Pennies Heaven from Visit us online at www.lacba.org

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March 2007 / $4
E A R N MCLE CR E D I T
2006 Ethics
Roundup
page 29
Pennies
from Heaven
Los Angeles lawyers
Theodore E. Calleton
and Jeffrey C. De Francisco
describe how to minimize
taxation of the post-death
income of a revocable trust
page 20
PLUS
Divisibility of Copyright page 11
Taxation of Noncompetition Income page 16
Electronic Invoice Auditing Services page 39
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F E AT U R E S
20 Pennies from Heaven
BY JEFFREY C. DE FRANCISCO AND THEODORE E. CALLETON
Practitioners now have several strategies to minimize the taxation of post-death
income in revocable trusts
29 2006 Ethics Roundup
BY JOHN W. AMBERG AND JON L. REWINSKI
After a year of scandals emanating from the practice of law in California,
revisions of the Rules of Professional Conduct are on the horizon
Plus: Earn MCLE legal ethics credit. MCLE Test No. 157 appears on page 31.
D E PA RT M E N T S
Los Angeles Lawyer
the magazine of
The Los Angeles County
Bar Association
March 2007
Volume 30, No. 1
10 Barristers Tips
Preparing for and making an ex parte
application
39 Computer Counselor
Preparing legal departments for
electronic invoice review
BY JAMES T. RYAN
BY KEN SWENSON
11 Practice Tips
Divisibility of copyrights in the
digital age
44 Closing Argument
A challenge to Governor
Schwarzenegger’s record on
judicial diversity
BY ROBERT LYON
COVER PHOTO: TOM KELLER
16 Tax Tips
Taxation of noncompetition income
in California
BY GARY A. FARWELL
41 Classifieds
42 Index to Advertisers
43 CLE Preview
03.07
BY JOHN B. MCCAULEY
There is no substitute for experience.
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ATTENTION
LOS ANGELES
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without notice. 1206-45
From the Chair
AX
fter closing the books and receiving our bonuses for
2006, many of us begin to reflect on whether the
total compensation received for the prior year is
commensurate with market pay and what we believe we are
worth. Associates, partners, and staff begin to cast their gaze
at potentially better opportunities elsewhere. Certainly it is human nature to be curious, or perhaps change is on the horizon.
No matter the reason, questions such as “am I paid what I deserve?” or “am I being
rewarded for contributing more than others or beyond expectations?” are on lawyers’
minds. Those of us who are not solo practitioners are most often compensated based
on a structure of calculations. Oftentimes, these structures consist of a base salary and
a performance bonus, with the bonus determined by a supposedly objective standard
based on hours billed in excess of a certain requirement. Other compensation systems
are subjective, rewarding individuals based on their perceived contribution to the overall profitability and well-being of the firm. This structure is usually encountered in small
firms. Additionally, some structures offer rewards for bringing in clients. However, I
have talked with several associates who do not receive compensation for bringing clients
to their firms. Perhaps these firms feel that discouraging an associate from acquiring
a client base is a good retention strategy.
A compensation structure is a reflection of the firm’s culture and the lifestyle it
promotes. Indeed, compensation consists of more than just pay. Feeling like a necessary, valuable, and respected member of the team can be an integral aspect of compensation. Benefits also play an important role, yet many firms fail to adequately provide for their employees. While enhancing the economic component of compensation,
benefits are a reflection of the firm’s appreciation for, and sense of responsibility
toward, its employees.
Finally, learning experience can be part of the package. After all, whatever is learned
will be a part of an employee’s skills wherever he or she goes. Certain benefits, therefore, can be an integral part of compensation and an effective retention strategy.
For 2007, the research that I have encountered indicates that companies are moving away from giving raises across the board and are, instead, back-loading compensation by rewarding their best contributors through large bonuses that sometimes exceed
base pay. Employers are trying to give renewed meaning to the word “merit” in
bonuses. This structure sends the message that showing up for work is just not
enough. For employees, this means that employers are willing to pay more to retain
their top contributors, since it is difficult to find and retain the best and the brightest.
Whatever the structure, after total annual compensation for the past year is received
and compensation going forward is set, we must all feel that we have been fairly recognized and rewarded for our individual contributions. Otherwise, it will not be long
before our productivity is affected, partly by being demoralized and partly due to
spending more time looking for a better opportunity. We all have enough to worry
about in trying to serve our clients and stay on top of developments in our practice
area. Our goal is to be as effective as possible, and wasting our time wondering
whether the grass is greener on the other side will not get us any closer to reaching
that goal. Wherever you find yourself in the compensation calculations, I hope you feel
that you received a fair deal and that the grass is green enough where you are.
■
Jacqueline M. Real-Salas is a partner at Calleton, Merritt, De Francisco & Real-Salas, LLP, where
she specializes in estate planning, trust administration, probate, and elder law. She is the
chair of the 2006-07 Los Angeles Lawyer Editorial Board.
8 Los Angeles Lawyer March 2007
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AL9416
barristers tips
BY JAMES T. RYAN
Preparing for and Making an Ex Parte Application
In the Central District of Los Angeles, ex parte applications are
EX PARTE RELIEF is requested when it is impractical or impossible to
wait the minimum statutory period for the court to hear a regular heard at 8:30 A.M., most often in the department to which the case
motion. California Rules of Court, Rules 3.1200-3.1207 contain is assigned. Hearing times may differ in other districts. Before an applivery specific guidelines for when and how ex parte relief should be cation will be heard and considered, several things need to occur. First,
requested. A court will only grant ex parte relief for good cause. The the ex parte application must be file stamped at the main filing winparty seeking relief must demonstrate irreparable harm, immediate dow, which opens at 8 A.M. The application requires a filing fee. From
danger, or some other statutory basis for granting relief.
there, it may be necessary to go to the records room to check out the
Under most circumstances, before a party can seek ex parte relief, most recent volume of pleadings to bring to the department. The best
it must notify all parties not later than 10 A.M. the court day before course of action is to call the clerk of the day before to see if the departthe intended ex parte appearance. (Court days do not include week- ment has the recent pleadings file or if it should be provided. It is imporends or holidays.) The person giving notice
must state with specificity the nature of the
relief requested and the date, time, and place
First, the ex parte application must be file stamped at the main
that an application will be made for relief (e.g.,
8:30 A.M. in Department 34 of the Los Angeles
Superior Court located at 111 North Hill
filing window, which opens at 8 A.M. The application requires
Street). In addition, the party must attempt to
determine whether any other party will appear
and oppose the relief requested.
a filing fee. From there, it may be necessary to go to the records
Notice is best given by informing the other
parties by phone. If it is clear that the other parties will not be opposing the ex parte relief,
room to check out the most recent volume of pleadings.
counsel should attempt to stipulate for an
order. This way, the parties can avoid having
to appear in court. However, if the other parties cannot be reached telephonically, leave a voice message and fol- tant to leave enough time to do this before the department opens its
low up by sending a confirming e-mail or facsimile with all the per- doors. The court staff rarely accepts ex parte applications that are pretinent information.
sented after 8:30 A.M.
A request for ex parte relief from the court must be made in a written application. In addition, a declaration must accompany the appli- Additional Requirements
cation that makes a factual showing of the need for ex parte relief as Ex parte applications are most often heard after the court’s morning
well as a description of the notice given, including the date, time, man- calendar, so be prepared to wait. Counsel are required to lodge a proner, and name of the party informed and whether it is expected that posed order that specifies the exact relief sought. The proposed order
anyone will appear and oppose.
should also contain a few blank lines in the event the court wishes
Ex parte applications should be drafted differently from regular to add anything.
motions. The judge usually has little, if any, time to read the papers
In addition, parties appearing at the ex parte hearing must serve
before taking the bench, so it is crucial that the relief sought is clearly the ex parte application and any written opposition on all other
stated on the caption page and in the memorandum of points and appearing parties at the first reasonable opportunity. In some cirauthorities, and that the papers be concise.
cumstances, this may mean that the exchange should take place the
A party seeking ex parte relief must personally appear to present night before the hearing. Most often, the application is not completed
the application, unless the relief sought falls into three narrow cate- until after business hours the day before the hearing. Therefore, the
gories: 1) permission to file a brief in excess of the page limit, 2) set- first reasonable opportunity may not be until the morning of the hearting hearing dates on alternative writs and orders to show cause, or ing. The court will not conduct a hearing unless the parties have had
3) stipulations by the parties for an order.
the opportunity to read each other’s papers.
A party opposing an ex parte application can orally oppose the
Courts are already overburdened, so it is critical that a party
relief without filing a written opposition. However, it is helpful to state seeking ex parte relief has a good reason to do so and that the rules
in writing the reasons for opposing in the event the judge has time are precisely followed.
■
to consider them before hearing argument. Opposing papers may be
filed directly with the clerk of the department on the morning of the James T. Ryan is an associate with the Feldhake Law Firm in Irvine, where he
hearing.
focuses on complex business litigation.
10 Los Angeles Lawyer March 2007
practice tips
BY ROBERT LYON
KEN SUSYSNSKI
Divisibility of Copyrights in the Digital Age
THE 1976 REVISION OF THE COPYRIGHT ACT1 brought a sea change
to U.S. copyright law. One of the most significant developments was
the clear recognition of the doctrine of divisibility, which views copyright rights as a bundle of discrete exclusive rights, each of which may
be transferred and owned separately—that is, for example, a publisher
and an author could both own a copyright in a single work. This development gave, after centuries of struggle, actual force to the concept
of authors’ rights. The revisions, however, resulted in uncertainty. One
area was to what extent publishers of collective works, such as magazines, could republish those works in new formats or media without violating the copyrights of the authors who contributed to the original collective work.
Two recent cases have helped provide answers regarding the
republishing of collective works: New York Times Company, Inc. v.
Tasini2 and Faulkner v. Mindscape Inc.3 In 2001, the U.S. Supreme
Court held in Tasini that, although the publisher of the collective work
has the right to reproduce the collection in its original form and to
republish the work as a revision, those rights have limits and do not
include the right to publish individually the separate works of the collective work.4 Although this decision provides some clarity, the
Supreme Court did not agree upon what constituted a revision.5
That issue was squarely addressed by the Second Circuit in 2005 when
it decided Faulkner. However, the Faulkner decision is factually
complicated, and its rationale and holding are not completely clear.
In essence, the court attempted to draw a line between republication
with acceptable modifications and republication with excessive modifications, the latter deemed an infringement of the author’s work. Both
cases are best understood when examined through the lens of the historical development of copyright and authors’ rights in copyright.
The concept that individual authors have individual rights was neither a new nor a purely theoretical concept prior to the 1976 Copyright
Act. Rather, the concept dates back to precolonial British law. The difficulty lay in implementing that concept, because, prior to the 1976
Act, copyrights were considered to be monolithic and indivisible.
More than half a millennium ago in England, manuscripts found
their way into book form when authors sold copies of their manuscripts to a group of booksellers and limners, known then as the
Stationers Guild. Booksellers copied the manuscripts, largely by
hand, and limners illustrated and decorated those manuscripts. In
1557, the Stationers Guild received a royal charter (sometimes called
the Statute of Mary I) and became, in effect, the Printer’s Guild, as
moveable type by then had replaced manuscripting. For the next four
hundred years publishers retained an iron grip on the control of the
printed word, both by statute as well as by pure economic forces.6
The charter of the Printer’s Guild established a royally sanctioned
monopoly for written publications. Members of the guild acquired
written works by purchase (or otherwise) of manuscripts from
authors, and according to the system, the authors granted or surrendered the rights to their manuscripts in perpetuity. Authors
received no further royalties no matter how successful the work. Since
authors were not allowed to join the Printer’s Guild they could not
self-publish and, therefore, the Printer’s Guild held a legal and de facto
monopoly on the use of printing machines. Once a member asserted
the right to publish copies of a text, no one else would copy it. This
is the origin of the term “copyright.”7
In 1710, British Parliament enacted the Statute of Anne, which represented the first attempt to reverse this hierarchy.8 The Statute of Anne,
widely regarded as the first copyright law, expressly vested ownership
of a writing in the author in the first instance.9 It is no coincidence
that the U.S. Constitution adopted this concept from the language of
the Statute of Anne in the enactment of Article 1, Section 8, Clause
8, which provides in pertinent part, “Congress shall have power…to
promote the progress of…the useful arts, by securing for limited
times to authors…the exclusive right to their…writings.” Irrespective
of the good intentions expressed by these provisions, it would be hundreds of years before authors were any more than a marginal factor
in the business of the printed word.
Although the U.S. Copyright Act of 1909 purported to perpetuate authors’ rights, it established a number of obstacles that kept
authors subservient to the power of the publishers. For example, while
an author could register a work as an unpublished work with the U.S.
Copyright Office, the 1909 Act provided that copyright could also
be obtained by publication of a work in printed form, published in
the name of the copyright proprietor with proper copyright notice
affixed.10 The shortcomings of this rule are obvious—the person
Robert Lyon is of counsel at Jeffer, Mangels, Butler & Marmaro LLP in Los
Angeles. He specializes in patent, trademark, and copyright law.
Los Angeles Lawyer March 2007 11
with the printing press continued to control
the rights.
Until very recently, publishers still had
the power of the press, and it was financially
difficult for authors to self-publish. Aside
from market forces, authors’ rights were
weakened by some very strict rules contained
in the 1909 Act, such as ones regarding the
placement of a copyright notice on a written
work. Not only did the statute lay out the precise language, it also specified precisely where
on the work the notice must be placed. The
specifications were strictly enforced, and
omission of the notice or placement in the
wrong position on a printed work resulted in
a loss of all copyright and caused the author’s
rights to fall for all time into the public
domain. Like the authors who lived in the
time of the Printer’s Guild, few modern
authors had the ability to publish their own
works in their own right, and most relied
upon owners of print media to publish their
works and secure the copyright. Authors did
so by granting to publishers the proprietary
right in their works so that they would be
published with proper notice and proper
identification of the proprietor. Additional
hurdles and pitfalls were written into the
1909 Act, which were a part of, or contributed to, the doctrine of indivisibility. For
example, the act provided for only a single
copyright, recognized only a single proprietor,
and required a single copyright notice.11
The 67-year interval between the the 1909
Act and the 1976 Act witnessed the creation
of a jumbled path of judge-made law. Courts
frequently tried to save authors’ rights from
falling into the public domain while coping
with the perilous confines of the 1909 Act.
Rationales were provided in defense of the
concept of indivisibility, and legal fictions
were created to cope with it. One defensive
rationale was that the concept of a single
copyright and a single proprietor only meant
that the one proprietor would have standing
to sue. This was a rationalized basis for the
doctrine of indivisibility, because it ensured
that alleged infringers would be protected
from a multiplicity of lawsuits.12
One of the early fictions was created in
cases in which it appeared that the parties to
a transfer intended to transfer less than the
entire copyright right—when it appeared
clear that the author intended to keep something back. This could be recognized as merely
a license whereby the transferor retained all
the rights not “licensed.” A corollary of this
fiction was that a licensee would have standing to sue for infringement if it joined the
“true” proprietor, the licensor, as a party to
the suit. However, assuming the licensee published and placed copyright notice in the
proper place, a question still remained concerning the copyright rights in the other parts
12 Los Angeles Lawyer March 2007
of the work that had not been published.
Another fiction created by courts recognized time limits on transfers whereby rights
would eventually revert back to the original
author. Courts also gave recognition to geographic limitations of transfers or looked at
the specific definition of rights of works as
defined in the 1909 Act.
The problems created by the concept of
indivisibility were exacerbated by the rule
that copyright required publication with specific notice. The problem was most acute and
may be best illustrated in the field of periodical publishing, such as magazines and newspapers. If a magazine accepted a number of
contributions from authors through licenses,
then assigned back to each author all but the
first publication rights, the single notice
requirement ameliorated each author’s copyright in his or her article. Since the publisher
would place a copyright notice under its name
on the masthead of the magazine in order to
protect its copyright, it usually would not
place a separate copyright notice on each article. The result was that the individual authors
forfeited all their rights because no notice
appeared on their articles and the articles
were not published by the “true” proprietor.
In 1970, in Goodis v. United Artists,13 the
Second Circuit expressly refused to apply
indivisibility rules, at least in the magazine context. The court employed the fiction that the
publisher acquired legal title, while the authors
were regarded as the beneficial owners.14
A similar theory was the concept of grant
backs, under which the author was deemed
to have transferred all his or her rights to the
magazine (because the rights were monolithic), but the magazine granted back the
desired rights to the author.15 Among the
difficulties of carrying out this charade was
the requirement that two separate transactions
be consummated and the fear that a literal or
short-sighted court would confuse ownership of the single copyright. Once again, the
author’s rights could fall into the public
domain, because the author’s works were
published by someone other than the proprietor and without proper notice.
Much of the confusion concerning
authors’ rights under the 1909 Act arose
from judge-made law, by which judges, in
good conscience, searched for desirable ends
that would not result in the forfeiture of an
author’s right. Unfortunately, the law confounded the courts with the historical concept
of a single, indivisible copyright. The patchwork of ad hoc fictions and mechanisms created more problems and more unrealistic situations as they were applied one atop another
to each new set of facts. The keystone to a
solution was divisibility. It is clear, however,
that the dissolution of the indivisibility concept was stalled by the imposing interests of
the publishers. While they gave lip service to
the principle of authors’ rights, and some
courts found ways to save authors’ rights
from the public domain, authors’ rights
remained a de facto fiction. Yet, the very
market forces that had kept control and
power in the hands of publishers began to dissolve as a broader base of commercialization came on the scene in the form of different types of media, including recorded and
broadcast works. Hence, the market forces
that had originally placed power in the hands
of publishers eventually devolved into recognizing that each interest is best served if
copyright is divisible.
The 1976 Copyright Act
In the 1960s, Congress established a subcommittee that began to study and hold hearings on how the 1909 Act should be revised.
The subcommittee continued its work over a
period of nearly twenty years. For the first
time, not only print publishers but representatives of newly emerged and emerging media
were able to bring their power to bear on the
legislation. The legislative history and reports
concerning the 1976 Act are therefore extensive and, not surprisingly, inconsistent. Indeed,
as Melvin Nimmer remarked, anyone who
seeks to determine legislative intent could
find among these reports an expression of
intent on almost any subject involving almost
any point of view at almost any time. 16
However, one area of the legislative history
that was clear was Congress’s intent to create a divisible bundle of copyright rights.
The enormity of the change wrought by
the 1976 Copyright Act is signalled in the first
substantive section. Section 102 defines copyrighted works as “original works of authorship fixed in any tangible medium of expression, now known or later developed, from
which they can be perceived, reproduced, or
otherwise communicated, either directly or
with the aid of a machine or device.” Under
the new act, copyright protection is thus
available to works at the moment they are
fixed in a tangible medium of expression,
irrespective of how the works are perceived
or reproduced.17 It can be said that the act recognized copyright rights as if attached to the
pen of the author—as the moving finger
writes, copyright follows.
Several sections of the 1976 Act address
divisibility or separation of works into distinct
parts. Section 101 (which is a collection of
definitions) includes definitions of “compilations” and “collective works.” Both definitions include two distinct species of rights—
rights in the overall work and rights in the
individual contributions or individual pieces.
A “collective work” is defined as “a work,
such as a periodical issue, anthology, or encyclopedia, in which a number of contribu-
tions, constituting separate and independent
works in themselves, are assembled into a collective whole.” As defined in Section 101, a
“compilation” also is a collection of preexisting works, including collective works, but
it may may also include data. Compilations
include such things as directories and phone
books. However, copyright protection in a
compilation applies only to the material contributed by the author and only to the extent
that such material or presentation of data is
original.18
Other vestiges of the indivisibility principle are addressed directly in particular provisions of the 1976 Act. For example, Section
201(c) provides that the copyright to each
contribution to a collective work is separate
and apart from the copyright in the collective
work as a whole. Section 201(c) also provides
that the rights of the publisher of the collective work are limited to reproduction and
distribution of the collective work, any revision of that collective work, and any later collective work in the same series. In addition,
Congress included Section 404(a), which provides that a single notice applied to a collective work is sufficient to protect the work as
a whole and each separate work within the
collective work. Therefore, it clearly was the
intent of Congress to protect the rights of
authors who contributed works to a collective work but, at the same time, to allow the
publisher of the collective work to have some
ability to reproduce and distribute the work
in different formats.
Into the Digital Age
No one could have predicted in 1976 how
digital technology would change how written
works were used and distributed. The strong
demand for digital formats of written works
has caused many publishers of collective
works to publish digital versions of the work.
Digital reproduction of such works raises
unresolved issues that the 1976 Act does not
address directly and that courts have had to
resolve, most notably in Tasini and Faulkner.
Based upon the plain language of the
1976 Act, the Supreme Court’s decision in
Tasini is not surprising. In Tasini, six freelance
writers filed copyright infringement claims
against the publishers of print periodicals on
the grounds that the publishers improperly
included the print articles in electronic databases that were retrievable in isolation and
shorn of the context in which they were presented in the original print publication.19
The Supreme Court held that the defendants had infringed the plaintiffs’ copyrights
“because the databases reproduce and distribute articles standing alone and not in
context, not ‘as part of that particular collective work’ to which the author contributed.…”20 As the Supreme Court stated,
if there is a demand for the freelance article
standing alone from the collective work or if
there is a demand from another collective
work for the freelance article, the author
should be compensated for those uses.21
Therefore, the Supreme Court held that a
publisher of a collective work could not separately publish electronic copies of each work
from a collective work. As other cases have
demonstrated, the digital age raised other
more complicated issues for collective works.
In 2005, the Second Circuit grappled with
a few of those issues in Faulkner.22 In summary, the court held that the original publisher
of a collective work is privileged to publish,
as a revision, a scanned or digitized version
of the original print publication as long as the
new version faithfully reproduces the first
publication in its original form, including all
text, photographs, graphics, advertising credits, and attributions. In so doing, the original
publisher does not infringe any rights retained
by the authors of the individual works collected, arranged, printed, and published by the
original publisher. Moreover, additions to
the original work may be made, including
headline copy, tables of contents, linking or
searching features, and the like, without
affecting this privilege as long as the original
content is intact.23
Faulkner involved the digitization of
National Geographic magazine, which has
been published monthly since 1888 in print
form. At various times, the magazine was
also compiled, bound, and published in volumes, and it has been published in Braille, on
microfilm, and on microfiche. In 1996,
National Geographic undertook a project to
reproduce the entire series of its magazines in
a digitized format that could be sold as a
series of CD-ROMs titled The Complete National Geographic: 108 Years of National
Geographic Magazine on CD-ROM (CNG).
The first volume was produced in 1997. Each
issue of the magazine was scanned two pages
at a time into a computer system and stored
on disk. In this manner each scanned page
appears as it did in the print version—two
pages at a time, including the fold of the
magazine between the two pages. The pages
appear exactly as they do in the print version,
including all text, photographs, graphics,
credits, attributions, and advertisements. The
issues of the magazine are arranged chronologically, with the first page of the first issue
appearing at the beginning of the first disk and
the last appearing at the end of the last disk.
The images of the pages, therefore, are viewed
almost as if the reader were looking at the
analog print version as first published.
There were, however, certain features
added to the CNG version that appear only
on the CD-ROMs. Each disk, as the user
boots it up in the computer, begins with what
Los Angeles Lawyer March 2007 13
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is called the Moving Cover Sequence, which
is a series of multimedia sequences (including
an advertisement by Kodak) that depict the
digital transition of 10 magazine covers into
a montage. At the end of the disk, a graphic
display depicts moving spines of the issues of
the magazine followed by credits as the CNG
program exits. In addition, digital tools were
added, including the ability to access the
table of contents and the text to search for
articles by using descriptions of articles, titles,
contributors, dates, or other related subjects,
or to search based on types of advertisements, advertisers, a cover, or page image
and page maps. Subsequent iterations also
provided other digital tools, such as the capability to bookmark, to rotate pages, and to
darken text. Although the disks are readonly memory, they include an end-user license
agreement that permits a user the freedom to
use, modify, print, and publish images from
the disk as the user wishes.24
Based upon the foregoing, the CNG disks
can be said to consist of three major components: the Moving Cover Sequence (the
Sequence), the digitally reproduced issues of
the magazine (the Replica), and the computer program (the Program) that stores and
retrieves the images and allows other computers access to the content. The Second
Circuit held that the Replica portion, being
a faithful reproduction of the original print
publications in all respects, is a privileged
revision that the publisher of the collective
work may reproduce pursuant to Section
201(c) of the 1976 Act, and digitization of the
analog version did not make it a new work.
Also, the court held that the addition of the
Sequence and the Program portions did not
affect the publisher’s privilege to produce the
Replica version because those elements were
deemed additional original works contributed
by National Geographic Society.25
In reaching this conclusion, the Second
Circuit had to clarify previous holdings
involving these same disks and reconcile the
recent decision by the Supreme Court in
Tasini. In a previous case involving the same
CNG disks, the Eleventh Circuit held in
Greenberg v. National Geographic26 that the
Moving Cover Sequence, which included a
photograph by the plaintiff, a freelance photographer, that had appeared on a National
Geographic cover, constituted copyright
infringement. In essence, the court concluded
that the montage of covers in the Moving
Cover Sequence was a new work that required
a new license.27 But the ruling suggested a
broader concept—that digitization was itself
a new work, not a privileged revision.
In Faulkner, the Second Circuit considered
the analysis in Tasini as a substantial departure from the rule of law followed by the
Eleventh Circuit in Greenberg, and con-
cluded, therefore, that Tasini was an intervening change of law. In other words, the
Second Circuit sidestepped Greenberg. In
Faulkner, the CNG disks presented the underlying works (in the Replica portion) in the
same context as they were presented in the
original print versions of the magazine. Accordingly, the Second Circuit concluded that
the digitized versions of the CNG were covered by the Section 201(c) privilege of reproduction and distribution of the collective
work as a revision and that the Moving Cover
Sequence and the Program additions did not
alter the original content. Instead, the court
reasoned that these additions did not affect
CNG’s Replica component and, therefore,
the entire CNG was privileged as a revision
pursuant to Section 201(c).
Considering the broad outlines of these
two cases, it now appears that authors have
the rights they long deserved, while publishers of collective works have clearer guidelines
concerning digital conversion and distribution
of their collective works. Of course, new
technology will bring new legal issues. The
only questions are when will they occur and
what will they mean.
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1 Copyright
Act, 17 U.S.C. §§101 et seq.
New York Times Co., Inc. v. Tasini, 533 U.S. 483
(2001).
3 Faulkner v. Mindscape Inc., 409 F. 3d 26 (2d Cir.
2005).
4 Id.
5 Id. at 36.
6 Scott Bennnett, Authors Rights, 5 J. OF ELECTRONIC
PUBLISHING 733 (1999).
7 Id.
8 Id.
9 Id.
10 MELVIN D. NIMMER & DAVID NIMMER, NIMMER ON
COPYRIGHT §10.01 (1963)
11 Id.
12 Id.
13 Goodis v. United Artists Television, Inc., 425 F. 2d
397 (2d Cir. 1970).
14 Actually, it is generally believed that the court looked
at the proposals of the Copyright Revision Committee,
and noted that the doctrine of indivisibility was “judgemade law” that led to harsh results. Goodis, 425 F. 2d
at 400. This notion of a “constructive trust” and that
the magazine licensee had acquired a property interest
is a thinly veiled results-oriented rationale.
15 NIMMER, supra note 10, §10.01[B].
16 Melvin D. Nimmer, Address to the Beverly Hills Bar
Association, 1978.
17 17 U.S.C. §101.
18 17 U.S.C. §103.
19 New York Times Co., Inc. v. Tasini, 533 U.S. 483,
487 (2001).
20 Id. at 488 (quoting 17 U.S.C. §201(c)).
21 Id. at 497.
22 Faulkner v. Mindscape, Inc., 409 F. 3d 26 (2d Cir.
2005).
23 Id.
24 Id.
25 Id.
26 Greenberg v. National Geographic Soc’y, 244 F. 3d
1267 (11th Cir. 2001), cert. denied, 534 U.S. 951
(2001).
27 Id. at 1267.
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Los Angeles Lawyer March 2007 15
tax tips
BY JOHN B. MCCAULEY
Taxation of Noncompetition Income in California
AN OWNER SELLING A BUSINESS usually is required to provide a
covenant not to compete for a term of years. The amount of compensation for noncompetition covenants can be substantial. California’s
right to tax a portion of noncompetition payments received by nonresidents in connection with the sale of the assets of an interstate business is the subject of the California Court of Appeal decision in Milhous v. Franchise Tax Board.1 In Milhous, the court held that
California could not tax the noncompetition compensation received
by two Florida residents for the sale of their corporation headquartered in California. The court held that the approach advocated by
the Franchise Tax Board, which is embodied in its noncompetition
compensation regulation, was not rational.2
The FTB adopted the regulation in 2001.3 It was the first FTB guidance available to practitioners that dealt specifically with California
taxation of noncompetition compensation received by nonresidents.
The 2001 regulation is based on a provision of the Revenue and
Taxation Code that taxes “gross income of nonresidents from sources
within” California.4 Under the regulation, income “from a covenant
not to compete executed in connection with the sale of a business conducted…within and without California has a source in California to
the extent the income is assigned to this state under this regulation.”5 Generally, the regulation assigns to California a share of the
nonresident’s noncompetition compensation when the nonresident
covenants not to compete against the sold business in California:
“Income from a covenant not to compete is assigned to California by
first identifying the legally enforceable area within which the promisor
forfeits the right to act. The income is then assigned to locations within
the legally enforceable area according to a formula.…”6
This formula is based upon the ratio that the sold business’s payroll, sales, and property in California bear to the business’s payroll,
sales, and property in all the states subject to the noncompetition
covenant.7 The regulation requires that the formula be used “in all
but unusual circumstances” in which the rule would result in a “distortion of income.” In that event, the FTB may require, or the taxpayer may petition the FTB for, another approach.8
The Milhous Case
Taxpayers Robert and Paul Milhous owned Treasure Chest Advertising
Company, which “specialized in printing circulars, flyers and advertising inserts for newspapers” and was headquartered in Glendora.9
The two hired managers to run Treasure Chest and in 1988 moved
to Florida. Treasure Chest sold its assets in 1993. At that time,
Treasure Chest had substantial business operations in California
and throughout the country. Treasure Chest was the largest printer
of advertising circulars, Sunday comics, and TV listings in the western United States. It provided inserts for 100 percent of the newspapers in California, 85 percent of the newspapers west of the Rocky
Mountains, and 20 percent east of the Rocky Mountains.10
At the closing, the purchaser paid $120 million for the Treasure
Chest business, and $30 million of this amount was allocated to the
16 Los Angeles Lawyer March 2007
noncompetition covenant, which prevented the Milhouses from
working for any competitor of Treasure Chest, revealing any trade
secrets or confidential information of the corporation, hiring any
Treasure Chest employees, or investing in any competitor. The
covenant had a five-year term and covered the United States, Canada,
and Mexico.11
The taxpayers did not assign any of the covenant payment to
California. The Franchise Tax Board, on the other hand, claimed 25
percent of the covenant payment, on the theory that Treasure Chest
reported 25 percent of its 1993 income to California. At trial, an economic expert testified that the noncompetition covenant had no
value in California because Treasure Chest had 100 percent of the market in California at the time of the sale. Moreover, the expert argued
that, given the narrow profit margins of the business and the large
capital investment needed to acquire the printing presses used in the
business, it would not be practical for anyone to attempt to compete
with Treasure Chest in California.12 The FTB offered no testimony
to counter the economist’s opinion, merely asserting its theory that
California should receive the same percentage that Treasure Chest
reported as California income on its 1993 California tax return.13
The trial court, however, held that California had no claim to any
part of the $30 million noncompetition payment because the covenant
had no value in California. The trial court found that imposition of
the tax violated the requirement of the commerce clause of the U.S.
Constitution that taxes imposed by the states be fairly apportioned.14
The court of appeal agreed with the trial court that the federal commerce clause prohibited California from taxing any of the noncompetition payments received by the two taxpayers.15 This result seems
counterintuitive, given that Treasure Chest was based in California.
The decisions may also be surprising because of the heavy burden
that the court of appeal indicated that the taxpayers bore in challenging
California’s apportionment of approximately 25 percent of the noncompetition income to California. Regarding fair apportionment, a
taxpayer must demonstrate that there is no “‘rational…relationship
between the income attributed to the State and the intrastate values
of the enterprise.’”16 Moreover, the taxpayer has the “distinct burden of showing by ‘clear and cogent evidence’ that [the state tax] results
in extraterritorial values being taxed.”17 Despite this imposing burden of proof, the court of appeal ruled for the taxpayers.
The principles underlying this ruling were aptly summarized by
U.S. Supreme Court Justice Felix Frankfurter in State of Wisconsin
v. J. C. Penney Company:18 “[The] test is whether…the taxing power
exerted by the state bears fiscal relation to protection, opportunities
and benefits given by the state. The simple but controlling question
is whether the state has given anything for which it can ask return.”19
In Milhous, the court of appeal noted that the taxpayers’ state of residence, Florida, generally had the exclusive right to tax the income
John B. McCauley practices tax, mergers and acquisitions, and transactional
law in Ontario.
from intangible assets received by its residents.20 However, California may tax income
from an intangible asset owned by a nonresident to the extent that “the capital which produces the income” is in California. This
exception arises because when a taxpayer
extends activities with respect to intangibles,
so as to gain the protection and benefit of the
laws of another state, in such a way as to
bring person or property within the reach of
the tax gatherer there, the reason for a single
place of taxation no longer obtains.21
The Location of an Intangible Asset
The court of appeal then considered whether
any of the $30 million noncompetition payment came from an intangible asset located
in California (i.e., the right to compete against
Treasure Chest in California). The court of
appeal stated: “Because at all relevant times
the Milhouses were residents of Florida,
California cannot rely upon…the doctrine
of mobilia sequuntur personam.” In the
absence of mobilia sequuntur personam, the
court continued, California may tax only
that portion of the $30 million that the
Milhouses received that was generated by
activities in California.22 Following this reasoning, the court of appeal concluded that the
taxpayers gave up no meaningful right to
compete with Treasure Chest in California:
The Milhouses amply demonstrated
that the covenant not to compete had
no value here. They testified at the
time of this sale that Treasure Chest
had 100 percent of the market here and
that the business is very capital intensive. Contrary to FTB’s contention, their
expert, Dr. Shapiro, could reasonably
rely on their testimony and out-of-court
statements about the business, in concluding that it would not have been
reasonable for anyone to attempt to
compete with TCA in California.23
The court concluded that the taxpayers’
right to compete in California had no meaningful value.
It seems that the taxpayers met their heavy
burden of proof that California had no claim
to the noncompetition income. Nevertheless,
the court then considered the FTB’s argument that it was rational for California to
claim 25 percent of the noncompetition
income because California taxed 25 percent
of the income earned by Treasure Chest in the
year of the sale. The court found that this
approach was flawed in two respects. First,
the court said that California’s share of
Treasure Chest’s 1993 income bears no relation to what share California can claim of the
taxpayers’ 1993 noncompetition income
because the noncompetition payment did not
come from income earned by Treasure Chest
but rather came from the purchaser. As such,
the court of appeal found no connection
between Treasure Chest’s income and the
money that the Milhouses received.24
Second, the noncompetition payment was
not income from Treasure Chest but rather an
asset of the taxpayers. Accordingly, the court
rejected the FTB approach:
Because neither the income the
Milhouses received nor the rights they
sold bear any direct or meaningful
relationship to the income or assets
of Treasure Chest, Treasure Chest’s
income and assets simply do not provide any means of determining how
much of the…income the Milhouses
received can be fairly apportioned to
activities or capital in this state.25
The FTB did not appeal the case. 26
Furthermore, the court of appeal, in a separate unpublished opinion,27 upheld the trial
court’s award of litigation costs (including an
award of attorneys’ fees) to the taxpayers
under Revenue and Taxation Code Section
19717.
The FTB argued that its position was justified because it had been sustained on a
number of occasions by the Board of
Equalization. The court of appeal examined
several of the decisions that held that a
covenant was earned in the states that were
subject to the covenant. It found that the
Milhous facts were distinguishable and held
that the taxpayers had demonstrated that it
was not possible to compete with Treasure
Chest in California. Therefore the trial court
in Milhous did not abuse its discretion in
concluding that the covenant had no value in
California.28
Unusual Circumstances
Milhous was the first decision in this area
from the California Court of Appeal.
Admittedly, the facts in Milhous are unusual.
It will be unlikely that a practitioner will
encounter many situations in which a
covenant not to compete in California against
a business that generates substantial income
in California has no value. But if those are the
facts, the FTB’s regulation formula would
arguably not apply, and the taxpayer may
argue that an unusual situation exists in
which application of the regulation’s formula
would result in an inappropriate distortion of
income. If that is the case, the regulation
then requires the taxpayer to petition the
FTB to obtain no or minimal assignment to
California based upon other years or other
methods of assigning income, provided the use
of another year or years or another method
produces an equitable assignment of income
within the legally enforceable area.29
If the taxpayer cannot obtain a satisfactory result under a petition, then the taxpayer can call upon the commerce clause.
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18 Los Angeles Lawyer March 2007
Milhous provides support for the argument
that California is not entitled to a share of the
noncompetition compensation under the federal commerce clause if the right to compete
in California has no value. In this Milhous is
directly on point. The fact that Milhous did
not consider the regulation is irrelevant, since
under the federal supremacy clause the
requirements of the commerce clause supersede the regulation’s formula.
Another case could involve taxing the
right to compete rather than taxing a promise
not to compete. The right to compete may
have a value in California that is arguably
much less than the result obtained under the
regulation’s formula. In such a case, a taxpayer could petition the FTB to be allowed to
deviate from the regulation’s formula under
the “distortion of income” exception.
To understand why, assume that a shareholder founds and manages a corporation
that has substantial operations in California
and throughout the country. The shareholder
causes his or her corporation to sell its assets.
At the closing, the purchaser pays the shareholder $10 million for a covenant not to
compete against the sold business for a term
of five years. The covenant covers the entire
country. Further assume that, in the year of
sale, 50 percent of the income of the corporation is assigned to California. However,
due to barriers to entry into the California
market, a respected economist is of the opinion that the shareholder’s sale of his or her
right to compete against the business in
California is only worth $1 million. The
shareholder petitions the FTB to disregard the
regulation’s formula assignment of $5 million
to California upon the basis that it results in
a distortion of income and asks the FTB to
approve an assignment of $1 million.
It is possible that the FTB would either not
find the appropriate “distortion of income”
and refuse to grant the petition or assign a
value to California substantially higher than
$1 million. Accordingly, the shareholder could
pay the tax on $5 million and seek a refund
primarily based on the “distortion of income”
exception to the regulation. Alternatively,
the shareholder could attack the formula
itself, based upon Milhous. The shareholder
could cite Milhous in support of the argument
that the commerce clause prohibits California
from taxing noncompetition compensation
when there is no “rational…relationship
between the income attributed to the State and
the intrastate values of the enterprise.”30
The taxpayer could also argue that
Milhous supports the proposition that the
formula that assigns noncompetition compensation to California based upon the way
income of the sold business is assigned to
California is not rational. The following
Milhous language supports this proposition:
“Because neither the [noncompetition] income
the [shareholders] received nor the rights
they sold bear any direct or meaningful relationship to the income or assets of [the business sold], [the sold business’s] income and
assets simply do not provide any means of
determining how much of the income the
[the shareholders] received can be fairly
apportioned to activities or capital in
California.”31 Milhous may be useful to practitioners when the value of noncompetition
compensation in California may be less than
the value obtained from the 2001 regulation’s formula.
■
1
Milhous v. Franchise Tax Bd., 131 Cal. App. 4th 1260
(2005).
2 See Cal. Code Regs. tit. 18, §17951-6. This regulation became effective Jan. 23, 2002, and was not considered by the Milhous court.
3 Cal. Regulatory Notice Reg. 2001, No. 52-Z §179516 (Dec. 24, 2001).
4 REV. & TAX. CODE §17951.
5 REV. & TAX. CODE §17951-6(a).
6 REV. & TAX. CODE §17951-6(a)(1).
7 See REV. & TAX. CODE §17951-6(a)(1)-(3).
8 See REV. & TAX. CODE §17951-6(a)(6).
9 Milhous v. Franchise Tax Bd., 131 Cal. App. 4th
1260, 1263 (2005).
10 Id. at 1264.
11 Id.
12 Id. at 1265.
13 Treasure Chest’s apportionment was done by application of the Uniform Division of Income for Tax
Purposes Act (REV. & TAX. CODE §§25120 et seq.),
which applies to corporations with multistate activities.
See R EV . & T AX . C ODE §§25128-25136. Under
UDITPA, a corporation’s income is apportioned based
on the proportion of the corporation’s payroll, property, and sales in the taxing state.
14 U.S. CONST. art. I, §8, cl. 3; see also Complete Auto
Transit, Inc. v. Brady, 430 U.S. 274, 279, 97 S. Ct.
1076, 51 L. Ed. 2d 326 (1977); REV. & TAX. CODE
§§25120 et seq.
15 “The trial court’s determination that the covenant
not to compete had no value in California which would
support California’s right to tax payments generated
by the covenant is supported by substantial evidence
and is consistent with constitutional considerations.…”
Milhous, 131 Cal. App. 4th at 1263.
16 Exxon Corp. v. Wisconsin Dept. of Revenue, 447
U.S. 207, 220, 100 S. Ct. 2109 (1980) (quoting Mobil
Oil Corp. v. Commissioner of Taxes, 445 U.S. 425,
436-37, 100 S. Ct. 1223 (1980)).
17 Exxon Corp., 447 U.S. at 221.
18 State of Wisconsin v. J. C. Penney Co., 311 U.S. 435,
444-45, 61 S. Ct. 246, 250 (1940).
19 Milhous, 131 Cal. App. 4th 1268.
20 Historically, income from intangibles has been taxed
at the domicile of the owner. Id. at 1269.
21 Id.
22 Id. at 1269-70.
23 Id. at 1270.
24 Id.
25 Id.
26 Franchise Tax Board Litigation Roster (Jan. 2006).
27 Milhous v. Franchise Tax Board (Milhous 2), 2005
Cal. App. Unpub. LEXIS 7271.
28 Id. at *4.
29 Id.
30 Milhous v. Franchise Tax Bd., 131 Cal. App. 4th
1260, 1268 (2005).
31 Id. at 1270.
Los Angeles Lawyer March 2007 19
by Jeffrey C. De Francisco and Theodore E. Calleton
Pennies
Heaven
from
Proper use of the Section 645 election
effectively provides revocable trusts with
the same income tax benefits as estates
Jeffrey C. De Francisco and Theodore E. Calleton are partners at Calleton, Merritt, De Francisco & Real-Salas, LLP, specializing in
estate planning and administration.
20 Los Angeles Lawyer March 2007
KEN CORRAL
T
he revocable trust is the standard tool used in California to avoid probate. While the revocable trust avoids
many of the complexities of court administration at the settlor’s death, it nevertheless has its own complications. One of these is the treatment of income received by the trust during the post-death trust administration period.
Post-death income is taxable directly to the trust’s beneficiaries or its succeeding trusts. As a consequence, a decedent’s trust does not receive the same tax benefits as a decedent’s estate. One significant benefit available to estates
is the use of a fiscal year. Depending upon the decedent’s date of death and the assets of the estate, using a fiscal
year often allows the executor to defer the income tax obligations of beneficiaries for a longer period than if a calendar year is used. Other benefits of being taxed as an estate include the ability to: hold S corporation stock without invalidating the subchapter S election,1 use the charitable set-aside deduction,2 recognize gain or loss upon satisfying a pecuniary bequest with assets whose basis differs from its fair market value,3 waive active participation
requirements under the passive loss rules for tax years ending less than two years after the decedent’s death,4 receive
deductions for amortization of reforestation expenditures,5 and allow time for the recipients of specific devises to
contemplate disclaiming.6
Prior to 1997, in order to take advantage of tax benefits accorded estates, trust attorneys and accountants used
a new trust—referred to as an “administrative trust”—to report the trust’s post-death income. The administrative
trust could use either a calendar or fiscal year. This technique was based on an obscure, and brief, Revenue Ruling
stating that when a settlor’s death causes a
revocable trust to become irrevocable, the
irrevocable trust, as a new entity for federal
income tax purposes, may report income on
either a calendar or fiscal year.7 Nevertheless,
even though the administrative trust used—
or at least could use—a fiscal year, the trust
was still not afforded the other benefits of
being taxed as an estate.
In 1997, Congress came to the rescue and
significantly lessened the disparity between the
post-death income tax treatment of a dece-
estate tax closing letter. Thus, although
trustees are allowed a reasonable period of
time to “perform the duties necessary to complete the administration of the trust,” the
Section 645 election may terminate prior to
the completion of the trust administration.22
Nonetheless, with the enactment of Section
645, trustees of QRTs have two authorized
options for reporting income during the postdeath administration period: 1) treat the
trust’s income as taxable to the beneficiaries
or continuing trusts, or 2) treat the trust’s
be made.
Most attorneys and accountants make
the Section 645 election as a matter of course.
Implementing the election, however, requires
thoughtful analysis. Before Section 645 was
enacted, a trustee could simply file a return
under the name of the administrative trust and
report all the trust’s post-death income on it.
With the enactment of Section 645, the proper
filing of returns and reporting of income
varies depending upon the entities involved.
If only the trustee of a QRT is making the
When the trustee of a QRT wishes to treat the trust as an estate
and an executor of the estate has been appointed, the trustee
and the executor must both make the Section 645 election.
dent’s estate and a decedent’s revocable trust
by codifying the precursor to what is now
Section 645 of the Internal Revenue Code.8
Section 645 explicitly authorizes the trustee
of a qualified revocable trust (QRT) to irrevocably elect,9 with the concurrence of the
executor10 of the decedent’s estate (if any), to
treat the trust as an estate, or as part of the
estate,11 for a limited period of administration.12 A QRT is any trust (or portion thereof)
that, on the decedent’s date of death, is owned
by the decedent because the decedent possessed the power to revoke the trust or that
portion.13 Because a revocable trust is, by
definition, revocable by the settlor prior to his
or her death, almost all revocable trusts are
QRTs.14 Thus, Section 645 effectively allows
revocable trusts the same income tax benefits
as estates.
Unfortunately, the Section 645 election
does not last indefinitely.15 A Section 645
election terminates on the earlier of the day
on which all estate assets, if any, and QRT
assets are distributed, or one day before the
“applicable date.”16 The applicable date
varies depending upon whether the size of the
decedent’s gross estate requires the filing of an
estate tax return using Form 706, United
States Estate (and Generation Skipping
Transfer) Tax Return.17 If Form 706 is not
required, the applicable date is the day two
years after the date of the decedent’s death.18
If Form 706 is required,19 the applicable date
is the later of the day two years after the
decedent’s date of death or the day that is six
months after the date of final determination
of liability for estate tax.20 Although the date
of final determination varies,21 in most circumstances when a Form 706 must be filed,
the applicable date will be the later of two
years after the decedent’s date of death or the
day that is 12 months after the issuance of an
24 Los Angeles Lawyer March 2007
income as taxable to the decedent’s estate by
electing under Section 645 to treat the QRT
as the decedent’s estate, or part of the decedent’s estate.23 In practice, the Section 645
election is almost always made.
However, in a few instances, making the
Section 645 election may not be appropriate—for example, when the entire trust
administration will be completed within the
calendar year of the decedent’s death.24 In this
case, the allocation of income to the beneficiaries or succeeding trusts should be relatively
straightforward, and not making the election saves the trustee from filing an additional fiduciary income tax return. A trustee
may also choose not to make the election
when the income tax brackets of the trust beneficiaries are lower than those of the trust, and
the trust is unable to make preliminary distributions of income.25 In this situation, the
overall amount of income taxes paid will be
diminished, thereby increasing the value of the
trust’s residue. Care must be taken when
using this strategy, because if the trust generates income but is unable to distribute it, the
beneficiaries will have “phantom income.”
For example, if the trustee retains an asset and
uses its income to pay the decedent’s debts,
but the income is reported by the beneficiaries, the beneficiaries will have to use nontrust
assets to pay the associated income tax.
Even in those instances when not making
the Section 645 election seems appropriate,
the trustee should ensure that the trust does
not hold stock in an S corporation, need to
fund a pecuniary formula with an asset
whose fair market value on date of distribution exceeds its date of death basis, or otherwise need to take advantage of being taxed
as an estate. If there is any uncertainty about
what events might transpire during the
administration, a Section 645 election should
election, the trustee reports all income on a
return for the “electing trust” (as the QRT is
known after the election is made).26 If the
trustee of the QRT makes the election with
the executor of the decedent’s estate, the
executor reports the income of both the electing trust and the “related estate” (as the
estate is known after the election is made)27
on one return. If the trustee of the QRT
makes the election but an executor is later
appointed and joins in the election, the trustee
reports the electing trust’s income for all periods prior to the executor’s appointment, and
the executor reports the income of both the
related estate and the electing trust on one
return after the executor’s appointment.
Electing Trust and Related Estate
When the trustee of a QRT wishes to treat the
trust as an estate and an executor of the
estate has been appointed, the trustee and the
executor must both make the Section 645
election.28 To make the election, the executor
must obtain a Taxpayer Identification
Number (TIN) for the related estate, the
trustee must obtain a TIN for the QRT,29
and both must file a joint Form 8855, Election
to Treat a Qualified Revocable Trust as Part
of an Estate,30 with the Internal Revenue
Service. To make a valid election, Form 8855
must be filed no later than the time prescribed
for filing the Form 1041, U.S. Income Tax
Return for Estates and Trusts, for the first taxable year of the related estate, including
extensions, regardless of whether there is sufficient income to require the filing of that
return.31
On Form 8855, both the executor and
the trustee, under penalty of perjury, must
agree to undertake substantial obligations.
The executor must agree to be responsible for
filing an accurate and timely Form 1041 for
the combined income, deductions, and credits of the electing trust and related estate and
to timely pay any tax obligations of the
related estate.32 The trustee must agree to
timely provide the executor with the necessary
information to file a Form 1041 and to timely
pay any tax obligations of the electing trust.33
Both must agree to be responsible for allocating the tax burden of the electing trust
and related estate in a manner that reasonably
reflects each entity’s tax obligation.34
Once a valid election is made, the executor is only responsible for filing a Form 1041
for the electing trust and related estate if
together they receive sufficient income to
require filing a return.35 If either or both generate sufficient income to require the filing of
a return, the executor files one Form 1041
under the TIN of the related estate but
attaches the name and TIN of the electing
trust and the address of the trustee to the
return.36 The attachment is important because
it starts the statute of limitations on the
assessment and collection of tax for the electing trust.37 Without it, filing the return only
starts the statute of limitations for the related
estate. The combined electing trust and related
estate continue reporting in this fashion until
the election terminates.
Once the election terminates—whether
because all the assets of the electing trust
and the related estate are distributed or
because the applicable date arrived—the
executor files a Form 1041 under the name
and TIN of the related estate reporting any
income, deductions, and credits of the electing trust for the short taxable year ending with
the last day of the election period as well as
all the items of income, deductions and credits, if any, of the related estate for the entire
taxable year.38 The trustee also files a Form
1041, but under the name and TIN of the
electing trust, indicating that it is a final
return.39 This return, however, is for information purposes only and does not report any
of the trust’s income.
If the election terminates because the
applicable date has arrived, all the electing
trust’s assets, including any items of income,
are deemed distributed to a new trust, while
the related estate assets remain in the estate.40
If the former electing trust continues after the
election terminates, it continues to use the TIN
obtained prior to making the initial Section
645 election and reports on a calendar year.41
Similarly, if the related estate continues after
the election terminates, it continues to use the
same TIN it obtained prior to making the election—the one used by the combined related
estate and electing trust42—but keeps the
same taxable year it used during the election
period.43 If the election terminates upon the
final distribution of both the related estate and
the electing trust, the trust administration is
complete and no further income tax returns
need be filed.
Electing Trust Only
When the trustee of a QRT wishes to treat the
QRT as an estate and no executor has been
appointed, the trustee alone makes the Section
645 election by obtaining a TIN for the electing trust and filing Form 8855. No TIN for the
estate is needed, of course, because there is no
estate. When filing Form 8855, the trustee
agrees to timely file a Form 1041 for the electing trust, timely pay any tax due, and states
that, although to the trustee’s knowledge and
belief no executor has or will be appointed, if
one is, a revised election will be filed.44
If the trust has sufficient income to require
the filing of an income tax return,45 the trustee
must file a Form 1041 under the electing
trust’s new TIN,46 making sure to check the
Estate box under the Type of Entity box on
the form.47 The consequences of checking
the Trust box instead of the Estate box are
unclear, but one might reasonably assume it
could increase the chance of an audit. Filing
a return will start the statute of limitations on
assessment and collection of tax for the electing trust.48
When the election terminates, the trustee
must notify the IRS of the termination by
filing a Form 1041 under the electing trust’s
name and TIN, indicating that it is the final
Los Angeles Lawyer March 2007 25
return.49 The Form 1041 must include all
items of income, deduction, and credit of the
electing trust for the short period ending with
the last day of the election.50 If the election
terminates the day before the applicable date,
its assets are deemed to be distributed to a
new trust51—which must obtain a new TIN,52
use a calendar year tax year,53 and file as a
trust in all subsequent years.54
Electing Trust, Subsequent Related
Estate
If the trustee of a QRT makes the Section 645
election, and an executor is subsequently
appointed, the Section 645 election terminates
as of the day before the executor’s appointment, unless the executor agrees to the election.55 If the executor so agrees, the executor
and the trustee must notify the IRS of that
agreement by filing a revised Form 8855 within
90 days of the executor’s appointment.56 In this
case, even though previous filings of Form
1041 were under the name of the electing
trust, all future tax returns are filed as if the
executor and trustee had made the initial election.57 Thus, future tax returns are filed by the
executor under the TIN of the related estate
and include the income of both entities.58
The statute of limitations for the related
estate does not run until all its income is
properly reported. Thus, if the trustee previ-
ously filed any Form 1041s for the electing
trust, the executor and the trustee must jointly
file amended Form 1041s correcting any
omissions associated with the related estate.59
These amended returns, which must be filed
under the name and TIN of the electing trust
but with an attachment listing the name and
TIN of the related estate, must include all the
income, deductions, and credits of both the
related estate and the electing trust for the
periods prior to the executor’s appointment.60
Furthermore, if the statute of limitations has
run on any of the Form 1041s previously
filed by the trustee for the electing trust, the
executor must file its own Form 1041s for the
related estate for any of those years if the electing trust’s returns for those years do not
properly report the income, deduction, and
credits of the related estate.61 As joint returns
for the period after the executor’s appointment are filed, the statute of limitations will
begin to run for both the electing trust and the
related estate.62
If the subsequently appointed executor
does not agree to the Section 645 election, the
election terminates and the executor must
file Form 1041s under the name and TIN of
the estate for all taxable years of the related
estate ending after the death of the decedent.
The electing trust, although not required to
file any amended returns,63 must presumably
file a final Form 1041 under the name and
TIN of the electing trust and deem all of its
assets transferred to a “new trust.”64 All subsequent returns of the new trust must be
reported under a new TIN and on a calendar
year basis.65
■
1 I.R.C.
§1361(b)(1).
§642(c).
3 I.R.C. §267(b)(13).
4 I.R.C. §469(i)(4).
5 I.R.C. §194(c)(4).
6 See I.R.C. §2518(b).
7 Rev. Rul. 57-51, 1957-1 C.B. 171.
8 See Taxpayer Relief Act of 1997, §1305, Pub. L.
No. 105-34, 111 Stat. 789 (1997).
9 I.R.C. §645(c).
10 An executor for §645 purposes is an executor, personal representative, or administrator who has obtained
letters of appointment to administer the decedent’s
estate through formal or informal appointment procedures. Treas. Reg. §1.645-1(b)(4).
11 Although the QRT and related estate, if any, are combined for income tax purposes, each is still a separate
share under the separate share rules of I.R.C. §663(c).
Treas. Reg. §1.645-1(e)(2)(iii).
12 The §645 election is only available to trusts of decedents dying on or after December 24, 2002. Treas. Reg.
§1.645-1(j).
13 See Treas. Reg. §1.645-1(b)(1); see also I.R.C.
§672(e).
14 I.R.C. §645 links the QRT to the power to revoke
under I.R.C. §676, which is the power in the grantor
or a nonadverse party to revest the trust assets in the
name of the grantor. Thus, other powers that cause the
2 I.R.C.
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grantor to be treated as an “owner” of the trust for
income tax purposes under Subpart E of Subchapter J
of the I.R.C. (dealing with grantors and others treated
as substantial owners), by definition, do not result in
QRT status. This is true even for powers that ostensibly fall within the purview of §676. For example, if the
decedent had the power to revoke but only with the
consent of an nonadverse party, or if the power to
revoke was only exercisable by a nonadverse party or
by the decedent’s spouse, the trust is not a QRT. See
Treas. Reg. §1.645-1(b)(1); see also I.R.C. §676(a).
15 I.R.C. §645(a).
16 Treas. Reg. §1.645-1(f)(1).
17 I.R.C. §645(b)(2). See also I.R.C. §6018(a).
18 Treas. Reg. §1.645-1(f)(2)(i).
19 Form 706 must be filed if the gross of the estate of
the decedent exceeds the applicable exclusion amount
in effect under I.R.C. §2010(c) for the calendar year that
included the date of death. I.R.C. §6018(a).
20 Treas. Reg. §1.645-1(f)(2)(ii).
21 Treas. Reg. §1.645-1(f)(2)(i) (solely for purposes of
determining the applicable date). The date of final
determination of liability is the earliest of: 1) the date
that is six months after the issuance by the IRS of an
estate closing letter, unless a claim for refund regarding the estate tax has been filed within 12 months
after the issuance of the letter, 2) the date of final disposition (that is, the date when all items have been either
allowed or disallowed) of a claim of refund, unless suit
is instituted within six months after the final disposition of the claim, 3) the date of issuance of a decision
resolving the estate tax liability, unless notice of appeal
or a petition for certiorari is filed within 90 days after
issuance of the decision, or 4) the date of expiration of
the statue of limitation of the estate. See also I.R.C.
§6501.
22 Treas. Reg. §1.641(b)-3(b).
23 I.R.C. §645(b)(1).
24 The ability to complete the trust’s administration
within one calendar year or less may prove to be difficult except with the simplest of trusts, because of
the time needed to marshal the decedent’s assets, determine and pay the decedent’s liabilities, and prepare the
estate tax return, if necessary. Obviously, the later in
the year the decedent dies, the more difficult this
becomes.
25 Because a §645 electing trust can distribute income
to beneficiaries to utilize their lower income tax brackets as well, not making the election is only beneficial
if the trust is unable to make distributions of income.
26 An electing trust is a QRT for which a valid §645
election has been made. I.R.C. §645(b)(1); Treas. Reg.
§1.645-1(b)(2).
27 The related estate is the estate of the decedent who
was treated as the owner of the QRT on the date of the
decedent’s death. See Treas. Reg. §1.645-1(b)(5).
28 I.R.C. §645(a).
29 See Treas. Reg. §1.645-1(c)(1). The trustee and
executor should not forget the requirement under
Treas. Reg. §301.6109-1(a)(5) to furnish the QRT’s
TIN to all payors of the trustee by giving each a Form
W-9, Request for Taxpayer Identification Number
and Certificate.
30 Under California Revenue & Taxation Code §17751,
any election made under I.R.C. §645 also applies for
California reporting purposes.
31 See Treas. Reg. §1.645-1(c)(1), (2); see also I.R.C.
§§6072 (regarding deadlines for filing Form 1041);
6012(a)(3),(4),(5) (stating that a trust or estate must file
an income tax return if it generates gross income in
excess of $600 or has a nonresident alien as a beneficiary. A trust must also file an income tax return if it
generates any taxable income whatsoever.).
32 Treas. Reg. §1.645-1(c)(1)(ii)(B).
33 Treas. Reg. §1.645-1(c)(1)(ii)(A).
34 Treas. Reg. §1.645-1(c)(1)(ii)(A), (B).
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35 See
supra note 22.
executor may only claim one personal exemption in the amount of $600 under I.R.C. §642(b). All
tax is computed under the tax tables for estates and
trusts under I.R.C. §1(e), and a deduction is allowed—
to the extent permitted under §642(c) and the governing
documents—for charitable contributions as defined in
I.R.C. §170(c). Treas. Reg. §1.645-1(e)(2).
37 See Treas. Reg. §1.645-1(e)(2)(ii)(B); see also I.R.C.
§6501.
38 Treas. Reg. §1.645-1(h)(2)(i)(A). The related estate’s
Form 1041 will also include a deduction for the deemed
distribution of the assets from the electing trust to the
new trust. See supra note 22.
39 Treas. Reg. §1.645-1(h)(2)(i)(B).
40 See Treas. Reg. §1.645-1(h)(1). All items of income,
including net capital gains, attributable to the electing
trust are included in the electing trust’s calculation of
distributable net income and are treated as being distributed to the new trust. Thus, the electing trust
receives a distribution deduction to the maximum
extent possible under I.R.C. §661 for this distribution,
and conversely, the new trust must include the deemed
distribution in its gross income to the extent required
by I.R.C. §662.
41 Treas. Reg. §1.645-1(h)(3),(4). See also I.R.C. §644.
42 Treas. Reg. §1.645-1(h)(3)(i).
43 Treas. Reg. §1.645-1(h)(4)(i).
44 Treas. Reg. §1.645-1(c)(2). The trustee also agrees
to report and pay taxes if multiple QRTs are joining
in the election.
45 See supra note 22.
46 Because the §645 election was made, no Form 1041
for the short taxable year between the decedent’s date
of death and the end of the calendar year must be
filed because that period is included within the estate’s
fiscal year. Treas. Reg. §1.645-1(d)(2)(i).
47 Treas. Reg. §1.645-1(e)(3)(ii).
48 See id.
49 Treas. Reg. §1.645-1(h)(2)(i)(B).
50 Treas. Reg. §1.645-1(h)(2)(ii). The trust’s final return
may also include a deduction for the deemed distribution of the share comprising the electing trust to the
new trust created upon termination of the election. See
supra note 38.
51 Treas. Reg. §1.645-1(h)(1). See also I.R.C. §§661 and
662 for the income tax deductions and inclusion of
income related to the distribution to the new trust.
52 Treas. Reg. §301.6109-1(a)(4)(ii).
53 Treas. Reg. §1.645-1(h)(4)(ii).
54 See I.R.C. §644(a).
55 Treas. Reg. §1.645-1(g)(2). Note that the instructions
to Form 1041 state that the election terminates as of
the date of the executor’s appointment if the executor
does not agree to the election. However, the cited
Treasury Regulation states that the termination occurs
the day before the executor is appointed.
56 Even if the executor agrees to the election, the election will terminate if the revised Form 8855 is not
timely filed. Treas. Reg. §1.645-1(g)(1).
57 See Treas. Reg. §1.645-1(g)(2)(ii).
58 See id.
59 Id.
60 Treas. Reg. §1.645-1(g)(3); see also I.R.C. §644.
Additionally, to ensure that the IRS understands that the
electing trust is no longer the sole entity making the §645
election, when the amended Form 1041 for the taxable
year ending immediately prior to the executor’s appointment is filed, it should indicate that it is a final return.
61 Id. Note that the personal exemption under I.R.C.
§642(b) cannot be taken on these Form 1041s filed by
the executor.
62 See Treas. Reg. §1.645-1(e)(2)(ii)(B).
63 Treas. Reg. §1.645-1(g)(3).
64 See Treas. Reg. §1.1645-1(h)(1).
65 Id.; see also I.R.C. §644.
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MCLE ARTICLE AND SELF-ASSESSMENT TEST
By reading this article and answering the accompanying test questions, you can earn one MCLE legal ethics credit.
To apply for credit, please follow the instructions on the test answer sheet on page 31.
by John W. Amberg and Jon L. Rewinski
2006
Ethics
Roundup
Bad acts by both
private attorneys
and prosecutors spurred decisions
in legal ethics last year
2006
was an active year
for professional
ethics. In a scandal that made national headlines, HewlettPackard’s in-house ethics counsel, along with
others, was indicted by California’s attorney
general for using a form of deceit known as
pretexting to obtain phone records of board
members suspected of leaking information to
reporters.1 Informed by one of the company’s
investigators that the investigators were lying
to obtain confidential information, the HP
lawyer reportedly e-mailed the informant: “I
shouldn’t have asked….”2
A Ninth Circuit Court of Appeals judicial
discipline council voted to publicly censure
Judge Manuel L. Real of the U.S. District
Court for the Central District of California for
improperly seizing control of a bankruptcy
case to protect a probationer he was super-
vising. This action was taken during the sixth
review of the case, after the Ninth Circuit was
criticized for its prior handling of the matter
by a committee chaired by U.S. Supreme
Court Justice Stephen Breyer, and Real was
threatened with impeachment by the Judiciary
Committee of the House of Representatives.
The order, which was not officially published
due to the judge’s appeal, was accidentally
posted on the Internet. It stated that the testimony given by Real to the four-judge investigating committee had been “inaccurate and
misleading.”3
Culminating years of investigation, the
U.S. attorney in Los Angeles indicted plaintiffs’ class action firm Milberg Weiss Bershad
& Shulman and two name partners on conspiracy and money laundering charges.4 In the
continuing probe of illegal wiretapping by private investigator Anthony Pellicano, a federal
grand jury indicted attorney Terry Christensen
for allegedly hiring Pellicano to bug the phone
of the ex-wife of Christensen’s client Kirk
Kerkorian.5
Last year also saw the Department of
Justice announcing in its McNulty Memorandum that it would revise its official policy of pressuring corporations to waive the
attorney-client privilege by requiring U.S.
attorneys to consult with the assistant attorJohn W. Amberg is a partner in the Santa Monica
office of Bryan Cave LLP, and Jon L. Rewinski is a
shareholder in the Los Angeles office of Heller
Ehrman LLP. Both are former chairs and current
members of the Los Angeles County Bar
Association’s Professional Responsibility and
Ethics Committee. Amberg is also chair of the State
Bar of California’s Committee on Professional
Responsibility and Conduct.
Los Angeles Lawyer March 2007 29
ney general for the Criminal Division before
asking for those waivers. By doing so the
DOJ was reacting to pressure from the
American Bar Association and business and
professional leaders across the political spectrum. Nevertheless, this limited reform did not
allay the ABA’s concerns that the government’s policy erodes the ability of corporate
officers and directors to obtain legal advice
to comply with the law.6 The U.S. Sentencing
Commission, however, voted to delete language from its sentencing guidelines encouraging federal prosecutors to demand that
corporations waive the attorney-client privilege in exchange for more lenient sentences.7
Conflicts of Interest
Increased lawyer mobility coupled with the
enormous growth of private, government,
and public interest law offices in recent years
continues to present lawyers and the courts
with challenges in interpreting traditional
conflicts rules. During 2006, the California
Supreme Court and First, Second, and Fifth
District Courts of Appeal published opinions on these and related topics, including
screening in a government law office, standing to move for a lawyer’s disqualification, the
sufficiency of evidence needed to disqualify a
lawyer, and the standard for assessing a client’s written waiver of a conflict.
Every lawyer owes his or her current
clients a duty of loyalty and current and former clients a duty of confidentiality.8 Rule 3310(C) of the California Rules of Professional
Conduct prohibits the concurrent representation of two clients with adverse interests,
absent the informed written consent of both
clients. Rule 3-310(E) prohibits a lawyer
from representing a client in an engagement
adverse to a former client without the former
client’s informed written consent if the lawyer
obtained from the former engagement confidential information material to the new
engagement. Violations of conflicts rules may
result in lawyer discipline, disqualification
of a lawyer, disqualification of the lawyer’s
firm or law office, disgorgement of fees, and
malpractice exposure.
In City and County of San Francisco v.
Cobra Solutions, Inc., 9 the California
Supreme Court concluded that a conflict disqualifying the head of a government law
office requires the disqualification of the
entire office—notwithstanding the office’s
attempt to avoid conflicts by creating an ethical screen. A lawyer and his firm represented
Cobra Solutions in negotiations with the city
over a technology agreement. The lawyer
billed minimal time on the engagement, just
four-tenths of an hour. He was subsequently
elected San Francisco city attorney. After the
election, the city attorney’s office began an
investigation concerning the city’s contract
30 Los Angeles Lawyer March 2007
with Cobra Solutions. The city attorney
erected an ethical screen that prevented him
from accessing the office’s paper and electronic files on the matter, required office personnel to refrain from talking to him about
the matter, and directed all inquiries about the
matter to a senior assistant city attorney.
After finding evidence of kickbacks, the city
attorney’s office filed an action for fraud,
breach of contract, and statutory violations
against Cobra Solutions. Citing a conflict of
interest, Cobra Solutions moved to disqualify the city attorney and the entire office.
The trial court disqualified both, and the
court of appeal and supreme court affirmed.
The reasons for disqualifying the city attorney himself were relatively straightforward.
He and his prior law firm represented Cobra
Solutions on a matter substantially related to
the lawsuit being pursued by the city attorney’s office. Because of the substantial relationship, the city attorney was presumed to
possess material confidential information
about Cobra Solutions. Lacking Cobra’s consent, he was disqualified. The supreme court,
in disqualifying the entire city attorney’s office
despite the presence of the ethical screen,
noted: “Individuals who head a government
law office occupy a unique position because
they are ultimately responsible for making
policy decisions that determine how the agency’s resources and efforts will be used.” The
attorneys who serve directly under the head
attorney cannot be entirely insulated from policy decisions, nor free from real or perceived
concerns as to what their boss wants. Hence,
a former client “might legitimately question”
whether a government law office has an
unfair advantage when the chief attorney
possesses confidential information about his
or her former client that pertains to the government law office’s current matter.10 As a
result, the entire office in Cobra Solutions had
to be disqualified. The court reserved for
later determination whether ethical screening
might suffice to shield a senior supervisory
attorney (as opposed to the head of the office)
with a personal conflict.11 Justice Corrigan,
joined by Chief Justice George, dissented,
citing Formal Opinion No. 342 of the
American Bar Association’s Committee on
Ethics and Professional Responsibility. Justice
Corrigan suggested that an automatic disqualification rule unreasonably impairs the
government’s ability to function.12
Disqualification can be a potent weapon
that impairs a party’s right to choose its own
counsel, imposes a financial burden on a
party needing to replace disqualified counsel,
and has the potential for tactical abuse. In
Dino v. Pelayo,13 a litigant, after participating in a mediation, sought to disqualify a
lawyer jointly representing two other parties because of an alleged conflict between
those parties. The First District Court of
Appeal concluded that the litigant, whom
the lawyer had never represented, lacked
standing to do so. Only a person who has or
had a fiduciary relationship with a lawyer has
standing to disqualify the lawyer.
As noted in Cobra Solutions, to disqualify one’s former lawyer from representing an
adversary in a pending litigation, a litigant
must establish that the subject of the current
litigation is substantially related to the subject of the prior litigation, which generally
triggers a presumption that the lawyer possesses confidential material information about
the litigant. Failure to prove a substantial
relationship between the two engagements
generally leads to the denial of a disqualification motion, as happened in Fremont
Indemnity Company v. Fremont General
Corporation14 and Faughn v. Perez.15 In
Fremont Indemnity, the lawyers’ prior representation of the moving party, who was
the plaintiff in a legal malpractice action,
was not substantially related to the lawyers’
current defense of the moving party’s parent
corporation against the moving party’s claims
for misappropriation. Similarly, in Faughn, the
lawyer’s prior defense of the moving party’s
parent and sister corporations in multiple
medical malpractice actions was not substantially related to the lawyer’s current representation of a mother and her child in a
medical malpractice action against the moving party. The court in Faughn concluded
that the moving party’s motion relied too
heavily on inferences about facts that were
within its control and could have been disclosed without compromising confidential
information.16 In both these cases, the courts
rejected the moving parties’ “playbook” arguments that the former lawyers had gained
some special understanding of the moving
parties’ method of litigating from the prior
engagements.17
To avoid disqualification in the face of a
conflict, a lawyer must obtain written client
consent. What must the consent say? The
First District Court of Appeal analyzed this
issue in People v. Baylis.18 The defendant’s
brother had been prosecuted in two assault
cases. The brother’s lawyer claimed mistaken
identity and suggested that the defendant,
who was then represented by another lawyer,
committed the crimes. Thereafter, the defendant was prosecuted in connection with a
third assault. The defendant wanted to retain
his brother’s former lawyer. The brother signified his consent with this language: “I have
been advised that a conflict of interest may
exist with [the lawyer] representing [the defendant]. I am aware of this and herby [sic]
waive any conflict of interest regarding same.”
Notwithstanding the brother’s consent, the
trial court denied the request because the
MCLE Test No. 157
The Los Angeles County Bar Association certifies that this activity has been approved for Minimum
Continuing Legal Education legal ethics credit by the State Bar of California in the amount of 1 hour.
MCLE Answer Sheet #157
2006 ETHICS ROUNDUP
Name
Law Firm/Organization
1. All lawyers owe their current clients a duty of loyalty
and their current and former clients a duty of confidentiality.
True.
False.
2. A lawyer cannot concurrently represent two clients
with adverse interests unless both clients give their
informed written consent.
True.
False.
3. A lawyer cannot represent a client adverse to a former client without the latter’s informed written consent
if the lawyer obtained confidential information material to the new engagement from the former client.
True.
False.
4. Under California law, an ethical screen is sufficient
to avoid disqualification of an entire law office.
True.
False.
5. Only a person who has a fiduciary relationship with
a lawyer has standing to disqualify the lawyer.
True.
False.
6. To disqualify a former lawyer from representing an
adversary in a new proceeding, a client generally must
show there is a substantial relationship between the
two engagements.
True.
False.
7. A former lawyer will be disqualified if he has learned
the former client’s “playbook,” or method of litigating.
True.
False.
8. Informed written consent requires, among other
things, that the client be made aware of the dangers
and possible consequences of joint representation.
True.
False.
9. A lawyer must preserve the secrets of his or her
client, at every peril to himself or herself.
True.
False.
10. A lawyer can be sued for breach of fiduciary duty
and malpractice if he or she discloses confidential
client information.
True.
False.
11. The identity of class members is always attorneyclient privileged information.
True.
False.
Address
City
12. A lawyer may not threaten to bring criminal, administrative, or disciplinary charges to gain an advantage
in a civil dispute.
True.
False.
State/Zip
13. A lawyer who acts as an escrow holder owes a
paramount duty of loyalty to his or her client and may
disregard the rights of the other party.
True.
False.
INSTRUCTIONS FOR OBTAINING MCLE CREDITS
1. Study the MCLE article in this issue.
14. A lawyer who misleads a judge or jury is subject to
discipline under the Rules of Professional Conduct.
True.
False.
15. A lawyer cannot withdraw from pending litigation
without the permission of the court.
True.
False.
16. Prosecutors may be disqualified if they cannot
exercise their discretion in an evenhanded manner, with
the result that the defendant is unlikely to receive a fair
trial.
True.
False.
17. A charging lien in a contingent fee case is an adverse
interest and subject to Rule 3-300 of the Rules of
Professional Conduct.
True.
False.
18. A lawyer for a successful party may intervene to collect that party’s statutory fees when the action has
resulted in the enforcement of an important right affecting the public interest.
True.
False.
19. When a client disputes the lawyer’s fee after it
has been withdrawn from the client’s trust account, the
lawyer must put the money back into the account until
the dispute is resolved.
True.
False.
20. A lawyer does not need to be admitted to practice
law in California to practice before a federal agency in
California.
True.
False.
E-mail
Phone
State Bar #
2. Answer the test questions opposite by marking
the appropriate boxes below. Each question
has only one answer. Photocopies of this
answer sheet may be submitted; however, this
form should not be enlarged or reduced.
3. Mail the answer sheet and the $15 testing fee
($20 for non-LACBA members) to:
Los Angeles Lawyer
MCLE Test
P.O. Box 55020
Los Angeles, CA 90055
Make checks payable to Los Angeles Lawyer.
4. Within six weeks, Los Angeles Lawyer will
return your test with the correct answers, a
rationale for the correct answers, and a
certificate verifying the MCLE credit you earned
through this self-assessment activity.
5. For future reference, please retain the MCLE
test materials returned to you.
ANSWERS
Mark your answers to the test by checking the
appropriate boxes below. Each question has only
one answer.
1.
■ True
■ False
2.
■ True
■ False
3.
■ True
■ False
4.
■ True
■ False
5.
■ True
■ False
6.
■ True
■ False
7.
■ True
■ False
8.
■ True
■ False
9.
■ True
■ False
10.
■ True
■ False
11.
■ True
■ False
12.
■ True
■ False
13.
■ True
■ False
14.
■ True
■ False
15.
■ True
■ False
16.
■ True
■ False
17.
■ True
■ False
18.
■ True
■ False
19.
■ True
■ False
20.
■ True
■ False
Los Angeles Lawyer March 2007 31
defendant intended to argue mistaken identity—that his brother may have committed the
crime. The court of appeal affirmed, holding
the consent failed to satisfy “the exacting
standard…calculated to ensure a legitimate
waiver of a defendant’s constitutional right to
conflict-free counsel and to insulate any conviction from a later challenge on appeal based
on the conflict.” The exacting standard
requires that:
• The defendant discuss the potential drawbacks of joint representation with the defendant’s attorney or outside counsel.
• Counsel advise the defendant of the dangers
and possible consequences of joint representation in the case.
• The defendant knows of his or her right to
conflict-free representation.
• The defendant voluntarily wishes to waive
that right.19
Confidentiality
An attorney’s duty of confidentiality is set
forth in Business and Professions Code Section
6068(e)(1): “It is the duty of an attorney…[t]o
maintain inviolate the confidence, and at
every peril to himself or herself to preserve the
secrets, of his or her client.” Several cases in
2006 explored the limits of protection for confidential client information.
In People v. Navarro,20 a family of car
thieves was prosecuted after an anonymous
informant tipped off police. The defendants
moved to suppress the evidence, arguing that
the police informant was their sister, who
also happened to be their lawyer. They argued
that their rights under the Fifth and Sixth
Amendments and the statutory attorneyclient privilege, Evidence Code Section 952,
were violated because the search warrant
was obtained with confidential information
from their attorney. Without deciding whether
the lawyer was the informant, the Second
District Court of Appeal rejected these arguments. It held that the Fifth Amendment was
not violated because the informant initiated
the contacts and had not acted at the behest
of the government.21 Further, it ruled that the
Sixth Amendment was not violated because
no right to counsel arises before a defendant
is charged.22 Also, the court held that the
“fruit of the poisonous tree” doctrine does not
apply to violations of evidentiary privileges,
so confidential client information could be
used to obtain a search warrant. The appellate court noted the defendants could sue
their lawyer for malpractice and breach of
fiduciary duty and seek State Bar discipline—
remedies that the court recognized would be
“a pyrrhic victory from behind bars.”23
In Tien v. Superior Court,24 a putative
class action suit for alleged wage and hour
violations by subsidiaries of Tenet Healthcare,
the parties sparred over the right to learn
32 Los Angeles Lawyer March 2007
the names, addresses, and phone numbers
of potential class members. Initially, the
plaintiffs served an interrogatory on Tenet
seeking the identity and contact information of approximately 50,000 potential class
members, and Tenet objected. The parties
agreed to send a neutral letter to a random
sample of 3,300 potential class members
selected by Tenet. The letter invited those in
the sample to contact the plaintiffs’ lawyers.
Eighty-one responded and 49 retained the
plaintiffs’ counsel to represent them. Tenet
then served an interrogatory on the plaintiffs,
seeking the names of and contact information
for all class members who responded to the
neutral letter. Of the 81, 24 consented to
the disclosure of their identities, and the rest
refused or did not respond. The superior
court denied a motion for a protective order
and directed the plaintiffs to provide the
information to Tenet. The Second District
Court of Appeal reversed.
The appellate court held that the identity
of the class members did not constitute attorney work product or, on the facts of this
case, attorney-client privileged information.25
However, it held that disclosure of the identity of the class members would invade the
individuals’ right of privacy, which outweighed Tenet’s interest in the information.
Withholding the identities would not affect
Tenet’s ability to defend itself, the court confidently stated, since Tenet knew the identity
of the 50,000 potential class members, including the 3,300 recipients of the neutral letter,
and was free to contact all of them. Moreover,
the court noted that Tenet should be aware
of the relevant facts in the case, including
whether it gave all of the employees proper
meal and rest breaks.26 Apparently alarmed
by the implication of its analysis, the court
added: “We do not mean to suggest that
Tenet has no right to conduct discovery in the
case.”27
Third-Party Liability
Too much zeal on behalf of a client can give
rise to liability to third parties, as a pair of
cases illustrated. In Flatley v. Mauro, 28
Michael Flatley, a popular Irish entertainer
known as the Lord of the Dance, fought back
when he received a histrionic demand letter
from a lawyer charging that the dancer had
raped his client. Several months earlier, in
October 2002, Flatley spent a consensual
night with a woman in his Las Vegas hotel
bedroom. The next morning, she kissed him
goodbye and said she hoped she would see
him again. Soon thereafter, she called the Las
Vegas police to report a rape but provided
insufficient information for an investigation.
In January 2003, her lawyer D. Dean Mauro
sent Flatley a demand letter that bluntly
threatened to sue the dancer for rape—citing
the report to the Las Vegas police—and to
expose him to worldwide media attention
unless he settled the claim for a huge sum. The
letter referred to the recent settlement of a
punitive damage claim in the amount of
“$100,000,000,” and in subsequent telephone calls with Flatley’s counsel Bertram
Fields, Mauro asked for “seven figures.”29
Flatley rejected the demand and sued Mauro
for extortion, intentional infliction of emotional distress, and interference with prospective business advantage. Mauro filed a motion
to strike under the anti-SLAPP (Strategic
Lawsuit Against Public Participation) statute,30
arguing that the prelitigation demand letter
was an exercise of his constitutionally protected rights of speech and petition.
The California Supreme Court disagreed,
stating that attorneys are not exempt from liability because they are engaged in professional conduct, and Rule 5-100 of the
California Rules of Professional Conduct
prohibits attorneys from “threaten[ing] to
present criminal, administrative, or disciplinary charges to obtain an advantage in a
civil dispute.”31 The court held that the
lawyer’s letter, though “half-couched in
legalese,” constituted criminal extortion as a
matter of law and was neither protected by
the Constitution nor the anti-SLAPP statute.32
In a footnote, the court noted that Mauro was
no longer licensed to practice law, having
voluntarily retired during the pendency of
the lawsuit.33
A partner in the Los Angeles law firm
Parker, Milliken, Clark, O’Hara & Samuelian
was found to have breached his fiduciary
duty to a third party when acting as an escrow
holder in Virtanen v. O’Connell.34 The partner, O’Connell, represented the buyer in a
stock sale transaction. He also agreed to act
as escrow holder by holding the seller’s stock
certificates until the sale closed. Before the
conditions of the sale were met, the seller,
Virtanen, decided to terminate the sale and
sent a written notice rescinding the transaction and demanding return of his stock.
Notwithstanding the notice, O’Connell proceeded to close the sale and delivered the
certificates to a transfer agent to effectuate the
transfer of the stock to his client. The seller
sued O’Connell and his law firm for negligence, breach of fiduciary duty, and conversion, and recovered nearly $2 million in compensatory damages. The court of appeal
affirmed, holding that the lawyer could not
favor his own client and disregard the rights
of the other party to whom he owed duties
as an escrow holder. Faced with conflicting
instructions, the lawyer must file an interpleader action and cannot convert the stock
to his client’s use. Delivering the stock to the
transfer agent was not the “functional equivalent” of interpleader, as O’Connell con-
RICHARD EWING
tended.35 The court rejected O’Connell’s “fantastical defense” and remanded the case for
retrial of punitive damages against the
lawyer.36
Bad Acts by Lawyers
years Wolff was a member of the Indigent
Defense Program (IDP) of Sacramento
County, which selected attorneys to represent
parents and children in dependency matters.
In 1999, the presiding judge of the juvenile
court decided to contract with one law firm
3-110(A) of the Rules of Professional Conduct
(an attorney shall not intentionally, recklessly, or repeatedly fail to perform legal services with competence), Rule 3-700(A)(1)
(an attorney shall not withdraw without the
tribunal’s permission), and Rule 3-700(A)(2)
Regrettably, some attorneys need to be
reminded that they must tell the truth to a
court. Business and Professions Code Section
6068(d) states: “It is the duty of an attorney…[t]o employ, for the purpose of maintaining the causes confided to him or her
those means only as are consistent with truth,
and never to seek to mislead the judge or
any judicial officer by an artifice or false
statement of fact or law.” Under Rule 5-200
of the Rules of Professional Conduct, misleading a judge or jury makes a lawyer subject to discipline.
In Mammoth Mountain Ski Area v.
Graham, 37 a ski instructor injured by a
teenage snowboarder sued the snowboarder
and his parents for damages. The 17-year-old
admitted he was engaged in a snowball fight
with his younger brother when he collided
with the instructor. The superior court granted
the defendants’ motion for summary judgment based on the primary assumption of risk
doctrine—namely, that the injury resulted
from an inherent risk in the sport.38 On
appeal, the issue was whether the teenager’s
conduct was so reckless as to be totally outside the range of normal activity involved in
the sport and, therefore, not protected by
the assumption of risk doctrine. The appellate court concluded the evidence could lead
to a reasonable inference that the collision was
neither inadvertent nor unavoidable and so
held that a triable issue of fact barred summary judgment.39
The court of appeal also found that a
serious mischaracterization of the record had
occurred during oral argument. The defendants’ lawyer, Ross Paulson, stated that there
was no evidence in the record that the snowboarder who collided with the plaintiff had
ever thrown a snowball, but in rebuttal, a witness’s declaration was read stating that the
snowboarder and his brother were throwing snowballs at each other. The court concluded that Paulson had “misrepresented the
record on a crucial point.”40 Noting that
some appellate counsel had recently found it
convenient to misrepresent the record, either
to gain an advantage or because they were
reckless with the truth, the court declared
that cavalier mischaracterizations of the
record must cease, and directed the clerk to
forward a copy of the opinion to the State Bar
for possible discipline under Section
6068(d).41
Different duties were breached in In the
Matter of Julie L. Wolff,42 a disciplinary
action heard by the State Bar Court. For nine
instead of using the IDP. Wolff’s bid to be the
law firm was rejected, and one month later,
she submitted a document to the superior
court in which she attempted to resign from
all of her 319 IDP-appointed cases. The presiding judge refused to file the document and
informed Wolff that it was not a proper
motion to withdraw from representation
because it did not identify the cases by name
or number or request a hearing date, and
she had not informed any of her clients of her
intent to withdraw. Indeed, she never submitted a proper motion to withdraw and the
court never authorized her withdrawal.
Nevertheless, she ceased making appearances
in all cases and returned the files to the IDP.
After Wolff had missed 39 appearances,
she was ordered by the court to show cause
why she should not be held in contempt.
Ultimately, in 2000 Wolff stipulated to an
order imposing sanctions. Four years later, the
State Bar filed a notice of disciplinary charges,
and Wolff was found to have violated Business
and Professions Code Section 6068(m) (an
attorney must keep clients reasonably
informed of significant developments), Rule
(an attorney shall not withdraw until taking
steps to avoid reasonably foreseeable prejudice, including giving notice to the client and
allowing the client time to employ other
counsel), among other rules and statutes.
The Review Department further found that
Wolff’s failure to accept responsibility for
her actions as well as her “tangled web of
excuses” demonstrated her indifference and
lack of remorse and recommended stern sanctions—including suspension from the practice
of law for 18 months, three years’ probation, quarterly reports showing her compliance with legal ethics rules, and taking and
passing the Multistate Professional Responsibility Examination.43
Unfortunately, this was not Wolff’s only
public sanction by a court in 2006. In In re
S.C.,44 the Third District Court of Appeal
found that Wolff’s appellate brief in the case—
containing 76,235 words and characterized
by the court as “rambling and ranting” over
its 202 pages—was so egregious it warranted
referral to the State Bar for discipline. The
court wrote:
This is an appeal run amok. Not only
Los Angeles Lawyer March 2007 33
does the appeal lack merit, the opening brief is a textbook example of
what an appellate brief should not
be….[The] appellants’ lawyer has managed to violate rules of court; misrepresent the record; base arguments on
matters not in the record on appeal; fail
to support arguments with any meaningful analysis and citation to authority; raise an issue that is not cognizable
in an appeal by her client; unjustly
challenge the integrity of the opposing
party; make a contemptuous attack
on the trial judge; and present claims
of error in other ways that are contrary
to common sense notions of effective
appellate advocacy….45
Prosecutor Misconduct
Prosecutors speak not solely for the victim or
the police, or those who support them. They
represent the people.46 Because prosecutors
possess the power and duty to charge individuals with crimes and to conduct the prosecution, the attorneys who make those decisions must not only be impartial but also
maintain the appearance of impartiality.47
Professional misconduct may result in attorney discipline, as happened to a former
Sonoma County prosecutor in a murder trial
who was suspended for three years and given
five years’ probation for secretly coaching a
coroner on how to answer questions concerning past employment and failing to turn
over or disclose the existence of a videotape
of the coaching session.48 In addition, if the
circumstances demonstrate that a prosecutor
cannot exercise his or her discretionary function in an evenhanded manner so that it is
unlikely the defendant will receive a fair trial,
the prosecutor may be recused pursuant to
Penal Code Section 1424. In three opinions
published in 2006, the Second District Court
of Appeal disqualified deputy district attorneys for misconduct.
The Second District issued two decisions
based on events in the Santa Barbara district
attorney’s office. In Haraguchi v. Superior
Court,49 the prosecutor wrote a novel that
was published in early 2006. The novel
described the exploits of the heroine—like the
author, a female Santa Barbara deputy district
attorney—as she prosecuted a rape by intoxication case. The plot bore several similarities
to a rape by intoxication case that the author
was prosecuting against Haraguchi. As a
result, Haraguchi moved to recuse her and the
entire district attorney’s office. The trial court
denied the motion, but the Second District
issued a writ instructing the trial court to
disqualify the author only. Expressing its
hope that “this case of first impression will
make a case of lasting impression,”50 the
Second District reasoned that the publica34 Los Angeles Lawyer March 2007
tion of the novel, and some of the views
expressed in it by the author, created a disabling conflict of interest and a reasonable
argument that the author could not exercise
her discretionary functions in an evenhanded
manner. Indeed, the publicity resulting from
a conviction could garner her additional royalties, so the author had no incentive to enter
into a negotiated settlement with the defendant. Also, in her acknowledgements, the
author, identifying herself with the heroine,
demonstrated a strong bias toward the prosecution and victims and characterized her
antidefendant description of the criminal justice system as “trustworthy.”51 Characterizing
these actions by the author as a “single lapse
of judgment,” the court disqualified the
author in the defendant’s case but not in all
criminal or sexual assault cases.52
On the same day as its Haraguchi decision,
the same panel from the Second District
issued an opinion chastising a second deputy
district attorney from the Santa Barbara
office. Hollywood v. Superior Court 53
involved Jesse James Hollywood, one of five
young men charged with a brutal kidnapping and murder. He fled the country, and in
his absence the deputy district attorney prosecuted his four codefendants. The four were
convicted. While Hollywood was still in hiding, a screenwriter solicited assistance from
the prosecutor to write a movie about the
crime. The prosecutor gave the screenwriter
his trial notebook and various files relating to
the investigation, including photographs,
tapes, police and probation reports, psychiatric reports, and possibly even rap sheets. The
prosecutor received no money for his assistance. He helped the screenwriter because
the prosecutor hoped that widespread publicity regarding the crime might lead to the
capture of Hollywood. The film, although
purportedly factually accurate, used pseudonyms. It painted the fugitive as manipulative, vicious, selfish, and without any redeeming characteristics—a portrayal described as
a “public vilification of a defendant in a case
which is yet to be tried.” 54 The credits
expressed gratitude to the prosecutor and
his office for their assistance.
Five years after the crime and shortly
before the release of the film, Hollywood
was arrested in Brazil, deported to California,
and faced prosecution on felony murder
charges as the film was being released. The
trial court denied the defendant’s motion to
recuse the prosecutor and his entire office. The
Second District initially denied the defendant’s writ petition. However, the California
Supreme Court granted review and directed
the court of appeal to issue an order to show
cause. The Second District proceeded to
reevaluate the case and issue the writ, finding
that the prosecutor, in his zeal to apprehend
the fugitive, had improperly given away public property in a pending case, disclosed his
work product, and potentially infected the
jury pool with his views on the strength of the
people’s case. The Second District, however,
declined to recuse the entire district attorney’s
office because Hollywood failed to establish
an “especially persuasive” showing of a causal
connection between the prosecutor’s conduct, the elected district attorney, and other
deputies in that office.55
In the third case,56 a different panel of the
Second District Court of Appeal denied a
writ petition, thereby affirming the recusal of
several members of the Los Angeles district
attorney’s office. These attorneys had blocked
the efforts of a minor charged with violations of Penal Code Section 288.5 from gaining access to the medical and psychotherapy
records of the victim, who was also a minor.
The court reasoned that the prosecutors had
aligned themselves too closely with the parents of the victim and thereby threatened the
ability of the minor to receive a fair trial.
Interestingly, the California Supreme Court
recently granted review in Haraguchi and
Hollywood. The court granted the prosecutor’s petition for review in Hollywood to
consider three questions:
1) Was the trial court’s ruling subject to independent review or reviewable only for an
abuse of discretion?
2) Was recusal appropriate under either standard?
3) If recusal was required, was it error not to
recuse the entire district attorney’s office?
On its own motion, the court granted
review in Haraguchi to determine the appropriate standard of review and whether recusal
was appropriate under either standard.
Getting Paid
In 2004, the California Supreme Court in
Fletcher v. Davis concluded—to the surprise
of many—that a lawyer’s charging lien (that
is, a lien upon a fund or judgment the lawyer
receives to ensure compensation for recovering the fund or judgment) created at the
commencement of an hourly fee engagement
constitutes an adverse interest within the
meaning of Rule 3-300 of the Rules of
Professional Conduct.57 As a result, for this
type of lien to be enforceable, the lawyer
must comply with all the requirements of
Rule 3-300—including, for example, advising the prospective client that he or she may
seek the advice of yet another lawyer about
the lien and obtaining the client’s written
consent. In Fletcher, the agreement between
the lawyer and the corporate client was oral.
As a result, the supreme court concluded that
the lawyer’s charging lien was invalid.
During 2006, the State Bar’s Committee
on Professional Responsibility and Conduct
(COPRAC) issued an opinion on an issue
not addressed in Fletcher—whether a charging lien in a contingent fee case constitutes an
adverse interest within the meaning of Rule
3-300. 58 In Formal Opinion 2006-170,
COPRAC concluded that it does not.
COPRAC distinguished Fletcher because
of material differences between hourly and
contingent fee arrangements. A charging lien
is almost always found in contingent fee contracts and is generally uncontroversial, but it
is relatively rare in a hourly fee agreement.
Also, the percentage fee owed in a contingent
fee case is fixed at the commencement of the
engagement, which reduces the likelihood of
fee disputes that could cause a delay in a
client’s recovery. Business and Professions
Code Section 6147 sets forth several requirements and client protections for contingent fee
contracts that are not applicable to hourly
agreements. Finally, COPRAC reasoned that
requiring compliance with Rule 3-300 in
contingency fee contracts would cause clients
to seek independent consultations without
any discernible benefit because charging liens
are so prevalent and well accepted in contingent fee contracts. To date, neither the
supreme court nor the intermediate appellate
courts have addressed the distinction adopted
by COPRAC.
Under certain circumstances, a lawyer
seeking payment for fees may also have an
equitable lien against a judgment in favor of
his or her client. In County of Los Angeles v.
Construction Laborers Trust Funds for Southern California Administrative Company,59 a
lawyer represented a construction company
in various matters, including a dispute with
the County of Los Angeles. The lawyer and
his client had a written fee agreement giving
the lawyer a lien on the client’s recovery not
in the county dispute but in a separate federal
court proceeding. The client lost the federal
case, but in the other matter the lawyer negotiated a settlement in which his client was to
receive $255,361 from the county. Although
his attorney’s lien did not apply against this
settlement payment, the lawyer sent the
county a letter advising the county that the
lawyer had a lien on the settlement proceeds.
The lawyer copied his client’s president on the
letter. In the meantime, a judgment creditor
of the client also claimed a right to the settlement proceeds. Faced with conflicting
claims, the county interpleaded the funds.
The court of appeal concluded that the lawyer
had an equitable lien on the settlement funds,
which attached when the lawyer sent the letter advising the county of the lien. Because the
lawyer’s equitable lien attached before the
judgment creditor’s lien, the lawyer’s lien had
priority.
It is not unusual for a lawyer working on
an hourly basis to require the client to pay a
retainer as security for the lawyer’s fee. In Rus,
Milliband & Smith PC v. Yoo,60 a bankruptcy appellate panel concluded that a prepetition security retainer, properly disclosed
and documented, is not subject to disgorgement. The panel also held that determining
whether a professional with a security retainer
is “disinterested” within the meaning of the
Bankruptcy Code or otherwise impaired by
a conflict of interest is necessarily fact-specific.
However, a finding of disinterest is not in
itself disqualifying.61
Code of Civil Procedure Section 1021.5
empowers a court to “award attorneys’ fees
to a successful party against one or more
opposing parties in any action which has
resulted in the enforcement of an important
right affecting the public interest….” Does the
lawyer of a prevailing party have a right to
intervene in litigation to move for statutory
fees? Courts have expressed different views on
this. In Lindelli v. Town of San Anselmo,62 the
First District Court of Appeal concluded that
the word “party” in Section 1021.5 includes
a litigant and the litigant’s lawyer. Thus, in
Lindelli, the lawyers for the prevailing petitioners in litigation over a voter referendum
were permitted to intervene for the purpose
of filing a motion for statutory fees, even
though the petitioners themselves had decided
to accept the town’s settlement without filing
a motion for statutory fees. In reaching this
decision, the court of appeal disagreed with
a 2004 Ninth Circuit holding that Section
1021.5 “confers no legally enforceable interest on the attorneys themselves.”63 The First
District reasoned that denying a lawyer the
right to intervene and move for fees would
“dilute section 1021.5’s effectiveness at
encouraging counsel to undertake litigation
enforcing important public policies” and
“provide a windfall to the wrongdoing defendant, at the expense of the attorneys who
labored in the public interest.”64 The court
warned, however, that a trial court might be
justified in denying intervention to a lawyer
seeking to move for fees when intervention
would interfere with settlement.65
A provision in an engagement letter irrevocably assigning to the lawyer the client’s
rights to a statutory fee award created an
obstacle to settlement in Pony v. County of
Los Angeles.66 The lawyer filed an action on
behalf of the plaintiff’s minor daughter against
the County of Los Angeles for intentional
torts and violations of 42 U.S. Code Section
1983. In the retainer agreement, the mother
irrevocably assigned to the lawyer her rights
“to waive, apply for, obtain judgment upon,
collect, and/or receive any statutory attorney’s fee award” on the claims.67 During the
litigation, the county offered to settle for
$29,999.99, including attorney’s fees. The
mother wanted to accept the amount. The
lawyer refused, claiming that his fees
amounted to roughly $50,000. In light of
the conflict, the lawyer withdrew from the
case but still objected to the settlement. The
mother thereafter settled with the county but
had to indemnify it against the possibility
that her former lawyer might pursue a claim
for fees. The former lawyer objected when the
district court dismissed the case upon the
settlement, but the district court denied the
lawyer’s objection for lack of standing. The
Ninth Circuit affirmed. Citing cases from
the U.S. Supreme Court and the Ninth Circuit,
the court reasoned that the provision permitting a plaintiff prevailing on a Section
1983 claim to recover attorney’s fees vests the
right in the client, not the lawyer. Also, a
claim for fees, which is derivative of a claim
under Section 1983, cannot be assigned under
California law. Therefore, the court concluded that the assignment in the retainer
agreement was void as a matter of law.68
Regarding financial arrangements between
lawyers and their clients, LACBA’s Professional Responsibility and Ethics Committee
reached two conclusions in Formal Opinion
No. 517. First, a lawyer may agree to advance
the reasonable expenses of prosecuting or
defending a client’s matter and waive the
right of repayment by the client if there is no
recovery. Second, at the inception of the representation or during the course of the litigation, a lawyer may agree to indemnify the
client for court-ordered costs if the client is
not the prevailing party. The committee reasoned that Rule 4-210 of the Rules of Professional Conduct permits a lawyer to agree
to pay a client’s reasonable litigation costs,
and indemnification is not materially different from advancing costs. Also, the committee reasoned that these agreements did not create an adverse interest within the meaning of
Rule 3-310.69
Client Trust Accounts
Rule 4-100 of the Rules of Professional
Conduct requires all funds received or held for
the benefit of a client to be deposited in a trust
account and not commingled with the attorney’s personal or office funds. Indeed, Rule
4-100(A)(2) states that any portion of the
funds belonging to the lawyer must be withdrawn “at the earliest reasonable time” after
the member’s interest becomes fixed. The
rule further states that if the lawyer’s right to
the funds is disputed by the client, the disputed funds may not be withdrawn from the
trust account until the dispute is finally
resolved. If an attorney has withdrawn his or
her fee from the trust account, and the client
later disputes the fee, does the lawyer have to
put the money back into the account? In its
Formal Opinion No. 2006-171, COPRAC
said no. Having properly withdrawn the fee,
Los Angeles Lawyer March 2007 35
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the lawyer neither received nor held the funds
for the benefit of the client. At the moment
of withdrawal, the funds were the attorney’s
personal property. COPRAC noted there is no
authority to suggest that funds regain trust
account status simply because the client later
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Unauthorized Practice of Law
In Benninghoff v. Superior Court71—a decision that serves as a coda to the Federal
Circuit Court of Appeals’ 2005 decision in
Augustine v. Department of Veterans
Affairs 72 —the Fourth District Court of
Appeal considered the State Bar’s jurisdiction over a former lawyer’s practice before
state and federal administrative agencies.
Following his guilty plea to several federal
felonies, Benninghoff resigned from the State
Bar with disciplinary charges pending against
him. He began to represent persons before
administrative agencies, styling himself a
“professional advocate” and “lay representative,” until the State Bar charged him with
the illegal practice of law, and a superior
court assumed jurisdiction over his practice
under Business and Professions Code Section
6180.73 In his petition for an extraordinary
writ, Benninghoff argued that laypeople may
represent parties in state administrative proceedings, but the court of appeal distinguished
between “true laypeople” and “defrocked
lawyers” who have lost their bar membership.74 It concluded that Benninghoff was
practicing law by representing parties in state
administrative proceedings—and the superior court had not abused its discretion in
assuming jurisdiction over Benninghoff’s
state practice.75
The appellate court reached a different
conclusion regarding Benninghoff’s practice
before federal agencies. Citing Birbrower,
Montalbano, Condon & Frank v. Superior
Court76—the seminal California case governing the unauthorized practice of law—
the Benninghoff court stated that the State Bar
Act does not regulate practice before U.S.
courts and, more specifically, state law cannot regulate the right of federal agencies to
control who practices before them.77 Therefore, the superior court had erred by assuming jurisdiction over Benninghoff’s federal
practice, and the appellate court granted a
writ of mandate requiring the State Bar to
return any seized materials regarding his federal practice.78
Competence
Under Rule 3-110 of the Rules of Professional
Conduct, a lawyer has an ethical obligation
to perform legal services with competence,
which means applying 1) diligence, 2) learning and skill, and 3) the mental, emotional,
and physical ability reasonably necessary for
the performance of his or her services.79 In
Formal Opinion No. 06-441, the ABA
Standing Committee on Ethics and
Professional Responsibility analyzed similar,
although not identical, provisions on lawyer
competence in the Model Rules of
Professional Conduct in the context of representing indigent persons charged with criminal offenses.
Although neither the Model Rules nor
ABA ethics opinions construing the Model
Rules are binding in California, ABA Formal
Opinion 06-441 makes several noteworthy
comments. It confirms that a lawyer’s duty of
competence does not vary based on the client’s
net worth or the lawyer’s caseload.80 A lawyer
owes a duty of competence to all clients. If the
lawyer’s workload is such that he or she is
unable to meet the basic ethical obligations
required in the representation of a client, the
lawyer must not continue the representation
of that client—or, if the representation has not
yet begun, the lawyer must decline the representation.81 If the lawyer works for the
public defender’s office, the lawyer must ask
his or her supervisor for assistance and, if necessary, continue to advance up the chain of
command within the office until the lawyer
has obtained relief or has sought relief from
the head of the office. If the office head’s
response is not reasonable, the public defender
must take further action, which might include
appealing to the office’s governing board or
filing a motion with the court for permission to withdraw.82
WESTERN STATE UNIVERSITY
COLLEGE OF LAW
Revision of the Rules of Professional
Conduct
1
Ex-Ethics Counsel Indicted in HP Privacy Scandal,
ABA J. eReport, Oct. 6, 2006, at www.abanet.org
/journal/ereport/oc6hp.html.
2 HP Probe Shifts to Senior Counsel, L.A. DAILY J., Sept.
26, 2006.
3 Web Error Reveals Censure of U.S. Judge, L.A. TIMES,
Dec. 23, 2006; Some System Failure in U.S. Judge
Oversight, ABA J. eReport, Sept. 29, 2006;
Congressman’s Gambit Puts Judge on Path to
Impeachment, L.A. DAILY J., July 19, 2006.
4 U.S. Grand Jury Indicts Milberg Weiss, L.A. DAILY
J., May 19, 2006.
5 Lawyer Indicted in PI Inquiry, L.A. TIMES, Feb. 16,
2006.
6 Principles of Federal Prosecution of Business
Organizations, Memorandum from Paul J. McNulty,
Symposium on State Civil Procedure
www.wsulaw.edu
During 2006, the Commission on the
Revision of the Rules of Professional Conduct
formally published for public comment its first
installment of proposed revisions. The
response included numerous comments in
writing and during scheduled public meetings
throughout the state. The commission is
expected to consider the comments and publish successive sets of revised rules in the
years to come.83
■
A Dialogue on State Civil Procedure Issues of Discovery,
Complex Litigation and Class Actions,
and the Role of State Courts in Interstate Litigation
Friday April 20, 2007
& Saturday April 21, 2007
Keynote Address By:
The Honorable EILEEN MOORE
JUSTICE OF THE CALIFORNIA COURT OF APPEAL
For More Information Contact:
Professor Glenn Koppel
(714) 459-1143
[email protected]
Western State University College of Law
1111 N o r t h S t a t e C o l l e g e B o u l e v a r d - F u l l e r t o n , C A 9 2 8 3 1
This program qualifies for 9 hours of general MCLE credit
Los Angeles Lawyer March 2007 37
Deputy Attorney General, to Heads of Department
Components and United States Attorneys; Statement
by ABA President Karen J. Mathis, Dec. 12, 2006, at
www.abanet.org/abanet/media/statement.cfm.
7 The U.S. Sentencing Commission, at http://ussc.gov
/guidelin.htm.
8 BUS. & PROF. CODE §6068(e)(1).
9 City & County of San Francisco v. Cobra Solutions,
Inc., 38 Cal. 4th 839 (2006).
10 Id. at 853-54.
11 Id. at 850 n.2.
12 Id. at 855 (citing ABA Committee on Ethics &
Professional Responsibility, Formal Op. No. 342
(1975)).
13 Dino v. Pelayo, 145 Cal. App. 4th 347 (2006).
14 Fremont Indem. Co. v. Fremont Gen. Corp., 143 Cal.
App. 4th 50 (2006).
15 Faughn v. Perez, 145 Cal. App. 4th 592 (2006).
16 Id. at 610.
17
Fremont, 143 Cal. App. 4th at 69; Faughn, 145
Cal. App. 4th at 607.
18 People v. Baylis, 139 Cal. App. 4th 1054 (2006).
19 Id. at 1068.
20 People v. Navarro, 138 Cal. App. 4th 146 (2006).
21 Id. at 160-61.
22 Id. at 157.
23 Id. at 162.
24 Tien v. Superior Court, 139 Cal. App. 4th 528
(2006).
25 Id. at 536, 537-38.
26 Id. at 540.
27 Id. at n.8.
28 Flatley v. Mauro, 39 Cal. 4th 299 (2006).
29 Id. at 307-09, app. A.
30 CODE CIV. PROC. §425.16.
31 Flatley, 39 Cal. 4th at 327.
32 Id. at 330, 333.
33 Id. at 311 n.6.
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38 Los Angeles Lawyer March 2007
1-800-344-5009
34
Virtanen v. O’Connell, 140 Cal. App. 4th 688
(2006).
35 Id. at 695-99.
36 Id. at 717.
37 Mammoth Mountain Ski Area v. Graham, 135 Cal.
App. 4th 1367 (2006).
38 Id. at 1369.
39 Id. at 1373-74.
40 Id. at 1375.
41 Id. at 1374, 1376.
42 In the Matter of Julie L. Wolff, __ Cal. State Bar Ct.
Rptr. __, 2006 DJDAR 16750 (Review Dep’t of the
State Bar Ct., Dec. 21, 2006).
43 Id. at 16759.
44 In re S.C., 138 Cal. App. 4th 396 (2006).
45 Id. at 400.
46 See People v. Superior Court (Humberto S.), 145 Cal.
App. 4th 32, 38 (2006).
47 Id.
48 See Bar Suspends Ex-DA for Three Years, L.A.
DAILY J., Aug. 3, 2006.
49 Haraguchi v. Superior Court, 143 Cal. App. 4th
846 (2006), review granted.
50 Id. at 848.
51 Id. at 856.
52 Id. at 857 n.5.
53 Hollywood v. Superior Court, 143 Cal. App. 4th 858
(2006), review granted.
54 Id. at 868.
55 Id. at 870.
56 People v. Superior Court (Humberto S.), 145 Cal.
App. 4th 32 (2006).
57 Fletcher v. Davis, 33 Cal. 4th 61 (2004).
58 State Bar of California, Standing Committee on
Professional Responsibility & Conduct, Formal Op.
2006-170.
59 County of Los Angeles v. Construction Laborers
Trust Funds for S. Cal. Admin. Co., 137 Cal. App. 4th
410 (2006).
60 Rus, Milliband & Smith PC v. Yoo, 339 B.R. 730
(Bankr. C.D. Cal. 2006).
61 Id. at 740.
62 Lindelli v. Town of San Anselmo, 139 Cal. App. 4th
1499 (2006).
63 Id. at 1513 (citing Churchill Vill. v. General Elec.,
361 F. 3d 566, 578-80 (9th Cir. 2004)).
64 Id. at 1512-13.
65 Id. at 1513 n.10.
66 Pony v. County of Los Angeles, 433 F. 3d 1138 (9th
Cir. 2006).
67 Id. at 1140.
68 Id. at 1143-44.
69 Los Angeles County Bar Association, Professional
Responsibility & Ethics Committee, Formal Op. No.
517.
70 State Bar of California, Standing Committee on
Professional Responsibility & Conduct, Formal Op.
No. 2006-171.
71 Benninghoff v. Superior Court, 136 Cal. App. 4th 61
(2006).
72 Augustine v. Department of Veterans Affairs, 429 F.
3d 1334 (Fed. Cir. 2005).
73 Benninghoff, 136 Cal. App. 4th at 64-66.
74 Id. at 67-69.
75 Id. at 71.
76 Birbrower, Montalbano, Condon & Frank v.
Superior Court, 17 Cal. 4th 119 (1998).
77 Benninghoff, 136 Cal. App. 4th at 74.
78 Id. at 75.
79 CAL. RULES OF PROF’L CONDUCT R. 3-110.
80 ABA Committee on Ethics & Prof’l Responsibility,
Formal Op. 06-411, at 3.
81 Id. at 4.
82 Id. at 6.
83 For the proposed new rules and a schedule of the
commission’s meetings, see http://www.calbar.ca.gov.
computer counselor
BY KEN SWENSON
BY AUTHOR’S NAME
Preparing Legal Departments for Electronic Invoice Review
ATTORNEYS WHO WORK WITH BUSINESS CLIENTS know that these
clients expect their lawyers to think like businesspeople. For the inhouse counsel, this expectation means that general and divisional counsel are being asked to run their departments in a manner similar to
that of the business units the attorneys serve. This includes monitoring
the productivity of the company’s external lawyers and finding the
proper level of legal department staffing to best balance attention to
high-value legal work with general administrative responsibility.
Lawyers with business clients can expect a need to produce reports
on legal spending at ever-greater levels of specificity.
At least six vendors have electronic invoicing products to support
these efforts. These products vary in detail, but most focus on two
categories of service: electronic invoice review and approval (or cost
saving) and database management and reporting (or financial analysis). These services are intended to perform much of the dull work
of checking every invoice for compliance with the law department’s
billing rules and to create tools that allow legal department management rapid access to accurate information on spending.
Prices and pricing methods vary. Some services bill the law firm
either a flat fee ($1,000 to $3,500 or more per year), while others
charge a percentage of invoices (often 1 to 2 percent). Directly or indirectly, law firms may pass this cost back to the client company, since
it is the company making the demand that the firm use the service.
In other cases, the vendor charges the client directly. Fees are higher
than a traditional business software package because electronic
invoice review vendors operate their proprietary computer programs
from their shops using their servers. Access is generally Web-based,
and communications are over secure connections. Usually, each inhouse attorney has access to the matters for which he or she is the
assigned manager, while senior legal department personnel may be able
to access all information. Outside counsel employed by in-house
counsel also have the ability to access the system.
If a company makes the decision to work with an electronic
invoice vendor, substantial preparatory work must be done. The
typical setup process involves five steps. They may occur simultaneously, and together they will take a minimum of three to six months
of planning and implementation. Keeping in mind the adage “garbage
in, garbage out,” detailed attention to setup is extremely important
in realizing the full benefits of an electronic invoicing system. Any company shopping for a system should be sure of the setup process and
the vendor’s dedication to the company.
The first step requires the legal department to provide the electronic
invoicing vendor with the rules for allowable invoice formats, time
entries, fees, and reimbursements that the legal department wants to
enforce during invoice review. For many companies, these rules cover
general billing rules and criteria specific to a particular firm. General
billing rules may include prohibitions on more than one attorney billing
for the same work (often the result of intra-firm meetings), refusing
to pay an hourly rate for clerical work (such as forwarding notices
or documents, or filing), or denying payment on aged invoices.
Examples of firm-specific rules include reviewing the approved billing
rates for each attorney assigned to the company’s matters, verifying
that agreed-upon discounts are provided, or tracking payment by type.
Cost reimbursement rules govern the rates of reimbursement for services such as distance, copying, and messenger services, and in some
cases create prohibitions on charges that some companies deem to be
the law firm’s overhead, such as computerized research access fees or
word processing time.
The second step requires designated outside law firms to submit
specified information to the electronic invoicing vendor, including the
firm’s office addresses, names of attorneys who will work on the company’s matters, and billing rates for those attorneys.
Third, the company must provide the electronic invoicing vendor
with information necessary to establish the matter management files
in the invoicing system. Most electronic invoicing vendors have a
degree of flexibility in creating matter management files to include the
information that the law department desires. This will include the obvious, such as the name of the law firm, the date of the invoice, the name
of the matter, and aggregate of fees and costs. Other information can
include the name of the responsible in-house attorney or that person’s
manager, a descriptive category of the nature of the work, budget information, or other information that the law department may want to
use in the future to categorize reports.
The fourth step occurs when the vendor and the company’s
accounts payable department coordinate the information that accounts
payable needs to receive from the invoice review system in order to
process payment. The fifth and final step involves training inside and
outside counsel to use the system. The training is different for each
and is done separately. Training should be provided by the vendor as
part of the fee.
Once setup is complete, outside law firms are instructed to submit invoices directly to the review system. Invoices can be submitted
via Web download or by e-mail in a computer format of the vendor’s
selection. Although customary formats for data submission are widely
available, this can present problems for small firms, which cannot be
expected to invest in expensive programs or technology for invoices
that may form only a small portion of the firm’s billings.
To address this, many vendors will accept paper invoices, which
are then scanned and converted to an electronic format. However,
experience has shown that vendors discourage submission of paper
invoices, and in some cases the acceptance of paper invoices is only
for a specified period after implementation. Of course, as there is considerable competition among vendors, it is likely that the acceptable
formats will be expanded over time to increase flexibility and ease of
use for law firms.
Upon submission, the vendor’s proprietary software reviews the
invoice against the rules the company’s legal department has submitted.
Ken Swenson is an in-house transactional attorney with Bank of America and
a member of the Los Angeles Lawyer Editorial Board.
Los Angeles Lawyer March 2007 39
The items reviewed are similar among the vendors, largely because legal departments tend
to be uniform in their demands. Among other
things, electronic systems make sure the law
firm is authorized to bill on that matter; confirm attorneys and billing rates or other rates
if the billing method is other than hourly;
check the billing increments; confirm that all
required information is provided (date of
service, time entries, attorney identification,
prorated charge); verify the age of time entries;
check the math; check tax, VAT, or currency
conversion calculations; and compare the
entries against the legal department’s billing
rules.
Electronic invoicing programs can be set
up to reject or reduce entire invoices, groups
of time entries, or single time entries, as
appropriate according to the billing rule that
is violated. For example, an invoice that is not
submitted in a timely manner may be rejected
in its entirety, whereas an invoice with a
charge for clerical services may only have
that charge eliminated. Similarly, if an invoice
is submitted with copying charges in excess
of the allowed amount, the typical program
can reduce the charge based on the allowable
amount multiplied by the number of units
identified on the invoice. Reductions can typically be made on a dollar, percentage, or
unit basis.
Most systems allow items to be flagged for
further review rather than automatically
reduced. This not only draws the company’s
attention to those items but also shows the
law firm those entries that are questionable.
The better electronic invoicing products flag
or annotate reductions and allow the company to direct personalized notes internally or
to law firms. This allows firms to understand
adjustments to invoices without the necessity
of contacting the in-house attorney on every
occasion. Also, all invoice review products
allow in-house reviewers to make adjustments to, or override, reductions.
Other Benefits
Reviewing invoices and providing reductions
in compliance with the company’s outside
counsel billing requirements is only part of the
benefit of the electronic invoicing service.
Most services also include database management systems that can search and retrieve
data and create and disseminate reports on a
company’s legal expenditures with varying
levels of specificity. The benefits of robust
reporting can include more accurate knowledge as to legal fee expenditures, improved
forecasting of future legal expenses, a more
reliable basis for comparing or reviewing the
performance of law firms, identification of
areas in which fees and costs could be saved,
identification of areas generating the greatest
risk to the company (based on fees incurred),
40 Los Angeles Lawyer March 2007
and creating an environment in which productivity and efficiency of firms and intracompany departments can be compared.
Vendors do not provide identical services,
so companies in the market for a new or
replacement electronic invoicing system
should interview several vendors. Any computerized system is only as good as its programming. In some cases, it is nearly impossible to program glitches out. Small but
persistent problems occur. For example, to
enforce the billing rules, the computer may
search the law firm invoice for key words, and
as a result can reject valid charges because of
multiple word meanings or even the programmer’s misunderstanding of legal terminology. It is common, for example, for companies not to pay for so-called clerical services,
such as “filing.” While this works well for
entries such as “organized files,” it results in
the rejection of valid entries such as:
“Prepared motion for interpleader for filing”
or “Reviewed filed notice of default.”
Another caveat is that no computer program can substitute for the subjective aspects
of invoice review: gauging the appropriateness
of the quantity or the quality of the work performed. The computerized portion of the
invoice process can only capture the administrative or procedural portions of invoice
review, quickly perform the necessary reductions, and then present the invoice for substantive review. For companies with substantial legal expenses, this can result in
significant time and cost savings, as overworked in-house lawyers will rarely be interested in scrutinizing invoices to recalculate
copying charges from 14 to 12 cents per
page, and accounting departments are often
equally short staffed and overburdened.
Companies with fewer legal expenses or less
stringent rules may not exact as much benefit. The long-term value of an electronic
invoicing system can also be compromised
when law firms learn how to invoice matters
to avoid rejection or reduction.
Notwithstanding the drawbacks of electronic invoicing systems, increasing numbers
of corporate users of legal services are turning to these systems to bring their legal departments to the same level of cost management
and reporting efficiency as their other business units. For outside lawyers, understanding how these systems operate is the key to
working with the system to achieve rapid
and error-free payment. For legal department
managers, an awareness of these systems is
necessary as pressures to run the legal department like a business grow. For the in-house
attorneys on the front line, knowledge of
these systems in advance can reduce the shock
of transition and guide the lawyer to a
smoother working relationship with invoice
management tools.
■
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Los Angeles Lawyer March 2007 41
Aon Direct Administrators/LACBA Prof. Liability, Inside Front Cvr
Mesriani Law Group, p. 8, 17, 40
Tel. 800-634-9177 www.attorneys-advantage.com
Tel. 310-826-6300 e-mail:[email protected]
Appraisers LLC, p. 13
Metrocities Mortgage Inc., p. 8
Tel. 800-500-2790 www.appraisersllc.com
Tel. 800-464-2484 www.metrociti.com
Arbitration and Mediation Group, p. 15
Noriega Clinics, p. 41
Tel. 818-790-1851 www.mediationla.com
Tel. 323-728-8268
Lee Jay Berman, p. 4
Pacific Dining Car, p. 36
Tel. 213-383-0438 www.leejayberman.com
Tel. 213-483-6000 www.pacificdiningcar.com
The California Academy of Distinguished Neutrals, p. 22, 23
Paulson Reporting & Litigation Service, p. 2
Tel. 310-341-3879 www.CaliforniaNeutrals.org
Tel. 800-300-1214 www.paulsonreporting.com
California Western School of Law, p. 26
R. S. Ruggles & Co., Inc., p. 4
Tel. 800-255-4252 www.californiawestern.edu
Tel. 800-526-0863 www.rsruggles.com
Coldwell Banker, p. 37
REMC Virtual Offices, p. 18
Tel. 310-442-1398 www.mickeykessler.com
Tel. 310-356-4600 or 888-551-REMC www.remcinc.com
Commerce Escrow Company, p. 25
Steven R. Sauer APC, p. 27
Tel. 213-484-0855 www.comescrow.com
Tel. 323-933-6833 e-mail: [email protected]
Convergence Graphics, Inc., p. 28
Stephen Sears, CPA-Attorney at Law, p. 14
Tel. 877-944-2487 e-mail: [email protected]
www.searsatty.com
Dale A. Eleniak, p. 6
Anita Rae Shapiro, p. 28
Tel. 310-374-4662
Tel. 714-529-0415 www.adr-shapiro.com
DepoSums Deposition Summaries, p 14
Special Counsel, p. 15
Tel. 800-789-DEPO (3376) www.deposums.biz
Tel. 323-658-6065 www.specialcounsel.com
Esthetic Dentistry, p. 27
Stonefield Josephson, Inc., p. 5
Tel. 213-553-4535 www.estheticdentistry.net
Tel. 866-225-4511 www.sjaccounting.com
Forensic Construction Defect & Engineering, Inc./Exp. Witness, p. 28
Tel. 213-632-1310 e-mail: [email protected]
G. L. Howard CPA, p. 4
Tel. 562-431-9844 e-mail: [email protected]
Steven L. Gleitman, Esq., p. 19
Tel. 310-553-5080
Jack Trimarco & Associates Polygraph, Inc., p. 6
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Law Offices of Rock O. Kendall, p. 27
Tel. 949-388-0524 www.dmv-law.com
Jeffrey Kichaven, p. 6
Tel. 213-996-8465 www.jeffkichaven.com
Lawyers’ Mutual Insurance Co., p. 7
Tel. 800-252-2045 www.lawyersmutual.com
Lexis Publishing, p. 1, 9
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MCLE4LAWYERS.COM, p. 37
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42 Los Angeles Lawyer March 2007
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UngerLaw, P.C., p. 14
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Tel. 619- 260-4596 www.acusd.edu/usdlaw/grad
Vision Sciences Research Corporation, p. 40
Tel. 925-837-2083 www.contrastsensitivity.net
Western State University College of Law, p. 37
Tel. 714-459-1143 e-mail: [email protected]
West Group, p. 38, Back Cover
Tel. 800-762-5272 www.westgroup.com
Witkin & Eisinger, LLC, p. 36
Tel. 310-670-1500
The 27th Annual Labor and Employment Law Symposium
ON THURSDAY, MARCH 8, the Labor and Employment Law Section will present its annual
symposium featuring panel discussions on labor and employment law issues of critical
importance to attorneys, judges, neutrals, government practitioners, union representatives,
in-house counsel, and human resource professionals. Each panel discussion covers
opposing viewpoints, interpretations, and strategies. All panelists are recognized experts in
their fields. Extensive written reference materials are provided on each topic, and panelists
invite audience questions. The 2007 symposium includes an update of significant
developments during the past year and a panel of preeminent speakers sharing their
thoughts on how opposing sides in a dispute can be zealous advocates but still get along.
The symposium will take place at the Biltmore Hotel, 506 South Grand Avenue, Downtown.
Self-parking at Pershing Square (Sixth and Olive Streets) is available for $6, while valet
parking at the hotel costs $18. On-site registration will be available at 7:45 A.M., with the
program continuing to 5:20 P.M. The luncheon speaker is Annabelle Gurwitch, author of
Fired, a humorous look at what it feels like to be fired. The event will be followed by a 5:30
P.M. cocktail reception hosted by JAMS for all symposium attendees. The registration code
number is 009617.
$220—CLE+PLUS members
$225—Educators, nonprofit and government personnel, nonattorney labor relations and
HR professionals, and NLRB members
$275—Labor and Employment Law and Corporate Law Section members
$300—other LACBA members
$305—all others
7.75 CLE hours (including 1 ethics hour)
Recent Developments in
Executive Compensation
ON THURSDAY, MARCH 15, the Business
and Corporations Law Section (together
with the Labor and Employment Law
Section, the Taxation Section, and the
Corporate Law Departments Section) will
present a program covering recent developments in stock-based executive compensation plans. Speakers Mike Fernhoff,
Christian D. Jester, and Lee R. Petillon will
address the tax, accounting, and securities law aspects of these plans. The panelists will cover a comparison of ISOs,
nonqualified options, restricted stock purchases and awards, the pitfalls of the
deferred compensation rules under
Section 409A (including the effect on
back-dated options), the expensing of
stock-based compensation under FAS
123(R), and a brief summary of the basic
securities law requirements, including the
new SEC disclosure rules. The program
will take place at the LACBA Conference
Center, 281 South Figueroa Street,
Videoconferencing for Lawyers
Downtown. Reduced parking is available
ON THURSDAY, MARCH 22, the Association will host a presentation on how videoconferencing can
with validation for $10. On-site registra-
streamline the way legal professionals conduct business. Speakers Sam Plotkin, Lainey Honum,
tion and the meal will begin at 5 P.M., with
and Kamran Nadir will discuss videoconferencing as a way of conducting court appearances,
the program continuing from 5:30 to 7:30.
arraignments, depositions, and expert witness interviews. Attorneys will also learn how not to
The prices below include the meal. The
run afoul of security, ethics, and confidentiality issues. The program will take place at the LACBA
registration code number is 009494.
Conference Center, 281 South Figueroa Street, Downtown. Reduced parking is available with
$15—CLE+PLUS members
validation for $10. On-site registration and the meal will begin at 11:30 A.M., with the program
$45—Business and Corporations Law,
continuing from noon to 1 P.M. The registration code number is 009621. The prices below include
Labor and Employment Law, and Taxation
the meal.
Section members
$15—CLE+PLUS members
$55—LACBA members
$50—LACBA members
$65—all others
$80—all others
$65—at-the-door registrants
1 CLE hour
2 CLE hours
The Los Angeles County Bar Association is a State Bar of California MCLE approved provider. To register for the programs listed
on this page, please call the Member Service Department at (213) 896-6560 or visit the Association Web site at
http://calendar.lacba.org/. For a full listing of this month’s Association programs, please consult the County Bar Update.
Los Angeles Lawyer March 2007 43
closing argument
BY GARY A. FARWELL
A Challenge to Governor Schwarzenegger’s Record on Judicial Diversity
IN HIS MOST RECENT BUDGET PROPOSAL, Governor Arnold Schwarzenegger seems to have appointed candidates to curry favor
Schwarzenegger included funding for 50 new judicial positions within the Republican Party. This is shown by the appointments of
statewide. As did a similar proposal that Schwarzenegger made in the former Republican Congressman James Rogan and Assistant U.S.
last legislative session, his proposal generated immediate criticism con- Attorney Laura H. Parsky (daughter of President George W. Bush’s
cerning the lack of diversity in his previous judicial appointments and confidant Gerald Parsky) to judgeships in Orange and San Diego
demands that approval of the 50 new positions be made contingent Counties, respectively. In the meantime, the judicial applications of
upon a commitment from the governor that more of these positions highly qualified African American candidates gather dust on the
be filled by minority appointees. The need for more judgeships to governor’s desk or have been “round-filed.”
To be sure, Schwarzenegger has shown a willingness to appoint
decrease the heavy workload of current judges and to reduce the backlog of trials that undercut litigants’ desires to have their day in court Democrats more readily than did his Republican predecessors. In addiis a problem well known among the three
branches of state government. However, some
legislators disagree with the governor’s office
As of October 31, 2006, the governor had appointed 186 judges
about the selection process used to fill the
empty seats.
On behalf of my colleagues in the California
during his tenure in office, of which only 6 were African American—
Association of Black Lawyers (CABL), I join
those who have been critical of Governor
Schwarzenegger’s failure to make judicial
and three of those were for Los Angeles County.
appointments reflective of the diversity of
California. CABL supported and encouraged
Speaker of the Assembly Fabian Núñez’s refusal
in August 2006 to allocate the complete funding necessary to fill the tion, he is suggesting changes in the judicial application that would
judgeships last year. Núñez, CABL, ethnic bar associations through- turn its current heavy emphasis away from trial experience.
out California, several California county bar associations, as well as Unfortunately, neither of these factors automatically inure to the
the administrative offices of the Los Angeles Superior Court all pro- benefit of African American or other nonwhite applicants. African
mote the necessity—and recognize the indispensable role—of diver- American lawyers and judicial applicants cover the waterfront in terms
sity in the legal profession and on the bench. It seems the governor’s of their party affiliations, backgrounds, and experience. Without a
office has steadfastly marched in the opposite direction, which specific commitment to increase racial diversity and appoint more
resulted in Núñez’s initial refusal to fund the positions so desperately African Americans, Latinos, and Asians to the bench, the disparities
will continue.
sought by so many, including Chief Justice Ronald George.
For some, the question of diversity on the bench appears to be no
Put starkly, Schwarzenegger has disqualified and intentionally
passed over highly qualified African American applicants to the more than a political football to be used for partisan advantage.
bench. As of October 31, 2006, the governor had appointed 186 judges However, the truth is that diversity is a necessary goal that should be
during his tenure in office, of which only 6 were African American— pursued by any elected governor, regardless of his or her party affiland 3 of those were for Los Angeles County. To put these statistics iation. Public faith in the judiciary is crucial in order to maintain social
in context, it should be noted that during the first ten months of 2006 stability and order, and litigants and criminal defendants, in particalone, three African American judges retired from the bench in Los ular, need to believe that the judiciary does not represent any specific
Angeles County.
sector of society or ideology other than that of law-abiding, fair-minded
In July 2006, it was reported that Schwarzenegger had appointed citizens. Yet, with the types of judicial appointments the governor has
several judicial candidates who had won their primary elections by made, where significant weight is given to factors other than diverlarge margins. Even this policy seemed to bypass African Americans: sity and the appreciation of varying backgrounds and experiences, the
He refused to and did not similarly appoint Commissioner Bobbi California judicial system’s fabric is subject to erosion, and its integrity
Tillmon, an African American woman running unopposed in Los is subject to challenge by those denied the equal right to participate
Angeles County. Not until December 2006 did Governor Schwarz- in its composition.
■
enegger appoint Commissioner Tillmon to the bench, along with other
candidates who had already won their contested races in the November Gary A. Farwell is a sole practitioner in Los Angeles. He is the president of the
general election.
California Association of Black Lawyers and past president of the John M.
Rather than use his judicial selections to inspire public confi- Langston Bar Association. He is also a former member of the Board of Trustees
dence in the impartiality and fairness of the judicial system, of the Los Angeles County Bar Association.
44 Los Angeles Lawyer March 2007
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