Cal Biz Lit

Too Many Lawyers -- California Business Division

    There are lots of places we can go to read about the misuse and abuse of the civil justice system, usually by attorneys representing plaintiffs in personal injury, pharma, consumer or other litigation (Overlawyered.com and its sister site PointofLaw.com come to mind right away).  But  businesses aren't immune from stirring up wacky litigation, either.  Without comment on whether this one qualifies, CalBizLit presents for your consideration Parkmerced Investors Properties LLC and Stellar Larkspur Partners LLC v. Does 1-18, Inclusive, filed September 23 in the United States District Court for the Northern District of California.

    And who are these Does 1-18?  Why they are unknown individuals who "unlawfully posted false, misleading and defamatory comments regarding" the Park Merced and Larkspur Shores apartments in San Francisco and Larkspur, respectively, on www.apartmentratings.com, part of the fast-growing Web 2.0 industry of unfiltered consumer review sites (see:  www.citysearch.com, www.yelp.com, or, for that matter, www.amazon.com).  Whomever these Doe people were, they sure weren't very nice to Park Merced or Larkspur Shores, posting such detailed advice as "STAY FAR AWAY AND NEVER LOOK BACK,"  "WORST PLACE I'VE EVER LIVED,"a real dump," and "RUN RUN RUN FAR FAR AWAY."

    The two plaintiffs allege that "on information and belief" the posting  reviewers included persons who were not tenants, but were employees, agents, etc. of competing apartment house communities.  "On information and belief."  That's often lawyer language for "I got no idea whether it's true or not, but let's do some discovery and see what happens."

    Now, it's really hard to get a judgment against Does 1-18.  Apparently the idea here is to get the complaint on file, then subpoena apartmentratings.com and find out who is saying these terrible things.  The ACLU and Public Citizen Litigation Group , representing one of the anonymous posters, have moved for a protective order and to strike the complaint under California's anti-SLAPP statute, CCP section 425.16.  Hearing is set for January 15, and I'm going to keep an eye on this one.

    You know, everybody is entitled to file a suit about anything, I suppose, but some people, and some companies, really need to get over themselves.

   Hat tip to Legal Pad.

Clayworth v. Pfizer: Supreme Court Extends Time For Granting Review

In August, I blogged on Clayworth v. Pfizer, Inc. (July 25, 2008) ___ Cal.App.4th )___ (A116798), an antitrust case where a California Court of Appeal for the first time considered the "pass on defense" and held that it applied to claims by intermediate purchasers under California's Cartwright Act (Bus. & Prof. Code §§16700 and following).

The plaintiffs petitioned the California Supreme Court for a hearing, and it now appears the Supremes have extended their own time to address the petition until December 4.  Although lawyers like to read the tea leaves from this sort of thing, the Supremes grant review after extending their own time and deny review after extending their own time.  So an order extending Supreme Court time for grant or review really means one thing:  that the Supreme Court has more time.

Hat tip to the UCL Practitioner.

Court of Appeal Rules Pass-On Defense Applies in Cartwright Act Anti-Trust Suits

    California has long had its own anti-trust law, the Cartwright Act (Bus. & Prof. Code §§16700 and following), and the California anti-trust jurisprudence is similar, but by no means identical to, that deriving from the Federal Sherman Anti-Trust Act (15 U.S.C. § 1, and following).  Last month, the Court of Appeal for the First District decided a case of first impression, creating another clear difference between the two.
    In Clayworth v. Pfizer, Inc. (July 25, 2008) ___ Cal.App.4th )___ (A116798), the Court held that the “pass-on defense” is available to defendants accused of price-fixing.  The issue, previously discussed by the U.S. Supremes in Hanover Shoe v. United Shoe Mach. Corp. (1968) 392 U.S. 481, is this:  Plaintiffs (in our case, a large number of retail pharmacists) buy products (here, prescription drugs) from Defendants (in our case, a large number of pharmaceutical companies).  Defendants unlawfully conspire to keep the prices artificially high.  Plaintiffs pass along every last nickel of the supra-market price to its customers.  Do Plaintiffs have a claim under the anti-trust laws?
    In Hanover Shoe, the U.S. Supremes said “yes,” or “maybe,” depending on how you interpret the decision.  Nine years later, in Illinois Brick v. Illinois (1977) 431 U.S. 720, the Court said that only the Plaintiffs had such a claim – not the customers to whom the unlawful increases were “passed on.”  This is what is known as the “indirect purchaser” doctrine, and it was eliminated by statutory amendment in a number of states, including California.  (Stats. 1978, ch. 536,§ 2, p. 1696).
    Surprisingly, the “pass-on defense” was never directly considered by a California Court of Appeal until last month.  And the Court held that it applied and barred Plaintiffs’ Cartwright Act claims.  The theory was this: since the unlawful increases were all passed on to somebody else, there were no damages, and you can’t have a Cartwright Act claim without damages.
    OK, I understand the decision, but here is what I don’t understand:  is it so clear that the plaintiffs didn’t have any damages?  If I recall my economics classes at Cal oh so many years ago, there is such a thing as “price elasticity of demand.”   If product has negative price elasticity (as I assume pharmaceuticals, like most consumer products, do), then an increase in price results in a decrease in demand.  If demand decreases, unit sales decrease, and if a retailer’s unit sales decrease as a result of a price increase which does not affect per-unit profits (as would be the case when price increases are “passed on”), isn’t the retailer damaged by a reduction in profits?  The pass-on defense might prevent the plaintiffs from recovering as damages the price increases.  But why couldn't they recover other damages, such as lost profits?  What am I missing here?

Liquidated Damages and Penalties in California

Generally speaking, the enforceability of a liquidated damages provision in a contract is governed by Civil Code section 1671, with the relevant part reading:

(b) Except as provided in subdivision (c), a provision in a
contract liquidating the damages for the breach of the contract is
valid unless the party seeking to invalidate the provision
establishes that the provision was unreasonable under the
circumstances existing at the time the contract was made.

On the other hand, according to the Cal Supremes:

A liquidated damages clause will generally be considered unreasonable, and hence unenforceable under section 1671(b), if it bears no reasonable relationship to the range of actual damages that the parties could have anticipated would flow from a breach. The amount set as liquidated damages "must represent the result of a reasonable endeavor by the parties to estimate a fair average compensation for any loss that may be sustained." [ Citation omitted].  Ridgley v. Topa Thrift & Loan Assn. (1998) 17 Cal.4th 970, 977.

This brings us to this month's Court of Appeal decision in Greentree Financial Group, Inc. v. Execute Sports, Inc. (May 6, 2008, Ordered published May 28, 2008) ___ Cal.App.4th___ (Fourth Dist. No. G039326).  Greentree provided financial advisory services to Execute, which allegedly failed to pay the $45,000 bill.  The parties settled, and memorialized the settlement in a stipulated judgment.  The stipulation provided that Execute would pay a total of $20,000 in two installments, but that if it missed either payment, the judgment could then be entered for the entire $45,000, plus interest, attorneys' fees and costs.

Execute defaulted on the first payment (that's why there's a case, right?) and Greentree proceeded to get a judgment entered for $61,232.50.  Better luck next time, said the Court of Appeal.  First of all, while Greentree argued that the amount set forth in the stipulation was reasonably related to its damages from the breach of the underlying contract, "...the breach we are analyzing is the breach of the stipulation, not the breach of the underlying contract."

Furthermore, "Greentree and [Execute] did not attempt to anticipate the damages that might flow from a breach of the stipulation.  Rather, they simply selected the amount Greentree had claimed as damages in the underlying lawsuit, plus prejudgment interest, attorney fees and costs."  So the Court ordered the trial court to correct the judgment by reducing it to $20,000, the amount in the stipulation that Execute had failed to pay.

Now, here's one from real life, and I've been on both sides of it:  the parties enter into a settlement for installment payments, say, $500,000 in thirty days and $550,000 in ninety days, but with a discount of $50,000 if the second installment is paid in sixty days rather than ninety.  In other words, if the settling defendant pays everything within sixty days, it costs him a million bucks, but if he takes longer to pay, it costs an extra $50K.  Is that a liquidated damages provision, or simply a bargained-for discount?  I think that it's a lawful discount, but I don't have any cases that say so.  Anybody else have experience with this?

Attorneys’ Fees and Fee Awards Under California Law, Part I

    The original purpose of this blog was to provide commentary on California law for out-of-state companies and others who only occasionally have to deal with litigation here in the Golden State.  And one area where I get many questions in my practice has to do with attorneys’ fees and California’s fee-shifting statutes.

    I’ve been trying to get around to writing a white paper on the subject, and haven’t been able to do it (that pesky law practice of mine keeps getting in the way).  So instead, I’m going to try to put together a series of posts, probably three of them, discussing the fundamental rules having to do with fee shifting.  In today’s post, I’ll be talking about the basic rule, where the parties pay their own fees, and Civil Code section 1717, California’s contractual fees reciprocity statute.  The second post will be about the public attorney general statute, fees in civil rights and employment litigation, lodestars and multipliers.  The final post (probably) will discuss fees in consumer litigation.

    So first, the basic rule: Under California’s Code of Civil Procedure section 1021, if there is no statute or contract to the contrary, the parties to a suit pay their own fees (although the prevailing party is entitled to certain costs, which are usually pretty minimal).

    That was the easy part.  We start with the hard part after the jump.

California -- Not a Judicial Hell Hole?

In April, the Chamber of Commerce published its list of judicial hellholes, giving California sixth place for the worst in the country, as I reported here.

At year end, here comes the judicial hellhole listing from the American Tort Reform Association.  I don't know what's happening here, but California didn't even make the hellhole list.  The best the golden state could do was number six on the "watch" list, based on ADA accessibility litigation.

Attorneys' Fee Awards: Big City Lawyers In Small Towns

A good deal of the litigation our firm defends involves the risk – or even the certainty – that one side or the other is going to be awarded attorneys' fees at the end of the proverbial day. 

• Much of our firm’s contract litigation involves contracts providing that fees go to the prevailing party.  Under Civil Code section 1717, even if the contractual provision only goes in one direction (e.g., the contract provides for fees to the company if it successfully defends suit), California law makes the provision reciprocal, allowing fees to the prevailing party on either side.
• Much of our firm’s consumer litigation is brought under the Consumer Legal Remedies Act or Song Beverly Consumer Warranty Act, both of which specifically provide for attorneys’ fees for a successful plaintiff.
• In our dealership work, the Automobile Sales Finance Act provides for fees for the successful plaintiff, while the Automobile Leasing Act provides for fees for the prevailing party, plaintiff or defendant.
• And then there is California’s private attorney general act, Code of Civil Procedure section 1021.5, which provides for attorneys’ fees for a successful party in a case which “has resulted in the enforcement of an important right affecting the public interest” under certain circumstances.  This statute is just about always in play in Proposition 65 matters and Unfair Competition Law cases.

All of this means that, in many cases, the attorney fee award is like the bomb that gets dropped at the end of the case:  the plaintiff or plaintiff class is awarded (or settles for) a modest amount of money.  Then comes the attorneys’ fee petition, seeking for the attorneys many multiples of what the plaintiff (or the plaintiff class) received.  And, on top of everything else, the plaintiff attorneys are likely entitled to their fees incurred in obtaining fees.

Under California’s leading case of Ketchum v. Moses (2001) 24 Cal. 4th 1122, an attorneys’ fee award is to be based, in part, on the hours reasonably spent times the prevailing hourly rates for attorneys in the same community conducting noncontingent work of the same type.  The resulting figure (the “lodestar”) may then be adjusted upward or, occasionally, downward, based on a variety of factors which have been developed by the courts.  Serrano v. Priest (1977) 20 Cal.3d 25;  Weeks v. Baker & McKenzie (1998) 63 Cal.App.4th 1128.

What happens, though, when a firm charging big city rates comes to the small town?  Under Horsford v. Board of Trustees of California State University (2005) 132 Cal.App.4th 359, the out of town firm may receive the out of town rate if it demonstrates that the plaintiff could not have received adequate representation using local counsel.

Now a new case fleshes out the limit of this rule.  In Nichols v. City of Taft (October 2, 2007), ___ Cal.App.4th ___, F051477, Morrison & Foerster (a San Francisco based AmLaw 100 firm universally known as “MoFo”) brought a case in Kern County under California’s Fair Employment and Housing Act, which provides for attorneys’ fees for successful plaintiffs.  On the eve of trial, the parties settled the case for $175,000, reserving to MoFo the right to move for attorneys’ fees. 

And move MoFo did, claiming some $507,000 at hourly rates as high as $550 (again demonstrating that CalBizLit and his partners are woefully underpaid).  The City challenged the rates, demonstrating that the highest hourly rate charged in the community was $250.

The trial court agreed, reducing the hourly rates accordingly.  But what the trial court took away with one hand, it gave with the other.  It concluded that it was required to use a “multiplier,” (i.e., an upward enhancement) to compensate MoFo for the fee reduction. It then applied a multiplier of 33 1/3%, bouncing the fee award back up to more than $470,000.

No dice, said the court of appeal.  The trial court was right in using local rates.  But it was wrong in using the multiplier (which MoFo had not even requested) to repair the damage.  Not only was the trial court not required to use a multiplier to compensate for a rate reduction, it was prohibited from using the multiplier for this purpose.  So the case was remanded to see if there was any other basis for applying a multiplier, or if MoFo would have to just struggle along with an award based on local rates – a mere $302,000.

As a side note, the defendant also argued that the $302,000 was too high because it was out of proportion to the result obtained.  But that argument fell flat.  The court added to the legion of other opinions holding that the defendant can’t drive the plaintiff’s hours off the chart with an aggressive defense and then argue that the lawyers spent too much time on the case.  A similar holding is in a case issued just yesterday, Cruz v. Ayromloo (October 3, 2007) ___ Cal.App.4th ___ (B190159), in which the court also stated clearly (albeit in dictum) that the lodestar should not be reduced just because the attorneys took the case “pro bono.”

How To Get Out Of A Contract: More Musings on Gentry

Last week I blogged about the first half of the Cal Supremes’ decision in Gentry v. Circuit City (2007) ___Cal.4th___, S141502.  And the first half –- casting considerable doubt on “class action waivers” in binding arbitration agreements, at least as to overtime claims – was noteworthy and got the most notice in the blawgosphere.  But I think the second half is potentially much more far-reaching.  It may open up the potential for unconscionability arguments in all kinds of contracts, and strike a big blow against all kinds of “contracts of adhesion.”

More after the jump.

Choice of Law in Contract Cases

I've been on hiatus from blogging for a few weeks owing to (a) crush of work, followed by (b) vacation at the beach with my family, including my brand new granddaughter.

But I'm back now, spending this beautiful California Sunday taking a look at what's new in the world of litigation and appeals in the Golden State.

One new Court of Appeal decision stands out, dealing with conflicts of laws.  This is a subject that gave me a headache thirty plus years ago in law school, and not much has changed in that regard since then.  In most cases, and particularly in tort cases, California courts apply a fairly convoluted version of the "governmental interest test," about which I will say no more in order to avoid sending either readers, or myself, off to an afternoon nap.

But the new case has to do with contracts.  Specifically, it involves an insurance contract between a Texas based insured and a Texas based insurer.  The insured's oil and gas drilling activities in Beverly Hills supposedly caused personal injuries and death, and the insured was sued.

You probably won't be surprised to learn that California's law on an insurer's  duty to defend lawsuits is more pro-insured than the law in Texas.  So under California law, the insurer potentially had a duty to defend under California law, and not under Texas law. 

After a long discussion of all those governmental interest cases that pretty much lost my attention, the Court of Appeal held that they didn't matter because of California's Civil Code section 1646:  in a contract case, questions of interpretation are determined by the law of the place of performance.  An insurance policy is performed in the place where the risk exists.  So California law applies.

The Court seemed to feel that no previous court had squarely addressed this question in this context.  I didn't go back and check the Court's work, but I don't remember seeing anything directly on point.  The ruling goes well beyond insurance contracts, and seems to apply to just about any contract interpretation case involving a choice of law issue.  It is refreshing to have a court hold that a statute means what it says.

By the way, Civil Code section 1646.5 says the parties can draft around this "place of performance" rule in contracts involving more than $250,000 that aren't consumer, employment or service contracts.

Off-topic post -- RIP Max Roach

I rarely include off-topic posts.  But while I was gone, Max Roach passed at the age of 83, and the loss is a tremendous one.  As all jazz lovers know, he was the second to last of the great bop and post-bop drummers (Roy Haines is still alive), and, just as importantly, an innovator all his life. You can hear him at his most vibrant on  Clifford Brown and Max Roach (Emarcy/Universal, 1954), Thelonius Monk's Brilliant Corners (Riverside/Concord, 1956) and Money Jungle, in trio with Duke Ellington and Charles Mingus (Blue Note/EMI, 1962), which Ben Ratliffe of the NYT aptly called "an odd record of aggression and calm," but which I never get tired of.  You can also hear him with Clifford Brown here, and see him playing solo here.   

What Does American Business Think About the Golden State?

The US Chamber of Commerce's Institute for Legal Reform is out with its annual state-by-state rankings of "state liability systems."  I'm not sure this is the right name for it -- it's more a combination of rankings of systems, the players (i.e., judges and juries) and outcomes.  Nonetheless, it will come as no surprise that California doesn't fair well in the eyes of in-house counsel.  Overall, California ranked sixth worst (or 45th best, depending on your level of optimism), ahead of only Illinois, Alabama, Louisiana, Mississippi and West Virginia. 

More after the jump.