The Death of the Non-Solicitation Clause

Gregory-J.-Wood

Partner

Since the California Supreme Court decision in Edwards v. Arthur Andersen, LLP, non-solicitation clauses have been held to be generally unenforceable.  There were two exceptions to this general rule.  Today, there may be none.

Solicitation Clauses are Generally Unenforceable

In Edwards v. Arthur Andersen, LLP, the employee, Edwards, signed a non-solicitation agreement.  When Edwards began soliciting past clients, Andersen sued.  At issue was the general enforceability of non-soliciation clauses.

The Edwards court said Business & Professions Code section 16600 “protects ‘the important legal right of persons to engage in businesses and occupations of their choosing’” (Edwards (2008), 44 Cal.4th at p. 946 quoting Morlife, Inc. v. Perry (1997) 56 Cal.App.4th 1514, 1520), and under section 16600’s plain meaning “an employer cannot by contract restrain a former employee from engaging in his or her profession, trade, or business unless the agreement falls within one of the exceptions” to section 16600. (Edwards, at p. 946.)  The Edwards court rejected Andersen’s argument that the term “restrain” under section 16600 should result in non-competition clauses being unenforceable while lesser restrictive non-solicitation and other like provisions should be permitted.

In a case that I worked on, The Retirement Group v. Galante, the trial court issued a preliminary injunction enjoining the defendants from soliciting past clients, which was appealed.  The appellate court reviewed the Edwards decision and its predecessors and came to the following, very interesting, conclusion:

We distill from the foregoing cases that section 16600 bars a court from specifically enforcing (by way of injunctive relief) a contractual clause purporting to ban a former employee from soliciting former customers to transfer their business away from the former employer to the employee’s new business, but a court may enjoin tortious conduct (as violative of either the Uniform Trade Secrets Act and/or the Unfair Competition Law) by banning the former employee from using trade secret information to identify existing customers, to facilitate the solicitation of such customers, or to otherwise unfairly compete with the former employer.

Retirement Group v. Galante (2009) 176 Cal.App.4th 1226, 1238 [98 Cal.Rptr.3d 585, 593].

It may help the lay reader to know, in the world of litigation, there are two kinds of claims: contract claims and everything else, known as tort claims.  The above passage is saying that the courts will not enforce contractual provisions that run up against Business and Professions Code Section 16600.

Possible Exceptions to the Ban on Non-Solicitation Clauses

We know that non-solicitation clauses are generally not enforceable to restrain competition.  So, the question is: When is a non-solicitation provision in a contract enforceable, if ever?

#1: Clauses Limited to Protecting Trade Secrets

Although Edwards reaffirmed the broad California rule that invalidates noncompetition agreements falling outside of statutorily-prescribed exceptions, Edwards expressly stated it was not “address[ing] the applicability of the so-called trade secret exception to section 16600[.]” (Edwards, supra, 44 Cal.4th at p. 946, fn. 4, 81 Cal.Rptr.3d 282, 189 P.3d 285.)

In so doing, the Edwards Court acknowledged the existence of an exception, i.e., for a contractual provision that prohibits the use of company trade secrets in soliciting customers, but did not give the exception a lot of attention or weight.  Indeed, the Supreme Court’s use of the phrase “the so-called trade secret exception” suggests the Supreme Court is less than certain such an exception actually exists, and lower court decisions have inadvertently resolved the question in favor of the general ban.

In a case called Dowell v. Biosense Webster, Inc., the Court of Appeal had this to say:

Biosense contends that the clauses are valid because they were tailored to protect trade secrets or confidential information, and as such satisfy the socalled trade secret exception, citing cases such as Thompson v. Impaxx, Inc. (2003) 113 Cal.App.4th 1425, 1429–1430, 7 Cal.Rptr.3d 427; Whyte v. Schlage Lock Co. (2002) 101 Cal.App.4th 1443, 1462, 125 Cal.Rptr.2d 277; Metro Traffic, supra, 22 Cal.App.4th at p. 860, 27 Cal.Rptr.2d 573; and American Paper & Packaging Products, Inc. v. Kirgan (1986) 183 Cal.App.3d 1318, 1322, 228 Cal.Rptr. 713. Plaintiffs counter that in light of our Supreme Court’s recent decision of Edwards, supra, 44 Cal.4th 937, 81 Cal.Rptr.3d 282, 189 P.3d 285, a common law trade secret exception no longer exists.
The Court in Edwards concluded that section 16600 “prohibits employee noncompetition agreements unless the agreement falls within a statutory exception.” (Edwards, supra, 44 Cal.4th at p. 942, 81 Cal.Rptr.3d 282, 189 P.3d 285.) In rejecting the Ninth Circuit’s “narrow-restraint” exception to section 16600 (Edwards, supra, at pp. 948–950, 81 Cal.Rptr.3d 282, 189 P.3d 285), the Court stated: “Section 16600 is unambiguous, and if the Legislature intended the statute to apply to restraints that were unreasonable or overbroad, it could have included language to that effect. We … leave it to the Legislature, if it chooses, either to relax the statutory restrictions or adopt additional exceptions to the prohibition-against-restraint rule under section 16600” (id. at p. 950, 81 Cal.Rptr.3d 282, 189 P.3d 285). The Court went on to state: “Noncompetition agreements are invalid under section 16600 in California even if narrowly drawn, unless they fall within the applicable statutory exceptions of section 16601, 16602, or 16602.5.” (Id. at p. 955, 81 Cal.Rptr.3d 282, 189 P.3d 285.) Biosense notes that the Edwards Court relied on its prior decision in Muggill v. Reuben H. Donnelley Corp. (1965) 62 Cal.2d 239, 242, 42 Cal.Rptr. 107, 398 P.2d 147 (Muggill ), which held that section 16600 invalidates provisions in employment contracts that “prohibit[ ] an employee from working for a competitor after completion of his employment … unless they are necessary to protect the employer’s trade secrets.” In a footnote, the Edwards Court stated: “We do not here address the applicability of the socalled trade secret exception to section 16600, as Edwards does not dispute that portion of his agreement or contend that the provision of the noncompetition agreement prohibiting him from recruiting Andersen’s employees violated section 16600.” (Edwards, supra, at p. 946, fn. 4, 81 Cal.Rptr.3d 282, 189 P.3d 285.) Given this language, Biosense argues that the trade secret exception is still “alive and well.”
Plaintiffs argue that the trade secret exception rests on shaky ground in the first place. They point out that many of the cases recognizing a trade secret exception cite to Muggill and that the language in Muggill regarding a trade secret was dicta, as no trade secrets were at issue in that case. Plaintiffs also point out that Muggill, in turn, relied on Gordon v. Landau (1958) 49 Cal.2d 690, 321 P.2d 456, a “trade route” case in which the employee was a door-to-door salesman, whose employment agreement prevented him from divulging the names of his prior customers or soliciting their business for one year following termination of employment. TheGordon court concluded that the agreement was valid under section 16600 because it did not restrain the employee from engaging in his profession. (Gordon v. Landau, supra, at p. 694, 321 P.2d 456.) Plaintiffs suggest that the trade secret exception should be limited to “the narrow and antiquated circumstances of door-to-door trade routes” where it is proven that the identity of the customers is a trade secret. Biosense counters that the exception has not been so limited, noting, for example, that the exception was at issue inMetro Traffic, supra, 22 Cal.App.4th 853, 27 Cal.Rptr.2d 573, a case having to do with the news radio business and not trade routes.
At oral argument, plaintiffs’ counsel discussed the recent case of The Retirement Group v. Galante (2009) 176 Cal.App.4th 1226, 98 Cal.Rptr.3d 585 (Galante ), the first published California case to discuss Edwards reference to the trade secret exception in footnote four.3 The Galante court stated that “Edwards did not approve the enforcement of noncompetition clauses whenever the employer showed the employee had access to information purporting to be trade secrets. Instead, Edwards merely stated it was not required to ‘address the applicability of the socalled trade secret exception to section 16600’ (Edwards, supra, 44 Cal.4th at p. 946, fn. 4, 81 Cal.Rptr.3d 282, 189 P.3d 285) because it was not germane to the claims raised by the employee.” (Galante, supra, at p. 1239, 98 Cal.Rptr.3d 585.) In reconciling the “tension” between section 16600 and trade secrets, the Galante court stated: “We distill from the foregoing cases that section 16600 bars a court from specifically enforcing (by way of injunctive relief) a contractual clause purporting to ban a former employee from soliciting former customers to transfer their business away from the former employer to the employee’s new business, but a court may enjoin tortious conduct (as violative of either the Uniform Trade Secrets Act (Civ.Code, § 3426 et seq.) and/or the unfair competition law) by banning the former employee from using trade secret information to identify existing customers, to facilitate the solicitation of such customers, or to otherwise unfairly compete with the former employer. Viewed in this light, therefore, the conduct is enjoinable not because it falls within a judicially created ‘exception’ to section 16600’s ban on contractual nonsolicitation clauses, but is instead enjoinable because it is wrongful independent of any contractual undertaking.” (Galante, supra, at pp. 1233, 1238, 98 Cal.Rptr.3d 585.)

Although we doubt the continued viability of the common law trade secret exception to covenants not to compete, we need not resolve the issue here.  Even assuming the exception exists, we agree with the trial court that it has no application here. This is so because the noncompete and nonsolicitation clauses in the agreements are not narrowly tailored or carefully limited to the protection of trade secrets, but are so broadly worded as to restrain competition. (See Kolani v. Gluska, supra, 64 Cal.App.4th at p. 407, 75 Cal.Rptr.2d 257 [finding as a matter of law on demurrer that a noncompete clause was void because it was not “narrowly tailored” but “an outright prohibition on competition”].)

Dowell v. Biosense Webster, Inc. (2009) 179 Cal.App.4th 564, 575-77 [102 Cal.Rptr.3d 1, 9-11].

Though the Dowell Court claimed to not decide whether the exception exists, in a way, it actually did.  The effect of this ruling is to say any contractual provision that is not strictly limited to the use of trade secrets, but rather, is more broad, will run afoul of Business & Professions Code Section 16600.  The court leaves open the possibility that a clause limited to banning the use of trade secrets is enforceable.

But no one would ever need to enforce a contractual provision that prohibits the use of trade secrets because such a provision is already enjoinable under the California Unifrom Trade Secrets Act (“UTSA”).

In sum, so much for the “so-called” trade secret exception.

#2: Enforcement to Prevent “Unfair Competition”

The Unfair Competition Law (“UCL”) can be found at Business & Professions Code Section 17200.  It generally prohibits any “unlawful” or “unfair” acts or practices and permits the courts to enjoin such conduct in the name of healthy market competition.The UCL was widely used by plaintiffs lawyers since it originally permitted what are called, “private attorney general” actions, which are basically class actions without the strict requirements needed for an actual class-action.  In 2004, California voters passed Proposition 64, which eliminated this right.  The UCL is now generally just used for its injunction power and to get restitution in applicable cases.

Under UCL case law, an “unlawful” act or practice is a practice that violates some other law or regulation.  An “unfair” practice is one that is misleading or deceptive.  It is a much squishier concept.

The question we should concern ourselves with is: Can an employer ban solicitation not tied to the use of trade secrets under the UCL?

In Morlife, Inc. v. Perry (1997) 56 Cal.App.4th 1514, 1519., the Court of Appeal stated: “While it has been legally recognized that a former employee may use general knowledge, skill, and experience acquired in his or her former employment in competition with a former employer, the former employee may not use confidential information or trade secrets in doing so.” (Ibid.)  This suggests that there was a difference between “confidential information” on the one hand and trade secrets on the other. In a 2005 case called Readylink, the court first analyzed whether the customer list at issue was a trade secret and concluded that it was.  Readylink quoted another case, Courtesy Temporary Services Inc., in its analysis:

In Courtesy, the plaintiff, a temporary employment agency, provided various companies with temporary workers. The defendants, former employees of the agency, admitted scheming to form a competitive business and compiled a list of the agency’s major customers while employed by the agency. The agency sued the defendants for unfair trade practices and injunctive relief for setting up a competing agency. The trial court issued a preliminary injunction enjoining the former employees from soliciting the agency’s customers and temporary labor force. The trial court also found, however, that the agency’s customer list and related information was unprotected work product, and thus denied an injunction enjoining use and disclosure of the information.

The Courtesy court reversed the trial court ruling denying the injunction, concluding the customer list was a protectable trade secret under the UTSA and unfair competition statutes. In reaching this conclusion, the Courtesy court noted that the UTSA and case law “establish that a customer list procured by substantial time, effort, and expense is a protectable trade secret.” (Courtesy Temporary Service, Inc. v. Camacho, supra, 222 Cal.App.3d at p. 1287, 272 Cal.Rptr. 352.) Such a list is a protectable trade secret even if the list contains information available to the public or competitors: “[E]ven if the customers’ names could be found in telephone or trade directories, such public sources ‘ “would not disclose the persons who ultimately made up the list of plaintiff’s customers.” ’ [Citation.] It is the list of persons who actually purchase Courtesy’s services that constitute confidential information.” (Courtesy, supra, at p. 1288, 272 Cal.Rptr. 352.)

The Courtesy court thus concluded that “Here, the evidence established that Courtesy’s customer list and related information was the product of a substantial amount of time, expense and effort on the part of Courtesy. Moreover, the nature and character of the subject customer information, i.e., billing rates, key contacts, specialized requirements and markup rates, is sophisticated information and irrefutably of commercial value and not readily ascertainable to other competitors. Thus, Courtesy’s customer list and related proprietary information satisfy the first prong of the definition of ‘trade secret’ under section 3426.1.” (Courtesy Temporary Service, Inc. v. Camacho, supra, 222 Cal.App.3d at p. 1288, 272 Cal.Rptr. 352.)

Likewise, here, some of the enjoined information might have been available to the public and/or to ReadyLink’s competitors but there is substantial evidence establishing that ReadyLink’s lists of hospitals and nurses, as well as other proprietary and confidential information listed in the preliminary injunction, were procured by substantial time, effort, and expense.

Considering the admitted misappropriation of sophisticated, detailed customer information and active solicitation by Cotton in the instant case, the trial court’s granting ReadyLink injunctive relief was not an abuse of discretion. (Courtesy Temporary Service, Inc. v. Camacho, supra, 222 Cal.App.3d at pp. 1290–1291, 272 Cal.Rptr. 352.) In Courtesy, the court also found that the trial court should have granted a preliminary injunction under the unfair competition provisions, Business and Professions Code section 17200, et seq. (Courtesy, supra, at p. 1291, 272 Cal.Rptr. 352.) The court concluded that, “even if Courtesy’s customer list would not qualify as a ‘trade secret’ under section 3426.1 [of the UTSA], the unfair and deceptive practices of employees in stealing Courtesy’s customers should have been enjoined under Business and Professions Code section 17200 et seq.” (Ibid.)

ReadyLink Healthcare v. Cotton (2005) 126 Cal.App.4th 1006, 1019-20 [24 Cal.Rptr.3d 720, 729-30].

It is the next part of the Readylink decision that is of interest here because it goes on to suggest the use is also enjoinable under the UCL separate and apart from the trade secrets act:

In discussing unfair competition, the court in Courtesy explained that a former employee has the right to compete with his former employer, even for the business of those who had formerly been the customers of his former employer, provided such competition is fairly and legally conducted and so long as it does not constitute unfair competition: “[A] former employee’s use of confidential information obtained from his former employer to compete with him and to solicit the business of his former employer’s customers, is regarded as unfair competition. [Citation.]” (Courtesy Temporary Service, Inc. v. Camacho, supra, 222 Cal.App.3d at p. 1292, 272 Cal.Rptr. 352.)

In the instant case, there is ample evidence supporting the trial court’s finding that Cotton misappropriated trade secret information and committed acts of unfair competition such that it is reasonably likely ReadyLink will prevail on its misappropriation claims and that denying a preliminary injunction will likely cause irreparable harm to ReadyLink.

ReadyLink Healthcare v. Cotton (2005) 126 Cal.App.4th 1006, 1020-21 [24 Cal.Rptr.3d 720, 730].

Edwards was published in 2008, and after that came The Retirement Group v. Galante passage, which states:

We distill from the foregoing cases that section 16600 bars a court from specifically enforcing (by way of injunctive relief) a contractual clause purporting to ban a former employee from soliciting former customers to transfer their business away from the former employer to the employee’s new business, but a court may enjoin tortious conduct (as violative of either the Uniform Trade Secrets Act and/or the Unfair Competition Law) by banning the former employee from using trade secret information to identify existing customers, to facilitate the solicitation of such customers, or to otherwise unfairly compete with the former employer.

Retirement Group v. Galante (2009) 176 Cal.App.4th 1226, 1238 [98 Cal.Rptr.3d 585, 593].
The idea here, which might excite employers, is that there is “confidential information” that is not a trade secret that may be protected under the UCL.

The problem is that all of these cases were basically decided employing trade secret principles.  There is no case supporting a ban on solicitation under the UCL that would not otherwise qualify under the trade secret law.  There is also, if not another way of saying the same thing, no guidance on what information might be considered “confidential” that would not quality as a trade secret, i.e., is valuable because it is secret.  Still, if you are an employer drafting a complaint against employees who have departed and are soliciting your customers

Conclusion

At the end of the day, we can say with confidence that contractual provisions prohibiting solicitation of customers are dead and gone.  They are unenforceable, period.  As far as prohibiting solicitation under something other than the Uniform Trade Secrets Act, employers have some hope of preventing “unfair” competition under the Unfair Competition Law, and will want to pursue that when discussing their case with an attorney.  But, their optimism should be mitigated.  The Edwards decision, re-enforcing an a California employee’s right to compete but for cases in which trade secrets are at issue, will likely result in any use of information that does not qualify as a trade secret as fair game.

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)

CLOSE
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.

CLOSE
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.

CLOSE
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.

CLOSE
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).

CLOSE
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.)

CLOSE
Disclaimer

Every legal dispute is infinitely different.  Successes in other cases are not a guarantee or prediction of success in your case.

The articles and information on this site are based on California law at the time they were written. They are informational only and should not be relied upon except in conjunction with the advice and counsel of an attorney licensed to practice law. Everyone’s situation is different and general advice, as is discussed here, is not helpful in a particular case.

If you are in the process of making decisions that may have legal consequences, you must contact a lawyer to update you on the current law and apply it to your specific facts. If you are interested is discussing potential representation by Wood Robbins, LLP, call for a free consultation (415) 247-7900. Your communications may be privileged, but the firm does not represent you as your lawyer unless and until a written fee agreement is signed and in effect.

CLOSE