Taking Clients With You

Gregory-J.-Wood

Partner

There is good news if you are thinking about leaving your employer and taking clients with you. In many instances, client contact information is not protected and can be used by a departing employee to compete with his former employer. Furthermore, recent case law, which we helped create, limits the applicability of non-solicitation provisions in employment agreements.

Background

Trade secret protection is a product of a pro-business socio-economic policy. California wants to encourage entrepreneurs and, in 1984, adopted the Uniform Trade Secrets Act to help protect entrepreneurs’ ideas and work from being stolen by their trusted employees and competitors. California is somewhat special, however, in that it has an equally important socio-economic policy in favor of an employee’s right to make a living. Trade secret protection in California is, thus, a balancing act between California’s desire to help entrepreneurs who have ideas and the employees who bring those ideas to life, so to speak.

The California Uniform Trade Secret Act

Under the Uniform Trade Secrets Act (“UTSA”), an owner of secret information may protect that information that has actual or potential economic value because it is secret. The secrecy required to prove that something is a trade secret does not have to be absolute in the sense that no one else in the world possesses the information. It may be disclosed to employees and outside agents as long as the employees and outside agents are instructed to keep the information secret. However, it must not have been generally known to the public or competitors.

Customer Lists

The good news for employers is that, generally, California courts have said a customer list acquired by lengthy and expensive efforts deserves protection as a trade secret. One court opined:

Trade and business secrets and confidential information are the property of the employer and cannot be used by the employee for his own benefit. A list of subscribers of a service, built up by ingenuity, time, labor and expense of the owner over a period of many years is property of the employer, a part of the good will of his business and, in some instances, his entire business. Knowledge of such a list, acquired by an employee by reason of his employment, may not be used by the employee as his own property or to his employer’s prejudice.

The good news for employees is that this general rule has exceptions that are so often applicable, the application of the general rule is increasingly hard to find.

Three Ways You Can Take Clients With You

1. When The Competitor Knows Who They Are

One basic long-standing exception to the general rule of protection is when the information is already known to the competition. This sounds obvious, but the exception should not be overlooked. In many instances, the departing employee’s client relationships are well known to the competitor and, in fact, the very reason for the new job offer.

Take the Abba Rubber Co. v. Seaquist case, for example. There, a seller of rubber products sued a competitor, claiming trade secret violations. With respect to the seller’s customer list, the court said, “By itself, knowledge of the identities of the businesses which buy from a particular provider of goods or services is of no particular value to that provider’s competitors. However, that information is valuable to those competitors if it indicates to them a fact which they previously did not know: that those businesses use the goods or services which the competitors sell.” The Court explained:

By way of illustration, consider a hypothetical market for widgets, supplied by five widget sellers. There are 100,000 businesses engaged in industries which have been known to use widgets in their operations; however, there is no way for the widget sellers to know for sure which of those individual businesses use widgets and which do not. Seller A has a list of 500 businesses to which he has sold widgets in the recent past. That list proves a fact which is unknown to his competitors: that those 500 businesses are consumers of widgets, the product they are trying to sell. Therefore, it has independent value to those competitors, because it would allow them to distinguish those proven consumers, who are definitely part of the widget market, from the balance of the 100,000 potential consumers, who may or may not be part of the market. With that list, they would know to target their sales efforts on those 500 businesses, rather than on 500 other businesses who might never use widgets.

Now imagine the same facts, but assume that each of the other four sellers of widgets know that the businesses on Seller A’s customer list are proven widget consumers (although they do not know that those businesses buy their widgets from Seller A). Under those circumstances, Seller A’s customer list has no independent economic value, because the identities of those consumers are already known to his competitors.

In both situations, the identities of the businesses which bought widgets from Seller A are unknown. The distinguishing factor is whether it is also unknown that those businesses bought widgets at all. Thus, the customer list in the first hypothetical would be a protectable trade secret, while the list in the second hypothetical would not be.

This means, if your competitor and future employer already knows with whom you have relationships, from a source other than you, and hires you for those relationships, you can call on those clients. If you are a wine salesman for Distributor A, and you sell to Safeway, and Distributor B knows you sell to Safeway and hires you for that relationship, you can call on Safeway. Your former employer does not own the clients, only information that falls within the very specific definition of a trade secret. Information already known to the other side is not a secret.

As indicated above, the competitor must already know the information from a source other than you. Distributor B, in the above scenario, cannot learn from you that you have a great relationship with Safeway. He must learn it from someone else, like Safeway. But even this requirement is somewhat contradicted by other case law, as explained below.

2. When The Competitor Can Easily Ascertain Who They Are

While the first exception discussed above focuses on the identity of known clients, the next major exception concerns the identity of ascertainable clients. One Court of Appeal opinion reads:

A client list can be a “trade secret,” but not every client list qualifies. As one court put it in a very famous opinion, “With respect to the general availability of customer information, courts are reluctant to protect customer lists to the extent they embody information which is ‘readily ascertainable’ through public sources, such as business directories. [Citation.] On the other hand, where the employer has expended time and effort identifying customers with particular needs or characteristics, courts will prohibit former employees from using this information to capture a share of the market. Such lists are to be distinguished from mere identities and locations of customers where anyone could easily identify the entities as potential customers. [Citations.] … [¶]”

In the above-quoted case, Valentine Capital Retirement Planning Group, Inc. v. Wixon, investment advisors marketing to Chevron employees left their employer and were sued for continuing to contact the same Chevron employees. The Court of Appeal found that “the names, addresses and places of employment of Chevron employees are readily ascertainable from public sources.” The court continued, “the same is true of information about Valentine Capital’s services and fees.” The Court concluded, “none of this information, therefore, is a trade secret.”

The above case is unpublished and cannot be cited by attorneys as precedent, but probably for a technical error in the opinion. Whether a fact is “readily ascertainable” is not part of the definition of a trade secret in California, as stated by the court. As explained in the Abba Rubber case:

Section 1, subdivision (4)(i), of the Uniform Trade Secrets Act, as proposed by the National Conference of Commissioners on Uniform State Laws, refers to information which “derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use….” (14 West’s U.Laws Ann. (1990) § 1, p. 438; italics added.) However, when the Legislature adopted that provision as Civil Code section 3426.1, subdivision (d)(1), it deleted the highlighted phrase. That deletion apparently resulted from arguments that conditioning the scope of a trade secret on the extent to which the information was not readily ascertainable would “ ‘mudd[y] the meaning of the term trade secret’ ” and “ ‘invite[ ] the various parties to speculate on the time needed to discover a secret.’ ” (Comment, supra, 20 Loyola (Cal.) L.Rev. at p. 1214, fn. 231, quoting from Senate Comm. on Judiciary, Selected Bill Analyses (1984) A.B. 501, pp. 5–6.) In short, our Legislature chose to exclude from the definition only that information which the industry already knows, as opposed to that which the industry could easily discover.

Whether the information is “readily ascertainable” can still get you out of a jam, however. Courts have gotten around the Legislature’s omission by referring to the ascertainability as a “defense” instead of part of the definition of a trade secret. The above court opinion goes on:

While ease of ascertainability is irrelevant to the definition of a trade secret, “the assertion that a matter is readily ascertainable by proper means remains available as a defense to a claim of misappropriation.” (Legis. committee com., West’s Ann.Civ.Code, § 3426.1 (1991 pocket supp.) p. 111.) Therefore, if the defendants can convince the finder of fact at trial (1) that “it is a virtual certainty that anyone who manufactures” certain types of products uses rubber rollers, (2) that the manufacturers of those products are easily identifiable, and (3) that the defendants’ knowledge of the plaintiff’s customers resulted from that identification process and not from the plaintiff’s records, then the defendants may establish a defense to the misappropriation claim. That defense, however, will be based upon an absence of misappropriation, rather than the absence of a trade secret.

In short, if you have a list of prospective customers that you want to take with you, get the list another way. Buy it commercially or put it together from commercial sources. So long as you can show that you didn’t bring it from your old employer, you should have a defense to a misappropriation claim.

The commercial lists available today are fairly extensive and detailed. This raises another point. If you are leaving one employer for another and are going to canvas, say, the same Chevron employees, canvas all of them and not “the best” ones. It doesn’t help you to later find the names on a commercially available list if you used a different set of names – for example, only your old employer’s best customers – that is based on private information and is not publicly available. You are better off canvassing everyone using the commercially available information.

3. When The Information Has Already Been Given Away

Last but not least of the exceptions, you can take information with you that has already been given away. Like the exceptions above, it sounds simple but you will be amazed when you see how broadly it applies.

In the case we worked on, Retirement Group v. Galante, the defendants-investment advisors would trot out to do seminars on retirement and investing. Interested seminar attendees would provide their information to the advisor’s firm, called TRG. The investment advisor would then pass the information on to a broker-dealer, which is an actual financial institution that holds money, makes trades, etc. The broker-dealer had a policy that the investment advisor could see and use the broker-dealer’s client information.

Thus, in that case, the client information went from the client to the investment advisor’s firm to the broker-dealer, then back to the investment advisor, as follows:

Client > Investment Advisor Firm TRG > Broker Dealer > Investment Advisor Firm TRG

The investment advisors left the advisors’ firm, TRG. TRG sued and argued that the client information was a trade secret of the TRG. We successfully argued that the client information in this scenario was not a secret of TRG because TRG freely gave the information away to the broker-dealer. There was no agreement between the firm and the broker dealer governing the use of the information. In fact, the broker dealer had separate agreements with the investment advisors and a policy that the information was not secret as to the advisors. Thus, the investment advisors were free to change firms and continue to access the broker-dealer’s information, even if to solicit the clients to their new firm.

If you are thinking of taking clients with you, think about whether the client information is given away as part of the operation of the business. Do not assume that it is given away under a tight confidentiality agreement. In most cases, such an agreement may not exist or may have significant holes. In some cases, federal and/or state regulations may even require information be made available (for the benefit of consumers). If you can show that a third party has the information, and that you can obtain the information from that source, it may not matter if it was confidential at an early stage in the process.

A Word of Caution to Departing Employees

Customer lists should not be confused with customer information. A customer list, as that phrase is used in this article, means the name and contact information of the individual or business. Customer information, more broadly stated, can also include unique information not generally available. If we are talking about an insurance company, for example, the client’s different policies, endorsements and limits is customer information beyond a name and phone number. A bank will have information on the client’s finances. An investment advisor will have information on the client’s investment goals and strategies. While a name or address is readily ascertainable customer information, the same cannot be said for this other goal-oriented or strategic information. Thus, you may be able to contact the client from your new firm, but you may have to get some specifics from them a second time to avoid exposure.

The Death of the Non-Solicitation Clause

Everyone seems to know that, under California law, non-compete agreements are unenforceable with limited exceptions, i.e., when an owner of a business is selling his interest in the business. This rule is a direct result of the socio-economic policy mentioned at the outset, the policy in favor of an employee’s right to make a living, and is embodied in California’s Business and Professions Code § 16600.

Where people are confused is with respect to the enforceability of the non-compete’s agreement’s sister agreement, the non-solicitation provision. Businesspersons and even the majority of the State Bar, if you polled them, would say these provisions are enforceable in California.

They are not.

The central issue in Retirement Group v. Galante was whether the injunction issued in the case was too broad. Immediately after our clients formed a new company, they were sued and the trial court issued a preliminary injunction prohibiting certain conduct. Included in the list of prohibited activities was 1) using trade secrets and 2) contacting clients.

We appealed the injunction to the extent it prohibited contacting clients even when doing so would not involve the use of trade secrets. Under Bus. & Prof. Code § 16600, as interpreted by the California Supreme Court in Edwards v. Arthur Andersen LLP, we argued that such a prohibition was unlawful. The court of appeal agreed:

TRG next asserts that numerous cases have ruled former employees may not solicit customers of the former employer, and an injunction may be issued to prevent such solicitation. However, we have already concluded it is not the solicitation of the customers, but is instead the unfair competition or misuse of trade secret information, that may be enjoined. (See, e.g., Thompson v. Impaxx, Inc. (2003) 113 Cal.App.4th 1425, 1428–1430, 7 Cal.Rptr.3d 427 [“ ‘Antisolicitation covenants are void as unlawful business restraints except where their enforcement is necessary to protect trade secrets.’ ”].) Indeed, although TRG cites numerous cases holding an employee may be enjoined from soliciting persons on his or her employer’s trade-secret customer lists, Thompson’s rationale for rejecting an analogous argument (which we echo here) explained “respondents argue [that] the cases hold that a covenant which barred the salesmen from soliciting business from customers for one year after termination of employment passed muster under section 16600. However, respondents leave out the core of the cases’ reasoning: the information about the customers could be protected because it was confidential, proprietary, and/or a trade secret.” ( Thompson, at p. 1429, 7 Cal.Rptr.3d 427, italics added.) …

[The portion of the injunction prohibiting solicitation of clients has no effect] except to bar solicitations not involving the use of trade secret information, and the latter type of competition appears to constitute the type of conduct sanctioned by Edwards.

Thus, the old rule about sending a professional announcement and stopping there is dead. While trade secrets may be protected, a non-solicitation provision, by itself, is an anti-competitive agreement that is unlikely to be enforced beyond what is already protected by the Uniform Trade Secret Act.

Conclusion

Many employees believe that the customer relationships they forge and maintain over the years, and the information in their cell phone pertaining to those customers for example, are their own. That is not true. But, that also does not mean that you are out of options. There may be facts and/or circumstances that permit you to take your clients with you. If you are an employee thinking of leaving, whether you can use information and for what purpose depends entirely on the facts of your individual case. You are strongly encouraged to speak with an attorney that specializes in this area of law.

Prior Restraints

Gregory-J.-WoodThe law against preliminary injunctions restricting speech is nothing short of brutal:

“The right to free speech is … one of the cornerstones of our society,” and is protected under the First Amendment of the United States Constitution and under an “even broader” provision of the California Constitution. (Hurvitz v. Hoefflin (2000) 84 Cal.App.4th 1232, 1241, 101 Cal.Rptr.2d 558; see Cal. Const., art. I, § 2, subd. (a).) An injunction that forbids a citizen from speaking in advance of the time the communication is to occur is known as a “prior restraint.” (DVD Copy, supra, 31 Cal.4th at p. 886, 4 Cal.Rptr.3d 69, 75 P.3d 1; Hurvitz v. Hoefflin, supra, 84 Cal.App.4th at p. 1241, 101 Cal.Rptr.2d 558.) A prior restraint is “ ‘the most serious and the least tolerable infringement on First Amendment  *1167 rights.’ ” (DVD Copy, supra, 31 Cal.4th at p. 886, 4 Cal.Rptr.3d 69, 75 P.3d 1; Near v. Minnesota (1931) 283 U.S. 697, 713, 51 S.Ct. 625, 75 L.Ed. 1357.) Prior restraints are highly disfavored and presumptively violate the First Amendment. (Maggi v. Superior Court (2004) 119 Cal.App.4th 1218, 1225, 15 Cal.Rptr.3d 161; Hurvitz v. Hoefflin, supra, 84 Cal.App.4th at p. 1241, 101 Cal.Rptr.2d 558.) This is true even when the speech is expected to be of the type that is not constitutionally protected. (See Near v. Minnesota, supra, 283 U.S. at pp. 704–705, 51 S.Ct. 625 [rejecting restraint on publication of any periodical containing “malicious, scandalous and defamatory” matter].)67 To establish a valid prior restraint under the federal Constitution, a proponent has a heavy burden to show the countervailing interest is compelling, the prior restraint is necessary and would be effective in promoting this interest, and less extreme measures are unavailable. (See Hobbs v. County of Westchester (2d Cir.2005) 397 F.3d 133, 149; see also Nebraska Press Assn. v. Stuart (1976) 427 U.S. 539, 562–568, 96 S.Ct. 2791, 49 L.Ed.2d 683.) Further, any permissible order “must be couched in the narrowest terms that will accomplish the pin-pointed objective permitted by constitutional mandate and the essential needs of the public order….” (Carroll v. Princess Anne (1968) 393 U.S. 175, 183–184, 89 S.Ct. 347, 21 L.Ed.2d 325.)89 Even if an injunction does not impermissibly constitute a prior restraint, the injunction must be sufficiently precise to provide “a person of ordinary intelligence fair notice that his contemplated conduct is forbidden.” (United States v. Harriss (1954) 347 U.S. 612, 617, 74 S.Ct. 808, 98 L.Ed. 989; see also People ex rel. Gallo v. Acuna (1997) 14 Cal.4th 1090, 1115, 60 Cal.Rptr.2d 277, 929 P.2d 596.) An injunction is unconstitutionally vague if it does not clearly define the persons protected and the conduct prohibited.

Evans v. Evans, 162 Cal. App. 4th 1157, 1166-67, 76 Cal. Rptr. 3d 859, 867 (2008)

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Summary Judgment Motion

Gregory-J.-WoodThere are a few different tools defense lawyers can use to defend a case.  One tool is the motion for summary judgment and/or motion for summary adjudication (“MSJ/MSA”).

A MSJ/MSA says two things to the Court.  It first says that the material facts of the case are undisputed.  There is no need for a trial.  The Court can decide this one on the papers.  The Motion then says: under these undisputed facts and the applicable law, moving party should win the case.

Motions for summary judgment and/or summary adjudication of causes of action are weapons of mass destruction that rarely detonate.  There is strong public policy in favor of giving plaintiffs their day in Court.  So, judges are reluctant to grant MSJ/MSA’s.  Judges can usually find at least one or more material facts in dispute to support a denial.  At the firm, we tell our clients that the best MSJ/MSA ever written in the history of time had a 50% of winning.

That said, the potency of the motion makes it worth filing if there are grounds to do so.  Trial is absurdly expensive.  Defeating a claim – or even reducing it in scope – can save the client hundreds of thousands of dollars in fees and costs alone, not to mention resolve the dispute favorably.

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Contractors licensing law 7031

Gregory-J.-WoodUnder the Contractors’ State Licensing Law, “no person engaged in the business or acting in the capacity of a contractor, may bring or maintain any action, or recover in law or equity in any action, in any court of this state for the collection of compensation for the performance of any act or contract where a license is required by this chapter…”  Further, “A person who utilizes the services of an unlicensed contractor may bring an action in any court of competent jurisdiction in this state to recover all compensation paid to the unlicensed contractor for performance of any act or contract.”

Being able to claw back fees paid to someone that has done the work may seem like a draconian rule.  California Courts have said, however, regardless of the equities, section 7031 bars all actions, however they are characterized, which effectively seek “compensation” for illegal unlicensed contract work. (Lewis & Queen, 48 Cal.2d at pp. 150-152, 308 P.2d 713.)  Thus, an unlicensed contractor cannot recover either for the agreed contract price or for the reasonable value of labor and materials.  (See Davis Co. v. Superior Court (1969) 1 Cal.App.3d 156, 159, 81 Cal.Rptr. 453; Grant v. Weatherholt (1954) 123 Cal.App.2d 34, 41-42, 266 P.2d 185.)  The statutory prohibition operates where the person for whom the work was performed knew the contractor was unlicensed.  (Pickens, 269 Cal.App.2d at p. 302, 74 Cal.Rptr. 788; Cash v. Blackett (1948) 87 Cal.App.2d 233, 196 P.2d 585.)  The statutory prohibition even operates where the person for whom the work was performed engaged in fraud.  (Hydrotech Systems, Ltd. v. Oasis Waterpark (1991) 52 Cal.3d 988, 803 P.2d 370.

The appellate court in Pacific Custom Pools, Inc. v. Turner Construction Co. (2000) 79 Cal.App.4th at p. 1262, 94 Cal.Rptr.2d 756, stated the rule and then provided its explanation for the basis thereof as follows.  “ ‘Because of the strength and clarity of this policy, it is well settled that section 7031 applies despite injustice to the unlicensed contractor. “Section 7031 represents a legislative determination that the importance of deterring unlicensed persons from engaging in the contracting business outweighs any harshness between the parties, and that such deterrence can best be realized by denying violators the right to maintain any action for compensation in the courts of this state.” ‘ “ (79 Cal.App.4th at p. 1261, 94 Cal.Rptr.2d 756; citations omitted.

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Independent contractor versus employee

doug-039-2-255x255Whether a worker is an independent contractor or an employee largely turns on whether the employer “has the right to control the manner and means by which the worker accomplishes the work.”  Estrada v. FedEx Ground Package System, Inc., 154 Cal. App. 4th 1, 10 (2007); see Cal. Lab. Code § 3353 (defining independent contractor as “any person who renders service for a specified recompense for a specified result, under the control of his principal as to the result of his work only and not as to the means by which such result is accomplished”); S.G. Borello & Sons, Inc. v. Department of Indus. Relations, 48 Cal. 3d 341, 350 (1989) (noting that “[the] principal test of an employment relationship is whether the person to whom service is rendered has the right to control the manner and means of accomplishing the result desired”); see also In re Brown, 743 F.2d 664, 667 (9th Cir. 1984) (stating that, under California law, “the most significant factor is the right to control the means by which the work is accomplished”).  Even the trial court in our case agreed that this factor is the “most significant question in the independent contractor/employee determination.”  (6 AA at 1728.)

“While . . . the right to control work details is the ‘most important’ or ‘most significant’ consideration, the authorities also endorse several ‘secondary’ indicia of the nature of a service relationship.”  S.G. Borello & Sons, Inc., 48 Cal. 3d at 350.  Those “secondary indicia” “have been derived principally from the Restatement Second of Agency.”  Id. at 351.  They include,

(1) whether the worker is engaged in a distinct occupation or business, (2) whether, considering the kind of occupation and locality, the work is usually done under the principal’s direction or by a specialist without supervision, (3) the skill required, (4) whether the principal or worker supplies the instrumentalities, tools, and place of work, (5) the length of time for which the services are to be performed, (6) the method of payment, whether by time or by job, (7) whether the work is part of the principal’s regular business, and (8) whether the parties believe they are creating an employer-employee relationship.

Estrada, 154 Cal. App. 4th at 10; see Antelope Valley Press, 162 Cal. App. 4th at 852-53.  Additionally, S.G. Borello & Sons Inc. also

noted with approval the six-factor test developed by other jurisdictions [which b]esides the right to control the work . . . include[s] (1) the alleged employee’s opportunity for profit or loss depending on his managerial skill; (2) the alleged employee’s investment in equipment or materials required for his task, or his employment of helpers; (3) whether the service rendered requires a special skill; (4) the degree of permanence of the working relationship; and (5) whether the service rendered is an integral part of the alleged employer’s business.

Bowman v. Wyatt, 186 Cal. App. 4th 286, 301 (2010) (internal quotation marks omitted) (citing S.G. Borello & Sons, Inc., 48 Cal. 3d at 354–55).  If these were not enough criteria to consider, the courts have found that the “the right to discharge at will without cause” is yet another “secondary factor . . . constituting strong evidence in support of an employment relationship” and against a contractor relationship.  Angelotti v. Walt Disney Co., 192 Cal. App. 4th 1394, 1404 (2011); see S.G. Borello & Sons, Inc., 48 Cal. 3d at 350; Kowalski v. Shell Oil Co., 23 Cal. 3d 168, 177 (1979).  Failure to consider these secondary factors is considered error.  See Bowman, 186 Cal. App. at 303-304 (holding that CACI jury instruction did not articulate a “correct statement of the law” because it failed to “instruct the jury that it must weigh all of [the secondary] factors”); Messenger Courier Assn. of Americas v. Cal. Unemployment Ins. Appeals Bd.,175 Cal. App. 4th 1074, 1095 (2009).

The fact that there is a contract between the parties that characterizes the relationship between the Parties as contractor/client or employee/employer is of limited relevance in determining a worker’s proper classification under law:  “The agreement characterizing the relationship as one of client – independent contractor will be ignored if the parties, by their actual conduct, act like employer – employee.”  Toyota Motor Sales U.S.A., Inc. v. Superior Court, 220 Cal. App. 3d 864, 877 (1990) (internal quotations omitted); see Tieberg v. Unemployment Ins. App. Bd., 2 Cal. 3d 943, 952 (1970).  “Indeed, attempts to conceal employment by formal documents purporting to create other relationships have led the courts to disregard such terms whenever the acts and declarations of the parties are inconsistent therewith.”  Toyota Motor Sales U.S.A., Inc., 220 Cal. App. 3d at 877; see, e.g., Pacific Lbr. Co. v. Ind. Acc. Com., 22 Cal. 2d 410, 422 (1943); White v. Uniroyal, Inc., 155 Cal. App. 3d 1, 27 (1984); Bemis v. People, 109 Cal. App. 2d 253, 266 (1952); Lewis v. Constitution Life Co., 96 Cal. App. 2d 191, 194 (1950).  As a matter of law it is not particularly relevant what an agreement might say about labor classification between the parties.

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Religious Land Use and Institutionalized Persons Act aka RLUIPA

doug-039-2-255x255“RLUIPA is the latest skirmish in a tug of war between Congress and the Supreme Court over the meaning and application of the Free Exercise Clause of the United States Constitution.” (Lennington,Thou Shalt Not Zone: The Overbroad Applications and Troubling Implications of RLUIPA’s Land Use Provisions (2006) 29 Seattle U. L.Rev. 805, 806–807.) Adopted in response to the Supreme Court’s partial invalidation of the Religious Freedom Restoration Act, title 42 United States Code section 2000bb (RFRA), in City of Boerne v. Flores (1997) 521 U.S. 507 [117 S.Ct. 2157, 138 L.Ed.2d 624], RLUIPA applies to a government’s implementation of land use regulations so long as the government makes, or has in place procedures allowing it to make, “individualized assessments of the proposed uses for the property involved.” (42 U.S.C. § 2000cc (a)(2)(C).) If applicable, RLUIPA prohibits a government from implementing a land use regulation in a way that “imposes a substantial burden” on one’s “religious exercise” unless the burden satisfies strict scrutiny.8 In passing the Act, Congress intended to relax the requirement under First Amendment jurisprudence that the “religious exercise” be central to the individual’s religion. Under RLUIPA, free exercise includes “any exercise of religion, whether or not compelled by, or central to, a system of religious belief.” (42 U.S.C. § 2000cc–5(7)(A).) *118 Particularly relevant to our inquiry here, RLUIPA provides that “[t]he use, building, or conversion of real property for the purpose of religious exercise shall be considered to be religious exercise of the person or entity that uses or intends to use the property for that purpose.” (42 U.S.C. § 2000cc–5(7)(B).)

A RLUIPA substantial burden analysis proceeds in sequential steps.  First we look, as a threshold question, to determine if the government has made an “individualized assessment” in its implementation of laws affecting land.  42 U.S.C. § 2000cc(a)(2)(C).  Second, “the plaintiff must demonstrate that a government action has imposed a substantial burden on the plaintiff’s religious exercise.”  Int’l Church of Foursquare Gospel v. City of San Leandro, 673 F.3d 1059, 1066 (9th Cir. 2011) [hereinafter Foursquare Gospel]; see 42 U.S.C. § 2000cc(a)(1) (providing that a land-use regulation “impos[ing] a substantial burden on the religious exercise of a . . . religious assembly or institution” is unlawful).  Finally, “once the plaintiff has shown a substantial burden, the government must show that its action was the least restrictive means of further[ing] a compelling governmental interest.”  Id.

In the United Methodist Church case, we argued the pending demolition and CUP permits qualified for RLUIPA protection.  Courts have repeatedly held that a city’s “treatment of [a] Church’s [CUP] applications” which include a demolition permit “constitutes an ‘individualized assessment’” subject to RLUIPA.  Foursquare Gospel, 673 F.3d at 1066; see Guru Nanak, 456 F.3d at 987 (same); Acad. of Our Lady of Peace v. City of San Diego, 09-CV962 (WQH) (AJB), 2010 WL 1329014, at *10 (S.D. Cal. Apr. 1, 2010) (examining whether a CUP that included a demolition permit was subject to RLUIPA and “conclude[ing] that RLUIPA applies in this case”).

We further argued the second part of the test, a substantial burden existed because, as a consequence of a city’s denial of a CUP—a CUP which includes a demolition permit—the religious organization suffered the “ultimate burden on the use of the [affected] land,” the burden of effective non-use of that land, quoting:

The burden on the Church’s use of land in this case is not only substantial, but entire. By denying the conditional use permit, the City has effectively barred any use by the Church of the real property in question. This is not a case where the Church’s proposed use of land—equated with “religious exercise” by RLUIPA—is restricted in a minor or “unsubstantial” way (e.g., by limiting a building’s size or occupancy). Rather, the denial of the CUP bars the Church’s use altogether, thereby imposing the ultimate burden on the use of that land.

Elsinore Christian Ctr. v. City of Lake Elsinore, 291 F. Supp. 2d 1083, 1090 (C.D. Cal. 2003), reversed on other grounds, Elsinore Christian Ctr. v. City of Lake Elsinore, 197 Fed. Appx. 718, 719 (9th Cir. 2006) (reversing the district court’s holding that RLUIPA was unconstitutional but affirming the district court’s holding that the City violated RLUIPA).

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California State Law

Gregory-J.-Wood

In 1963, the State of California enacted Government Code sections 25373 and 37361.  Section 25373 provides in pertinent part:

(b) The board may, by ordinance, provide special conditions or regulations for the protection, enhancement, perpetuation, or use of places, sites, buildings, structures, works of art and other objects having a special character or special historical or aesthetic interest or value.
§ 37361 is identical and applies to cities.

In enacting subsection (b), the State Legislature expressly granted to cities and counties broad powers to regulate and protect all kinds of structures.  (Cal. Govt. Code §§ 25737 and 37361.)

The broad power granted by subsection (b) encompasses not only landmarking but all manner of preservation.  In fact, the word “landmark” is not used.  (Cal. Govt. Code §§ 25737(b) and 37361(b).)

In 1994, by Assembly Bill No. 133, the broad powers granted to cities and counties by subsection (b) were expressly taken away from cities and counties with respect to noncommercial property held by religious organizations.  The Legislature amended both statutes to allow religiously affiliated organizations to exempt their noncommercial property (“exempt property”) from the placement of any condition, or any regulation, for the protection, enhancement, perpetuation, or use of said property.  Subsection (d) provides:

Subdivision (b) shall not apply to noncommercial property owned by any association or corporation that is religiously affiliated and not organized for private profit …

(Cal. Govt. Code § 25737(d).)

Thus, in 1963, the State of California expressly granted to local governments broad powers to regulate and protect all kinds of structures and, in 1994, expressly took that power away from local governments with respect to exempt property.  The result is that local governments are without power to place any “special conditions or regulations for the protection, enhancement, perpetuation, or use of places, sites, buildings, structures, works of art and other objects having a special character or special historical or aesthetic interest or value.”  (Cal. Govt. Code §§ 25737 and 37361.)

The California Supreme Court has discussed the purpose of the Government Code exemptions, which is to protect religious freedom:

An explanation of the purpose of the exemption subdivisions was included in Senate Bill No. 1185 (1993–1994 Reg. Sess.), the 1993 legislation, and in Assembly Bill No. 133 (1993–1994 Reg. Sess.), the 1994 bill (hereafter Assembly Bill No. 133), each of which, after noting that historic landmark restrictions were not related to or compelled by public health or safety concerns, stated: “Sections 1 and 2 of this act ensure the protection of religious freedom guaranteed by Section 4 of Article I of the California Constitution and by the First Amendment to the United States Constitution.” (Stats.1993, ch. 419, § 7, p. 2388; see Stats.1994, ch. 1199, § 3 [substantially identical].)

East Bay Asian Local Dev. Corp. v. State of Cal., 24 Cal.4th 693, 702 (2000) (East Bay).

The legislative history is even more specific.  With respect to the Senate bill, Section 7 of Stats.1993, c. 419 (S.B.1185), provides:

“(a) The Legislature hereby finds and declares that Section 2 of this act addresses a matter of statewide interest and concern… (b) Sections 1 and 2 of this act ensure the protection of religious freedom guaranteed by Section 4 of Article I of the California Constitution and by the First Amendment to the United States Constitution.”

(West’s Ann. Cal. Govt. Code § 25373.)

With respect to the Assembly bill, Section 3 of Stats.1994, c. 1199 (A.B.133), provides:

“Sections 1 and 2 of this act address a matter of statewide interest and concern…

Therefore, Sections 1 and 2 of this act ensure the protection of religious freedom guaranteed by Section 4 of Article I of the California Constitution, and by the First Amendment to the United States Constitution.”

(West’s Ann. Cal. Govt. Code § 25373.)

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