness and/or whether that witness will have relevant information).  In such cases, the witness list is the result of the attorney or agent’s industry and effort and may be protected.

Ultimately, whether or not an investigation will be protected will be determined on a case by case basis.  When investigating a claim, proper planning and strategy from the outset, including the early involvement of counsel, is the best means to ensure witness statements and witness lists are protected.

Reminder: If You Suspect Your Trade Secret Has Been Misappropriated, Take Action Now!

Article authored by Matthew Day

As a reminder to employers and owners of trade secret information, you should take prompt action if you suspect someone has stolen your trade secret and sold it to a third party. Last year, the California Court of Appeal addressed the issue of when the statute of limitations begins to run for the misappropriation of trade secrets in Cypress Semiconductor Corp. v. Superior Court, 163 Cal.App.4th 575 (2008). Don’t forget to take appropriate actions to protect your business’s most valuable information.

The holding in Cypress represents a significant departure from the previous rule, where the statute of limitations did not begin to run until the third party knew or had reason to know that the misappropriated information constituted a trade secret. Now, under theCypress framework, the statute of limitations begins to run when the plaintiff has any reason to suspect that a third party knows or reasonably should know that the information is a trade secret.

In Cypress, the third party who used information which constituted misappropriated trade secrets, argued that the single claim rule applied – namely, that the California Uniform Trade Secrets Act (CUTSA) statute of limitations period begins to run on all third party actions when the plaintiff learns of the original misappropriation. However, the court rejected this argument finding that such reasoning would allow “malevolent third parties to merely lie low and wait out the clock.” As a result, through no fault of their own, plaintiffs “would forever lose their trade secrets with recourse only against the original misappropriator.”

Instead, after considering Sections 3426.1 and 3426.6 of the CUTSA, the court found that a more reasonable interpretation of the single claim clause is that each new misuse or wrongful disclosure is a single claim of continuing misappropriation rather than a separate claim. Thus, a plaintiff may bring a claim, with its own statute of limitations period, against each subsequent third party who acquires, uses or discloses the information obtained in the original misappropriation. Any continuing misappropriation by that third party constitutes a single claim.

The court further held that the third party’s actual state of mind does not matter in determining the running of the statute. The court noted that for the purpose of statute of limitations “the proper focus is not upon the defendant’s actual state of mind but upon the plaintiff’s suspicions.” In addition, a plaintiff’s suspicions must be reasonable such that there is a sufficient factual basis to suspect that he or she has been injured in some way. This shift from the previous standard requires trade secret owners to take affirmative steps to protect their trade secrets.

How to Protect Your Trade Secret?

The implications of the Court’s holding in Cypress are clear: Failure of the trade secret owner to take affirmative action against third parties who may misappropriate the trade secret could result in forfeiture of a claim for misappropriation, and more importantly, forfeiture of protection of the trade secret itself.

A trade secret owner must be proactive and promptly investigate instances of possible misappropriation in order to ensure the trade secret remains protected. Specifically, the trade secret owner should determine which third parties may be in possession of its trade secret, and let these third parties know that the information being used is a protected trade secret. This allows a trade secret owner to avoid later factual legal battles as to when it had knowledge, or reasonably should have had knowledge, that the trade secret was misappropriated.

Finally, business employers should carefully consider the conditions under which they separate from former top-level employees. Although standard non-solicitation agreements can offer some protection to employers, without adequate trade secret protection, it is possible that a company’s most valuable asset could be used by former employees in a competing business upon departure.

For more information on trade secrets, businesses are always encouraged to seek legal counsel for specific questions.

Making the Legal World a Nicer Place

Article authored by Nancy Sheehan

“Membership in the bar is a privilege burdened with conditions.  A fair private and professional character is one of them.”  These words were written by Justice Cardozo in 1917 and have been repeated many times since then in discussions about the need for civility and professionalism in the practice of law.  In an era when everyone is more on edge, more overloaded, and more stressed, the importance of good professional manners is at an all-time high.

The perception of lawyers as rude, argumentative, confrontational people is fueled by portrayals in the media.  “Boston Legal’s” Denny Crane may be very entertaining, but his behavior in depositions and court would hardly be condoned by any member of the bench.  Similarly, the smarmy tactics and denigration of opposing counsel engaged in by Jon Voight’s character in “The Rainmaker” did nothing to improve the public perception of attorneys. Rather, that behavior no doubt confirmed in the minds of many that we are on the whole a loathsome group.  Thanks to the Internet, examples of awful behavior by lawyers (and their clients) are easily accessible to the public.  They include the deposition of Aaron Wider in the GMAC Bank v. HTFC Corporation case where Mr. Wider used the “f-bomb” 73 times towards the deposing counsel while his own attorney sat back and snickered, and the “Texas Style Deposition” on You-Tube during which the attorneys told one another to “shut your mouth” and referred to each other as “fat boy” and “Mr. Hairpiece”.

There are occasions where this type of conduct is directed at women attorneys because of their gender.  In a 2007 New York case, a male attorney asked a female attorney why she was not wearing a wedding ring, and told her “this is not a white collar interview that you’re sitting here interviewing something with your cute little thing going on”, and referred to her as “hon”, which he later explained was a reference to Attila the Hun (Laddcap Value Partners LLC v. Lowenstein Sandler PC).  In a Florida case, the offending attorney called a female attorney a “bush leaguer” and told her that depositions are not conducted under “girl’s rules”.

Courts do not countenance such conduct and are quick to issue sanctions and orders designed to prevent future occurrences.  In the GMAC Bank case the court not only sanctioned Mr. Wider, but also his attorney for “sitting by idly as a spectator to Wider’s abusive, obstructive and evasive behavior” and speaking up only to incorrectly instruct his client not to answer a question or to dare opposing counsel to file a motion.  The attorney in the Florida case was placed on probation for two years and publically reprimanded by the state Supreme Court. In an inventive approach to lawyer bickering, a federal court judge ordered the two attorneys to meet at a neutral place and engage in the game of “rock, paper, scissors”; the victor was permitted to choose the location of the deposition that caused the dispute.  One hopes that the recipients of this ruling were chagrined enough to avoid bringing such issues back to court for resolution.

I am honored to be serving as the President of the Sacramento Valley Chapter of the American Board of Trial Advocates this year. ABOTA is an organization dedicated to preservation of the right to trial by jury and to promoting civility, integrity and professionalism in the practice of law.  Based on observations made during my 26 years of practice, I believe the vast majority of attorneys are polite, professional, hard-working individuals who abide by the rules of professional conduct and represent their clients zealously without crossing the line into incivility. Nonetheless, there is room for further improvement.

All ABOTA members agree to abide by its Code of Professionalism and Principles of Civility. Our members are litigators. However, the tenets set forth in the Code and the Principles apply equally to all aspects of the practice of law.  Some are based on the Golden Rule (do unto others as they would do unto you). Treat all other counsel, parties and witnesses in a courteous manner.  When calendar conflicts occur, accommodate counsel by rescheduling dates.  Agree to reasonable requests for extensions of time when doing so will not adversely affect your client’s interests. Some are based on common sense approaches to the practice of law that make life easier for all involved and keep client costs down. Stipulate to undisputed matters where it is obvious they can be proved and there is no good faith basis for not doing so. Make a good faith effort to resolve discovery and pleading issues without court intervention.  Some address so-called “Rambo” tactics.  Never use discovery or the timing of discovery as a means to harass opposing counsel.  Don’t be obstructive during a deposition.  Document production requests and interrogatories should be drafted to obtain information necessary to the prosecution or defense of the case, not to place an undue burden or expense on the responding party.  When responding to discovery requests, do not interpret them in an artificially restrictive manner so as to avoid disclosing discoverable items.  And finally, some are rules for survival. Be punctual and prepared for all court appearances.  If delay is unavoidable, call. Be respectful and courteous to judges, courtroom staff, court reporters and bailiffs.

Good habits are learned early in one’s life and career. We in ABOTA urge all seasoned attorneys to teach the values embodied in the Code of Professionalism and the Principles of Civility (as well as other sources of guidance such as the Sacramento County Bar Association Standards of Professional Conduct) to newer attorneys and to lead by example. As part of our mission to remove rudeness and “Rambo-ism” from the practice of law, ABOTA presents a program to law students called “Civility Matters” which emphasizes the point that you can be effective without being obnoxious.  Some students have expressed amazement at the fact that opposing counsel can vigorously advocate for their clients yet remain cordial with each other.  Our goal is to launch them into their new careers with the understanding that politeness, civility and a good sense of humor are attributes, not detriments.
We all have bad days and have said things in the heat of the moment that we later regret.  That is human nature and unlikely to change at any time in the near future.  However, if we  agree to quash the urge to make a nasty comment and not to respond in kind when boorish behavior  is directed at us, our professional world will be a nicer place.  Thank you!

(Nancy Sheehan is a partner at Porter Scott, where she practices employment litigation. She is a graduate of McGeorge School of Law and has been a member of ABOTA since 1999.  The Code of Professionalism and Principles of Civility referenced in this article are available for download at www.abota.org. Click on the publications tab).

Derivative Lawsuits: What Directors, Officers and Shareholders Need to Know

Article authored by Carl J. Calnero and Martin N. Jensen

These are challenging economic times for many businesses.  A climate such as this one can result in actions against individuals who manage and/or direct corporations, limited liability companies or other types of business associations. Whether we are talking about a moderately sized real estate investment venture, a large multi-national corporation, or a family venture, many such associations have been involved in litigation in the past few years.

Lawsuits take on particular significance when a corporation is involved. Shareholder derivative lawsuits provide legal insurance for minority interests to safeguard against abuse and/or incompetence – but such lawsuits are not without their quirks.  Whether you are considering filing a shareholder derivative lawsuit or you are defending against one, the following are a number of worthy considerations.

Is the Claim Truly Derivative?
There are two broad types of lawsuits that shareholders can file when there has been an injury: a direct lawsuit or a derivative lawsuit.  Whether a claim is truly derivative or is instead an individual claim may impact a variety of litigation components.

A direct or individual lawsuit is one that has been brought to remedy harm done to an individual shareholder.  Any damages recovered are given to the individual shareholder who filed the lawsuit, not to the company or the shareholders in general.  By contrast, a derivative lawsuit is brought on behalf of the corporation for injuries to the entire entity, usually by shareholders or by directors acting at the behest of the general shareholders.  This type of lawsuit usually arises out of a breach of a fiduciary duty.  In effect, the party filing the suit claims to be acting on behalf of the corporation because the directors and management failed to exercise their authority for the benefit of the company and all of its shareholders.  We see this type of suit most often in situations where there is fraud, mismanagement, self-dealing and/or dishonesty which are engaged in or ignored by officers or directors.

A key case in California is Nelson v. Anderson (1999) 72 Cal.App.4th 111.  In that case, the plaintiff was a minority shareholder who sued for individual recovery, as opposed to corporate recovery.  The court was asked to determine whether Nelson had standing to assert an individual claim.  The test developed by the court is to look to the type of harm allegedly suffered.  In other words, it is the nature of the “wrong,” not the resulting injury that determines the nature of the lawsuit. The claimant must establish the right to recover independent of his status as a shareholder; otherwise the claim is usually deemed to be a corporate or a derivative action.

Is a Bond Needed?
Bonds are not required to be posted in individual actions.  However, when a court has deemed a lawsuit to be truly derivative, the corporation may ask the court to order the plaintiff to post a bond.  The purpose of posting a bond is to ensure that corporate resources are not unnecessarily wasted by having to defend a lawsuit, including hiring attorneys to represent its executives. The requirement for posting a bond protects against “litigation terrorism,” where corporations are threatened with having to defend meritless cases rather than capitulate to the demands of minority shareholders with contrary views regarding management.  In many cases, the requirement of posting a bond may deter the filing of suit at the outset.

Can One Attorney Represent Both the Corporation and its Executives?
Attorneys are required to comply with ethical obligations relating to representation of clients.  While the California Rules of Professional Conduct permit an attorney representing a corporation to “also represent any of the corporation’s directors, officers, employees, etc.,” there are certain limitations.  An attorney cannot jointly represent clients whose interests may, or do, conflict. When an executive is accused of fraud or theft, it would be virtually impossible for one attorney to jointly represent that person and the corporation.  There are strict requirements pertaining to joint representation, including having the attorney obtain informed written consent of the subject parties.

What Other Requirements Apply to Derivative Lawsuits?
The law imposes specific requirements for derivative suits that are not present in other types of litigation.   For example, before minority shareholders can file suit, they typically must make a demand on the board of directors to take on their claim in litigation. The law also requires that the complaint in a derivative suit be verified, which means it must be signed under oath by the suing party or its representative.  This may deter frivolous claims.

Derivative lawsuits pose different and unique requirements than other types of business litigation.  Porter Scott attorneys are well versed in corporate and partnership litigation. The firm can provide exceptional counsel in prosecuting or defending these types of claims.

New Law Pertaining to an Employer's Duty to Accommodate Religious Practices

Article authored by David P.E. Burkett

California’s Fair Employment and Housing Act protects the rights of applicants and employees to be free from discrimination or harassment on the basis of religion. The FEHA also requires employers to reasonably accommodate the religious beliefs and practices of an individual unless the accommodation would be an undue hardship on the employer.

Typical examples of requests for accommodation include allowing employees to observe religious holidays or adjust their schedules to attend prayer services during work hours.  But what about allowing employees to wear religious attire, such as turbans, in the work place? California employers have seen an increase in religious discrimination lawsuits, particularly among followers of the Sikh and Islam faiths, who claim that they are being discriminated against for observing religious dress and grooming practices required by their religion.  One such case involved a Sikh man who was denied a job at Folsom State Prison because of his beard and turban. That case was eventually settled by giving the applicant a managerial position and making an exception to policy.  However, the prison retained its policy that all employees had to be clean shaven.  To address such cases, Governor Brown signed the Workplace Religious Freedom Act, which went into effect on January 1, 2013.

New Law Governing Religious Dress and Grooming

The Act increases protection for employees who wear religiously mandated clothing and hairstyles in the workplace, such as a turban or hijab.  It broadens the definition of “religious creed,” “religion,” “religious observance,” “religious belief” and “creed” to include “all aspects of religious belief, observance and practice, including religious dress and grooming practices.” Religious dress and grooming practices are “construed broadly to include the wearing or carrying of religious clothing, head or face coverings, jewelry, artifacts, and any other item that is part of the observance by an individual of his or her religious creed” and “all forms of head, facial and body hair that are part of the observance by an individual of his or her religious creed.”

The Act also expands the definition of “undue hardship.” Current law allows employers to claim undue hardship where accommodation of an employee’s religious beliefs and practices would minimally interrupt the course of business.  A “minimal interruption” could be construed as other employees or customers taking offense to a particular religious dress or grooming practice. That view of minimal interruption might have allowed an employer to separate a religiously-attired employee from others, by perhaps putting him or her in the back office away from the public.  The Workplace Religious Freedom Act makes it more difficult for employers to claim “undue hardship.” Specifically, the Act states that “an accommodation of an individual’s religious dress practice or religious grooming practice is not reasonable if the accommodation requires segregation of the individual from other employees or the public.”

Accommodating an Employee’s Religious Practice

Employers should recognize that any religious belief or religious practice sincerely held by one of their employees is protected.  Even non-traditional religious beliefs and practices are protected.  Dress codes and personal appearance standards may need to be modified to accommodate the religious dress or grooming practices of an employee.  For example, a personal appearance standard requiring employees to be clean shaven likely would need to be modified to allow an employee to wear a beard as part of a religious practice.  Dress codes banning hats or other headwear also likely need modification to ensure that employees are allowed to follow their religious dress practice.  Employers will need to be open to modifying their policies to accommodate religious dress and practice as required by the new Workplace Religious Freedom Act.

The new law can be found in Government Code section 12926 (p).

Employers May Be Able To Prevent Class-Action Lawsuits By Including Waiver Of Those Claims In Arbitration Provisions

Article authored by Carl L. Fessenden and Clayton T. Cook

Until recently, California courts regularly held that arbitration provisions which require a person to waive their rights to pursue a class-action lawsuit were unconscionable. However, in late April 2011, the U.S. Supreme Court changed that in its ruling in AT&T v. Concepcion, 131 S.Ct. 1740 (2011).  In AT&T, the Court held 5-4 that the Federal Arbitration Act (FAA) preempted California state law, thereby allowing California businesses to include contract provisions requiring consumers to submit their claims toindividual arbitration. The AT&T decision allows businesses to demand that consumers waive their right to pursue class-action lawsuits.

Prior to AT&T, the validity of arbitration agreements in California depended on Discover Bank v. Superior Court, 36 Cal.4th 148 (2005). In Discover Bank, the California Supreme Court held that class-action waivers in adhesion contracts were unconscionable because of the business/employer’s superior bargaining power. However, Justice Antonin Scalia, in the majority opinion for AT&T, held that any state laws which allow class-action proceedings, even where the contract explicitly says differently, “[interfere] with fundamental attributes of arbitration and this creates a scheme inconsistent with the FAA.”

Although the AT&T decision did not specifically apply to the employer/employee context, its holding should apply to that relationship. Many employers already have arbitration provisions in their employment agreements. For those employers, they should consider including class-action waivers in those provisions. For those employers without arbitration agreements, they may want to consider requiring employees to agree to arbitration in order to prevent class-action claims. Doing so may help reduce the financial exposure presented by employment lawsuits, especially those involving wage and hour and employment discrimination class-actions.

The ruling in AT&T is yet to be interpreted by California courts, and it is expected that the AT&T ruling may meet opposition from the legislature and the Equal Employment Opportunity Commission. However, for the time being, AT&T provides refuge for employers from the ever-increasing wage and hour and discrimination class-actions in employment law.

The New Year Brings Significant Changes to the California Department of Fair Employment and Housing

Article authored by Michael W. Pott and Kristina M. Hall

In an effort to reduce a multi-billion dollar budget deficit, Governor Brown is attempting to improve government efficiency by eliminating duplication within the state government. As part of this process, Governor Brown signed SB 1038, which eliminates the California Fair Employment and Housing Commission (“FEHC”) as of January 1, 2013. In addition, the bill creates a new Fair Employment and Housing Council, comprised of seven council members who are appointed by the governor and confirmed by the Senate. The council is funded by the existing DFEH budget and is responsible for the regulatory function of the DFEH, including rule making and non-adjudicatory public hearings.

What are the Changes?
The California Fair Employment and Housing Act (“FEHA”) prohibits, among other things, discrimination and harassment based on protected characteristics in the workplace. It also prohibits employers from retaliating against employees for making complaints of discrimination or harassment or participating in investigations into complaints of discrimination or harassment in the workplace. Before a current or former employee can file a lawsuit asserting the FEHA has been violated, the current or former employee must first file a claim with the DFEH within one year of the purported discriminatory conduct. In the past, a complaining current or former employee could request an immediate “right to sue” letter from the DFEH and pursue his/her claims in court or the employee could request the DFEH investigate the complaint. If the employee requested an investigation by the DFEH and the DFEH uncovered a violation of the law, the DFEH then decided whether to file an accusation with the FEHC or issue the complainant a “right to sue” letter.  If the FEHC issued an accusation, the employer had 90 days to respond to the accusation, during which time voluntary mediation services were available to try to settle the matter. If the matter could not be settled, then the case proceeded to a hearing before an FEHC administrative law judge. The employer also could remove the case to the superior court if an award of emotional distress damages or administrative fines was requested by the DFEH.

The elimination of the FEHC brings several important changes for California employers. Following the consolidation of the FEHC’s powers under the DFEH, the DFEH now will be able to file lawsuits directly in the superior court instead of presenting the claims to the FEHC for adjudication. However, before the DFEH files a lawsuit against an employer, the DFEH will require all parties to complete mandatory mediation in the DFEH Internal Dispute Resolution Division. (This is a significant change from the prior system, in which mediation was voluntary.) The mediation is free to all parties. The DFEH will continue to offer voluntary mediation during the pre-investigation phase.

Other changes occasioned by the passage of SB 1038 pertain to damages and attorney’s fees. Particularly significant to employers, SB 1038 now allows the DFEH to recover attorney’s fees (at the Attorney General’s rate of $170.00/hour) and expert witness fees if it is successful in pursuing claims against an employer. In addition, the DFEH can also seek punitive damages in any lawsuit it files. Proceeds of any recovery of fees and costs by DFEH will be deposited into a special fund that will be used to fund the DFEH itself. Perhaps most important, these statutory changes also result in the elimination of administrative fines and of the $150,000 cap on a complainant’s emotional distress damages that existed in the former administrative process. Since the DFEH can now take a case immediately to superior court, a jury can award any amount it believes is appropriate to compensate the complainant for alleged discrimination, including unlimited damages for emotional distress.

What is the Effect on California Employers?
While the transfer of the FEHC’s rulemaking duties to the DFEH most likely will not cause any significant change for California employers, the change may not be so benign with regard to ability of the DFEH to directly file lawsuits in civil court. The statutory change effectively permits complaining employees to pursue claims through essentially free representation by the DFEH. In theory, this could result in more employees attempting to obtain representation through the DFEH rather than through private attorneys because the employees would not have to share settlement proceeds with their attorneys. We expect these changes will likely have a significant impact on the number of cases the DFEH files in Court. It will be interesting to see if the DFEH decides to be extremely selective as to which cases it will pursue in court or files many cases.

As the DFEH can no longer pursue cases through the accusation and hearing process that was previously available, which resulted in hearings before the FEHC, employers will no longer be able to benefit from that process which provided for limited discovery, a cap on emotional distress damage awards and did not allow for the DFEH to recover reasonable attorneys’ fees against the employer.

One possible benefit to employers from SB 1038 is the requirement that all cases be mediated before the DFEH files a civil lawsuit. This may help employers resolve cases inexpensively at the outset before they spend thousands of dollars in defense costs. DFEH statistics indicate its Dispute Resolution Division has a success rate of over 80% in settling cases. In the DFEH’s 2010 Annual Report, it noted that the average case it resolved in the pre-accusation stage settled for just over $7,000, while cases that resolved post-accusation settled for just over $40,000. Thus, employers will have a significant opportunity to limit exposure to damages and defense costs through the mandatory mediation process.

Employers should take note of these changes to the FEHA and prepare for the opportunity to resolve difficult cases pre-litigation in matters that the DFEH decides to pursue in court. Employers may also be able to use the mediation process to resolve non-meritorious cases for little or nothing and thereby reduce their overall exposure in litigation. To this end, our attorneys are available to assist employers during this pre-litigation phase and, if the case does not resolve, through trial.

Technology in the Courtroom – Is it a Recoverable Cost at Trial?

Article authored by David A. Melton and Lindsay A. Goulding

The use of technology is so prevalent today that it is difficult to imagine an event that is “technology-free”—including a trial. Attorneys use technology to showcase timelines, impeaching testimony from depositions, scene photographs, and animations. Technology, however, is not free. It costs money to prepare the presentations and project them in the courtroom.

Code of Civil Procedure section 1032 allows a prevailing party to recover costs as a matter of right. The Second District Court of Appeal recently indicated that expenses associated with trial technology may be included in recoverable costs.

In Bender v. County of Los Angeles, the plaintiff sued the County and several deputies for unlawful arrest and use of excessive force. The jury found in his favor and awarded him compensatory and punitive damages. The Court awarded substantial costs and attorney’s fees as allowed by statute. The cost award included the expenses incurred in using video equipment, creating a PowerPoint presentation, and having a video technician present during trial. The plaintiff’s attorney used technology to show videos of his client’s post-incident interview and key portions of deposition testimony from witnesses. The Court of Appeal held that the trial court did not abuse its discretion in allowing the plaintiff to recover these costs.

Central to the Court’s reasoning was that it viewed the case as one of witness credibility. Under such circumstances, it would be “inconceivable for plaintiff’s counsel to forego the use of technology” to show the images and convey this information to the jury—particularly since the use of technology in the courtroom is now commonplace (including the use of a technician to monitor equipment and fix glitches) and less expensive than it used to be.

In reaching its conclusion, the Court rejected the County’s reliance on the earlier case ofScience Applications International Corp. v. Superior Court. In that case the requested technology expenses totaled hundreds of thousands of dollars. The Court of Appeal expressed concern that allowing recovery of such a large amount of technology-related costs would place a chill on litigation. In Bender, the technology costs claimed were much more reasonable—about $24,000. Further, the plaintiff’s counsel in that case convinced the trial court that the use of technology enhanced his advocacy and “was reasonably necessary to the conduct of the trial.”

At Porter Scott, we embrace new technology and use it to our clients’ advantage. When our clients prevail at trial, they will be able to recoup the expenses related to trial technology as part of their costs recovery.

Vicarious Liability

Article authored by Jonathan A. Corr and Kimberly L. Kakavas

Consider this hypothetical: a business owner is sued and named as a defendant in a lawsuit. The alleged wrongful conduct was not committed by the business owner, but rather by another defendant in the case.  As is typical in cases involving multiple defendants, the plaintiff makes a generic allegation that all defendants were acting as the agents, employees or partners of each other. Under this situation, could the business owner be liable for the actions of one of the co-defendants?

It depends. The extent of a business owner’s potential liability for the actions of another is determined by a number of factors.  One of the more critical factors is the nature of the legal relationship between the two parties.  Is the co-defendant an employee of the business?  An agent?  An independent contractor?  The following are some general rules and issues to consider in evaluating potential liability concerns relating to your business.

When the Co-Defendant is an Employee
If the co-defendant is an employee of a business, the general rule is that the business will be held vicariously liable for the torts of the employee if the employee was acting within the course and scope of his or her employment.  How is this determined?  Courts will typically analyze whether the employee’s tort was incidental to his or her job duties and whether it would be foreseeable for a business to bear that type of liability.

For example, a delivery truck driver who is involved in an accident while making a delivery would typically be within the course and scope of employment.  One of the driver’s main duties is to drive and deliver goods, so having a vehicular accident while performing those duties would certainly be foreseeable.  In contrast, if a grocery store checker leaves the store on her break and drives recklessly, causing an accident, a court would not likely find she was in the course and scope of her employment.  Her primary job duties involve ringing up purchased goods and performing in-store tasks such as stocking the shelves, not driving for her employer.  Thus, it would not be foreseeable to the employer that a checker would cause injury to another via a vehicular accident.

When the Co-Defendant is an Agent
What if the co-defendant is not an employee, but rather someone authorized to act on behalf of the business owner?  Even though an agent is not an official employee, if the business has a right to control the conduct of the agent in its relations with third parties, an agency relationship might be inferred by a court that could lead to a finding of liability. One common example of an agency relationship would involve a creditor and collection agency. The creditor business contracts with the collection agency to negotiate and settle debts on its behalf. The collection agency is permitted to bind the creditor business in its negotiations with debtors, even though the employees of the collection agency are not employees of the creditor business. If a debtor sues the collection agency at any point, the creditor business may also be liable for the collection agency’s torts.

When the Co-Defendant is an Independent Contractor
Generally, a business owner will not be liable for an independent contractor’s torts.  The difference between an employee or agent or independent contractor can be confusing, but it is crucial for purposes of potential liability.  The key factor in determining whether a person is an employee or an independent contractor is the right of the employer to control the manner and means of accomplishing a desired result.  Professionals such as consultants, accountants or physicians will often be considered independent contractors.  For example, physicians are typically considered independent contractors, not employees of hospitals because, under California law, hospitals cannot control the practice of medicine.  Thus, physicians are typically employed by a medical group which is separate from the hospital, and the hospital in turn contracts with the medical group to provide physician coverage for the hospital.

Even if the co-defendant is an independent contractor, there are still some circumstances where the non-offending defendant can be held liable.  The courts refer to this as ostensible agency.  Under this doctrine, the court looks at the perspective of the injured party in regard to the relationship between the contractor and the business.  If the business, either intentionally or by lack of ordinary care, causes a third person to reasonably believe that the independent contractor is actually an employee or agent, there may be a basis for vicarious liability.  The hospital/physician example is useful again here.  California courts have held that a hospital may in fact be held liable for a physician’s negligence in certain circumstances.  In those cases, the court considered whether the hospital took affirmative steps to indicate the legal nature of the employment relationship with the physician and whether signage was placed indicating that the physician was an independent contractor with the hospital.

Steps to Avoid Responsibility for Someone Else’s Actions
Be clear about who is – and is not – an employee or authorized agent.  Many hospitals use signs in waiting rooms to clearly notify patients the physicians are not employees.  If you have a business that relies on independent contractors to provide services, make that business relationship clear to your customers.  Those who are not agents or employees of the business should be discouraged engaging in conduct that suggests otherwise.  Likewise, the business should take its own steps to notify third parties of the lack of a relationship between the entities.  For example, if you use a contract, put specific language in it to identify any service providers who are independent contractors.

Consider an indemnity clause in contracts.  When a business is working with an agent or independent contractor, it is wise to include an indemnity clause in the contract requiring them to hold the business harmless for any torts or claims that occur.

If you find yourself in the unfortunate position of having to defend a lawsuit, don’t assume that you will not be liable for the acts of other defendants.  An early and thorough investigation of the relationship between defendants, and the plaintiff’s perception of these relationships, is crucial to proper evaluation of your potential liability and planning a proper defense for the case.

School District Can Be Vicariously Liable In Cases of Employee-Student Sexual Assault

Article authored by Carl L. Fessenden and Derek J. Haynes

The California Supreme Court recently issued its decision in C.A. v. William S. Hart Union High School District, holding that school districts can be vicariously liable for negligent hiring, supervision, and training in cases involving employee-student sexual assaults.

The case arose out of allegations by a high school student that his guidance counselor sexually harassed and assaulted him numerous times over an eight month period.  The lawsuit was filed against the guidance counselor and the school district, claiming that the student’s injuries were caused by both the counselor’s sexual misconduct and the failure of the school district administrators to properly hire, supervise and train the guidance counselor.

Public entity liability can be direct or vicarious. Pursuant to Government Code §815, public entities are immune from direct liability unless authorized by statute. There is no statute authorizing direct liability against public entities for sexual assaults by their employees. Therefore, traditionally, direct liability claims like those asserted against the school district in C.A. v. William S. Hart Union High School District would fail. Vicarious liability exists when one of the public entity’s employees is legally responsible for harm he or she caused while that employee was acting in the course and scope of employment. Gov. Code § 815.2(a).  Historically, courts have found that sexual assaults fall outside the course and scope of employment. Therefore, vicarious liability claims against a school district premised on sexual assault by an employee have failed.  The Supreme Court’s recent ruling provides plaintiffs a way to get around those limitations.

In C.A. v. William S. Hart, the school district filed a demurrer, arguing that Plaintiff’s direct liability claim failed because there is no statute authorizing direct liability for negligent hiring, supervision or training as required under Government Code §815. To the extent Plaintiff’s claim was one for vicarious liability, the school district argued there was no underlying liability on the part of its administrators because the district itself, not its individual administrators, was responsible for hiring, training and supervising its personnel. The trial court sustained the demurrer and the Court of Appeals affirmed.

On March 8, 2012, the California Supreme Court overturned that decision, based largely on the special relationship between school districts and their students. The Court explained that the “special relationship” between school districts and their students imposes a duty on school district administrators, themselves, to protect students from foreseeable harm. That includes harm at the hands of other employees that could have been avoided had the administrators properly trained or supervised those employees. If the administrators do not satisfy that duty, the school district can be held vicariously liable for negligent hiring, supervision and training under Government Code §815.2.

As a result of this holding, plaintiffs can now avoid dismissal by simply alleging that a school district administrator failed to properly hire, supervise, or train the person who committed the act of sexual assault.

The Court attempted to minimize the significance of its decision by pointing to the fact that plaintiffs must still prove that the negligent hiring, training or supervision caused the injuries.  The Court suggested that would be hard to prove in most cases. However, that ignores the true implications of this decision. Before this decision, school districts could seek dismissal of these lawsuits at the outset of the litigation by filing a demurrer. Plaintiffs can now overcome that hurdle, thereby forcing the districts to incur the substantial costs of litigation until school districts can raise the issue of causation on a motion for summary judgment or at trial.

Court Rules That Information-Regardless of Timing-Is Key to the Reasonableness of a C.C.P. Section 998 Offer to Compromise

Article authored by David Melton, Lindsay Goulding and Colleen Howard

California’s Second District Court of Appeal held on January 15, 2013 that a plaintiff’s offer to compromise pursuant to Code of Civil Procedure § 998 was reasonable, and thus in good faith, despite being made only two months after the defendant appeared in the case.  The Court in Whatley-Miller v. Cooperapplied a two-stage test to determine the reasonableness of the offer.

A § 998 offer to compromise is a statutorily-provided cost shifting device designed to encourage settlement before trial.  When a party’s § 998 offer to compromise is rejected by the recipient and the offering party obtains a more favorable result than the offer at trial, the offering party is entitled to recover certain costs, including expert fees, from the rejecting party from the date of the offer forward.  Accordingly, § 998 may operate as a severe penalty against a party who unreasonably declines to accept a statutory settlement offer – especially if the offer is extended early in the litigation thereby allowing considerable costs to accrue after the offer is made.  An offer made pursuant to § 998 is subject to a good faith requirement.

Circumstances of Whatley-Miller v. Cooper
On February 22, 2008, the plaintiffs, Susanne Whatley-Miller and her daughters, filed a complaint for medical malpractice and wrongful death against Dr. Collin Cooper.  The plaintiffs served Dr. Cooper with a § 998 offer on June 20, 2008 offering to resolve all claims for $950,000.  At that point, Dr. Cooper had only filed a response to the complaint and received discovery responses from the plaintiffs (nine days earlier).  Dr. Cooper did not request additional information or time in order to evaluate the plaintiffs’ offer and allowed it to expire.

After the jury returned a verdict in favor of the plaintiffs and against Dr. Cooper, the trial court entered judgment in the amount of $1,437,276.  Since their recovery exceeded their § 998 offer, the judge awarded the plaintiffs over $530,000 in costs and interest.  Dr. Cooper argued that the plaintiffs’ §  998 offer was not made in good faith because it was made just two months after he responded to the complaint and, thus, before he had an opportunity to fully assess the demand’s reasonableness.  The trial court rejected Dr. Cooper’s argument and determined that the plaintiffs’ offer of $950,000 was reasonable in light of the decedent’s income, the losses accompanying his wrongful death, and Dr. Cooper’s $1,000,000 insurance policy limit.  Additionally, Dr. Cooper was deemed to be aware of these facts through discovery and therefore should have known the plaintiffs’ offer was both within his insurance policy limits and reasonable—despite the timing of the offer.  The appellate court agreed after applying a two-stage reasonableness test.

Two-Stage Reasonableness Test
Because a § 998 offer is subject to a good faith requirement, it must be reasonable.  The Court of Appeals explained that whether a § 998 offer is reasonable depends upon the information available to the parties at the time the offer is served.  The first part of the test is to determine whether the offer represents a reasonable prediction of the amount of money the defendant would ultimately have to pay, if any.  This is an objective standard premised upon information that is or should be known by the defendant in addition to whether an experienced attorney or judge would place that prediction within the range of the case’s possible results.

If a § 998 offer is reasonable under the first part of the test, then it must satisfy the second part as well: a § 998 offer will only be found reasonable if the plaintiff’s information is or should be known by the defendant.  This is because an offeree is not expected to accept an offer to compromise if he or she has no reason to know whether the § 998 offer is reasonable.  Accordingly, where both prongs of this test are met, a § 998 offer will be deemed to be made in good faith and be enforceable.

Take Away Tips
Based on this recent ruling, courts will likely uphold a § 998 offer to compromise irrespective of its timing so long as a defendant had sufficient information to make a determination as to the reasonableness of the offer.  An important thing to note is that a defendant has the ability and opportunity to request additional time or further information from the plaintiff in order to evaluate a § 998 offer prior to its expiration.  Be sure to know both your rights and the impact of your decisions in situations such as these.

What Documents Do You Need to Keep When A Lawsuit is Filed?

Article authored by Porter Scott Attorneys

If a former employee of your company filed a lawsuit against the company, would you know what to look for and how to look for documents that might be relevant to the case so you can provide them to your attorney? If the employee’s attorney sent you a letter requesting you to preserve documents, would you know where to start?

Many businesses can benefit from evaluating their company’s data retention policies and practices.  This can help you determine what types of information you have access to and should protect if you have notice that a lawsuit may be or has been filed.  For example, surveillance footage may need to be saved before it is cycled over, or auto-delete features on email programs may need to be modified to ensure that important information is retained.

In addition to documents such as emails, personnel records, accident reports, and investigation reports, to name a few, there are also other materials that are relevant to the defense of a claim that should be gathered and preserved.  These include text messages, voicemails, and video footage. Social media sites such as Facebook often contain personal posts that can be relevant to a case. This information can be preserved through the use of your IT staff or an IT expert.

A company-wide document retention policy can alleviate problems at the litigation stage. The policy should have both a schedule identifying the retention period and a means for administering the policy. Retention periods vary depending on the categories and types of documents.  Minimum retention periods are sometimes set forth by law. For instance, personnel records must be kept for three years after termination of the person’s employment. You may choose to hold on to certain documents for longer periods if they serve an important business purpose. Generally, it is a good idea to keep documents for the length of the statute of limitations of any potential claims. The policy should identify the documents to be retained and set forth the method for removing outdated documents.

During a lawsuit, the attorney for the plaintiff will typically ask where the defendant stores documents, how they are maintained, and how they are preserved.  If your company has a document retention plan in place and follows it, then you may be able to avoid some awkward questions about where certain documents are once litigation commences.  Of course, once you have notice of a potential claim, you should make every effort to preserve relevant documents and should not destroy any relevant documents even if your document retention policy would otherwise allow you to do so.

Our attorneys are available to assist you with document retention strategies, and can provide information on applicable limitation periods for your business so that you are well equipped to defend a lawsuit if one is brought.