ihwlaw

Given the frequent use of pre-litigation jury trial waivers in contracts, it may be news to some that such waivers are considered unenforceable under California law since the California supreme court’s decision in Grafton Partners L.P. v. Sup.Ct., 36 Cal. 4th 944 (2005).  Virtually all other states in the nation, save California and Georgia, permit pre-litigation jury trial waivers in contracts subject to certain conditions, such as whether the waiver was knowing and voluntary.  The same rule – conditional enforceability of pre-dispute jury trial waivers – is followed by the federal courts as well, as least for cases arising under federal law.  However, a recent decision by the Ninth Circuit holds that federal courts enforcing state law in diversity cases must follow state law regarding pre-litigation jury trial waivers. In re County of Orange, 784 F.3d 520 (9th Cir. 2015).

In this case, the Ninth Circuit Court of Appeals addressed whether a federal court sitting in diversity (a case lacking a substantive federal question but involving parties from diverse jurisdictions) applies state or federal law to determine the validity of a pre-dispute jury trial waiver in a contract governed by California law.  While one might expect that such waivers are enforceable in any federal case because federal procedural law permits these waivers and a jury trial would seem to be a procedural issue, the Ninth Circuit reasoned that California’s rule is both procedural and substantive because it “embodies the state’s substantive interest in preserving the right to a jury trial in the strongest possible terms, an interest the California Constitution zealously guards.”  For legal enthusiasts, the decision is all the more interesting because of the issues raised under the pivotal Erie doctrine, which requires federal courts sitting in diversity to apply state law on substantive issues (such as what defines a legal claim) but confirming they may continue to apply federal law on procedural questions.

While it may be too soon to tell if the Ninth Circuit’s ruling will be adopted by other courts or lead to any shift in the use of jury trial waivers in contracts, both this case and California’s law regarding such waivers should give contracting parties and their counsel serious pause in including these waivers in contracts governed by California law.  It should also give parties who sign such waivers – but who would have preferred not to – cause to believe they will not be enforced in a case involving claims under California law (and presumably Georgia law, too).  An issue not addressed is the enforceability of pre-litigation jury trial waivers in federal cases arising under federal law with supplemental jurisdiction over state law claims arising under California or Georgia law.  Applying In re County of Orange, it seems likely a court would bifurcate trial and try the state law claims with a jury and the federal claims with a judge.  With this scenario inevitable, it should not be long before the case law develops an answer to this and related issues in this interesting nexus of substantive and procedural law.

To learn more about the author of this article, visit www.ihwlaw.com.

Since ICANN – the organization that allocates domain names — approved an initiative in 2011 to add thousands of new “generic” Top-Level Domains (gTLD), over 635 new gTLDs have been registered.  Many of these are creative efforts to expand topical diversity on the internet, but few have received as much notoriety as .sucks.

A gTLD is the portion of an internet address to the right of the dot, such as .com, .net or .org.  Under ICANN’s plan, third parties may register and administer new gTLD’s, such as .bank for banking, .law for the legal industry, and .golf for golfing, leaving it within the purview of the gTLD registrar to enable creation of domain names using the gTLD.  A partial list of some of the more recently approved gTLD’s can be found here.

The delegated registrar of .sucks, Momentus Inc., is charging $2,499 for pre-public registration of .sucks strings, which first requires a trademark to be registered with the Trademark Clearinghouse.  Beginning June 1, 2015, registrations of .sucks domain names are generally available to the public — at lower pricing — with an open registration process so that anyone can register a new .sucks domain without restriction.  (There are restrictions for registration of some gTLD’s but none for .sucks after May 31.) This enables trolls and trashers to gobble up .sucks strings bearing company names and brands alike.

The .sucks gTLD promises to ruffle the feathers of many a brand owner because trademark law, which protects the use of marks in domain names, may not apply to .sucks strings because one purpose of this gTLD is to enable public comment regarding brands.  Under existing law including the Lanham Act and its anti-cybersquatting provisions, courts have traditionally protected trademark owners from parties that register a domain utilizing a mark in a manner that is confusingly similar to, or dilutive of, the mark or which evinces a bad faith intent to profit from a mark the registrant does not own.  But registrants of .sucks URLs may be able to muster arguments that countervail these protections based on First Amendment law and the view that the .sucks string on its face is intended for brand criticism and thus ipso facto cannot cause confusion or be used in bad faith.  One need only consider the success of consumer darling Yelp in defending against manifold attacks on its platform to infer how .sucks registrants may be able to utilize the law in their favor to stop businesses from attacking web forums that are exclusively dedicated to trashing business brands.

Though many consider the purveying of .sucks domains to be little more than legalized extortion, businesses that value their names, brands and trademarks would do well to consider registering .sucks domains to prevent opportunists from trading-off valuable brand names to their detriment.  And some may even consider turning lemons into lemonade by using a .sucks domain to assist in their own customer relations program.

To learn more about the author of this article, visit www.ihwlaw.com.

Did you know that selling stock in exchange for an unsecured promissory note may be unlawful, void or voidable?  In an area like Silicon Valley where stock may be worth a fortune from the second a company is born, companies might think to be creative in order to sell stock to a party that’s unable or unwilling to pay large sums for it immediately. One might think that a safe course is to sell the stock for a promissory note to pay for the stock later, such as when it’s worth more than the sum of the note.

However, a somewhat obscure law in California, which is echoed in other states, makes it unlawful for a corporation to sell or issue stock in exchange for a promissory note (a debt) that is not secured by property other than the stock itself.  Section 409 of the California Corporations Code makes it unlawful for a California corporation to sell or issue stock for a promissory note that is not “adequately secured by collateral other than the shares acquired.”  Thus, a company cannot sell or issue stock for a promissory note, even if the note is secured by the stock itself.  So what consideration in a sale of stock is valid?  The answer is money, services already rendered, valuable property received or a promissory note that is secured by property other than the stock itself.

Delaware corporations, which are not subject to this provision of California law, are nevertheless subject to a similar statute under Delaware law.  Section 152 of Delaware’s General Corporation Law provides that “[t]he board of directors [of a corporation] may authorize capital stock to be issued for consideration consisting of cash, any tangible or intangible property or any benefit to the corporation, or any combination thereof.”  While this statute is less clear on the issue than the California law, Delaware case law arguably supports a construction of the Delaware statute the same as the California law, and Section 152 itself implies the corporation must receive some actual benefit in exchange for the issuance of stock.  Interestingly enough, the Delaware Constitution (Article IX, Section 3) used to expressly prohibit the issuance of stock “except for money paid, labor done or personal property, or real estate or leases thereof actually acquired by such corporation.”  However, this provision was repealed in 2004, leaving the issue somewhat more ambiguous under current Delaware law.  One would have to check the legislative history to understand why that section was repealed, but in any case the statutory provision remains, along with at least one case which cites both as a basis to consider the stock sale invalid.  See Prizm Group, Inc. v. Anderson, 2010 Del. Ch. LEXIS 105, 2010 WL 1850792 (Del. Ch. May 10, 2010).

The legal implications of these statutes are potentially not good for anyone involved in the leveraged sale of stock – neither the company, its management nor the putative purchaser.  Taking the last case first, the sale to the buyer is likely void or voidable as against the buyer, which means the corporation may rescind (cancel) the sale of stock arguably at any time the issue is raised, at least until proper consideration is received by the corporation, such as all money due on the debt that is at issue.  (Note that the sale is probably not voidable by the buyer as against the corporation, and the note is almost certainly enforceable by the corporation against the debtor, the above notwithstanding.)  As respects the company, an invalid sale of stock might expose the company to liability from other shareholders who might argue that their equity in the corporation has been unfairly diluted by a sale of stock without real value received in return.  And officers or directors who approved the sale might also be exposed to action by the corporation and/or by other shareholders on a similar theory of liability, as might arise in the context of a shareholder derivative action (a lawsuit brought by one or more shareholders in the name of the corporation against officers and/or directors for mismanagement that harmed the corporation or its shareholders).

Turning to limited liability companies, it is much less clear and, at least for now, doubtful that the limitation on consideration for the sale of equity applies to LLC’s. The statutes cited do not apply to LLC’s – they are quite specific to corporations only. With that said, in principle, one could make the same policy argument in the context of LLC’s – that the sale of equity in exchange for an unsecured note does not provide actual value to the company and thus frustrates existing equity holders and creditors.  However, the statutory and case law for LLC’s on this is thus far non-existent based on research done to date, so currently there is no known legal basis to support this policy rationale as applied to LLC’s, or other types of business associations for that matter.

However, corporations, their managers and purchasers would be wise to heed the law in California, Delaware and other states that generally bar an unsecured debt obligation as consideration for the sale of stock.  Transactions violating these laws will be void or voidable, and the participants in such stock sales may be subjecting themselves to inadvisable risks and liabilities.  So, as the saying goes, buyer beware.

To learn more about the author of this article, visit www.ihwlaw.com.

FEDERAL FA$TRACK:  Saving Time and Money in the Northern District

Cost-conscious litigants and litigators have long complained about delays, fees and costs incurred in litigating cases in California’s federal courts.  Recent statistics show that the median time to trial (the interval from filing a lawsuit through trial) in California’s federal courts is over 26 months, with the S.F. Bay Area (N.D. Cal.) falling just within that range and L.A. (C.D. Cal.) and San Diego (S.D. Cal.) courts falling below and above, respectively.  (Aside:  what’s up with San Diego at a median interval of nearly three years?)  The standard procedural rules (F.R.C.P.) allow for relatively extensive litigation, with the prospect of intensive discovery, cumbersome law and motion practice and – ironically – mandatory alternative dispute resolution (ADR) procedures.  These temporal and procedural norms enable more litigious (and prodigal) litigants and lawyers to rack-up substantial fees and costs as they railroad the litigation process, causing financial pain for all of the litigants, payday heydays for lawyers, headaches for judges and gridlock for everyone, including litigants and lawyers who didn’t ask for any of this.

With good fortune (no pun intended), the federal district court for the S.F. Bay Area (N.D. Cal.) (the “Court”) just announced the adoption of an expedited trial program in which litigants can get to trial within six months of consenting to do so.  Under newly-adopted General Order No. 64, the Court is now offering litigants the option of consenting to a binding one-day trial to occur six months after the parties agree to this process, with limited (i) discovery, (ii) law and motion practice, (iii) expert testimony, and (iv) general trial and appellate procedure.  This Expedited Trial Procedure is meant to offer an abbreviated, efficient and cost-effective litigation and trial alternative and is intended to offer litigants access to justice in a more efficient and economical fashion.  Some key features of the program include limiting each side to:  (i) written discovery of ten interrogatories, requests for production and requests for admission (each), (ii) only fifteen hours of deposition time (used at each side’s discretion), (iii) only one expert witness, (iv) judicial voir dire (jury selection, typically conducted by counsel), (iv) only three hours of evidence presentation at trial (not including limited opening and closing statements), and (v) restricted post-trial motions and rights of appeal.

Overall, this expedited litigation program amounts to a substantial reduction in the primary litigation procedures and should result in a substantial reduction of attorneys fees, costs and delays.  Although certainly not for everyone, it offers more economically-minded litigants and their lawyers a way to save significant time and money in getting their cases resolved by a judge, jury or — maybe, just maybe — the litigants themselves.  The latter point is to say that, once litigants commit to this lightning fast track procedure, they may also be nudging themselves to reach a quicker pre-trial, out-of-court resolution in what would otherwise amount to a serious game of litigation “chicken.”  When combined with standard ADR (mediation principally, I should think), litigants may find it is in their mutual economic interest to conserve fees and costs by rushing themselves through both formal — and informal — dispute resolution procedures in order to reach the most efficient outcome, one way or the other (i.e., a settlement — or a judgment).  Of course, submitting to an expedited litigation procedure is not for the faint of heart:  jumping on this express train to trial will also mean  acute, sleeve-rolling work and decision-making for both litigants and lawyers alike in what could easily lead to undesired results.  A lack of thoroughness and standard procedural checks in the litigation process could result in some very rough justice.

These concerns notwithstanding, the Northern District Court has done the public, the bar and the judiciary a great service by making this expedited litigation procedure available for those parties prepared to endure its strictures for the sake of conserving their own time and money and, in so doing, the public’s.  Given the vast waste of time, money and human resources that is all too common in some litigation, parties and their lawyers should give serious thought to this new program.  It may indeed be a good idea for parties with discrete disputes, such as actions for streamlined declaratory relief.  Venturing into more unchartered territory, it may be a way for contracting parties to economize in the event they have a dispute by agreeing in advance to submit to this expedited program, in a fashion similar to an arbitration clause.

Taking one step back, it should be observed that the mere existence of this expedited trial program serves to reinforce upon clients and counsel alike the issue of whether they really want to embark upon the costly path of any litigation.  Although state courts are slightly more efficient than federal courts in California due to the state courts’ own “fast track” rules (which yield intervals to trial of roughly twelve to eighteen months), wise disputants and their lawyers should always consider pre-litigation dispute resolution and ADR options before initiating a lawsuit.  Litigation of any sort is seldom an ideal course; good lawyering and pragmatic decision-making can often steer even the most adversarial of disputes toward a pragmatic pre-litigation result.  Barring that, the Northern District’s new program may be the next most economical option.

Using symbols and punctuation in naming your company: http://ow.ly/5CCiZ

What’s In A Name?  Symbols and Punctuation in Naming a Company — EXPRE$$ YOUR$ELF ; – ) 

A client asked me if, in naming their California start-up company, they could use symbols and/or punctuation (say, other than a period or comma for “, Inc.” or “Corp.”). (The specific entity — a corporation, LLC or other entity — wasn’t decided yet.) The short answer appears to be “yes,” a company may use certain symbols and punctuation in the name of an entity, and the applicable rules cover all entities registered in California. 🙂  Specifically, Sections 21000-21009 of the California Code of Regulations (the “Code”) provide rules for naming a business entity in California. The introductory provision, Section 21000 subpart (a), provides that “Business entity names must use the English alphabet or Arabic numerals (0, 1, 2, 3, 4, 5, 6, 7, 8, 9) or symbols as listed in Section 21002(b)(6)(B) or a combination thereof.” The latter provision identifies nine (yes, 9!) symbols, specifically including the @, #, $, %, ^, &, *, + and =. While the term “punctuation” is not used in Section 21000, my interpretation of the Code is that at least eighteen (18!) punctuation marks are allowed in naming an entity: the period (.), slash (/), comma (,), back slash (\), semicolon (;), hyphen or dash (- or –); colon (:), underline (_), apostrophe (‘), swung dash or tilde (~), single quotation mark (‘), parentheses (( )), double / regular quotation mark (“ ” or ” “), brackets ([ ]), question mark (?), angle brackets or greater / less than signs (), exclamation mark (!), and braces ({ }). Whether more unusual punctuation marks, like the ellipsis (…) or guillemets (« »), are acceptable in an entity name is unclear from the Code, but … it seems unlikely … that any punctuation which is not identified in Section 21002(b)(6)(A) of the Code will be permitted! 😦

When a company desires to form or register an entity in California, the decision as to what entity name will be allowed is reposed in the deft hands of the California Secretary of State’s office which supervises filings for entity formations and foreign (non-California) entity registrations. Applying the rules for naming a company in California and obtaining the Secretary of State’s acceptance of an entity’s name can be tricky, so new California companies and existing foreign entities should consult with a California business lawyer (like myself ; – ) )  for assistance in navigating these muddy waters! Oh, and by the way — I hope you’ll forgive my excessive use of symbols, punctuation and emoticons in writing this post… I was overcome by an urge to express myself! So, go out there and express yourself (just like Madonna : – P) — with punctuation and symbols in naming your company, but … beware the pitfalls of California law in doing so. : – )

[Q.E.D.]

# # #

Copyright © 2011 Isaac H. Winer, Esq.

A client just completed the purchase of a residential property and asked me what documents he should retain from the mountain of documents that accumulated during the transaction, such as disclosures, offers, counteroffers, emails, loan documents and the like. While there is no blanket rule for what documents you can dispose of, there are some general guidelines to consider before disposing of any legal documents. For example, generally you should keep all disclosures about the property in question, for at least two reasons. First, if there is a problem with the property that wasn’t disclosed and it later becomes an issue, a buyer may have recourse against a seller; conversely, a seller may be able to prove that a problem was disclosed and thereby avoid significant liability for a failure to disclose, particularly if the seller knew or should reasonably have known about the problem. Next, for buyers, if/when you should ever decide to sell the property, you may want to incorporate all prior disclosures into your new disclosures (to the extent applicable), either by hand-writing them into your new disclosures or by literally attaching the prior disclosures to your new disclosures. You should also keep all offers and counteroffers that were exchanged during the negotiation of the transaction, as well as all loan applications, agreements and other loan documents. If there is ever a contract dispute with between buyer and seller or with the lender, the negotiation history could be important and, in any event, these documents will support and clarify the final terms of your agreement. In short, when it comes to document retention following the purchase or sale of real estate, a good rule of thumb is to “retain, retain, retain.”  This may not help you save a lot of space during Spring Cleaning, but it may save you a lot of legal headaches in the future.  Always consult a lawyer before you dispose of any legal documents.

If “lawyers are a dime a dozen,” why is a good lawyer so hard to find? The answer may have a lot more to do with your own due diligence than any clichés about lawyers. As you consider whether and how to hire a lawyer to assist your business, or any other legal issue for that matter, there are a number of things you can do to improve the chances of finding the right lawyer for your issue.

Before you even start looking for a lawyer, the first question you should ask is “what kind of a lawyer do I need?” In today’s complex economy, lawyers have become highly diversified by practice area, meaning that different lawyers tend to focus their practices in different areas of the law. Some lawyers may focus strictly on intellectual property law or even specific types of intellectual property (e.g., patents, trademarks or copyrights), while other lawyers may focus solely on business transactions, such as mergers and acquisitions, just to name a few practice areas. As a result, if you are starting a new business and looking for a lawyer to assist with any other legal needs, such as forming a new business entity (e.g., corporation, LLC, etc.), it is possible to engage a lawyer who has devoted a material portion of his or her practice to assisting start-up’s and small businesses with the specific needs and legal issues that confront new business ventures.

Once you have identified the type of lawyer you need, the next step will probably be to identify specific lawyers in that area who can assist you. Here, there are many ways one might go about doing this, including searching the internet, the Yellow Pages or using a lawyer referral service. However, if you think about it, these devices will at best inform you about lawyers who are looking for new clients, rather than lawyers who are actually qualified to assist you. Just as you may not seek-out a physician for yourself or a loved one by relying on such impersonal methods, it may be inadvisable to do the same when searching for a lawyer for your business. More reliable methods may involve more inter-personal efforts on your part, like asking friends, colleagues or consultants for a referral.

When you have identified one or more specific lawyers to consider, you may think that you’re “almost there,” but in reality your investigation has only just begun! In addition to confirming that the lawyer(s) you are considering are qualified to represent you or your new business in the specific area of law at issue, perhaps equally or more important is to make sure you find a lawyer whose personality and practice style are a good fit for you. In this regard, there are a number of specific issues to consider, such as the following:

1. Does the attorney have experience in the area of law or matter at issue?

2. How long has the attorney been practicing law generally, and in your state?

3. Does the attorney have strong educational credentials (college, law school)?

4. Can the attorney provide you with any client references? Are they recent?

5. Does the attorney charge for initial consultations? What is included?

6. How does the attorney charge for services? Hourly? Fixed fee? Costs?

7. Does the attorney have a compatible personality and communication style?

8. Is the lawyer willing and able to educate you in the area of law at issue?

9. Will the attorney be the one actually performing the services at issue?

10. How many other clients does the attorney represent at the same time?

11. Does the attorney have any disciplinary record with the state bar? (In some states, you can check this at the state bar’s web site; e.g., http://www.calbar.ca.gov.)

These are just some of the considerations to think about when looking for a lawyer. You may have a number of additional questions or concerns, and in this respect the adage that “there’s no such thing as a stupid question” should hold true. If a lawyer is too busy or unable to answer your questions, it may be a sign that this is not the right lawyer for you.

Especially in the area of law for start-up’s and new businesses, it is worth trying to find a lawyer who will take the time to educate you about your legal issues for several reasons:

1. If a lawyer can explain the applicable law, it suggests the lawyer knows what s/he is doing and is presumably less likely to make mistakes representing you.

2. If a lawyer can teach you about the applicable law, you should be more able to collaborate with the lawyer on the legal and business objectives you desire to accomplish and will presumably be more likely to accomplish your objectives.

3. If a lawyer can impart an understanding of the law, you may be more able to address or at least identify issues after the lawyer has completed the services.

In today’s sophisticated business world, the line between “legal” and “business” issues is thinner than ever, and has arguably merged in many ways. In this context, it makes sense to find a lawyer who not only appreciates this point but can help you understand the legal issues – who can assist you in navigating legal waters and also help you accomplish your business goals. By engaging in the due diligence that is necessary to find the right lawyer for your business, you can minimize the risk of engaging the wrong lawyer and attendant hardships and at the same time take steps to accomplish your broader business objectives.