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Holiday Travel & Gift Guide 2006 Attorney Obstruction
f s
y o ng
er di
ov or
sc ec 46
Di io R PAGE
d
Au
2006 Holiday Travel & Gift Guide
December 2006 / $4
Los Angeles lawyer
Miriam Claire Beezy
advises intellectual
property owners to
adopt more aggressive
trademark strategies
E A R N MCLE CR E D I T
Attorney
Obstruction
of Justice
page 27
GOOD
MARKSMANSHIP
page 20
PLUS
Discovery of Interview Notes page 12
Rescission of Insurance Contracts page 15
Accidental Franchises page 34
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December 2006
20 Good Marksmanship
Vol. 29, No. 10
BY MIRIAM CLAIRE BEEZY
The entertainment industry should move more aggressively to provide trademark protection
for its intellectual property
27 Walk the Line
BY MARK MERMELSTEIN AND CHARLOTTE DECKER
Even in civil litigation, attorneys must steer carefully between zealous advocacy and
obstruction of justice
Plus: Earn MCLE legal ethics credit. MCLE Test No. 154 appears on page 29.
34 Franchise Player
BY ROCHELLE B. SPANDORF
Courts are not hesitant to deem a trademark license to be a franchise agreement
when statutory requirements are met
LosAngelesLawyer
42 Special Section
2006 Holiday Travel & Gift Guide
The magazine of
The Los Angeles County
Bar Association
DEPARTMENTS
10 Barristers Tips
Serving the community as a volunteer
PVP attorney
46 Computer Counselor
New tools in the discovery of sound
recordings
BY STEVEN I. AWAKUNI
BY DAVID FISHEL AND CAROLE LEVITT
12 Practice Tips
Discoverability of attorney interview notes
52 Closing Argument
To settle or not to settle?
BY MICHAELBRENT COLLINGS
BY JON D. MEER AND ERIC S. BEANE
15 Practice Tips
Exercising rescission after commencement
of a lawsuit
49 Classifieds
50 Index to Advertisers
BY ANDREW S. WILLIAMS AND VIVIAN I. ORLANDO
Cover photograph: Tom Keller
51 CLE Preview
LosAngelesLawyer
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8 Los Angeles Lawyer December 2006
From the Chair
BY JACQUELINE M. REAL-SALAS
he one thing we lawyers all have in common is that we rely on others to deliver our work to our clients. Some of us are fortunate
enough to have associates who perform a great deal of our legal work.
Others have staff members that assist us in whatever we consider to
be secretarial or administrative work. The rest of us, while not so fortunate as to have our own associates or staff, still rely on help available through services offered by our office suites. The assistance we get from others—to whom, for
the sake of this column, I will respectfully refer to as “staff”—ranges from doing
complex work to taking our phone messages.
Often, when the staff we rely upon are out of the office, our world stops, or at
best slows down. Many of us do not know how to accomplish the basic tasks involved
in running a law office. By way of example, and with some admitted shame, I confess that I do not know how to operate the mail meter. Therefore, when my alwayswilling assistant is out, my mail stays in. In sum, without the people who help us
do our work, we may be lost—at least temporarily.
Working with clients and opposing counsel is challenging. But sometimes the real
challenge lies in working with staff. There is no law school course that I know of
that teaches us how to work effectively with staff—“effectively” meaning getting the
best performance from the people we work with. Yet somehow we lawyers seem to
find our bumpy way and accomplish all that we need to do, despite the fact that sometimes our own clumsiness undermines our overall productivity. Still, most of us would
like to be more productive, and this involves working more effectively with our staff.
In today’s business world, where the greatest expense is human capital, getting
the most out of our staff can really boost our bottom line. In my role as “personnel partner” in a very small firm, always dreaming up ways to maximize our modest resources, I have come to understand that properly delegating assignments
translates into getting more for the firm’s money. Having no formal delegating
skills of my own, I tapped into the knowledge of my husband, a business executive
who has read most if not all of the management books ever written. I asked him to
teach me about the art of delegating. This he did, and even though what I learned
is not a particularly novel approach, I am passing his suggestions along for those
of you who, like myself, would like to become more effective.
In delegating work to others, ask yourself a series of questions. First, does the
person being delegated the assignment have the skills to carry it out? If he or she does
not have the necessary skills, can resources to acquire these skills be identified? Second,
has the objective been clearly defined? This is a key aspect of delegating work. If the
person delegating the assignment is not clear about the objective, the person at the
receiving end cannot be expected to deliver. Third, has a quality standard for the
expected work product been established? Setting a quality standard will avoid disappointment and frustration at both ends of the assignment. Fourth, do adequate
resources for completing the assignment exist? And fifth, has a timeline been set for
making progress reports and delivering the final work product? It is important to
reach a meeting of the minds about what the assignment entails and whether it can
be reasonably achieved within the designated time for completion of the work.
Although there is obviously no need to think through these five steps of delegation when the assignments are routine tasks, using these steps may help staff complete more elaborate projects in a productive and efficient manner. In turn, a wellplanned delegation process may lead to maximized resources, a better quality work
product, and a motivated, happier, and less frustrated staff.
■
T
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.
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AL9154
Barristers Tips
BY STEVEN I. AWAKUNI
Serving the Community as a Volunteer PVP Attorney
As the PVP attorney your first duty is to represent the interests of
FOR QUALIFIED BARRISTERS with an interest in representing some
of our most vulnerable citizens, the Probate Volunteer Panel repre- your client. The relationship with your client can be difficult. In the
sents a unique opportunity. The Los Angeles Superior Court appoints case of a proposed conservatee, your client may not have the capacPVP counsel in a variety of cases, including trust and probate admin- ity to form an attorney-client relationship or may object to the petiistration, special needs trusts, litigation, Medi-Cal planning, estate tax- tion for conservatorship and your involvement in the case. The level
ation, tuberculosis detention, and conservatorship and guardian- of cooperation that you receive from each client and the interested
ship. The clients include the elderly, young adults with developmental parties may vary greatly.
Some matters may not be contested, and you may find that it is
disabilities, or persons of any age alleged to lack the capacity to care
for themselves, to manage their finances, or both. To serve as a PVP in the best interests of your client to recommend approval of the petiattorney, applicants must meet specific experience, education, and con- tion. Other cases may be very contentious and may proceed to trial.
tinuing education requirements, described
in Appendix E of Chapter 10 of the Los
Angeles Superior Court Rules (www
Those you help may be facing the loss of the right to control
.lasuperiorcourt.org/courtrules).
Attorneys who do not have the required
number of completed cases to meet the
their finances, make medical decisions for themselves, decide
experience requirements may take a training class and volunteer to take pro bono
guardianship cases. There are also agencies
where to live, vote, or get married or enter into a civil union.
that provide pro bono assistance with conservatorships that may offer training or a
mentor in exchange for pro bono work.
Applicants must complete a training program conducted by the Trust To determine the best interests of the client, the PVP attorney must
and Estates Section of the Association. The section works closely with review all pleadings and reports that are filed. Personal interviews with
probate court bench and probate department staff to provide education the proposed conservatee, the proposed conservator, and the petitioner
and training. Interested attorneys should check the section’s pages on will provide the PVP with valuable insight. Counsel should also
speak with family members, physicians, caregivers, friends, and
the Association site (www.lacba.org) for more information.
Applications for the Probate Volunteer Panel can be obtained by neighbors as appropriate.
The PVP attorney is in a unique and often challenging position.
calling the probate office in the Central Division or by accessing the
Probate section of the Los Angeles Superior Court Web site. Applicants PVP counsel must inform the court of their clients’ desires. After the
may request appointment in areas in which they are qualified and have PVP attorney evaluates the issues, he or she must report observations
an interest. If you are selected for the panel, you may get a call from and recommendations to the court about what is in the best interest
one of the clerks in the probate office or a clerk from one of the branch of the client. PVP attorneys are provided with sample reports in
courts. It is important to check for client and calendar conflicts their training manuals. For limited conservatorships, there is an
before accepting an assignment. Not only is it important that you online form for PVP attorney reports on the court’s Web site.
Additional guidance is available. For example, in one article,
attend the hearing but that you have time to meet with the person
whose interests you will be representing, conduct the appropriate inves- probate attorney Carmen Alberio discusses drafting readable petitions
tigation, and write a report to the court. Probate judges make approx- for court review.1 This article provides insight into how the courts
imately 100 appointments per month. According to Ron Cyger, man- review petitions and pleadings that advocates submit. The main
ager of the probate department, those appointments account for audience of the PVP report is the court, but a well-written report may
approximately a third of the PVP appointments in California.
also provide guidance to the interested parties.
You may be asked to represent the interests of an individual facPVP cases are not for the fainthearted. It can be very difficult work
ing the prospect of losing civil rights that we take for granted. Those for which counsel may receive limited compensation. But as PVP counyou help may be facing the loss of the right to control their finances, sel you may be the only person willing to represent the best interests
make medical decisions for themselves, decide where to live (e.g., not of our most vulnerable citizens.
■
in a secured facility), vote, choose social and sexual relationships, or
get married or enter into a civil union. Your “client” may be a senior 1 Carmen Alberio, Drafting Readable Petitions for Court Review, CAL. TRUST AND
citizen living in a nursing home, a young adult incapacitated by an ESTATES Q., Spring 2004, at 30, available at http://calbar.ca.gov.
accident, someone with a developmental disability, or a child in need
of a guardian. Clients may be the victims of physical or financial abuse. Steven I. Awakuni is a partner with Torii and Awakuni LLP in Torrance.
10 Los Angeles Lawyer December 2006
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Practice Tips
BY MICHAELBRENT COLLINGS
RICHARD EWING
Discoverability of Attorney Interview Notes
ATTORNEYS ARE MORE THAN MERE LEGAL ANALYSTS. A significant
portion of their job involves fact-finding, which may involve poring
over thousands of documents produced by opposing counsel or
reviewing hundreds of stilted interrogatory responses. Sometimes
the investigation involves more private interactions, such as when an
attorney interviews percipient witnesses. If those witnesses are clients,
the conversations are protected, and the notes of the attorney regarding those conversations are rarely discoverable.
But the question of discoverability becomes more difficult when
an attorney has interviewed nonparty witnesses he or she does not
represent. Clearly, such conversations are not protected by an attorney-client relationship. So what will happen when an attorney interviews a nonparty witness and takes notes of that interview? Though
the underlying facts of an event are not protected, can the attorney
be forced to turn over his or her notes in discovery? And what happens when the attorney interviews two or more people at once?
Clearly, this type of interview can provide helpful or even critical information that interviewing attorneys would prefer to keep to themselves.
But can they be forced to turn over their notes of those interviews?
The answer is probably not.
In Nacht & Lewis Architects, Inc. v. Superior Court,1 employees
brought an action against their former employer and others. The plaintiffs propounded form interrogatories asking for “the identity of
and information regarding individuals concerning the incident” and
“individuals from whom written or recorded statements were obtained
concerning the incident.” The defense attorneys issued a reply:
“Counsel for the Defendants has conducted interviews of employees
of Nacht & Lewis Architects [a defendant]. The information collected
from the interviews is protected by the attorney-client privilege and
work product doctrine.”
The trial judge granted an order to compel answers to the interrogatories. The appellate court reversed, distinguishing between
cases in which the attorney merely is collecting information (such as
statements by witnesses who had previously offered written or
recorded recollections) and those in which the attorney is engaged in
an ongoing evaluation of the case and is interviewing witnesses to aid
in that effort. The court stated:
The distinction is significant. A list of the potential witnesses
interviewed by defendants’ counsel which interviews counsel
recorded in notes or otherwise would constitute qualified
work product because it would tend to reveal counsel’s evaluation of the case by identifying the persons who claimed
knowledge of the incident from whom counsel deemed it
important to obtain statements. Moreover, any such notes or
recorded statements taken by defendants’ counsel would be protected by the absolute work product privilege because they
would reveal counsel’s “impressions, conclusions, opinions, or
legal research or theories” within the meaning of Code of
Civil Procedure section 2018, subdivision (c).…
On the other hand, a list of potential witnesses who turned
12 Los Angeles Lawyer December 2006
over to counsel their independently prepared statements would
have no tendency to reveal counsel’s evaluation of the case. Such
a list would therefore not constitute qualified work product.
Moreover, unlike interview notes prepared by counsel, statements written or recorded independently by witnesses neither
reflect an attorney’s evaluation of the case nor constitute derivative material, and therefore are neither absolute nor qualified
work product.2
In Nacht, the witnesses interviewed by defense counsel were
employees of the defendant. However, the standing or status of a witness does not seem to matter in the determination of whether attorney notes are discoverable. An example of this can be found in
Southern Pacific Company v. Superior Court (Shasta County).3 In that
case, a defendant railroad in a wrongful death action petitioned for
a writ of mandate to compel the plaintiff’s answers to interrogatories requesting detailed facts regarding the basis of the plaintiff’s
allegations of negligence. The appellate court held that the facts
were discoverable by the railroad. It concluded that the plaintiff’s attorney had failed to establish that the information gathered by the
attorney or a private investigator employed by the attorney was protected:
The trial court erred in classifying the information as work product. The interrogatories did not seek derivative material in the
Michaelbrent Collings is a litigation associate at Kamine Ungerer LLP, where
he focuses on construction contract disputes.
attorney’s possession such as statements of witnesses, investigative
reports or technical data; did not seek
the attorney’s legal theories, research
or calculations; did not seek information which would not ultimately be
disclosed at the trial.4
The inference is that recordings and notes
of interviews conducted by the attorney and
not a product of the witness’s own volition are
afforded work product protection, regardless
of the witness’s relationship to the lawsuit.
Similarly, the case implies that any attempt to
ask about the content of the interviews will
be seen merely as an attempt to circumvent
the protection provided by the work product
doctrine—as if the seeker of the information
were saying, “Okay, don’t provide the writings to me, just quote them out loud.”
The Presence of Third Parties
If an attorney’s interview notes are protected,
does the fact that an interview is conducted
with two people present at the same time
waive the attorney work product protection?
The answer to this question is maybe.
This is an issue of first impression in
California. Those who wish to argue that
the interview notes are discoverable will state
that an attorney’s disclosure of work product
to a third party operates as a waiver of the
doctrine just as disclosure to a third party can
waive the attorney-client privilege. This argument appears plausible in light of several
cases in which disclosure of an attorney’s
work product operated as a waiver of the protection. For example, in McKesson HBOC,
Inc. v. Superior Court, 5 a corporation
involved in the lawsuit was also the target of
a government investigation. The plaintiffs
moved to compel the corporation to produce an audit committee report and interview
memoranda, which had been prepared by
attorneys retained by the corporation to perform an internal review of alleged securities
fraud. The corporation had shared the materials at issue with the government.
The trial court granted a motion to compel the production. The court of appeal held
that the corporation waived the attorneyclient privilege and work product protection
with regard to shared documents. The court
stated:
As Merrill Lynch points out, McKesson
did not need to disclose the audit
report and interview memoranda to
prepare its case for trial, and McKesson’s adversaries are not taking undue
advantage of [counsel’s] efforts because
the documents would have remained
protected had not McKesson disclosed
them to third parties.6
Another line of cases has reached a contrary result, stating that mere disclosure will
not waive the work product protection. These
include Laguna Beach County Water District
v. Superior Court,7 which held that disclosure
of an attorney’s work product operates as a
waiver of the work product doctrine only
when otherwise protected information is
divulged to a third party who has no interest
in maintaining the confidentiality of a significant part of the work product. Similarly,
in Eddy v. Fields,8 the court held that an
attorney’s disclosure of work product to an
attorney who represents a mutual client or a
client with common interests does not necessarily operate as a waiver of the work product protection as to third parties.
Tellingly, however, the first line of cases
probably has no application to the issue of the
discoverability of an attorney’s notes of interviews of one or more percipient witnesses.
Those cases uniformly deal with a writing that
has already been turned over to a third party
who has no interest in maintaining the confidentiality of the writing. But what if the
attorney has not provided the writing or
recording to anyone? The argument persists
that the mere presence of a third party during the interview is enough to waive the work
product protection.
While no California case is directly on
point, one cites a federal case with helpful language. In BP Alaska Exploration, Inc. v.
Superior Court,9 an oil exploration company
brought suit against another for bad faith
arising from the defendant’s alleged use of
confidential information provided by the
plaintiff in entering into an exploration agreement with a third party from which the plaintiff was excluded. The trial court issued a
discovery order compelling the defendant to
produce documents and answer questions
concerning an internal investigation it performed with respect to the third-party agreement. That investigation culminated in
allegedly fraudulent correspondence and statements made to the plaintiff with the intent to
dissuade it from pursuing its legal claims.
The defendant asserted that the communications were protected by the attorney-client
privilege and the work product doctrine. The
trial court, however, granted the plaintiff’s
motion to compel, based on its finding that
the plaintiff made a prima facie showing of
fraud and its conclusion that the attorneyclient privilege and the work product doctrine
therefore did not apply.
The court of appeal granted the defendant’s petition for a writ directing the trial
court to vacate its earlier discovery order,
holding that the crime-fraud exception of
Evidence Code Section 956 does not apply to
materials protected by the work product doctrine. The court also discussed the effect of an
attorney providing work product to the client
and to others. It pointed out that the attor-
ney work product protection generally is
complete and subject only to a waiver. The
court then discussed the differences between
the attorney-client privilege and the work
product doctrine, citing a federal case, United
States v. American Telephone & Telegraph
Company, holding that the delivery of work
product documents does not necessarily constitute a waiver of the attorney work product
protection.10
The court of appeal quoted extensively
from American Telephone & Telegraph
Company, pointing out that the attorneyclient privilege exists solely to protect confidentiality between attorney and client.
Therefore, “[a]ny voluntary disclosure by
the holder of such a privilege is inconsistent
with the confidential relationship and thus
waives the privilege.”11 Nevertheless, according to American Telephone & Telegraph
Company:
[T]he work product privilege does not
exist to protect a confidential relationship, but rather to promote the
adversary system by safeguarding the
fruits of an attorney’s trial preparations from the discovery attempts of
the opponent. The purpose of the work
product doctrine is to protect information against opposing parties, rather
than against all others outside a particular confidential relationship, in
order to encourage effective trial preparation….We conclude, then, that while
the mere showing of a voluntary disclosure to a third person will generally
suffice to show waiver of the attorney-client privilege, it should not suffice in itself for waiver of the work
product privilege.12
This rationale appears to be followed by
California treatise authority:
Sharing with others information that
is entitled to qualified work product
protection does not waive the protection unless the circumstances are inconsistent with safeguarding the privacy of
the attorney’s trial preparations.13
Thus the compelling question for a practitioner will be whether the circumstances of
the witness interviews were inconsistent with
the intent to safeguard the attorney’s trial
preparations. Attorneys would be welladvised to remember this when conducting
their interviews and be prepared to argue
that the interviews were conducted in a way
that was reasonably necessary to the litigation
process. For example, attorneys interviewing
two witnesses who were employees of the
same entity should be able to assert that the
witnesses had to consult one another to
uncover information requested by the attorney, and thus there was no intent to waive the
work product protection.
Los Angeles Lawyer December 2006 13
Nevertheless, attorneys should seek to
avoid interviewing multiple witnesses at once.
Otherwise, attorneys face the risk not only of
finding that the information may be discoverable but also of losing the essential and
important element of surprise.
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1 Nacht & Lewis Architects, Inc. v. Superior Court, 47
Cal. App. 4th 214 (1996).
2 Id. at 217-18 (internal citations omitted).
3 Southern Pacific Co. v. Superior Court (Shasta
County), 3 Cal. App. 3d 195 (1969).
4 Id. at 198-99 (emphasis added).
5 McKesson HBOC, Inc. v. Superior Court, 115 Cal.
App. 4th 1229, 9 Cal. Rptr. 3d 812 (2004).
6 Id. at 1241.
7 Laguna Beach County Water Dist. v. Superior Court,
124 Cal. App. 4th 1453, 22 Cal. Rptr. 3d 387 (2004).
8 Eddy v. Fields, 121 Cal. App. 4th 1543, 18 Cal.
Rptr. 3d 487 (2004).
9 BP Alaska Exploration, Inc. v. Superior Court, 199
Cal. App. 3d 1240, 245 Cal. Rptr. 682 (1988).
10 United States v. American Tel. & Tel. Co., 642 F. 2d
1285 (D.C. Cir. 1980).
11 BP Alaska Exploration, 199 Cal. App. 3d 1240,
1256 (quoting American Tel. & Tel. Co., 642 F. 2d
1285).
12 Id.
13 W EIL & B ROWN , C ALIFORNIA P RACTICE G UIDE :
CALIFORNIA CIVIL PROCEDURE BEFORE TRIAL ¶8:263.10
(2005). The treatise, however, cites a case of limited usefulness for the purpose of the issue of the discoverability
of an attorney’s notes from an interview with two or
more witnesses. See Raytheon Co. v. Superior Court,
208 Cal. App. 3d 683, 689 (1989). The majority of the
holding addressed whether the attorney-client privilege
was waived when information was circulated among
codefendants. In the only part of the decision addressing the work product doctrine, the Raytheon court
stated:
As for the work product privilege, language in
at least one California decision strongly suggests
that privilege is not waived except by a disclosure wholly inconsistent with the purpose of
the privilege, which is to safeguard the attorney’s work product and trial preparation. (See
Fellows v. Superior Court (1980) 108
Cal.App.3d 55, 65-66 [166 Cal.Rptr. 274];
see also 2 Jefferson, Cal. Evidence Benchbook
(2d ed. 1982) § 41.2 [work product is waived
by disclosure to one with no interest in maintaining its confidentiality]; and see BP Alaska
Exploration, Inc. v. Superior Court (1988) 199
Cal.App.3d 1240, 1261 [245 Cal.Rptr. 682].)
Normally, disclosure to a litigation adversary
would be inconsistent with those policies. But
again, because the trial court relied exclusively
on inapposite authority, there is no evidence
developed in the record by which that court
could determine whether work product was
here disclosed under circumstances inconsistent
with claiming the privilege. There is no detailed
description of the nature of the administrative
investigation and the various interests each
party had at stake during its progress; yet these
facts are crucial to determining whether disclosure could reasonably be made with an
expectation of confidentiality. The trial court’s
conclusion that mutual disclosure here constituted waiver rests on no evidentiary
basis.
Thus, the court never reached the question of whether
the work product protection is waived when documents are circulated among codefendants.
Practice Tips
BY ANDREW S. WILLIAMS AND VIVIAN I. ORLANDO
Exercising Rescission after Commencement of a Lawsuit
select those whom it will insure and to rely upon him who
RESCISSION IS AN IMPORTANT and powerful remedy available to
would be insured for such information as it desires as a basis
insurers that have issued insurance policies based upon an applicafor its determination to the end that a wise discrimination may
tion for coverage containing material misrepresentations or omissions.
be exercised in selecting its risks.12
The effect of a proper rescission is drastic, voiding the insurance policy from its inception and thus relieving the insurer of all obligations
In other words, an applicant for insurance has an unalterable duty
under the policy while simultaneously depriving the insured of the abil- to communicate, in good faith, every fact within his or her knowlity to sue the insurer for failing to pay policy benefits.
edge that is material to the risk the applicant seeks to insure.13
In California, a unique issue arises when an insurer seeks to Moreover, an insurer is entitled to take an insured’s application
rescind an insurance policy after the insured files a lawsuit against the answers at face value in determining whether to issue insurance and
insurer based on a failure to pay benefits. With increasing frequency, need not investigate an application to determine if the applicant lied
the plaintiff-insured claims that rescission is
inappropriate under California Insurance Code
Section 650, which provides that an insurer
Courts that have discussed Section 650 have not applied it
may not exercise its right to rescind after an
insured has commenced “an action on the
contract.” While, on its face, this statute
to deprive insurers of the ability to rescind.
appears to present a seemingly insurmountable
hurdle for insurers who fail to rescind before
being sued, case law demonstrates that a plaintiff-insured seeking to avoid rescission faces, at a minimum, an uphill or omitted material information.14
battle in precluding an insurer from obtaining rescission that is warResure v. Superior Court
ranted by the facts.
When, after issuing a policy, an insurer discovers that the insured Fueled by the harsh consequences of rescission, insureds are challenging
made material misrepresentations or omissions on the application for the timing of the purported rescission with increased frequency.
coverage, the insurer may elect to rescind the policy or may continue Relying on Section 650, plaintiff-insureds often argue that rescission
coverage and sue for damages.1 An insurance policy may be rescinded is inappropriate after the insured files a lawsuit. Section 650 provides:
Whenever a right to rescind a contract of insurance is given to
1) for material misrepresentations or the concealment of material inforthe insurer by any provision of this part such right may be exermation made in procuring the insurance,2 2) on any basis for resciscised at any time previous to the commencement of an action
sion specified in the California Civil Code, including fraud and
on the contract. The rescission shall apply to all insureds
duress,3 3) for breach of a material warranty,4 or 4) by mutual agreeunder the contract, including additional insureds, unless the conment of the parties to the policy.5
tract provides otherwise.
When misrepresentation is the basis for rescission, rescission is
On its face, Section 650 appears to support the argument that an
appropriate only when the representation is false in a material way.6
An applicant’s misrepresentation is material if the misrepresenta- insurer may not, under any circumstances, rescind an insurance poltion would have resulted in any of the following: 1) rejection of the icy after an insured files a lawsuit to challenge denial of policy (i.e.,
application, 2) a higher premium, or 3) an amendment of the terms contract) benefits. Accordingly, relying on this language, a plaintiffof the contract.7 An insurer need not prove that the applicant intended insured will typically claim that unless rescission is effectuated before
to deceive in order to rescind.8 A single material misrepresentation the filing of his or her lawsuit, rescission is improper and may not be
raised in conjunction with defending a lawsuit seeking policy beneor omission in an insurance application is ground for rescission.9
In order to effectuate rescission, notice must be given to the fits. In other words, under the plain language of Section 650, the insurer
insured, and all premiums must be restored or offered to be restored.10 is barred from rescinding the insurance policy after a lawsuit is filed,
When grounds for rescission exist, and the insurer properly exercises even though grounds for a valid rescission might have existed at the
its right to rescind or rescission is effectuated by mutual agreement, time the lawsuit was filed or were discovered during the course of litthe contractual rights of the insured and insurer are extinguished ab igation.
Nevertheless, presumably recognizing the harsh result of such a
initio—it is as if the policy had never existed.11
The basic rationale underlying rescission was clearly stated in rule on insurers who have a legitimate basis for rescission, and mindImperial Casualty & Indemnity Company v. Sogomonian:
Andrew S. Williams is a partner and Vivian I. Orlando is an associate in the Los
[A]n insurance company is entitled to determine for itself
Angeles office of Barger & Wolen LLP. They specialize in commercial litigation,
what risks it will accept, and therefore to know all the facts
including the defense of insurance companies and healthcare service plans.
relative to the [risk insured]. It has the unquestioned right to
Los Angeles Lawyer December 2006 15
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16 Los Angeles Lawyer December 2006
ful of the potential that the literal application
of Section 650 could result in sanctioning
fraud, courts that have discussed Section 650
have not applied it to deprive insurers of the
ability to rescind. For example, the Second
District Court of Appeal in Resure, Inc. v.
Superior Court15 rejected a literal interpretation of Section 650 and, in fact, read and
interpreted the statute to allow insurers to
raise rescission even after the plaintiff-insured
wins the race to the courthouse.
In Resure, the insurance company discovered facts that led it to suspect that the
plaintiff-insureds lied or concealed material
facts in their application for insurance.16 The
insurer’s notice to rescind and offer to restore
the premiums were stated only in its complaint for rescission and declaratory relief
against its insureds.17
In opposition to the insurer’s motion for
summary judgment, the insureds argued that
the insurer’s lawsuit was, in and of itself, an
“action on the contract,” and therefore, was
barred under Section 650. The trial court
agreed and, citing Section 650, held that
“since [the insurer] had not noticed or
attempted to rescind the policy prior to the
filing of the complaint,” the action for rescission was barred.18
The court of appeal reversed, first noting
that in interpreting the plain language of
Section 650, the phrase “an action on the contract” was ambiguous, and concluded that it
meant “an action brought at law to enforce
the insurance policy.”19 It also found that
the statute as a whole was ambiguous
because, at the time it was enacted, there
were two distinct types of rescission. The
court therefore looked to the state of the law
at the time Section 650 was enacted to determine the meaning and purpose of the
statute.20
When Section 650 was enacted in 1874,
the court explained, there were separate
courts of equity and law, and the distinction
between an action on the contract at law
and an action for equitable rescission was of
great significance. At that time, equity would
not assume jurisdiction when a plaintiff had
a clear remedy at law.21 According to the
Resure court, “It followed that once an action
to enforce a contract was commenced at law,
the party holding a right to rescind was
expected to raise that as a defense rather
than bring a new action in equity” because of
the equitable nature of rescission. Thus, the
Resure court concluded, the point of Section
650 “was merely to guarantee that resort to
equity was not needlessly made where the
insurer had ample opportunity to raise the
same issues in defense of the action on the policy.”22 The Resure court went on to hold
that while the statute precludes a “new”
action for rescission when one commences
“an action on the contract,” it does not
deprive the party entitled to rescind from
defending an action on the contract by raising the grounds for rescission as an affirmative defense or by way of a cross-complaint:
Established law clearly affords the
insurer the right to avoid coverage by
way of cross-claims and affirmative
defenses when the insured files an
action on the contract before the
insurer can file its action for rescission.23
The Resure court’s affirmation of an insurer’s right to raise the grounds for rescission
or seek rescission by way of an affirmative
defense to an action on the contract is consistent with case law. For example, in Maddini
v. West Coast Life Insurance Company,24
the court of appeal upheld as correct a jury
instruction that provided that the insurer in
the case could defend against the insured’s
claims on the insurance contracts at issue on
the basis of material misrepresentations in the
insured’s applications. According to that
court, “[T]hough the insurer had the right to
rescind the contracts upon discovery of false
representations, it was under no obligation to
do so but might elect to await action upon the
part of the beneficiary and defend upon that
ground.”25 Similarly, the Resure court’s statement that an insurer can “avoid coverage” by
way of a cross-claim is consistent with the idea
that while Section 650 precludes a separate
or “new” action when the insured files first,
it should not prevent the insurer from raising
rescission in a cross-complaint filed in connection with the insured’s already-filed contract action.
This year, a federal court in the Northern
District of California reached a conclusion
concerning the application of Section 650
that was consistent with that of the Resure
court. In Atmel Corporation v. St. Paul Fire
& Marine Insurance Company,26 the insured
filed a lawsuit against its insurer for breach
of contract and breach of the implied
covenant of good faith and fair dealing.27
The insurer counterclaimed, asserting claims
for rescission, breach of contract, intentional
misrepresentation/concealment, negligent misrepresentation, and breach of the implied
covenant of good faith and fair dealing. It also
asserted rescission as an affirmative defense.
After the complaint was filed, the insurer
also notified the insured it was rescinding
the policy and offered the insured a check for
the premiums it had paid.28
In response, the insured in Atmel raised
Section 650, arguing that rescission was
improper. The court concluded that the
insured was correct that the plain language of
Section 650 precluded the insurer from unilaterally rescinding the policy after the insured
filed suit but, relying upon Resure, found
that “although an insurer is precluded from
unilaterally rescinding once an insured has
filed suit, the insurer may raise ‘the same
issues’ by asserting rescission as an affirmative defense and counterclaim.”29
In addition to the fact that Section 650
does not preclude an insurer from raising
rescission as an affirmative defense to an
action on the contract initiated by the insured
or as a cross-claim, case law is clear that an
insurer may also raise other affirmative
defenses based on facts that would commonly support rescission. For example, in
Williamson & Vollmer Engineering, Inc. v. Sequoia Insurance Company,30 even though
the defendant insurer did not seek rescission,
the court held that the plaintiff’s failure to disclose material information as requested on the
application constituted misrepresentation and
concealment of material facts, and that such
misstatements could be raised as a defense to
an action on the contract.31 The court rejected
the insured’s argument that the only option
the insurer had was to seek rescission or
affirm the contract and sue for fraud.32
The Practical Impact of Section 650
While a plaintiff-insured may choose to focus
his or her argument on the plain language of
Section 650 to argue that the right to rescind
a contract can only be exercised prior to the
commencement of an action on the contract,
that argument is likely to fail based on the
holdings in cases such as Resure, Maddini,
and Williamson & Vollmer Engineering.
Indeed, based on the current state of the law
in California, Section 650 has little or no
value to insureds who file an action on the
contract before the insurer decides to rescind
coverage, except that the statute would preclude an insurer from unilaterally rescinding outside the context of the lawsuit.33
The best approach for plaintiff-insureds
when an insurer raises rescission, even though
it did not rescind prior to litigation, is to
evaluate whether the general requirements
of rescission have been met and to be cognizant of asserting any counter-defenses that
might exist to rescission. For example, the
insured may want to focus on whether the
purported misrepresentations or omissions
on which the insurer’s rescission argument is
based are, in fact, material to the insured
risk. He or she should also determine who
took the application for coverage. For example, if the application was taken over the
telephone by an agent for the insurer, and the
agent made an error in completing the application, rescission might be inappropriate.
Moreover, depending on the circumstances,
an insured may be able to argue that the
insurer waived the right to rescind by not
■ RISK
ANALYSIS
seeking rescission earlier, although proving
waiver is often difficult.34 Likewise, generally
speaking, an insurer’s right to obtain information of material facts in the application
process may be waived “by neglect to make
inquiries as to such facts, where they are distinctly implied in other facts of which information is communicated.”35 Thus, an insurer
may be found to have waived the right to disclosure of material facts by its failure to investigate obvious leads in the application process
that would have disclosed that the application
contained misrepresentations or omissions.36
On the other hand, insurers seeking to
rescind an insurance policy after an insured
has filed suit on the policy must plead grounds
for rescission through an affirmative defense
for rescission or by way of cross-complaint if
the facts support what appears to be a legitimate basis to rescind. If facts are discovered
during the course of litigation that suggest
rescission is appropriate, an insurer should,
at a minimum, promptly seek leave from the
court to amend its answer to assert an affirmative defense based on rescission. As an
additional protective measure, the insurer
may also want to seek leave to file a crosscomplaint for rescission. Additionally, insurers may assert affirmative defenses for misrepresentation of fact and suppression of fact
as permitted by Williamson & Vollmer
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18 Los Angeles Lawyer December 2006
Engineering based on the same facts supporting a defense of rescission.37
In asserting these defenses and crossclaims, whether by leave or in the first
instance, insurers should rely on the Resure
court’s reasoning—that is, the purpose of
Section 650 was to guarantee that resort to
equity (by the filing of a “new” action) was
not needlessly made if an insurer could raise
the matter defensively in an already-filed
action on the contract.38 In this regard, insurers can argue that based on the rationale of
Resure, a cross-complaint, which was asserted
in the action in response to a complaint, is not
a “new” action and is consistent with the
Resure court’s analysis of the purpose underlying Section 650—efficient resolution of
contract disputes in one action. An insurer
may further wish to note that the Resure
court’s reasoning makes sense. If one were to
accept that Section 650 stripped insurers of
the right to raise rescission when they were
misled into issuing insurance that would otherwise not have been issued, it would result
“in absurd consequences which the Legislature could not have intended.”39
■
1 De
Campos v. State Comp. Ins. Fund, 122 Cal. App.
2d 519, 527-28 (1954).
2 California Insurance Code §§331 and 359, enacted
in 1935, explicitly authorize an insurer covered by the
rules to rescind a policy for concealment or misrepresentation in an application. Sections 331 and 359 provide that an applicant’s omission or misrepresentation of material facts entitled the insurer “to rescind the
contract from the time the representation becomes
false.” See also INS. CODE §332 (noting required disclosures).
3 De Campos, 122 Cal. App. 2d at 529.
4 See INS. CODE §447.
5 See Stevenson v. Sun Ins. Office, 17 Cal. App. 280,
288 (1911).
6 Thompson v. Occidental Life Ins. Co., 9 Cal. 3d
904, 916 (1973).
7 Imperial Cas. & Indem. Co. v. Sogomonian, 198
Cal. App. 3d 169, 181 (1988). Materiality is determined
solely by the probable and reasonable effect that truthful answers would have on the insurer. Id. at 916;
INS. CODE §334. The fact that an insurer has demanded
answers to specific questions in an application for
insurance is, in itself, usually sufficient to establish
materiality as a matter of law. Thompson, 9 Cal. 3d
at 916; Sogomonian, 198 Cal. App. 3d at 179.
8 Cohen v. Penn Mut. Life Ins. Co., 48 Cal. 2d 720, 725
(1957); Thompson, 9 Cal. 3d at 915-16; Telford v. New
York Life Ins. Co., 9 Cal. 2d 103, 105 (1937); INS.
CODE §331.
9 Old Line Life Ins. Co. v. Superior Ct., 229 Cal. App.
3d 1600, 1604 (1991).
10 CIV. CODE §1691. See also Sogomonian, 198 Cal.
App. 3d at 184. Note, however, CIV. CODE §1693:
When relief based upon rescission is claimed…
such relief shall not be denied because of delay
in giving notice of rescission unless such delay
has been substantially prejudicial.…A party
who has received benefits by reason of a contract that is subject to rescission and who in an
action of proceeding seeks relief based upon
rescission shall not be denied relief because of
a delay in restoring or in tendering restoration
of such benefits before judgment unless such
delay has been substantially prejudicial to the
other party; but the court may make a tender
of restoration a condition of its judgment.
11 See, e.g., Sogomonian, 198 Cal. App. 3d at 182;
Thompson, 9 Cal. 3d at 916.
12 Sogomonian, 198 Cal. App. 3d at 180-81.
13 Thompson, 9 Cal. 3d at 916; Lunardi v. Great-West
Life Assur. Co., 37 Cal. App. 4th 807, 826 (1995).
14 See Robinson v. Occidental Life Ins. Co., 131 Cal.
App. 2d 581, 585 (1955); Mitchell v. United Nat’l
Ins. Co., 127 Cal. App. 4th 457, 476 (2005).
15 Resure, Inc. v. Superior Court, 42 Cal. App. 4th 156
(1996).
16 Id. at 160.
17 Id. at 161.
18 Id.
19 Id. at 163, 167.
20 Id. at 162-63.
21 Id. at 166.
22 Id.
23 Id. at 162-63.
24 Maddini v. West Coast Life Ins. Co., 136 Cal. App.
472, 476 (1934).
25 Id. at 476-80.
26 Atmel Corp. v. St. Paul Fire & Marine Ins. Co., 416
F. Supp. 2d 802 (N.D. Cal. 2006).
27 Id. at 804.
28 Id.
29 Id. at 805.
30 Williamson & Vollmer Eng’g, Inc. v. Sequoia Ins. Co.,
64 Cal. App. 3d 261, 275 (1976).
31 Id.
32 Id. at 274.
33 Generally, an insurer is advised to rescind when it
becomes aware of facts supporting rescission. The
danger associated with waiting and continuing to collect premiums is that the insurer may later be found to
have waived the right to rescind.
34 “Waiver requires the insurer to intentionally relinquish its right to deny coverage.” Monteleone v. Allstate
Ins. Co., 51 Cal. App. 4th 509, 517 (1996); Anaheim
Builders Supply, Inc. v. Lincoln Nat. Life Ins. Co.,
233 Cal. App. 2d 400, 410 (1965). “To constitute a
waiver, there must be an existing right, a knowledge
of its existence, and an intention to relinquish it, or conduct so inconsistent with the intent to enforce the right
as to induce reasonable belief that it has been relinquished.” Silva v. Nat’l Am. Life Ins. Co., 58 Cal.
App. 3d 609, 615 (1976). “The burden is on the party
claiming a waiver of a right to prove it by clear and convincing evidence that does not leave the matter to
speculation, and ‘doubtful cases will be decided against
a waiver.’” CBS Broadcasting Inc. v. Fireman’s Fund
Ins. Co., 70 Cal. App. 4th 1075, 1085 (1999) (finding
no waiver).
35 INS. CODE §336. While “waiver” and “estoppel” are
often used interchangeably, they are different doctrines. Waiver always rests upon intent: “Case law is
clear that ‘waiver’ is the intentional relinquishment of
a known right after knowledge of the facts.” Waller v.
Truck Ins. Exch., Inc., 11 Cal. 4th 1, 31-32 (1995)
(internal quotes omitted). An insurer may be estopped
to assert a policy right or defense when, by words or
conduct, the insurer has caused the insured reasonably
to change its position to its detriment. See EVID. CODE
§623; Chase v. Blue Cross of Cal., 42 Cal. App. 4th
1142, 1157 (1996).
36 Old Line Life Ins. Co. v. Superior Ct., 229 Cal.
App. 3d 1600, 1605 (1991). This concept is embodied
in the Insurance Code, which prohibits “post-claims
underwriting.” See INS. CODE §10384.
37 Williamson & Vollmer Eng’g, Inc. v. Sequoia Ins. Co.,
64 Cal. App. 3d 261, 275 (1976).
38 Resure, Inc. v. Superior Ct., 42 Cal. App. 4th 156,
166 (1996).
39 Id. at 164.
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by Miriam Claire Beezy
GOOD
MARKSMANSHIP
New technologies require the implementation of
creative trademark protection strategies
the entertainment industry has essentially
protected only half its valuable intellectual
property assets. Budget concerns have focused
the majority of the content-driven industry’s
resources on comprehensive copyright registration policies while at times giving short
shrift to trademark rights. All too often,
assumptions that common law rights would
provide adequate trademark protection on an
as-needed basis prevailed. The same faith
was placed in the protective reach of the
“well-known marks” or “famous marks”
doctrine1—a part of the Lanham Act and
promulgated worldwide through the Paris
Convention—even though the doctrine is not
applied consistently. As digital trends continue
and the industry’s attention increasingly turns
to global branding and merchandising, these
companion rights must be given the same
careful consideration as copyrights. Given
20 Los Angeles Lawyer December 2006
the difficulties that arise when protection is
left to haphazard registrations, common law
rights, and the unpredictable application of
the well-known marks doctrine, the industry
is being confronted with the reality that developing a comprehensive trademark registration
policy is crucial to protecting intellectual
property.
With another copyright term extension
unlikely,2 a comprehensive trademark registration policy makes sense from an economic
standpoint. While copyrights have a fixed
lifespan and will ultimately fall into the public domain, trademarks can last indefinitely if
properly maintained and provide the cornerstone for exploitation and enforcement. As
new media continue to give rise to new
brands, global financial opportunities for
exploiting these intellectual property assets
will increase as well. As a result, companies
need to take appropriate steps to retain own-
ership and control of their rights to their
properties and combat the unauthorized uses
of those properties over the Internet. The
cost of building and maintaining a solid trademark program should be a priority to companies as a whole and should not degenerate
into budget feuds between company divisions. From counterfeiting and cybersquatting
to cobranding and merchandising, trademarks remain the key to brand power and are
Miriam Claire Beezy, a partner in the Los Angeles
office of Foley & Lardner LLP, is chair of the firm’s
Trademark, Copyright and Advertising Practice
Group and cochair of the Entertainment and Media
Industry Team. She would like to thank Jeffrey A.
Kobulnick and Brian P. Kinder, associates in Foley’s
Los Angeles office and members of the Trademark,
Copyright and Advertising Practice Group and
Entertainment and Media Industry Team, for their
assistance with this article.
RON OVERMYER
For the last several decades,
Los Angeles Lawyer December 2006 21
certain to play an increasingly central role in
the portfolios and strategic plans of companies worldwide.
Evolution of Entertainment
Trademark Use
A review of the history of trademark use in
the entertainment industry is important to
fully understand the range of trademark
rights. There is no question that companies
considered trademarks to be valuable assets
long before the Harry Potter character was
born—although with 30 federal registrations
and another 10 applications still pending
with the United States Patent and Trademark
Office (USPTO), Harry’s still tender age certainly has not precluded him from being well
protected as a trademark.3 In the early days
of show business, however, many companies
tended to register only the most obvious
marks, such as their studio names (for example, Universal Films 4 and Paramount
Pictures5) and logos (such as the lion’s head
design mark of Metro Goldwyn Mayer6).
The subsequent advent of television brought
about similar trademark registrations for network acronyms such as NBC7 and CBS8 as
well as certain early radio and television
shows.9 Walt Disney was particularly prescient, as he was one of the earliest, if not the
earliest, person to register the name of a character when he registered Mickey Mouse for
motion pictures in 1928.10
While these early marks were used and
registered in connection with core entertainment products and services such as motion
picture films and broadcasting, the extension of branding to merchandise was limited. For example, according to USPTO
records, Warner Brothers began using the
Looney Tunes11 and Merrie Melodies12 marks
in connection with a series of animated films
in 1929 but did not register either mark for
use with merchandise until almost a half century later.13 Likewise, the Bugs Bunny character has been bouncing around in comic
books since 1944,14 but the mark was not
used or registered in connection with much
in the way of merchandise until the 1970s,
when it was used with vitamins,15 toys,16
towels,17 and sleeping bags.18 The Flintstones
mark was not used with vitamins until 1969,
just one year after Hanna Barbera released its
Pebbles brand breakfast cereal.19 Even Disney
did not register the Mickey Mouse mark for
merchandise until recently.20
The same holds true for other comic character favorites such as Superman and Batman
(originally The Bat Man), both of which first
appeared in comic books in the late 1930s.
Not until decades later did DC Comics register both of these marks for children’s clothing, lunch kits, and various other merchandise. Similarly, although the heart-shaped I
22 Los Angeles Lawyer December 2006
Love Lucy design mark was in use since 1951
in connection with the well-known television program, the registration of the mark was
not extended to goods until the late 1980s and
early 1990s.21 Today there are many I Love
Lucy brand collectibles, and the mark is used
in connection with a video slot machine game
found in some Las Vegas casinos. I Love Lucy
is a mark protected by broad registrations of
its standard character and stylized logo.
Where did this merchandising frenzy in the
entertainment industry all begin? Perhaps
not surprisingly, many sources attribute credit
to Walt Disney with the 1937 release of the
full-length animated film Walt Disney’s Snow
White and the Seven Dwarfs. The Snow
White film was a huge endeavor for Disney,
taking nearly four years and more than $1.5
million to complete and going well over the
original budget of $150,000.22 As the film was
nearing completion, Herman “Kay” Kamen,
Disney’s first licensing representative, made
preparations to launch an aggressive merchandising campaign unlike anything seen
before, including the mass production and
release of dolls of Snow White and each of the
seven dwarfs as well as comic, paint, coloring, and picture books. Soon after the film’s
release there were millions of collectible character items marketed in connection with the
Snow White mark. From a full line of clothing to high-end collectible items like porcelain
and bisque figurines and jewelry sold at
Cartier of Fifth Avenue, Kay Kamen took
the concept of merchandising to a whole new
level.23 The mark also was used in connection
with food products—for example, Snow
White sliced bread featured the Snow White
mark and images of Snow White and all
seven dwarfs on the packaging.24 The product also contained picture cards and endpaper stickers that were collected and traded
by children. Snow White and Dopey were the
most popular characters in the film, which
explains why they have been seen on more
merchandise than the other characters from
the film to this day.25
Ever since the first release of Snow White,
the flood of animated films that followed in
its wake has been increasingly accompanied
by similar large-scale merchandising campaigns and licensing programs. For instance,
in the early 1990s, the merchandising realm
reaped the benefits of another major promotion from Disney’s release of The Little
Mermaid. The film prompted the launch of an
even more aggressive marketing campaign
than its predecessors and featured products
from cosmetics and food to toys and clothing, all depicting characters from “Under the
Sea.” Given this growing merchandising
trend, it was no surprise that soon after
Disney released its 60th anniversary edition
of Snow White in 1997, it applied to register
the mark with the USPTO in 10 International
Classes for use in connection with an even
wider range of products and services.26 The
entertainment industry’s attitude toward the
registration of trademarks has clearly evolved
over the years and now reflects an understanding of the value in protecting trademark rights in artistic works.
Titles and Characters
Today, studio and character names as well as
film and television show titles remain among
some of Hollywood’s most valuable marks.
Companies are not only using these marks in
more creative ways but also registering marks
that would have otherwise received little
attention in years past. The availability of
“intent to use” applications with the 1989
enactment of the Trademark Law Revision
Act27 also has enabled companies to seek
registration of their marks beyond the traditional entertainment products and services of
films and broadcasting. New opportunities
through character image licensing and
celebrity branding continue to emerge. As a
result, enforcement and expansion efforts
from a trademark perspective—both offensive and defensive—are flourishing. Having
engaged in battles with opportunistic third
parties, the industry is relying less on common law and the well-known marks doctrine and beginning to register marks both
earlier and in broader ranges of categories
than in years past.
Television show titles, for example, which
entertainment companies have traditionally
registered as trademarks, are now being registered and enforced on a broader scale. With
each new popular television series comes
merchandising opportunities using the title as
a mark. The importance of securing early
registration has been underscored in recent
years as companies have had to defend actions
when popular television shows branched out
into marketing campaigns. For instance, in
Surfvivor Media, Inc. v. Survivor Productions,28 the owner of the registered mark
Surfvivor for beach-themed products brought
suit against the producers of the Survivor
television show, alleging trademark infringement resulting from the use of the Survivor
mark on consumer merchandise. Likewise, in
Playmakers, LLC v. ESPN, Inc.,29 the Playmakers sports agency asserted its registration for its name against the cable television
company producing a program with the name
as its title, alleging a likelihood of confusion.
Similarly, when Viacom rebranded the cable
channel TNN as SpikeTV, it was met with an
action for a preliminary injunction by director Shelton “Spike” Lee.30 Although the
Surfvivor and Playmakers suits were decided
in favor of the television show producers,
and the Spike TV action was settled on undis-
closed terms, each of these cases is a reminder
that early clearance and registration are necessary for the protection of entertainment
properties.
Indeed, when Twentieth Century Fox first
launched the popular series Buffy the Vampire
Slayer in 1997, it did so without filing to
register the television show’s title as a trademark for entertainment services, much less
merchandising categories. Fox waited three
years before filing an application to register
the show’s title in multiple classes. This is in
stark contrast to the strategy Fox employed
with its recent hit comedy series My Name Is
Earl. Fox applied to register the title as a
mark in three classes (entertainment, clothing,
and printed publications) more than five
than actors in the movie industry, who have
tended to focus on product endorsements.
Dolly Parton, for example, registered her
name in connection with entertainment services in 1982, whereas John Travolta did so
in 2003. One of the exceptions to this trend
is Elizabeth Taylor, who has registered her
name in connection with numerous products
once thought to be beyond the realm of the
entertainment industry. Moreover, there is
an increasing interest in branding programs
featuring the names of deceased celebrities, as
demonstrated by currently pending applications and registrations for Marlon Brando and
James Dean. Nevertheless, celebrities in the
music industry seem to be expanding their
brands through registration of their names as
online all types of media and merchandise featuring their favorite stars. This convenience
has allowed production studios, distribution
companies, and licensees to reap huge financial benefits. However, not all trademark use
on the Internet has been favorable for trademark owners, especially those who have not
had a policy of registering their marks. For
instance, through Uniform Dispute Resolution
Policy (UDRP) proceedings, the industry has
contended with third parties who have registered the domain name equivalents of everything from company names and show titles
to character and celebrity names.
UDRP proceedings have for the most part
produced favorable decisions for individual
celebrities and the entertainment industry in
With past and present trends as guidance, there is no
question that trademarks will continue to be valuable
assets. They will also persist as enticing targets for
opportunistic third parties seeking to capitalize on the
goodwill belonging to others.
months before the show even aired.
Just as show titles have garnered attention,
so have many of the characters featured in
films. The types of toys and other merchandise on which certain character names have
been used as trademarks cover a wide range.
Buzz Lightyear, for example, is a Disney character that really has gone “to infinity and
beyond” since his debut in the 1995 animated film Toy Story. Consumers can buy a
host of Buzz Lightyear items, from action
figures or Halloween costumes to full bathroom and bedroom sets. Buzz Lightyear joins
many of his fictional colleagues by having his
name used in connection with various video
games and on screen savers and party supplies, including plates, napkins, and cups featuring the star commander. The Buzz
Lightyear mark also has been registered as a
domain name. Visitors to www.buzzlightyear
.com are automatically redirected to a Web
site for Buzz Lightyear’s Astro Blasters, an
attraction at Disneyland.
Just as brand expansion based on animated films and their characters has become
well established, so too have celebrity branding campaigns seen tremendous growth. It is
interesting to note, however, that artists in the
music industry have been more cognizant of
trademark rights and branding campaigns
marks in more classes of goods and services
than actors, as exemplified by singer Justin
Timberlake, who has four registrations and
four more applications pending for his name
in eight classes of goods and services.
In addition to using a single mark in connection with a wide variety of goods and
services, cobranding has afforded even greater
opportunities to trademark owners in the
entertainment industry. Examples of cobranding have included Disney collectible figures
made by Lenox and the Disney Rewards Visa
Card. Another example was the appearances
of Bugs Bunny and Michael Jordan (whose
name is a registered mark)31 in the motion picture Space Jam and the wide array of consumer products in association with that film.
A more recent example is the cobranding of
the Motorola and Phat Farm marks. These
types of cobranding opportunities allow lesserknown marks in the entertainment industry
to develop a strong presence in a relatively
short amount of time and also allow already
famous marks to gain even more strength
and visibility.32
Domain Name Issues
The Internet has also provided portals for
broadening the scope of trademark rights,
with consumers able to search for and order
general. The panels in these proceedings have
ordered the transfer of disputed domain
names to the trademark owner in the majority of cases, such as in one well-known dispute in 2000 involving the domain name
juliaroberts.com.33 In that UDRP proceeding,
the respondent had also registered more than
50 other domain names—including
madeleinestowe.com and alpacino.com.—
that incorporated other celebrity names.
Fortunately for Julia Roberts, although her
name was not registered as a trademark, the
panelist in the UDRP proceeding found that
her name was entitled to protection as a service mark under common law because it had
acquired secondary meaning.
That same year, a different UDRP panel
came to a similar conclusion in a dispute
involving the domain name jimihendrix
.com. 34 Like the respondent in the Julia
Roberts case, the respondent in the Jimi
Hendrix dispute had also registered various
other domain names incorporating celebrity
name marks, including elvispresley.com and
jethrotull.com. The respondent also offered
vanity e-mail addresses for sale that included
the jimihendrix.com domain name (such as
[email protected]). Recognizing both
common law and registered trademark rights
in the Jimi Hendrix mark and concluding
Los Angeles Lawyer December 2006 23
that the respondent had registered and was
using the jimihendrix.com domain name in
bad faith, the UDRP panelist ordered the
transfer of the domain name to the complainant.
More recently, in July 2006, Tom Cruise
successfully acquired the tomcruise.com
domain name via a UDRP proceeding, which
was also based on his common law rights to
his name as a mark. 35 Likewise, several
domain names—warneremi.org, warneremi
.net, emiwarnermusic.com, emiwarner.org,
and emiwarner.net—were ordered to be transferred to Time Warner, Inc.,36 in a UDRP
proceeding brought by that company and
EMI Group.
Those with celebrity status, however, do
not always prevail in domain name disputes.
Consider Reverend Jerry Falwell, for example. Falwell has recognized common law
rights to Falwell and Jerry Falwell as well as
a federal registration for the mark Listen
America with Jerry Falwell. His Web site,
located at www.falwell.com, reportedly
receives more than 9,000 hits per day. In
February 1999, Christopher Lamparello registered the domain name “fallwell.com” and
put up a Web site expressly criticizing Falwell’s
views on homosexuality. Lamparello was not
the ordinary cybersquatter in that he did not
own any other domain names that featured
names of famous people, did not make commercial use of the site, and even included a disclaimer on the home page indicating that his
Web site was not affiliated with Falwell or his
ministry. The disclaimer was placed next to
a link to Falwell’s site for those who wished
to visit it.37
Although Falwell successfully asserted his
rights at a UDRP proceeding, in which the
panel found in his favor and ordered the
domain name to be transferred,38 his victory
was short-lived. Lamparello filed suit in the
Eastern District of Virginia seeking a declaratory judgment of noninfringement. Falwell
counterclaimed, and the district court entered
summary judgment in his favor. The Fourth
Circuit Court of Appeals reversed, finding
that although the fallwell.com domain name
closely resembled Falwell’s mark, the two
Web sites did not look alike in any way. The
Fourth Circuit also found that Lamparello’s
use of his site was noncommercial and the
public was not likely to be confused into
believing that Falwell authorized the Web
site’s critical content. Moreover, the court
found that Lamparello did not have a bad
faith intent to profit from using the domain
name fallwell.com and that Lamparello’s
noncommercial use of the domain name did
not violate the Anti-Cybersquatting Protection
Act (ACPA).39 Instead, the court found that
the site constituted protected speech under the
First Amendment.40 Lamparello’s anti-Falwell
24 Los Angeles Lawyer December 2006
site still remains accessible through the
domain name fallwell.com. The Lamparello
v. Falwell decision is a warning to the entertainment industry of the importance of registering their valuable trademark rights both
with trademark offices worldwide and on
the Internet as domain names.
Strategic Considerations
Entertainment and media companies will
continue to face many of the same issues
they have faced in the past. But with increasing technological advances and a relentlessly
expanding global marketplace, the amount of
infringement is certain to grow exponentially.
The trademark battlefields will require trademark owners and their counsel to grapple
with disputes of evolving complexity and
geographic scope. With past and present
trends as guidance, there is no question that
trademarks will continue to be valuable assets.
They will also persist as enticing targets for
opportunistic third parties seeking to capitalize on the goodwill belonging to others. The
best way to ensure ownership and control of
these assets is to protect them from their
inception and not as a mere afterthought
once copyright registrations are secured.
Trademark protection policies and the
best practices of companies in the industry
must keep up with new technological and
marketing developments. New merchandising ideas and brand expansion hasten the
need to register marks on a larger scale in connection with a wider array of goods and services. The reach of the Internet should compel trademark owners to protect marks online
and vigorously use mechanisms like the UDRP
and ACPA to do so. New media and distribution channels and a convergence of the
advertising and entertainment industries make
it imperative for entertainment and media
companies to register their marks earlier and
with a more worldwide focus than in years
past.
Long gone are the days when a company
could test the waters by waiting to see if a
film, television series, or video game would be
successful domestically before launching a
trademark filing campaign abroad. Technologically savvy and legally sophisticated
opportunists will invariably file trademark
applications with the hope of tying up merchandising rights or extorting settlements.
This practice is particularly troubling in most
foreign countries, which have a first-to-file priority system and may not permit cancellation
on grounds of nonuse for more than five
years.
A growing trend among trademark offices
around the world is to offer online filing.
Just as the registration of domain names has
become easier over time, the same is true for
opportunists seeking to file trademark appli-
cations in foreign countries without the need
or expense of hiring local counsel. No matter whether these third-party applications
stand up to formal scrutiny, they will
undoubtedly present obstacles to a company
seeking to expand the use of its mark. To insulate against this deleterious activity, entertainment and media companies should evaluate and adjust their budgets as needed to
allow for early filing of applications in key
geographic areas worldwide.
This assumes, of course, that a company
knows which marks will offer the best merchandising opportunities at an early stage in
the development of an entertainment property.
There are situations, however, in which merchandising opportunities are speculative, such
as when a new series debuts and the host
uses a distinctive catch phrase (such as Donald
Trump’s “You’re Fired” from The Apprentice). While the filing of national and regional
applications worldwide should remain the
standard for a company’s core marks, the
Madrid Protocol might present a viable solution for these more speculative scenarios,
particularly when a company faces budgetary
concerns.41 This international treaty does
carry significant drawbacks, including requirements for a more narrow description of
goods, the risk of a central attack, and the
absence of North and South American accession. Nevertheless, these factors may still
present a reasonable risk when balanced
against the decrease in filing costs by as much
as 70 percent in some countries if the trademark is filed under the protocol. By filing
applications around the world at a greatly
reduced cost without the initial need to retain
local counsel, companies can provide their
assets with a layer of insulation in the event
that merchandising opportunities later present
themselves. If a company ultimately decides
to move forward with a full-scale merchandising campaign, broader follow-up applications may be filed. Alternatively, should
opportunities fail to emerge or not succeed,
then costs can be minimized.
Companies need to be selective and targeted in their enforcement strategies, from a
defensive and offensive stance. To accomplish this, entertainment and media companies must forge early and strong alliances
between their marketing and legal departments to develop sound approaches for protecting and enforcing trademark rights at an
early stage in the development and exploitation of an entertainment property.
In light of Lamparello, the distinction
between cybersquatter and cybergriper—that
is, the difference between bad faith registration and the use of a domain name that incorporates another’s mark and permissible registration and use, albeit unauthorized, of
another’s mark—will become difficult to dis-
cern. Relying on First Amendment or fair
use42 defenses, sophisticated cybersquatters
are certain to create visually impressive gripe
sites in a manipulative attempt to blur the line
between free speech and trademark infringement. Moreover, due to the availability of confidential or anonymous domain name registration, it will become more difficult to
determine if the third party has a legitimate
gripe or is merely a known cybersquatter
with predatory objectives.
Indeed, cybersquatters are already mounting free speech and fair use defenses. For
example, in the dispute involving the domain
names marthastewartfoundation.com and
marthastewardfoundation.org,43 the registrant of those domain names contacted
Martha Stewart’s company the same day the
names were registered with an offer to sell
them. When the company did not purchase
the domain names, the registrant posted a
Web site listing the political contributions
made by Martha Stewart’s company. During
the UDRP proceeding that ensued shortly
thereafter, the registrant argued that his use
was protected free speech since he was merely
using the Martha Stewart domain names as
part of a Web design school project. Although
the panel in the UDRP proceeding acknowledged the complainant’s rights to several registrations for the name Martha Stewart and
found the registrant acted in bad faith in that
case, if the student had not initially offered to
sell the domain names the outcome could
have been very different.44
Another continuing problem is the socalled fan site that is actually used for commercial profit by a domain registrant. For
example, in the Tom Cruise UDRP proceeding, the respondent claimed it registered the
domain name as a fan site notwithstanding
the fact that it derived commercial benefit
from paying advertisers. To combat the trend
toward gripe site and fan site abuses, the
entertainment industry must not only register the identical domain name equivalents of
their marks but as many reasonable variations
as possible, top level extensions, and country
codes. For domain names used only as a portal rather than for hosting the main Web site,
companies can decrease the annual expense
of these domain portfolios by relying on bulk
registration registrars that offer fewer bells
and whistles. Also, companies can reduce
the annual costs by committing to longer
term registration periods with discounted
rates.
Video games will continue to be assets to
monitor. Popular films have been made into
video games since the early days of gaming
consoles. Not until the early 1990s, however, did a new genre begin to emerge in the
opposite direction. Films based on video
games have generated significant amounts of
revenue for the entertainment industry, including box office sales and associated merchandise. While many sources indicate that only
one film—Lara Croft: Tomb Raider—has
achieved more than $100 million in sales,
the genre will no doubt continue to make
more appearances in the coming years.
As the distinctive names and characters in
video games give rise to trademark rights,
owners should continue to take steps to adequately protect their assets and control their
use through technology and by contract. The
impulse to register copyrights alone for these
properties should be resisted. Trademark
owners should take steps early to identify,
clear, and apply to register those marks that
will be used on a large scale with merchandise. Perhaps the traditional approach of registering the title of a video game in only one
International Class of goods (such as Class 9)
should no longer be followed. A better
approach may be to file applications in several fields to secure the trademark rights that
may emerge from the variety of ways that a
video game will be exploited. Finally, owners
ought to look beyond the obvious, such as the
title of the game, and identify key characters
and other properties with potential merchandising appeal.
It may not always be easy to predict the
course of brand extensions, but filing applications before actual use and in protected
areas of expansion will put trademark owners in a better position to avoid potential
opposition proceedings and resulting litigation costs down the road. Invariably, it is
more cost effective to put resources into protecting trademarks at an early stage. Since
trademarks are valuable to the entertainment
company as a whole and not necessarily just
one division, the cost of building and maintaining a solid trademark portfolio need not
fit under one department’s budget.
The Internet will continue to be a doubleedged sword for trademark owners in the
entertainment industry. As technological
advances provide increasing sources of revenue, trademark owners will find it more difficult to monitor the use of their marks online.
Further complicating the issue is the fact that
in many cases it is not always clear whether
the use is authorized, a fair use, or one that
is likely to cause consumer confusion and
thus constitute an infringement.
Though laws are being amended to
address these issues, as quickly as the legal
landscape changes, opportunists modify their
activities to take advantage of exceptions
and loopholes. For instance, within weeks
of the Napster decision, new peer-to-peer
file-sharing sites emerged that were entirely
passive as a means to circumvent the monitoring requirement necessary for users to be
found liable for contributory copyright
infringement. Among the many developments
that will continue to facilitate infringement are
peer-to-peer file-sharing networks and Web
sites with user-created content such as
MySpace, Wikipedia, and YouTube. Also, an
increase in the number and breadth of Web
2.0 45 sites will consume a great deal of
resources earmarked for trademark enforcement activities.
Monitoring the unauthorized use of marks
has already become a standard expense in
many budgets within the entertainment industry. Indeed, watch services can assist trademark owners in keeping track of newly registered domain names and marks worldwide.
These services are constantly changing to
keep up with new technology, but they will
likely prove to be insufficient in the future
given the sheer volume of user-created content. As a result, some trademark owners are
looking for more creative solutions.
Walt Disney went to work on his first
full-length animated film nearly 70 years ago.
It is useful to imagine what that film would
look like and how it would be distributed to
the public if it were created today. Trademark
protection strategies must keep pace with
technology. Trademark owners must register
their marks for a broader range of goods
and services and on a global scale. With the
advent of a new generation of trademark use
online and in new media, retaining as much
control over trademark rights as possible is
more crucial than ever. It is a tireless job,
but someone has to do it. Walt would be
proud.
■
1 See
Lanham Act §43(c). The well-known marks doctrine is described in Article 6bis(1) of the Paris
Convention. Under that article, countries that are
members of the Paris Union may refuse or cancel a
mark registration and prohibit the use of a trademark
that is confusingly similar to a mark considered by the
competent authority of the country of registration or
use to be well-known in that country as being already
the mark of a person entitled to the benefits of the Paris
Convention and used for identical or similar goods.
Though the well-known marks doctrine is law in
many countries, its application is inconsistent among
the various jurisdictions.
2 The most recent copyright term extension, the Sonny
Bono Copyright Extension Act of 1998, was met with
contention.
3 Those applications and registrations are just for the
Harry Potter marks. Warner Brothers also owns numerous other registrations and pending applications for various Hogwarts and Dumbledore marks, just to name
a few of the terms introduced in J. K. Rowling’s Harry
Potter book series.
4 Registered June 29, 1915, as U.S. Registration No.
105,030.
5 Registered March 23, 1915, as U.S. Registration No.
103,248.
6 Though not registered until January 7, 1941, U.S.
Registration No. 384,224 notes the use by predecessors
of Metro since July 1916, Goldwyn since about January
1917, and the roaring lion since on or about September
9, 1917.
7 Registered January 17, 1956, as U.S. Registration No.
Los Angeles Lawyer December 2006 25
619,641, with a date of first use in commerce in 1927.
8 The current registration for the CBS word mark (U.S.
Registration No. 2,758,242) was granted only a few
years ago in 2003. However it was based on prior
registrations and use dating back to 1933.
9 For example, the Meet The Press (television show) and
Sports Eye (radio program) marks were registered in
1954.
10 Registered September 18, 1928, by Walter E. Disney,
U.S. Registration No. 247,156.
11 U.S. Registration No. 597,341.
12 U.S. Registration No. 597,342.
13 U.S. Registration No. 1,081,450.
14 See U.S. Registration No. 950,381.
15 U.S. Registration No. 1,235,144.
16 U.S. Registration No. 1,065,358.
17 U.S. Registration No. 1,280,778.
18 U.S. Registration No. 1,280,759.
26 Los Angeles Lawyer December 2006
19 See
U.S. Registration Nos. 936,474 and 879,594.
See, e.g., U.S. Registration No. 3011935 (use of
Mickey Mouse for various clothing items) and U.S.
Registration No. 3007745 (use of Mickey Mouse for
jewelry and watches), both of which registered in
2005; see also U.S. Application Serial No. 78/163,587
for use of Mickey Mouse in connection with entertainment services.
21 See U.S. Registration No. 1,715,262 (which covers
many types of I Love Lucy merchandise and collectibles).
22 ROBERT HEIDE & JOHN GILMAN, DISNEYANA: CLASSIC
COLLECTIBLES 1928-1958 (Hyperion 1994) [hereinafter
HEIDE & GILMAN].
23 Id.
24 Id. The sliced bread idea was not new with Snow
White. Kamen exploited Mickey Mouse in the same
way in 1934, with posters featuring the character
20
exhorting boys and girls to buy bread with the Mickey
Mouse image on the wrapper.
25 See HEIDE & GILMAN, supra note 22.
26 Pursuant to the Nice classification system, goods
and services are classified into one of 45 international
classes. For instance, U.S. Registration No. 2891463
for the Snow White and the Seven Dwarfs design
marks includes, among other things, bubble bath, jewelry, stationery, calendars, party supplies, wrapping
paper, travel bags, backpacks, wallets, luggage, umbrellas, glassware, dishes, kitchen utensils, tea kettles, soap
dishes, towels, table linens, sweaters, shirts, pants,
footwear, hats, baseball caps, masquerade costumes,
plush toys, action figures, board games, dolls, puzzles, golf balls, children’s play cosmetics, coffee, tea, pastry, breakfast cereals, candy, chocolates, cookies, frozen
dairy desserts, ice cream, pasta, and ready-to-serve
meals.
27 Trademark Law Revision Act of 1988, Pub. L. No.
100-667, codified in the Lanham Act, 15 U.S.C. §1(b).
28 Surfvivor Media, Inc. v. Survivor Prods., 406 F. 3d
625 (9th Cir. 2004).
29 Playmakers, LLC v. ESPN, Inc., 376 F. 3d 894 (9th
Cir. 2004).
30 Lee v. Viacom, Inc., 2003 WL 22319071 (N.Y. Sup.
Ct. 2003).
31 See, e.g., U.S. Registration No. 1487719.
32 Cobranding is particularly useful as it allows production studios to reach consumers at all levels of
sophistication, from low-cost merchandise to higher
priced specialty collectible items. For a more in-depth
discussion on cobranding, see Miriam Claire Beezy,
CoBranding: A Popular Form of Strategic Alliance, in
IP VALUE: BUILDING AND ENFORCING INTELLECTUAL
PROPERTY VALUE (2005).
33 Julia Fiona Roberts v. Russell Boyd, Case No.
D2000-0210 (WIPO, 2000).
34 Experience Hendrix, L.L.C. v. Denny Hammerton
& The Jimi Hendrix Fan Club, Case No. D2000-0364
(WIPO, 2000). The complainant in that case, a company formed by Jimi Hendrix’s family, owns the rights
to several Jimi Hendrix marks.
35 Tom Cruise v. Network Operations Center/Alberta
Hot Rods, Case No. D2006-0560 (WIPO, 2006).
36 Time Warner Inc. & EMI Group plc v. CPIC Net,
Case No. D2000-0433 (WIPO, 2000).
37 Lamparello v. Falwell, 420 F. 3d 309 (4th Cir.
2005).
38 Falwell v. Lamparello Int’l, Claim No.
FA0310000198936 (National Arbitration Forum,
2003).
39 The Anti-Cybersquatting Protection Act (ACPA),
15 U.S.C. §1125(d).
40 Lamparello, 420 F. 3d 309.
41 See Paul D. Supnik, Protecting Trademarks under the
Madrid Protocol, LOS ANGELES LAWYER, Apr. 2004, at
26.
42 The issue has also plagued other industries, as noted
by other cases cited by the Fourth Circuit in Falwell that
involved online criticism of homebuilder and landscaping companies by dissatisfied customers. See, e.g.,
TMI, Inc. v. Maxwell, 368 F. 3d 433, 438-39 (5th Cir.
2004) (court found use was noncommercial and
designed only “to inform potential customers about a
negative experience with the company”); Lucas Nursery
& Landscaping, Inc. v. Grosse, 359 F. 3d 806 (6th Cir.
2004) (no bad faith intent to profit found when domain
name was registered and used to share a consumer’s
negative experience with a company).
43 Martha Stewart Living Omnimedia, Inc. v. Josh
Gorton, Case No. D2005-1109 (WIPO, 2005).
44 Id.
45 The term “Web 2.0” frequently refers to next-generation Web sites that have made the transition from
an isolated information storage model to a source of
user-created content and interactive functionality.
W
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 29.
by Mark Mermelstein and Charlotte Decker
Walk theLine
Attorneys will find statutory language of limited
use in determining what constitutes obstruction of justice
Some careers are known to be risky,
but the practice of law typically is not one of
them. Yet lawyers are exposed daily to the
scary risk of criminal consequences for the
practice of law. Terry Christensen, a respected
member of the California bar, hired a private
investigator, Anthony Pellicano, for a client’s
divorce case. Christensen now finds himself
charged in a criminal indictment, which
alleges that the investigator conducted illegal
wiretaps and Christensen used information
gleaned from the wiretaps to secure a litigation advantage.1 Christensen faces two counts
of conspiracy and wiretapping.2 Whatever
the outcome of the case, Christensen—a civil
attorney litigating a civil case—has been
charged with crimes, and the fact that he
may be vindicated at trial will do little to
remedy the damage to his reputation.
Unfortunately, situations like Christensen’s
are not unique. More typically, civil litigators,
whose very role some consider to be obstructionist, are charged with obstruction of justice rather than conspiracy. This is so because
under current law, the line between laudable,
ethically mandated, zealous advocacy and
criminal obstruction of justice is not always
clearly demarcated.
Consider a scenario in which a lawsuit
challenges a drug manufacturer’s advance
knowledge of risks posed by one of the company’s drugs. A subpoena calls for production
of all studies conducted by the company
regarding the drug. The manufacturer’s lawyer
knows the company created an affiliate company expressly to study the effects of the
drug, and that the affiliate, but not the named
party defendant, is in possession of the study.
Should the lawyer obtain a copy of the study
from the affiliate and produce it? Alternatively, should the lawyer direct an associate to send a letter to opposing counsel indicating that the manufacturer possesses no
documents responsive to the subpoena
request?
Or consider the situation in which a
lawyer is defending a corporate client on civil
fraud allegations. The opposing party has
issued a deposition subpoena to an employee
of the corporate client. The corporation’s
Mark Mermelstein is associated with the law firm
of Beck, De Corso, Daly, Kreindler & Harris, where
he specializes in criminal defense and related civil
litigation. Charlotte Decker is a law student at the
University of Southern California and cowrote this
article while a summer law clerk at Beck, De Corso.
Los Angeles Lawyer December 2006 27
lawyer does not realistically think the
employee has any criminal fraud exposure
and therefore concludes that the employee
does not need representation separate from
corporate counsel. Later, however, a question is posed in the employee’s deposition, the
answer to which may be harmful to the company. Should the corporate attorney counsel
the employee to invoke his Fifth Amendment
right to remain silent and not answer the
question, or even advise the employee of the
existence of that right?
Suppose another attorney is hired by the
corporation’s lawyer to represent the
employee and to advise him whether to assert
his Fifth Amendment right in the deposition.
The new lawyer’s fees are paid by the corporate client. The new lawyer recognizes that
if the corporation’s lawyer is pleased with
his performance, further referrals of business will likely follow. The witness’s lawyer
also recognizes that his client’s testimony will
be harmful to the corporation’s legal interest
but his client is unlikely to suffer criminal
prosecution. Should the new lawyer advise his
client to assert his Fifth Amendment right
and decline to answer?
As these scenarios and many others illustrate, even lawyers whose practice is limited
entirely to civil litigation may find themselves
enmeshed in situations calling for a nuanced
understanding of criminal law. The legal
ethics rules in many states are silent or vague
on a number of topics, including the dilemmas posed by these scenarios.3 Compounding
the problem is the fact that all attorneys are
ethically required to zealously represent their
clients.4 As a result, an attorney may, in some
instances, be ethically bound to approach
the line between ethical and unethical conduct. Because most states’ ethical codes are
silent as to the precise location of that line,
or define the line by reference to the criminal
code, the de facto or de jure ethical line is
drawn when the attorney’s conduct becomes
criminal.5 This may mean that ethically representing a client requires attorneys to strive
for the best result for their clients using all
methods just short of committing a crime.6
A conservative approach advocated by
some commentators is to never communicate to a nonclient witness anything that
could be perceived as legal advice.7 That
approach, however, leaves unresolved many
questions for a corporate attorney like the one
in the second scenario, defending a corporate
client and pondering how to counsel a corporate employee witness, unless he or she is
prepared to recommend that the corporate
client hire an attorney for every potential
employee-witness in the lawsuit. In addition,
adopting a conservative approach to challenging ethical questions may result in the
lawyer’s representation falling below the stan28 Los Angeles Lawyer December 2006
dards of zealous advocacy. Indeed, in the
context of criminalizing attorney conduct,
Justice Antonin Scalia has warned of the dangers of chilling legitimate advocacy.8
Nuts and Bolts of Obstruction of
Justice Law
Criminal practitioners refer to “obstruction
of justice” as a collective term for a series of
federal crimes. Conduct by a lawyer may
constitute obstruction of justice in violation
of Title 18 United States Code Sections 1503
or 1512, if the following elements are present:
1) The existence of a “pending proceeding.”
2) The defendant must know or have notice
of the proceeding.
3) The defendant must endeavor to obstruct
justice.
4) The defendant must act corruptly with
the specific intent to obstruct or interfere
with the proceeding.
5) The defendant’s conduct must have the
natural and probable effect of interfering
with the proceeding.9
No specific methods of obstruction are
enumerated in the statutes. This means that
any actions can constitute obstruction if done
with the requisite intent.10 Indeed, the statutes
cover conduct that is otherwise entirely legal.
For example, the First Circuit upheld a conviction of an attorney who advised his client
to invoke his Fifth Amendment right.11 In so
doing, the court soundly rejected the notion
that for attorneys, a corrupt motive may not
be found in the absence of an independently
illegal act.12 As a result, no act, not even traditional litigation tasks, are excluded from the
realm of prosecutable conduct.
When lawyers retained to defend a client
in a civil lawsuit respond to a document subpoena, talk to a prospective witness, or advise
their client, these actions presuppose a pending proceeding and the lawyers’ knowledge of
the proceeding. Because a lawyer’s goal is
typically, at least in part, to impede his or her
adversary’s search for the truth, and because
limiting access to the truth can be seen as
obstructing justice, almost by definition a
lawyer’s conduct may approach obstruction
of justice. The critical question is whether the
conduct was committed with the requisite
intent. Accordingly, there is no lawyerly conduct, no matter how “traditional,” that is, ab
initio, clearly exempt from the purview of
criminal obstruction of justice law.
Given the fine line between zealous advocacy and obstruction of justice, attorneys
facing criminal prosecution have advocated
for a special privilege due to the unique nature
of their ethical duty.13 Courts have resoundingly rejected such arguments, holding that as
long as an attorney acts with the requisite
intent, he or she can be prosecuted for
obstruction of justice.14 Far from recognizing
a privilege, some courts have held attorneys
to an even higher standard than other parties
in obstruction of justice proceedings, explaining that attorneys possess a “heightened
awareness” of the law and have a “sophisticated understanding of the type of conduct
that constitutes criminal violations of the
law…more so than an ordinary individual.”15
Congress recently passed a statute containing a defense uniquely available to attorneys. Under the statute, attorneys do not
commit a crime when they “provid[e] lawful,
bona fide, legal representation services in
connection with or anticipation of an official
proceeding.”16 However, this defense suffers
from the same basic problem as the criminalizing statutes—it does not define or enumerate any specific legal representation services. This defense requires the legal services
to be “lawful,” that is, done without corrupt intent. Accordingly, if a legal service is
done with corrupt intent, it cannot be a “lawful legal representation service.” As a result,
this defense merely returns the focus of the
inquiry to whether the act was done with
the requisite intent.
To understand obstruction of justice as
applied to the legal profession, it is crucial to
understand that the whole issue comes down
to the intent element: If the lawyer was acting “corruptly” while practicing law, he or she
is guilty; if the lawyer was acting in good faith,
he or she is not. Looking to how courts have
defined “corruptly,” neither the Ninth
Circuit’s definition—“the specific intent to
obstruct justice”17—nor the Fifth Circuit’s
definition—“acting with an improper
motive”18—sheds much light on what conduct falls within and without the confines of
the law. For lawyers, the scariest holding was
the one in which the Seventh Circuit stated
that the fact that an attorney’s actions were
“motivated by his attempt to protect his
client from prosecution” was of no significance because those same actions demonstrate that the defendant-lawyer “clearly
intended and corruptly endeavored to obstruct
justice.”19 Clearly, the definition of the intent
element leaves something to be desired.
A review of some fact-specific cases sheds
a little more light on the definition. In United
States v. Cintolo, during a grand jury investigation an attorney advised his client to
invoke his Fifth Amendment right and suffer
contempt charges even though he had immunity.20 The First Circuit found that the attorney’s advice was motivated not by a desire to
protect his client but for the purpose of shielding other individuals—those who would be
inculpated by the client’s testimony.21 As a
result, the First Circuit affirmed the finding
that the attorney-defendant had acted corruptly and was therefore guilty of obstructing justice.22
MCLE Test No. 154
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.
1. The crime of obstruction of justice is limited to specific behaviors, such as threatening a witness or discarding documents.
True.
False.
2. Attorneys are no longer at risk for being charged with
obstruction of justice because Congress passed 18
USC Section 1505(c).
True.
False.
3. Courts have recognized a special privilege for attorneys in obstruction of justice law.
True.
False.
4. In some circumstances an attorney can counsel a
client not to testify even if it would result in the suppression of evidence.
True.
False.
5. The court in United States v. Rasheed defines “corruptly” in relation to obstruction of justice as “acting
with an improper motive.”
True.
False.
6. Attorneys in California have a duty derived from
case law to zealously advocate for their clients.
True.
False.
7. In United States v. Cueto, the Seventh Circuit upheld
attorney Cueto’s conviction because he:
A. Counseled his client to invoke his Fifth
Amendment right.
B. Entered into a business transaction with his
client.
C. Gave legal advice to a nonclient.
D. A and B.
8. A prosecution for obstruction of justice is based
exclusively on an attorney’s conduct in a criminal proceeding.
True.
False.
9. A literal truth defense to obstruction of justice
charges is uniquely available to attorneys.
True.
False.
10. In obstruction of justice law, a corrupt motive may
not be found in the absence of an independently illegal act.
True.
False.
MCLE Answer Sheet #154
WALK THE LINE
Name
Law Firm/Organization
11. A lawyer engaged in a state litigation can be held
liable for federal obstruction of justice.
True.
False.
Address
12. It is possible for a lawyer to be charged with obstruction of justice for conduct that is otherwise entirely
legal if the lawyer has the requisite intent.
True.
False.
Phone
13. Who bears the burden of proof at trial regarding
mens rea in an obstruction of justice case?
A. The defendant.
B. The government.
14. For a lawyer to be found guilty of obstruction of justice, the lawyer must know about or have notice of a federal proceeding.
True.
False.
15. Attorneys who advise their own clients to invoke
their Fifth Amendment rights are safe from prosecution
for obstruction of justice.
True.
False.
16. Attorneys whose sole motive is to protect their
clients from prosecution are always shielded from
obstruction of justice charges.
True.
False.
17. Obstruction of justice charges for a civil attorney
require a parallel criminal investigation.
True.
False.
18. California law defines obstruction of justice as
“misleading conduct with the intent to obstruct or hinder…justice.”
True.
False.
19. In the Third Circuit, 18 USC Section 1515(c) is:
A. An element of the crime alleged in the
indictment.
B. An affirmative defense.
20. Encouraging witnesses to invoke their Fifth
Amendment right in return for a benefit is legal under
federal obstruction of justice statutes.
True.
False.
City
State/Zip
E-mail
State Bar #
INSTRUCTIONS FOR OBTAINING MCLE CREDITS
1. Study the MCLE article in this issue.
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.
■A
8.
■ True
■ False
9.
■ True
■ False
10.
■ True
■ False
11.
■ True
■ False
12.
■ True
13.
■A
14.
■ True
■ False
15.
■ True
■ False
16.
■ True
■ False
17.
■ True
■ False
18.
■ True
■ False
19.
■A
20.
■ True
■B
■C
■D
■ False
■B
■B
■ False
Los Angeles Lawyer December 2006 29
In United States v. Cioffi, an attorney
advised a nonclient witness to invoke his
Fifth Amendment right in an SEC investigation and suggested that some benefit—the
forgiveness of a loan that a third party had
made to the witness or avoidance of harm to
the witness’s wife—might flow to the witness if he did so.23 Even though the evidence
could be interpreted as the attorney inquiring
of the status of the cancer-stricken wife of the
witness rather than threatening the wife’s
demise, the Second Circuit not only affirmed
the attorney-defendant’s conviction for
obstruction of justice but also rejected the
notion that advising a nonclient witness to
invoke his Fifth Amendment right is protected conduct.24
In contrast, the Fifth Circuit perceived no
impropriety in an attorney’s contacting counsel for a codefendant to impress upon him the
danger of his client’s testifying and to remind
the attorney of his client’s Fifth Amendment
right to remain silent.25 Also, the Supreme
Court has firmly established that in appropriate circumstances it is permissible for attorneys to offer such advice to their client, even
if the advice to invoke the Fifth Amendment
right would inevitably lead to less information being supplied and, consequently, justice
being obstructed.26
In United States v. Cueto, the Seventh
Circuit affirmed the obstruction of justice
conviction of an attorney who, during a pending covert federal investigation, obtained a
state court injunction barring an undercover
federal investigator from interfering with his
client’s business operation and requested that
the state attorney’s office criminally prosecute
the agent.27 Although this conduct is ostensibly legal (independent of obstruction of
justice) and motivated, at least in part, by a
desire to protect his client, the Seventh Circuit
upheld the attorney’s conviction because the
attorney, in addition to his role as advocate
for his client, had also entered into a business
relationship with his client and personally
benefitted from his client’s continued business
operations.28 In other words, the court was
satisfied that Cueto’s actions were “corrupt”
because he personally benefitted from them
as opposed to his client being the sole beneficiary.
The common theme derived from these
cases is that courts appear to find corruption
when there is a departure from the traditional role of a lawyer advising a client for the
benefit of only that client. Cintolo was protecting a third party, Cioffi was giving legal
advice to a nonclient, and Cueto was protecting himself. Courts first seem to distinguish
between an attorney acting in the best interests of a client and an attorney acting in
someone else’s interests and then reason that
if an attorney is acting in someone else’s
30 Los Angeles Lawyer December 2006
interests, he or she must not be acting in the
best interests of the attorney’s client and is
therefore acting corruptly.
There are other significant factors in determining whether a situation poses a risk of an
obstruction of justice charge for a lawyer.
First, a lawyer is not shielded from obstruction of justice liability merely because the
proceeding in which a corrupt act takes place
is civil or because the government is not a
party to the proceeding.29 A lawyer who
destroys documents responsive to a subpoena
issued in a civil lawsuit is clearly in violation
of obstruction statutes. Moreover, while much
ink has been spilled regarding the type and
duration of the pending proceeding that is
required as an element of a federal prosecution for attorney obstruction of justice,30 it is
clear that a postcomplaint prejudgment civil
lawsuit constitutes a pending proceeding.31
Second, although the violation of federal
criminal obstruction of justice law requires an
endeavor to obstruct a federal proceeding, a
lawyer engaged in a state litigation can still
be liable for federal obstruction of justice if
his or her conduct has the collateral effect of
undermining, for example, a federal investigation.32 By contrast, obstructing a California
state litigation that has no bearing on any federal investigation33 would be prosecutable, if
at all, under California state law. California
state obstruction of justice law is much narrower than federal law. California law makes
criminal only certain discrete acts such as
subornation of perjury,34 solicitation of perjury,35 and obstructing a police officer during
the performance of his or her official duties.36
In California there is no crime defined as
general obstruction of justice; however, conspiracy to obstruct justice is a crime under
California law.37
Third, it is not necessary for a lawyer’s act
to actually obstruct justice. Even if, for example, the lawyer who destroys a subpoenaed
document delivers another copy of the document to the propounder of the document
subpoena, a prosecution for obstruction of
justice could still lie. That is because the
crime punishes mere “endeavors” to obstruct
justice. 38 An “endeavor” encompasses a
broader range of action and includes any
effort that has the natural and probable effect
of interfering with justice.39
Fourth, a lawyer who engages in “misleading conduct” may be found to obstruct
justice.40 Federal law provides that misleading conduct toward a possible witness to
“influence, delay or prevent” testimony or to
withhold, alter, or destroy a “record, document or other object” is a felony. Misleading
conduct includes 1) omitting information so
that a part of a statement is misleading, 2) creating a false impression, or 3) creating a false
document.41
Lastly, it is important to bear in mind
that the government can secure an indictment of a lawyer without alleging that the
lawyer was not providing legal services.42
Even if the lawyer was in fact providing lawful legal services, that fact alone cannot
achieve dismissal of an indictment.
Accordingly, even an attorney who is vindicated at trial has nonetheless suffered the
stigma of public indictment.
Applying the Law
In the scenario in which an attorney is faced
with a decision whether, in response to a
document subpoena, to produce a document
in possession of a corporate affiliate, the ethical code does not address the issue other
than in the general duty of an attorney to be
a zealous advocate. The constraint on this
duty, found in criminal law, dictates that it is
a crime to conceal or destroy documents
responsive to a document subpoena.43 So
how do these rules operate in conjunction
with one another?
The threshold question asks whether the
document is responsive to the subpoena. If,
on the one hand, the document is not responsive to the subpoena (that is, because there is
no such study in possession of the company),
then there is no affirmative obligation to produce the study. A narrow reading of the subpoena may reach this result. If the attorney
concludes that despite the fact that the study
is not technically responsive to the subpoena,
it is relevant to the proceedings and produces
it, this attorney may have violated his ethical
duty to zealously represent his client and
may have exposed himself to malpractice
charges. In the absence of an affirmative
obligation to produce the document, the
attorney is barred from harming the client.
Thus, if the document is not responsive to the
subpoena, it probably cannot be produced
even if the attorney believes that some sense
of justice requires it.
If, on the other hand, the document is
responsive to the subpoena, must the attorney produce it? To be sure, it is a crime for
the attorney to conceal or destroy the document. However, the Ninth Circuit was clear
that mere failure to produce documents, without more in the way of actions or conduct,
does not constitute an intent to obstruct the
proceeding in which the documents were
subpoenaed. 44 Indeed, the U.S. Supreme
Court reversed a contempt conviction of an
attorney who had counseled his clients not to
respond to a subpoena duces tecum because
the attorney acted in good faith.45 So one
could imagine some response to the subpoena that does not involve the production
of the document but also does not constitute
active concealment or destruction.
Assuming the lawyer is not going to pro-
duce the document requested by the subpoena, the lawyer would presumably have an
associate communicate that fact to opposing
counsel. This would typically be accomplished
via a letter stating there is no document
responsive to the subpoena. The danger in this
action is that if a lawyer directs an associate
to write a letter omitting material information—that there is a document on point but
not in possession of the subpoenaed corporate entity—the lawyer has arguably engaged
in misleading conduct toward another person
with intent to cause or induce a person to
Once one
ing in the best interest of someone other than
the nominal client), it may be enough to tip
the scale in favor of prosecution. Although the
rule of lenity—in an ambiguous statute an
action that is not clearly prohibited is legal47—
offers some solace, it is of little comfort to
practicing attorneys who must risk indictment to fulfill their ethical duties to their
clients.
The second scenario tackles the issue of a
lawyer for a corporate party dealing with
the corporate client’s employee, who is a witness. In preparation for the witness’s upcom-
still have committed obstruction of justice?
That is, if Cioffi had merely met with the witness and encouraged him to invoke his Fifth
Amendment right, would that have been
enough to sustain a conviction? There does not
appear to be a case on point, but the Third
Circuit has recognized that the language of 18
USC Section 1512 is broad enough to encompass criminal responsibility for a lawyer advising a nonclient witness to invoke his or her
Fifth Amendment right.49 Given this case
law, the prudent lawyer would be wise to
avoid advising nonclient witnesses to invoke
recognizes that the lawyer may have committed the
actus reus of a crime, the question becomes has the lawyer done so
with the requisite mens rea? If the lawyer is acting corruptly, he or she
will be found to have obstructed justice; if the lawyer is acting in good
faith, he or she will not. To complicate matters, most, if not all, of the
evidence of good faith will lie in the attorney’s own mind.
withhold a document from an official proceeding in violation of 18 USC Section
1512(b). It is important to remember that any
conduct can be construed as obstruction of
justice, so the fact that the lawyer’s statement is literally true (there is in fact no company study responsive to the subpoena) is
not a defense. Unlike the crime of perjury in
which literal truth is an affirmative defense,46
there is no literal truth defense to obstruction
of justice.
Once one recognizes that the lawyer may
have committed the actus reus of a crime, the
question becomes has the lawyer done so
with the requisite mens rea? If the lawyer is
acting corruptly, he or she will be found to
have obstructed justice; if the lawyer is acting in good faith, he or she will not. To complicate matters, most, if not all, of the evidence
of good faith will lie in the attorney’s own
mind. The Section 1515(c) good faith defense
offers little protection because it essentially
inquires into the nature of the attorney’s
thoughts. While there do not seem to be any
prosecuted cases of attorneys under this theory, the defense is seemingly weak. If some
other evidence were to surface (for example,
if the lawyer had a personal stake in the outcome of the litigation or the lawyer was act-
ing deposition, perhaps the corporate lawyer
has reviewed his correspondence and has
debriefed the witness. The lawyer may not
think the witness has any personal exposure
but is aware of conduct by the employee that
may be harmful to the lawyer’s corporate
client.
Practitioners facing this situation must
be aware of criminal obstruction of justice
law, which provides that intimidation or misleading conduct toward a possible witness to
“influence, delay or prevent” testimony is a
crime. Given these parameters, lawyers could
very well face obstruction of justice liability
if they mislead a witness into thinking that it
is in the witness’s best interest to invoke his
or her Fifth Amendment right when, in fact,
the lawyers are counseling the witness to
invoke the Fifth Amendment in order to protect their client.
Knowledge of the Cioffi case is crucial.
Attorney Cioffi was convicted of obstruction of justice for meeting with a witness,
encouraging him to invoke his Fifth
Amendment right, and offering the witness a
benefit—forgiveness of a $25,000 loan—and
avoidance of some detriment—harm to his
wife—if the witness invoked his right.48 If
Cioffi had not offered the benefit, would he
their Fifth Amendment right.
Attorneys who “merely inform” witnesses
of the existence of their Fifth Amendment
right as opposed to advising its invocation
could also face exposure, particularly if the
“mere information” would be interpreted by
a reasonable person as advice to assert the
Fifth Amendment right. Attorneys should bear
in mind that courts have deemed that “whatever the contours of the line between traditional
lawyering and corrupt intent may be, they
must inevitably be drawn case-by-case.”50 As
a result, with no case law on this point, attorneys in this situation must risk indictment in
order for a court to determine whether their
behavior was zealous or criminal.
Ultimately, the best solution for lawyers in
this situation is to ensure that another attorney is involved in the case exclusively to represent the interests of the witness. Case law
protects an attorney who conveys an encouragement to invoke a Fifth Amendment right
through the filter of an attorney representing
the witness.51 Apparently, if the witness in the
second scenario has his own counsel, the corporate client’s lawyer may be able to persuade the witness to invoke his right while
knowing the witness will get the benefit of
independent legal advice.
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This scenario posits that the corporate
client’s lawyer enlists the aid of another lawyer
to represent the witness, the newly retained
lawyer recognizes that his legal fees are being
paid by the corporate client, and the corporate client’s lawyer is a good source of future
referrals. The corporation and its lawyer will
be pleased if the employee asserts his Fifth
Amendment right. Can the newly retained
lawyer thus counsel the witness to invoke
the Fifth Amendment on these bases? The
answer is, of course, no. The lawyer must put
the personal benefits of the invocation out of
mind and focus solely on the best interests of
the client. The newly retained lawyer may
advise the client to invoke the right or not, but
the advice must be based solely on what will
most benefit the lawyer’s client.
If a witness’s lawyer allows external motivations to influence his or her counsel, the
lawyer is no longer acting with good faith,
since the advice is based on factors other
than the best interests of the client. On the
other hand, if the lawyer does not allow
external motivations to influence his or her
thinking and considers only the best interests
of the client, although the lawyer is not guilty
of obstruction of justice, the lawyer still may
not be in the clear. Most crimes, and obstruction of justice is no exception, are prosecuted
based on the actus reus of the crime, not the
mens rea, because it is impossible for a prosecutor to know with certainty what goes on
in another’s head. The scenario in which the
lawyer considers motivations extraneous to
the best interests of the client may, from the
prosecutor’s vantage point, look exactly the
same as the scenario in which the lawyer
does not consider such motivations. Both
scenarios posit a lawyer with a personal financial interest advising his or her client to invoke
the Fifth Amendment right and the client
does so, resulting in evidence being suppressed. As a result, the virtuous lawyer may
still be charged even though he or she has not
committed a crime.
Nevertheless, there are some steps lawyers
can take to create exculpatory evidence
regarding virtuous intent and thereby reduce
the likelihood of being charged. One option
is to draft a memo to file detailing a lawyer’s
thinking at the time of counseling the client
to invoke his or her Fifth Amendment right.
Another option is to consult a legal ethicist.
If an ethicist sanctions a lawyer’s conduct,
then the lawyer may have both a defense and
a witness to testify on his or her behalf.
Unfortunately for the practicing attorney,
obstruction cases against attorneys turn on
very fine lines—and some of them involve an
inquiry into the lawyer’s thinking.
Exculpatory evidence will help a lawyer avoid
conviction but will not necessarily avoid
indictment or the accompanying embarrass-
ment or harm to the lawyer’s reputation.
There are situations in which the line
between zealous advocacy and obstruction of
justice is hazardously vague and relies on
invisible evidence of the inner thoughts of a
practicing attorney. Because the distinction in
obstruction of justice law between criminal
and legal is so fine, and the repercussions so
severe, civil litigators must acknowledge that
if they are not aware of the law of criminal
obstruction of justice, they may be doomed
to violate it—or come perilously close.
■
1
United States v. Pellicano, Case No. 05-1046(C)
RMT (pending U.S. Dist. Ct., Central Dist. of Cal.),
Indictment, at 54.
2 Id. at 54, 61.
3 To the extent that state ethical rules do address these
issues, it is through incorporation by reference of a
state’s criminal laws. For example, the ABA Model
Rules of Professional Conduct forbid lawyers from
“unlawfully obstruct[ing] another party’s access to
evidence.” MODEL RULES OF PROF’L CONDUCT R. 3.4(a).
4 See, e.g., MODEL RULES OF PROF CONDUCT R. 1.3
cmt (“A lawyer should act with commitment and dedication to the interests of the client and with zeal in
advocacy upon the client’s behalf.”). In California,
case law recognizes the same duty. See, e.g, People v.
McKensie, 34 Cal. 3d 616, 631 (1983). In the criminal context, zealous representation may be constitutionally mandated by the Sixth Amendment.
5 Bruce A. Green, Zealous Representation Bound: The
Intersection of the Ethical Codes and the Criminal
Law, 69 N.C. L. REV. 687 (Mar. 1991). It is outside
the bounds of a lawyer’s ethical duties to engage in or
counsel criminal conduct. See MODEL RULES OF PROF’L
CONDUCT R. 1.2(d).
6 See United States v. Moran, 2000 WL 33981888, at
*5 (Jury Instructions as cited in Reply Brief for the
United States).
7 See, e.g., Mary Spearing, Obstruction of Justice and
Attorneys Who Work on Civil Fraud Cases, 456
PLI/LIT. 521, 532 (PLI Mar. 1993).
8 Hubbard v. United States, 514 U.S. 695 (1995)
(Scalia, J. concurring). See also United States v. Cueto,
151 F. 3d 620, 631 (7th Cir. 1998).
9 United States v. Aguilar, 515 U.S. 593 (1995).
10 Cueto, 151 F. 3d at 631 (“[I]t is not the means
employed by the defendant that are specifically prohibited by [18 U.S.C. §1503] but is, instead, the defendant’s corrupt endeavor which motivated the action.”).
11 United States v. Cintolo, 818 F. 2d 980 (1st Cir.
1987). See text, infra.
12 Id.
13 See Cintolo, 818 F. 2d at 992.
14 See, e.g., Cueto, 151 F. 3d at 631-32; Cintolo, 818
F. 2d at 996 (The court emphatically rejected “the
notion that a law degree, like some sorcerer’s amulet,
can ward off the rigors of the criminal law.”).
15 Cueto, 151 F. 3d at 631-32.
16 18 U.S.C. §1515(c).
17 United States v. Rasheed, 663 F. 2d 843, 852 (9th
Cir. 1981).
18 United States v. Haas, 583 F. 2d 216, 220 (5th Cir.
1978).
19 Cueto, 151 F. 3d at 633. On the other hand, according to the Eleventh Circuit, if there is a “fair doubt”
that the lawyer-defendant did not act, at least in part,
with a “corrupt motive,” the doubt must be resolved
in the defendant’s favor. United States v. Brand, 775
F. 2d 1460, 1465 (11th Cir. 1985). According to the
Supreme Court, the “corruptly” component of the
crime must in some way limit the class of defendants.
Arthur Anderson v. United States, 544 U.S. 696, 706
(2005) (The inclusion of “impede” and exclusion of
“dishonestly” from the definition of “corruptly” rendered the 5th Circuit’s jury instructions “flawed.”).
20 United States v. Cintolo, 818 F. 2d 980 (1st Cir.
1987).
21 Id. at 994.
22 Id.
23 United States v. Cioffi, 493 F. 2d 1111 (2d Cir.
1974).
24 Id.
25 McNeal v. Hollowell, 481 F. 2d 1145 (5th Cir.
1973).
26 Maness v. Meyers, 419 U.S. 449 (1975).
27 United States v. Cueto, 151 F. 3d 620 (7th Cir.
1998).
28 Id. at 633.
29 See, e.g., United States v. Barfield, 999 F. 2d 1520,
1525 (11th Cir. 1993); Sneed v. United States, 298 F.
911, 912 (5th Cir. 1924).
30 But see United States v. Veal, 153 F. 3d 1233, 1250
(11th Cir. 1998) (“By its wording, §1512(b)(3) does not
depend on the existence or immanency of a federal case
or investigation but rather on the possible existence of
a federal crime and a defendant’s intention to thwart
an inquiry into that crime.”).
31 See, e.g., United States v. Lundwall, 1 F. Supp. 2d 249
(S.D. N.Y. 1988); Bruce E. Yannett & David A.
Weinstein, Civil Discovery Missteps Invite Criminal
Sanctions; Once Almost Unheard Of, Prosecution for
Perjury or Obstruction of Justice Arising from Civil
Discovery Is Now More Common, NAT’L L. J., Feb. 22,
1999, at 26 (collecting cases).
32 See, e.g., Cueto, 151 F. 3d at 631.
33 PENAL CODE §127.
34 PENAL CODE §653f(a).
35 PENAL CODE §69.
36 Business and Professions Code §1628 makes any
attorney guilty of a misdemeanor who “is guilty of any
deceit or collusion, or consents to any deceit or collusion, with intent to deceive the court or any party.”
37 PENAL CODE §182(5) (“If two or more persons conspire to commit any act injurious to the public health,
to public morals or to pervert or obstruct justice, or the
due administration of the laws, they are punishable as
follows….”).
38 See, e.g., United States v. Brady, 168 F. 3d 574,
580 (1st Cir. 1999). See also Arianna Berg & Jeffrey
Levinson, Obstruction of Justice, 37 AM. CRIM. L.
REV. 757, 765 & n.53 (Spring 2000).
39 United States v. Aguilar, 515 U.S. 593, 599 (1995).
40 118 U.S.C. §1512(b)(1)-(3) prohibits the use of misleading conduct with the intent to affect another person or object in relation to their participation in a
legal proceeding.
41 Id.
42 United States v. Kloess, 251 F. 3d 941, 949 (11th Cir.
2001).
43 18 U.S.C. §§1505, 1510(a), 1512(b)(2)(A)-(B).
44 United States v. Rasheed, 663 F. 2d 843, 852 (9th
Cir. 1981).
45 Maness v. Meyers, 419 U.S. 449 (1975).
46 Bronston v. United States, 409 U.S. 352 (1973).
47 See United States v. Bass, 404 U.S. 336, 348 (1971).
48 United States v. Cioffi, 493 F. 2d 1111 (2d Cir.
1974).
49 United States v. Davis, 183 F. 3d 231, 248 (3d Cir.
1999); Cole v. United States, 329 F. 2d 437 (9th Cir.
1964).
50 United States v. Cintolo, 818 F. 2d 980, 995 (1st Cir.
1987).
51 It is not a federal crime for a defense lawyer to persuade a witness to assert his or her Fifth Amendment
right as long as the witness is represented by his or her
own attorney. McNeal v. Hollowell, 481 F. 2d 1145
(5th Cir. 1973).
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by Rochelle B. Spandorf
FranchisePlayer
Trademark licensees need to carefully
consider the three-prong test for
franchise agreements
Rochelle B. Spandorf is a partner in the Los Angeles office of Sonnenschein Nath & Rosenthal LLP, specializing in
franchise and distribution law.
34 Los Angeles Lawyer December 2006
KEN CORRAL
In
Gentis v. Safeguard Business Systems,1 the defendant retained commissioned sales agents
to solicit orders, follow leads, and provide customer service. The agents did more than
just take orders, but lacked authority to enter into binding sales contracts with customers,
never took title to or paid for goods, seldom made deliveries, and did not handle billing
or collection. When the relationship between the agents and Safeguard soured, the agents
sued Safeguard for violations under California’s Franchise Investment Act. In one of the few reported appellate decisions interpreting the statute, the court of appeal found that the relationship between the sales agents
and Safeguard did constitute a franchise.
In Gabana Gulf Distribution Ltd. v. Gap International Sales, Inc.,2 the defendant authorized a United
Kingdom company to distribute its Gap brand merchandise in markets outside the United States, reserving control over the distributor’s customers. The manufacturer terminated the distribution agreement without cause as permitted by the parties’ contract in order to pursue a different international distribution strategy. The distributor sued for wrongful termination in violation of California’s Franchise Relations Act even
though the parties’ contract disclaimed a franchise relationship. When Gap moved to dismiss the claim,
the court denied the motion.
Both cases involve typical distribution arrangements for the offer, sale, or delivery of branded goods
or services identified by the seller’s trademark. In neither case did the agent pay cash upfront or any type
of monthly payment based on gross receipts for the distribution
rights. Nor did the parties intend to form a franchise relationship.
Neither seller expected to end up defending franchise allegations.
Yet, these situations arise with considerable frequency. Manufacturers, suppliers, and other trademark owners overlook a possible franchise connection when they enter into continuing commercial
relationships with independent third parties to sell their branded
products or services. Embedded in these distribution arrangements
is a de facto trademark license. While not every trademark license creates a franchise, every franchise contains a trademark license.
Knowledge of California’s franchise laws may not be enough.3
Given the interstate, national, and even international scope of so many
franchise networks today, California lawyers need to know about
potentially applicable federal, state, and foreign franchise laws.4
Sorting franchises from nonfranchise licenses can be a highly
uncertain process. The quality controls that trademark owners must
retain over a licensee’s trademark use closely resemble the marketing
controls that are characteristic of a franchise. Yet, from a regulatory
viewpoint, nonfranchise and franchise licenses are as different as
day and night.
Nonfranchise licenses are unregulated private consensual arrangements. Franchises, by contrast, are highly regulated. Franchise sellers must obey elaborate federal and state presale disclosure and registration laws; nonfranchise licensors do not. Many states restrict the
conditions under which a franchise may be terminated or not renewed.
Some states dictate substantive terms for the franchise relationship.
A franchisee cannot waive the statutory protections of franchise
laws even if it wants to. A terminable-at-will contract clause cannot
be enforced in a jurisdiction that requires good cause to terminate a
franchise agreement—even if the franchisee’s attorney actively negotiated the contract.
Franchise law violations carry significant penalties even if the
inadvertent franchisor never knew about the law or had no intent to
violate it. Not only is it a felony to sell a franchise without complying with franchise sales law,5 but federal and state franchise agencies
have broad powers to punish franchise law violators and may freeze
assets, order restitution, issue cease and desist orders, ban violators
from selling franchises, and recover substantial penalties. Franchisees
have private remedies for state franchise law violations.6 Besides
compensatory damages and, in some states, attorney’s fees, an injured
franchisee may 1) rescind a franchise agreement for disclosure and
registration violations, including fraud in connection with a franchise
sale, 2) obtain an injunction to enjoin a wrongful termination or nonrenewal of a franchise, and/or 3) recover damages or restitution.
Furthermore, state franchise laws impose personal, joint and several liability on the franchisor’s management and owners even when
the franchisor is a legal entity.7 Finally, lawyers who overlook franchise laws may be guilty of malpractice and potentially liable to victims of their client’s wrongdoing.8
What Is a Franchise?
Most people think they know a franchise when they see one. In
truth, franchising is a method of distribution, not a particular industry. There is no uniform definition of a franchise. As consumer protection statutes, courts give franchise laws a sweeping scope.
Consequently, a broad variety of unsuspecting commercial arrangements may qualify as franchises.
At the most basic level, a franchise is defined by the coexistence
of three elements:
1) A grant of rights to use another’s trademark to offer, sell, or distribute goods or services (the “grant” or “trademark” element).
2) Significant assistance to, or control over, the grantee’s business,
which may take the form of a prescribed marketing plan or what is
more broadly described as a “community of interest” (the “market36 Los Angeles Lawyer December 2006
ing plan variation” element).
3) Payment of a required fee (the “franchise fee” element).
A franchise finding hinges entirely on whether a commercial
arrangement fits the applicable statutory definition. If any one statutory element is missing from the arrangement, the relationship is not
a franchise. The legal analysis considers the parties’ actual practices,
oral as well as written promises, and course-of-dealing evidence.9 A
party cannot avoid a franchise relationship simply by disclaiming its
existence.10 It is immaterial what the parties call themselves.
While federal and state jurisdictions that regulate franchises share
common definitional approaches, each jurisdiction has its own definitional subtleties and mix of exclusions and exemptions. What
qualifies as a franchise under the federal franchise sales law may not
qualify under state law definitions, or vice versa. What is a franchise
in one state may not be a franchise in all the regulating states in which
the franchisor operates.
Business owners and their advisers are not the only ones confused.
Irreconcilable legal precedents reflect misperceptions among regulators and the judiciary about the legal concept of a franchise. As a result,
legislators, regulators, judges, and practitioners alike all suffer from
uncertainty about the exact kinds of commercial arrangements
intended to be regulated as franchises.11
In advising companies that manufacture and distribute products
or services or that license business methods, technology, or trademarks
to independent operators, practitioners should, as a preliminary,
consider the possibility of unwittingly creating a franchise. In so
doing, they should consult the franchise statutes, judicial opinions,
and administrative guides of each jurisdiction in which the parties
reside or intend to do business before their client offers an opportunity involving an express or implied trademark license or takes steps
to modify or end the relationship.
On the federal level, franchises are governed by the Federal Trade
Commission rule, which describes three general types of franchises:
package, product, and business opportunity franchises.12 The first two
are best known and involve the presence of the three basic elements.
The package franchisee adopts the franchisor’s business format and
identifies its independent operation by the franchisor’s trademarks,
in exchange for which the franchisee pays the franchisor a fee. The
franchisee’s operating methods are subject to significant control by
the franchisor or, alternatively, the franchisor renders significant
assistance to the franchisee in day-to-day operations. Fast food, convenience stores, and real estate services are examples of package
franchises. The product franchisee distributes goods identified by the
franchisor’s brand manufactured by, or for, the franchisor. The franchisee pays a fee for the distribution rights above the wholesale price
of the goods. As with package franchises, the franchisor exercises significant control over, or provides significant assistance to, the franchisee. Automobile and gasoline dealerships and delivery route distributors are examples of product franchises.
The third type, business opportunity ventures, encompasses readily distinguishable lower-cost investments such as vending machine
routes and work-at-home programs.13
State law franchise definitions largely resemble the FTC rule’s package and product franchise definitions in that most also require the combination of the three basic elements.14 The trademark and fee elements
are fundamentally the same as the FTC rule. However, states laws differ by requiring either 1) substantial assistance or control (the federal standard), 2) a marketing plan prescribed in substantial part by
the franchisor, or 3) a community of interest. A few state laws define
a franchise by a two-prong test that either omits the marketing plan
or the payment of a required fee.15
The Trademark Element
The grant of rights to associate with another’s trademarks in offer-
ing, selling, or distributing goods or services is not only a common
element of every franchise definition but also the easiest definitional
element to meet. Absent an express prohibition against use of the licensor’s trademark, a right to use the mark will be inferred even if the
mark is, in fact, never used.16 For this reason, every franchise involves
an express or implied trademark license of some sort.
Franchise definitions vary from requiring a “license to use” the
licensor’s mark to requiring a “substantial association” between the
grantee’s business and the licensor’s trademark. Under the “license to
use” approach, an express contract authorizing trademark use will
support a franchise relationship even if the mark is not part of the
licensee’s trade name—for example,
Smith’s Appliances, an authorized
Brand X Service Center. Permission to
display a manufacturer’s logo in dealing with customers satisfies this element. Even without explicit contract
authority, longstanding use of a licensor’s trademark in dealing with customers may be enough to establish a
trademark license.
Courts have found a requisite de
facto trademark license in the following situations:
• A distributor sold uniquely configured branded goods which consumers
readily associated with a particular
manufacturer in an exclusive territory.17
• A dealer was entitled to identify
itself as an authorized dealer of the
manufacturer’s products in Yellow
Pages advertising.18
• A distribution agreement imposed
a duty to use best efforts to promote
the sale of branded products.19
• A distributor was required to wear uniforms and add the licensor’s
logo or name on delivery vehicles or store windows.20
States following the “substantial association” approach, such as
California, have also found the requisite trademark element satisfied
when branded products or services account for a significant percentage of the independent operator’s overall sales.21 In fact, California
courts have shown a willingness to stretch the definitional elements
to achieve desired results. In one California appellate decision, a
substantial association with the licensor’s mark was found even
though the licensee was forbidden to use the licensor’s brand name
and, in fact, never used it.22 The court was swayed by evidence
showing that a building owner had relied on the brand name in
renting space to the licensee to operate a cafeteria in the building, which
satisfied the substantial association test.
The Licensor’s Dilemma.The fact that an agreement lacks an
express trademark license does not prove the trademark element is
missing. As noted, a de facto license is part of the rights granted to
an independent third party who is authorized to sell branded products or services accounting for more than an insignificant percentage
of the third party’s overall sales. Since the trademark element’s presence may depend on the extent of the licensee’s branded sales, contract drafting cannot save a license from being a franchise. A contract
that expressly denies a trademark license may leave the licensor,
manufacturer, or supplier with the worst of both worlds: an agreement that is subject to various franchise laws, but does not contain
the protections that a well-drafted trademark license should contain.
Therefore, whether an arrangement lacking an express trademark
license is, indeed, a franchise will most likely turn on the presence or
absence of one of the other two definitional elements.
The Marketing Plan Variation Element
A handful of states follow the FTC rule’s approach and require the
licensor to furnish significant assistance or impose significant controls
over the licensee’s entire method of operation. Significant assistance
exists when the licensor provides formal sales, repair, or business training programs; site location assistance; management, marketing, or personnel advice; promotional support requiring the licensee’s participation or financial contribution; or operating advice such as by
furnishing a detailed operating manual. Significant controls exist if
the licensor approves or restricts the business location or sales territory, specifies design or appearance requirements, prescribes operating hours, establishes production methods or standards, restricts the
customers a licensee may serve, mandates personnel policies or practices, or dictates mandatory accounting practices. Under certain circumstances, any one of these factors may be enough to constitute significant control or assistance. Significant promises of assistance, even
if unfulfilled, will satisfy this element. However, merely providing pointof-sale advertising and media support may not be enough.23
The franchisee’s reliance on the franchisor’s experience influences
whether the licensor’s control or assistance is significant. The franchisee’s general business experience, knowledge of the industry, relative financial risk in light of its total business holdings, and the extent
to which the controls or assistance go beyond normal industry practices each bear on the reliance factor.
California and a number of other states define a franchise as a trademark license in conjunction with a marketing plan. The marketing
plan element is composed of four distinct components, all of which
must coexist: 1) a marketing plan, 2) prescribed, 3) in substantial part,
4) by the licensor. Each component has been separately analyzed by
judicial and administrative authority.24
Determining whether a marketing plan exists is inherently subjective
and, consequently, difficult to dodge in a written agreement. While
judged by the presence of various facts, no interpretative and judicial opinion suggests a minimum number or combination of facts that
inherently guarantee a marketing plan’s presence. The parties’ contract, course of dealing, and industry customs are all relevant. The
term “prescribed” has been interpreted to mean something less than
mandatory.25 Consequently, a marketing plan may be prescribed by
Los Angeles Lawyer December 2006 37
implication when it is outlined, suggested, recommended, or otherwise originated by the licensor, even when making use of the plan is
not obligatory.26
Courts differ in the degree of franchisor involvement in a franchisee’s daily business activities that are necessary to support a marketing plan. Some require significant control, such as confining sales
to assigned territories, imposing sales quotas, establishing mandatory
sales training, or supplying detailed instructions for customer selection and solicitation. Other courts have found a marketing plan
based on far less—for example, a promoter’s recommendations,
advice, or suggestions even when there is no obligation on the franchisee’s part to observe them, such as suggesting resale prices and discounts, providing demonstration equipment or advertising materials,
recommending or screening advertising materials, or providing product catalogs.
What courts identify as a “marketing plan prescribed in substantial part” may actually be basic to most distributorships.27 For
example, a marketing plan was found to exist when:
• Dealers were required to advertise the manufacturer’s products intensively, conduct a variety of promotions, and carry the manufacturer’s array of accessory sales devices.28
• Distributors marketed products pursuant to a comprehensive
advertising and promotional program developed by the supplier,
who reserved the right to screen and approve all promotional materials used by distributors.29
• Distributors were required to perform warranty services in accordance with the manufacturer’s warranty policy, send representatives
to sales meetings, complete the manufacturer’s factory service training program, maintain minimum inventory levels, hire an extra salesman, and provide periodic sales reports to the manufacturer.30
• A promoter promised to provide a marketing plan but failed to
deliver on its promise.31
Administrative and judicial opinions try to forge a distinction
between production-type controls (which do not result in a marketing plan) and marketing controls (which do), but the distinction
between the two has never been well articulated.32 A marketing plan
can exist even when the controls or advice do not relate to advertising or marketing matters, such as when a manufacturer provides
detailed instructions and advice regarding operating techniques and
skill training that make independent businesses appear as if they are
centrally managed and follow uniform standards.
Several states follow the community of interest model, rather
than the marketing plan or assistance/control approach, but differ in
how they define this element. However, all these states agree that a
community of interest exists when parties derive fees from a common
source—a standard that potentially encompasses every distributorship and license.33
The Licensor’s Dilemma. Because the trademark element of a franchise is so easily established, trademark licensors may be tempted to
avoid the imputation of a franchise by eliminating the second definitional element—some form of assistance to or control over the
licensee’s business. This creates a dilemma because the federal Lanham
Act imposes an affirmative duty on licensors to control the quality
and uniformity of goods and services associated with their federally
registered trademarks. Failure to do so may result in abandonment
of trademark rights.
As a practical matter, it is often impossible to distinguish trademark quality controls from the factors identifying substantial control,
a marketing plan, or a community of interest. It may also be inadvisable to try to avoid the reach of franchise laws by eliminating or
modifying contractual provisions designed to protect product or service quality or set operating standards that identify the licensee with
a larger branded network. A licensor that eliminates or reduces quality controls may not only sacrifice important core values vital to the
38 Los Angeles Lawyer December 2006
business and brand, it may risk abandoning its trademark rights.
The Required Fee Element
The required fee element captures all sources of revenue paid by a franchisee to a franchisor for the distribution rights or license. The element
is deliberately expansive, encompassing lump sum, installment, fixed,
fluctuating, up-front, and periodic payments for goods or services, however denominated, whether direct, indirect, hidden, or refundable.34
Under federal law, imputation of a franchise relationship can be
avoided by following the FTC rule, which requires a minimum payment of $500 or more before or during the first six months of operations.35 By deferring required payments exceeding $500 for at least
six months, a licensor will not be deemed a franchise under federal
law even if the licensee signs a nonnegotiable, secured promissory note
(with no acceleration clause) promising to pay the money after six
months. While this exemption offers interesting structuring opportunities for franchises sold in states without franchise laws, it has no
counterpart in California or in any other state with franchise sales or
relationship laws. Deferral of fees, therefore, is not a universal solution for avoiding franchise status.
All jurisdictions exclude payments that do not exceed the bona fide
wholesale price of inventory if there is no accompanying obligation
to purchase excessive quantities. To qualify, the payment must be
entirely for goods for which there is a ready market.36 Most product distribution arrangements rely on the bona fide wholesale price
exclusion to avoid structuring a distributorship or dealership program
as a franchise. In addition, only required payments count, not optional
ones. Nevertheless, calling something optional is not necessarily controlling. Payments, though nominally optional, will be deemed
required if they are essential for the successful operation of the business.37 Finally, to be classified as a required fee, the payment must be
made to the licensor or its affiliate, or for its benefit, as the quid pro
quo for the licensing or distribution rights. For this reason, commissions paid by a licensor to a licensee are not franchise fees.38
There is some lingering confusion about whether ordinary business expenses paid to third parties to establish or maintain a business
qualify as a required fee. All jurisdictions that have considered the issue,
except Indiana, have held that franchise fees are confined to payments
to the franchisor (or an affiliate, or for the benefit of either) and exclude
payments to third parties.39 Thus, while a franchise fee—direct or indirect—is generally a prerequisite for application of federal and state
franchise sales laws, it is not a prerequisite for the application of several franchise relationship laws regulating termination, nonrenewal,
and other substantive conditions of the parties’ relationship.40
The Licensor’s Dilemma. For the trademark licensor trying to
avoid a de facto franchise agreement, the fee element is the easiest of
the three definitional prongs to avoid. A manufacturer or supplier of
branded goods that limits its compensation from a distributorship or
dealership to the difference (markup) between its cost of goods and
the bona fide wholesale price at which it sells the goods to its distributors or dealers can lawfully avoid the franchise laws in all jurisdictions that use a three-prong definition. This is true regardless of
how closely the licensor, manufacturer, or supplier controls the distribution process or how much the supplier’s markup is.41
Often a trademark owner is in a position to collect a premium from
those who want to affiliate with its brand. A manufacturer or supplier may impose innocuous payments for noninventory materials or
support services, like sales manuals, demonstration kits, point-of-sale
materials, or bookkeeping services, not suspecting that these payments
may be enough to constitute a franchise fee.
Some branded affiliations do not involve the purchase of inventory, like service businesses and technology alliances. In these relationships, the bona fide wholesale price exception is not available, and
all payments that flow from the licensee to the licensor are potentially
franchise fees.
Frequently, licensors, manufacturers, and suppliers do not awake
to the reality of the franchise relationship until years after it is formed
when they seek to end the relationship pursuant to an at-will termination provision in their contract. If there is no breach of contract
by the licensee, the licensor cannot end the relationship absent good
cause. Because franchise laws cannot be waived, once a fee is paid anytime during the parties’ affiliation, a licensor may be foreclosed from
reverting to nonfranchise status even if the licensor offers to refund
the unintended franchise fee.42 Efforts to have the licensee waive the
franchise laws are unhelpful. Thus, the trademark licensor’s dilemma
is that, in order to escape franchise regulation, licensors may be
required to leave dollars on the table.
Every U.S. jurisdiction regulating franchises has its own mix of definitional exclusions and exemptions, offering a complicated and
often confusing maze of structuring opportunities and limitations for
companies considering regional or national expansion. Some exclusions and exemptions are common to most, or all, jurisdictions. For
example, transfers by franchisees are not regulated by federal or
state franchise sales laws if the licensor’s involvement in the transfer
is confined to approving the buyer’s qualifications. Other exclusions
and exemptions are unique to a particular jurisdiction, reflecting
special local lobbying efforts.43
Accordingly, individual statutes must always be checked. For
example, California law, the FTC rule, and a few other states exclude
or exempt arrangements, referred to as fractional franchises, in which
less than 20 percent of the licensee’s revenue is derived from sales of
the licensed brand.44
Accidental Franchises
Because branding is an increasingly important factor in consumer purchasing decisions, accidental franchises occur more frequently today
than when franchise laws were first enacted in the 1970s. Accidental
franchises occur because franchise laws poorly articulate the distinction between nonfranchise licenses and franchises.
Every branded distribution arrangement involves an implied, if not
an express, trademark license. Strategic affiliations between brand owners, with each owner giving the other the right to affiliate publicly with
the other’s brand, are, at a minimum, de facto licenses. With few exceptions, the brand owner’s equity stake in a joint venture will not save
the joint enterprise (a distinct legal entity) from being classified as a
franchisee.
Each time a license, distributorship, strategic trademark alliance, or
other type of branded joint venture or marketing affiliation is formed,
the cornerstone of a franchise potentially is laid. Given the prevalence
of technology-related licenses and cobranding programs today, that cornerstone may be laid more often than brand owners realize.
Courts have shown no sympathy for trademark owners that
defend franchise claims by pleading ignorance of the law or no intent
to create a franchise.45 Modeled after U.S. security laws, franchise
statutes impose strict liability, thereby making a defendant’s intent or
knowledge of the law irrelevant.46 Franchise laws also have their roots
in consumer protection legislation, and, as a consequence, are construed liberally.
Given the serious consequences flowing from an accidental franchise, lawyers should suspect a franchise whenever an express or de
facto trademark license presents itself. Strategic branding alliances,
joint ventures, and technology licenses should be viewed suspiciously
as hidden franchises and closely inspected to see if money is being paid,
directly or indirectly, by one party for the right to associate with the
other’s trademarks.
Certain aspects of the franchise definition, like the marketing
plan, community of interest, and substantial assistance and control
elements, are so inherently imprecise that it is difficult to render an
opinion to a client that an arrangement does not contain at least some
indicia of a franchise. The key is knowing how many factors are
enough to tip the scale.
Counsel should never rely on contract terminology or disclaimers,
neither of which will defeat deemed franchise status. But contract
drafters are not without tools. When a license or distribution contract
is deliberately structured to avoid a franchise definitional element or
takes advantage of a statutory exemption or exclusion, the drafter
should express these facts in the contract. While self-serving and certainly not bulletproof, the plain language will certainly aid, and possibly influence, the fact-finder’s analysis of the franchise claim.
Structural solutions may save some commercial relationships
from the reach of franchise laws, but often they come at the price of
sacrificing essential marketing concepts, economic objectives, or
competitive opportunities. The regulatory burdens of being deemed
a franchisor should be kept in perspective. Numerous franchisors comply with federal and state franchise laws every day and sustain and
grow successful and viable businesses. They compete in the marketplace while complying with presale disclosure and annual registration duties, close franchise sales while honoring rules restricting
promises about future earnings and obeying disclosure document delivery rules, and manage franchise relationships while respecting state
laws requiring good cause for termination or nonrenewal.
In the long run, the costs associated with franchise avoidance, be
they added business risks or extra legal expenses, may be more painful than franchise law compliance. Companies are short-sighted if their
overwhelming desire to avoid legal regulation as a franchise drives
their business decisions about their overall strategic objectives. ■
1 Gentis
v. Safeguard Bus. Sys., 60 Cal. App. 4th 1294 (1998).
Gulf Distribution, Ltd. v. Gap Int’l Sales, Inc., 2006 U.S. Dist. LEXIS 59799
(N.D. Cal. 2006). The court held that the complaint adequately pleaded the existence of a franchise. While the early stage ruling on the pleadings did not reach the
merits, it illustrates the nuisance cost of the accidental franchise dragnet.
3 California has two general franchise laws: the California Franchise Investment Act,
CORP. CODE §§31000-31506, and the California Franchise Relations Act, BUS. &
PROF. CODE §§20000-20043. Enacted in 1970, the California Franchise Investment
Act was the first law of its kind to require franchisors to make presale disclosures
and register with a state agency before offering or selling franchises in the state. While
other jurisdictions later modeled their franchise sales laws after California’s, little
regulatory uniformity exists. California enacted the California Franchise Relations
Act in 1980, requiring franchisors to have good cause to terminate, not renew, or
cancel a franchise.
4 Franchise sales in the U.S. are subject to dual regulation at the federal and state
level depending on where the parties reside or intend to do business. The federal franchise sales law, formally titled Disclosure Requirements and Prohibitions Concerning
Franchising and Business Opportunity Ventures, 16 C.F.R. §§436.1-3 (1978) [hereinafter FTC Rule], regulates franchise sales in all 50 states, including wholly
intrastate transactions, and requires presale disclosure, but not registration with a
federal agency. California, Hawaii, Illinois, Indiana, Maryland, Michigan, Minnesota,
New York, North Dakota, Rhode Island, South Dakota, Virginia, Washington, and
Wisconsin have franchise sales laws coupled with some obligation on franchisors
to register the franchise offer with a state agency. Oregon’s franchise sales law does
not require registration with a state agency but does mandate disclosure and certain record-keeping duties. The FTC Rule supplements state franchise sales laws but
does not preempt them. Roughly half the states also have franchise relationships laws
comparable, but not identical, to California’s.
5 CORP. CODE §31410 (“Any person who willfully violates any provision of this
law…shall upon conviction be fined not more than one hundred thousand dollars
($100,000) or imprisoned in the state prison, or in a county jail for not more than
one year or be punished by both.…).
6 There is no private right of action for FTC rule violations, which only the FTC may
enforce.
7 Spahn v. Guild Indus. Corp., 94 Cal. App. 3d 143 (1979).
8 See Courtney v. Waring, 191 Cal. App. 3d 1434 (1987).
9 The FTC rule excludes purely oral agreements from its franchise definition, but
most state franchise definitions apply to oral and written contracts.
10 People v. Kline, 110 Cal. App. 3d 587 (1980) (partnership agreement held to be
franchise).
11 Stephen C. Root, The Meaning of “Franchise” under the California Franchise
2 Gabana
Los Angeles Lawyer December 2006 39
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30 MCGEORGE L. REV. 1163, 1188 (1999).
12 Federal Trade Commission, Interpretive Guides to
Franchising and Business Opportunity Ventures Trade
Regulation Rule, 44 Fed. Reg. 49,966 at 49,968.
13 California regulates “seller assisted marketing plans,”
arrangements comparable to business opportunities,
under the Contracts for Seller Assisted Marketing
Plans, which has its own disclosure and registration
requirements. CIV. CODE §§1812.201-1812.221.
14 California’s franchise definition is a fairly typical
three-prong definition, although it is somewhat broader
in scope than other three-prong definitions in that it
expresses the right to offer, sell, or distribute goods or
services, in the disjunctive. Gentis v. Safegaurd Bus. Sys.,
60 Cal. App. 4th 1294, 1300 n.1 (“By using the word
‘or,’ the Legislature intentionally broadened the scope
of the statute.”).
15 Arkansas, Connecticut, Delaware, Missouri,
Nebraska, New Jersey, Wisconsin, Puerto Rico, and the
U.S. Virgin Islands have franchise relationship laws that
define a franchise without reference to payment of a
required fee.
16 The California Department of Corporations, which
oversees the California Franchise Investment Law,
elaborates on California’s franchise definition in oftencited Release 3-F, When Does an Agreement Constitute
a “Franchise”? (rev. June 22, 1994), available at http:
//www.corp.ca.gov/commiss/rel3f.htm [hereinafter
Release 3-F]. Regarding the trademark grant, it says:
“Therefore, if a franchisee is granted the right to use
the franchisor’s symbol, that part of the franchise definition is satisfied even if the franchisee is not obligated
to display the symbol.” Other jurisdictions have cited
Release 3-F to interpret their own statutes.
17 Lobdell v. Sugar ‘N Spice, 658 P. 2d 1267 (Wash.
App. 1983).
18 American Bus. Interiors, Inc. v. Haworth, Inc., 798
F. 2d 1135 (8th Cir. 1986).
19 Cassidy Podell Lynch, Inc. v. Synder Gen. Corp., 944
F. 2d at 1139 (3d Cir. 1991).
20 Cooper Distrib. Co., Inc. v. Amana Refrigeration,
Inc., 63 F. 3d 262, 272-73 (3d Cir. 1995).
21 There is no universally recognized minimum percentage of branded product sales that qualifies as a
“substantial association” with a supplier’s trademark.
The FTC rule, California, and a number of other states
have their own version of an exemption for “fractional
franchises,” defined generally as multiline distributorships in which sales of any one brand make up less than
20% of the distributor’s total sales. States lacking this
exemption do not construe “substantial association” uniformly or necessarily view 20% as a minimal threshold.
22 Kim v. Servosnax, Inc., 10 Cal. App. 4th 1346 (1992).
23 Release 3-F, supra note 16.
24 Release 3-F, supra note 16, provides a comprehensive explanation of the individual components of the
marketing plan element and identifies numerous factors
indicating a marketing plan.
25 Release 3-F, supra note 16.
26 Id.
27 Steven D. Wiener, Gentis v. Safeguard Business
Systems, Inc., Liberal Construction of Remedial
Statutes: What Is a Franchise?, 17(4) FRANCHISE L.J. 115
(1998).
28 Boat & Motor Mart v. Sea Ray Boats, Inc., 825 F.
2d 1285 (9th Cir. 1987).
29 Meadow Fresh Farms, Inc. v. Sandstrom, 333 N.W.
2d 780 (N.D. 1983).
30 Carlos v. Philips Bus. Sys., Inc., 556 F. Supp. 769
(E.D. N.Y. 1983), aff’d in part and rev’d in part, 744
F. 2d 287 (2d Cir. 1984).
31 People v. Kline, 110 Cal. App. 3d 587.
32 Whether know-how controls, such as those common
to patent licenses, are enough to turn a nonfranchise
license into a franchise may depend on whether the
know-how affects just an aspect of the licensee’s operations (e.g., production) or are more pervasive.
33 See, e.g, Instructional Sys., Inc. v. Computer
Curriculum Corp., 826 F. Supp. 831 (D. N.J. 1993).
34 FTC Rule, §436.2(a)(2); Release 3-F, supra note 16.
35 FTC Rule, §436.2(a)(3)(iii).
36 Boat & Motor Mart v. Sea Ray Boats, Inc., 825 F.
2d 1285 (9th Cir. 1987).
37 Release 3-F, supra note 16.
38 Thueson v. U-Haul International, Inc., 2006 Cal.
App. LEXIS 1736 *12 (2006). The California Court of
Appeal, finding no published California authority
directly explaining what constitutes a “franchise fee”
seized the chance to explain California law on the
subject even though the discussion is unnecessary to the
holding. The California court, following Wright-Moore
Corp. v. Ricoh Corp., 908 F. 2d 128 (7th Cir. 1990)
(Indiana law), explained that a “franchise fee” requires
a “firm-specific investment in the franchisor,” in contrast to payments for ordinary business expenses,
although it shed no light on when a payment to a licensor is, and is not, a firm-specific investment. The UHaul facts, however, showed that the dealer had made
no payments at all to U-Haul. Rather, U-Haul had
deducted from the dealer’s rental commissions expenses
for the dealer’s use of a local telephone line, directory
listing, and local computer terminal. The U-Haul decision, that commission deductions are not franchise
fees, is in line with previous interpretations of California
law. See Adees Corp. v. Avis Rent a Car Sys., 157 Fed.
Appx. 2 (9th Cir. 2005).
39 See, e.g., Wright-Moore Corp. v. Ricoh Corp., 908
F. 2d 128 (7th Cir. 1990).
40 See supra, note 14.
41 Sports Racing Servs. v. Sports Car Club of Am.,
131 F. 3d 874, 891 (10th Cir. 1997) (Indiana law).
42 The California Commissioner of Corporations interprets a franchise fee to include payments for the right to
enter a business that are made during the course of the
business, not just at inception. In To-Am Equipment Co.
v. Mitsubishi Caterpillar Forklift America, Inc., 152 F.
3d 658, 659-60 (7th Cir. 1998), the Seventh Circuit
found that a tractor dealership, which was not a franchise at the inception of the parties’ relationship, became
one when the dealer’s incremental payments for sales
manuals over the course of eight years exceeded $500,
Illinois’s statutory threshold. Nothing in California’s
statute suggests that an outcome like To-Am could not
happen in California, which defines a franchise similarly
to Illinois. If any required payment to a supplier over
California’s minimum ($100 per year for fees and $1,000
per year for fixtures, equipment, or other tangible property) is enough to create a franchise in California, then
a distribution or licensing program that is not a franchise
at inception for lack of a required payment could become
a franchise once required payments exceed the minimum
in any year. The idea that a nonfranchise agreement could
turn into a franchise sometime after the parties execute
a contract adds an entirely new level of uncertainty to
the status of licensing and distribution arrangements. For
additional discussion, generally, on what is a franchise
fee, see “point/counterpoint” articles by Jonathan Solish,
Unrecoverable Investments Are Critical, 26 FRANCHISE
L.J. 1 (2006) and Bruce Napell, State Relationship Laws
Are Not Uniform, 26 FRANCHISE L.J. 1 (2006).
43 For example, only Minnesota exempts burglar alarm
franchises and arrangements between local and national
airlines carriers.
44 CORP. CODE §31108.
45 To-Am, 152 F. 3d at 659-60. The Seventh Circuit
admonished inadvertent franchisors everywhere: “Legal
terms often have specialized meanings that can surprise
even a sophisticated party. The term ‘franchise,’ or its
derivative ‘franchisee,’ is one of those words.”
46 Keating v. Superior Court, 31 Cal. 3d 584, 597
(1982).
RODNEY R. HATTER & ASSOCIATES
Franchise Specialists for more than 30 years
Assists both Franchisors and Franchisees
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e-mail
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Los Angeles Lawyer December 2006 41
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HOTELS/MEETINGS/CATERING
Hotel Metropole
Conveniently located in the heart of Avalon on
Catalina Island just 5 minutes from the ferry. The
Hotel Metropole is a luxury hotel in a beautiful pristine setting offering 48 spacious air-conditioned
guest rooms with spectacular views of the ocean,
mountains, and the hotel’s courtyard. Situated just
footsteps from the beach, it is the ideal locale for
romantic getaways, family vacations, and corporate
functions. The look of relaxed elegance imparts a
sense of peace and serenity, which echoes the
overall island ambiance of balmy breezes and
soothing waters. The Hotel Metropole is adjacent
to the Metropole Market Place, an open-air marketplace with cobblestone walkways and sparkling
fountains featuring a potpourri of boutiques, specialty shops, delis, cafes, and fine dining. The hotel
offers wireless high speed Internet throughout, and
guest rooms feature king-size beds, cable TV, DVD
players and rental library, and amply stocked snack
bars. Each of the bright rooms is appointed with
comfortable fruitwood furnishings in an aesthetically pleasing blend of colors to match the seaside
ambiance. Many rooms have Jacuzzi tubs and
42 Los Angeles Lawyer December 2006
private balconies, and adjoining rooms are available for families and groups. The hotel’s spectacular 1800 square-foot apartment, the Beach
House, offers panoramic views and an added level
of luxury, including two bedrooms, two Jacuzzi
baths, a fully equipped kitchen, dining area, large
living room with big screen TV and stereo, and
over 1,000 square feet of private deck space. And
coming in June ’07 are four brand new oceanfront suites, including one spectacular three room
suite to compliment the beach house. Other inroom amenities include plush terry cloth robes
(seasonal), complimentary continental breakfasts,
and wireless Internet. Room service and day spa
also available. 205 Crescent Avenue, Avalon, CA
90704, reservations and information (310) 5101884, (800) 300-8528, Web site: www.hotelmetropole.com.
La Quinta Resort & Club
La Quinta Resort & Club was recently named one
of the “World’s Best Golf Resorts” by Travel +
Leisure. The resort offers five championship golf
courses, 41 pools and 53 hot spas, the full-service
23,000 square foot Spa La Quinta, Camp La
Quinta, four fabulous restaurants, live entertainment and 11 boutique shops. For more information or reservations call (760) 564-4111 or go to
the resort’s Web site at: www.laquintaresort.com.
Please see display ad on page 42.
Angeles, with a scenic view of California Plaza and
surrounded by world-famous art and cultural
venues. Home to the award-winning Noé restaurant and a brand-new intimate spa, the hotel features 453 guest rooms and suites and offers more
than 20,000 sq. feet of state-of-art meeting
space. Quite simply it is luxury that’s surprisingly
sensible. 251 South Olive Street, Los Angeles, CA
90012, (213) 617-3300, fax (213) 617-3399.
Promenade Ristorante
Located on the southwest corner of 1st and Hope
Street in the Promenade Plaza and one block
from the LA Superior Courthouse, Promenade
Ristorante has long been a haven for gourmet
Italian cuisine. Among the restaurants regulars
are personnel from the Courthouse, Music Center, Philharmonic and Los Angeles Opera. We
have a wide selection of salads, pizza, pasta,
and panino. There are also entrees such as
hearty chicken, steak and fresh fish in addition
to daily specials. Indoor and outdoor dining in a
courtyard atmosphere. Free one hour validated
parking below our restaurant. Promenade Ristorante, 719 West 1st Street, Los Angeles, CA
90012, (213) 437-4937, fax (213) 437-4940.
Lunch Monday-Friday 11:30 A.M. to 2:00 P.M.
Dinner Tuesday-Sunday 5:00 P.M. to 8:00 P.M.
Web site address with full lunch and dinner
menu: www.promenaderistorante.com.
RESORTS
Omni Los Angeles Hotel at California Plaza
Just 20 miles from LAX, this luxury hotel is ideally
located in the heart of a revitalized downtown Los
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Choose from an extensive menu of creative
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www.lagunabeachinfo.com. Laguna Beach
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Lake Arrowhead Resort and Spa
Safely out of reach of the congestion of the
city, Lake Arrowhead Resort and Spa is situated
at 5,106 smog-free feet in the San Bernardino
National Forest. Fresh from a $15 million transformation, the resort features a lodge-like
lobby; a new wine-inspired restaurant, BIN189;
an 11,000-square-foot spa; exceptional indoor
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suites. Experience complimentary clear-blue
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air. Lake Arrowhead Resort and Spa, 27984
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800-6792, (909) 336-1511, fax (909) 7443088, e-mail: [email protected]. Web site:
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A C O L L A B O R AT I O N O F T H E M U S I C C E N T E R A N D S R P R O D U C T I O N S
44 Los Angeles Lawyer December 2006
Computer Counselor
BY DAVID FISHEL AND CAROLE LEVITT
New Tools in the Discovery of Sound Recordings
Amendments to the FRCP (and similar provisions in state courts)
RECENT CHANGES to the Federal Rules of Civil Procedure are poised
to move the discovery and analysis of sound recordings out of the realm will soon affect discovery requirements and practices regarding sound
of high-profile government investigations and into the everyday recordings. The new rules make it clear that judges and lawyers
world of normal litigation. While only a few attorneys currently must understand and manage electronic discovery from the beginning
have experience with discovery of small amounts of recordings from of a case. Parties need to decide whether and how to ask for sound
voice mail, fewer still have engaged in discovery of hundreds or recordings. In addition, parties should have a reasonable underthousands of hours of voice mail or call center recordings. The pro- standing of recording and storage systems, put appropriate controls
liferation of audio recordings created in the course of business will in place, formulate credible plans for how they will review and promake the availability of this kind of evidence more common. Along duce responsive recordings, and decide on the forms in which the
with the new rules are new tools that make discovery and analysis recordings will be produced.
of this evidence more manageable.
On the surface, the challenges presented
by hundreds of hours of audio recordings are
Phonetic audio search technology is based on breaking down audio
similar to those presented by any other large
body of potentially relevant materials.
Requesting parties must skillfully frame
recordings by analyzing the smallest components of human speech.
their requests. Responding parties will
attempt to limit the scope of requests and to
manage the production process as best they
can. The tasks are similar to any e-discovery endeavor. Parties are faced
The newly revised Rule 34(a) specifically identifies “sound recordwith locating, extracting, searching, reviewing, culling, and produc- ings” as “electronically stored information” (ESI). This new term claring responsive recordings, and doing so accurately, cost-effectively, ifies and expands the “documents and data compilations” included
and under short deadlines. The primary pitfalls stem from the com- in the earlier version of the rule. The new rule also allows the requestplexity of recording technologies and the sheer size of recorded audio ing party to specify the form in which it wants the information procollections, combined with the difficulty of searching them.
duced. The stated aim of this provision is production of ESI in a “reaAudio recordings have long been discoverable and admissible as sonably usable” form. Audio recordings are captured in a wide
evidence and have often provided compelling proof in court, but most variety of formats, many of which are proprietary to specific recordlawyers have not yet conducted audio discovery on the massive scale ing systems, so the question of whether a sound recording is reasonably
now common for electronic and paper documents. That is about to usable can be expected to arise regularly. The cost and time required
change. Recordings can be very good evidence. They provide a per- to convert a large collection of recordings from a proprietary format
son’s words in his or her voice. In many cases this might include a tone to a more “usable” one can be significant. It behooves attorneys to
of voice, verbal inflection, or snicker that conveys far more information learn about the various audio formats and seek early expert help in
than a written transcript ever could. Recordings can contain “smok- making decisions about production issues so that they can be fully
ing gun” statements and are very effective when used in conjunction prepared to defend their preferred form of production.
with documentary evidence or witness testimony. With the right
analytical tools, audio can be used to quantify evidence of specific Amended FRCP Deadline
behaviors, such as the number of times a company engaged in a spe- Attorneys are required to do this very quickly. Amended FRCP 16(b)
cific prohibited activity.
requires parties to hold a scheduling conference to consider electronic
Three factors are rapidly transforming discovery of audio evidence: discovery plans within 120 days of the commencement of an action.
• Recent amendments to the Federal Rules of Civil Procedure (FRCP) Furthermore, at least 21 days before this scheduling conference, parexpressly identify “sound recordings” as “electronically stored infor- ties must meet to discuss and, if possible agree upon, electronic dismation” and impose new requirements for disclosure, case manage- covery procedures for the case.
Rule 26(f) specifically requires the parties to address “any issues
ment, planning, and form of production of all electronically stored
relating to disclosure or discovery of electronically stored informainformation.
• The quantity of sound recordings is increasing because of technology tion, including the form or forms in which it should be produced.”
advances such as digital storage, regular office and cellular phone voice In relation to audio recordings, this means that parties must be
mail, VoIP telephony, and unified messaging systems that deliver knowledgeable about the relevant recording and storage systems, audio
voice mail as e-mail.
• New tools are making it feasible to find, extract, convert, search, David Fishel is a litigator and senior director and technology counsel for
and produce audio recordings.
Nexidia. Carole Levitt is president of Internet For Lawyers.
46 Los Angeles Lawyer December 2006
formats, and other production issues, and
must formulate their electronic discovery
plans within the first 100 days of the life of
a case. Following the Rule 16 scheduling
conference, the court may issue a scheduling
order that sets forth how electronic discovery
will proceed. By the time of that order, parties should make certain that the court is
fully informed of any issues regarding ESI,
including audio evidence.
Discovering Audio
New digital recording technologies have
rapidly increased the ability to record speech
and to store vast amounts of those recordings.
More recordings are being made, and since
the new technologies are digital (that is, created and stored on computerized systems
rather than analog tape), the growth is
enabled by the same factors that brought
about the recent explosion of electronic messaging and documents.
“Sound recordings” means voice mail to
many attorneys, but voice mail is not the
only variety of audio evidence. Collections of
recordings may include audio archives from
corporate call logging systems, Web conferences, or IP-based conference calls. Businesses
that routinely record conversations with customers and business partners may have huge
stores of potentially discoverable recordings.
These business recordings are subject to the
same requirements for retention, preservation,
litigation holds, and production as any other
potentially relevant information.
Digital recording technology spawns new
opportunities and challenges for requesting
and producing parties. Corporate call centers
routinely record conversations between businesses and their customers for quality assurance. If the issues in a case include, for
instance, the number and type of complaints
about a certain product, when a company had
notice of alleged problems with a product, or
how a company treated its customers, that
information may be found in the thousands
(or millions) of calls the company received and
recorded. Many businesses also record transactional conversations, such as trading or
sales calls. This type of recording has proven
critical in cases involving energy companies
and commodities traders and is common in
financial service businesses.
Voice mail itself is changing. Initially,
voice mail technology moved slowly from
the era of the cassette tape answering machine
to the PBX. Now, businesses are rapidly moving to unified messaging systems in which
all messages—voice, e-mail, or instant text—
are delivered to the user’s computer desktop
and stored along with other message traffic
on mail servers. In this environment, voice
mail is converted into .wav format attachments to e-mail messages. Some routine e-mail
discovery could now include voice mail
attachments.
In the past, voice mail recordings were
generally kept in a central location, with
strict limits on the number of messages each
user could save and how long a message
could be stored. A single person’s mailbox was
easy to identify and could only contain a few
minutes of recordings. As businesses switch
to unified messaging, the same problems that
have vexed e-mail discovery—duplicates, the
propensity of users to retain e-mail, and mailbox archives that are not under the direct control of system administrators—will arise for
voice mail. Voice mail was previously sought
in hope that a particular message may have
been saved, but now a company’s entire voice
mail system may be considered to contain
potentially relevant information. For example, an employment suit may seek evidence of
a pattern of behavior or practice in a company’s voice mail archive.
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Tools to Meet the Challenge
With the advent of e-discovery of large
amounts of audio comes the need to fully
process them as discovery materials, and that
includes finding responsive recordings. It is not
uncommon for a litigant’s IT and legal staff
to have a good grasp on the location of audio
evidence but to have no idea of the content
of the recordings. At present, there are three
primary ways of reviewing and searching
recordings: listening, manual transcription,
and phonetic search. (A fourth option, speechto-text transcription by computer software,
is widely regarded in the legal field as currently
not sufficiently accurate to produce reliably
searchable transcripts.) Listening and manual
transcription are the two most used at present
and can be effective for small collections of
recordings. However, both are very expensive,
slow, and cannot scale up to economically
handle the several hundred hours of recordings that a larger matter might produce. Even
for small audio collections, the cost of transcribing or listening to recordings can quickly
become prohibitive.
Listening suffers from a number of limitations, the greatest of which is the inability
to search the audio content. Having once listened to recordings, if a new search is needed,
the recordings must be listened to again in
their entirety. Listening costs vary widely.
Paralegals or contract attorneys are often
used for the initial review, but attorneys generally listen to the potentially relevant recordings in order to make legal determinations
about them. In addition to prohibitive cost
and lack of searchability, effective listening
takes much longer than the duration of the
recordings themselves. Also, attentive listening is difficult to sustain for any long period
of time, and it is difficult to get directly back
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48 Los Angeles Lawyer December 2006
to relevant bits of conversation even after
they have been located.
Manual transcription is similarly slow
and expensive. On average, a law firm can
expect to spend about $120 per hour of audio
recording to produce a usable transcript of
audio content. Economical transcription services can also take a long time, a problem that
increases as the size of an audio collection
grows. It may require transcribing more than
100 to 200 hours of recordings just to locate
a few seconds of audio evidence.
Phonetic audio search technology is based
on breaking down audio recordings by analyzing the smallest components of human
speech, known as phonemes. (There are
roughly 40 phonemes used in spoken North
American English.) Since 2000, Nexidia
(www.nexidia.com) has applied phonetic
search technology in the government intelligence and commercial call center arenas.
More recently, the company began applying
the technology to the e-discovery and corporate compliance market.
The high-speed phonetic audio search
approach has two phases: preprocessing and
searching. The first phase preprocesses the
sound recordings to break the words into
their component phonemes. This step produces a phonetic search track and on one
processor occurs roughly 60 times faster than
real time. Thus, one hour of audio recording
can be rendered searchable in about one
minute. This means that it is feasible to handle collections of thousands of hours of
recordings for discovery. Reviewers can run
searches against the phonetic index for words
and phrases. Search results are linked directly
to the point in the original recording where
the search term was found, allowing reviewers to jump directly to the point in the recording containing potentially relevant terms.
This greatly increases the speed at which
reviewers can pinpoint their listening to potentially relevant passages of the audio.
The phonetic approach can be up to 98
percent accurate on recordings with the best
quality. Accuracy can be as low as 70 percent
when speakers have regional accents or the
recording is of poor quality, contains blended
words, proper names, slang, code words, or
ad hoc usage. Accuracy of other speech recognition methods, such as speech-to-text, can
drop as low as 50 percent.
More lawyers are going to conduct discovery of sound recordings. Those who are
going to be successful need to understand
the technical aspects of audio recording systems, master the rules that govern discovery
of audio materials, and use effective tools to
find and organize the information. Whether
they are requesting or producing sound
recordings, attorneys who develop those skills
can act with confidence.
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Los Angeles Lawyer December 2006 49
Index to Advertisers
50 Los Angeles Lawyer December 2006
Aon Direct Administrators/LACBA Professional Liability, p. 1,
Lawyers’ Mutual Insurance Co., p. 7
Tel. 800-634-9177 www.attorneys-advantage.com
Tel. 800-252-2045 www.lawyersmutual.com
Lee Jay Berman, p. 4
Lexis Publishing, Inside Front Cover, p. 9
Tel. 213-383-0438 www.leejayberman.com
www.lexis.com
Boserup Mediation, p. 17
M. Nair, M.D. and Associates, p. 32
Tel. 310-552-1020 www.Boserup.com
Tel. 562-493-2218 www.psychiatryforensic.com
Coldwell Banker p. 33
Arthur Mazirow, p. 33
Tel. 310-442-1398 www.mickeykessler.com
Tel. 310-255-6114 e-mail: [email protected]
Commerce Escrow Company, p. 26
MCLE4LAWYERS.COM, p. 33
Tel. 213-484-0855 www.comescrow.com
Tel. 310-552-4907 www.MCLEforlawyers.com
Law Office of Robert D. Coviello, p.19
Mesriani Law Group p. 16, 32, 47
Tel. 310-277-7709 www.coviello-law.com
Tel. 310-826-6300 e-mail:[email protected]
Creative Dispute Resolution, p. 18
Metrocities Mortgage Inc., p. 8
Tel. 877-CDR4ADR (877-4237) www.adr-fritz.com
Tel. 800-464-2484 www.metrociti.com
Greg David Derin, p. 4
Noriega Clinics, p. 49
Tel. 310-552-1062 www.derin.com
Tel. 323-728-8268
Dale A. Eleniak, p. 18
Pedersen Law & Dispute Resolution, p.18
Tel. 310-374-4662
Tel. 949-260-1181 www.pedersenlaw.com
E. L. Evans & Associates, p. 19
Quo Jure Corporation, p. 33
Tel. 310-559-4005
Tel. 800-843-0660 www.quojure.com
Esthetic Dentistry, Inside Back Cover
Rodney R. Hatter & Associates, p. 41
Tel. 213-553-4535 www.estheticdentistry.net
Tel. 384-6540 e-mail: [email protected]
G. L. Howard CPA, p. 48
R. S. Ruggles & Co., Inc., p. 41
Tel. 562-431-9844 e-mail: [email protected]
Tel. 800-526-0863 www.rsruggles.com
Steven L. Gleitman, Esq., p. 4
Sanli Pastore & Hill, Inc., p. 6
Tel. 310-553-5080
Tel. 310-571-3400 www.sphvalue.com
Holmes & Lofstrom, LLP, p. 41
Steven R. Sauer APC, p. 40
Tel. 562-596-0116, 805-547-0697 www.holmeslofstrom.com
Tel. 323-933-6833 e-mail: [email protected]
The Holmes Law Firm, p. 8
Anita Rae Shapiro, p. 48
Tel. 626-432-7222 www.theholmesfirm.com
Tel. 714-529-0415 www.adr-shapiro.com
Jack Trimarco & Associates Polygraph, Inc., p. 40
Speaker Series at the Music Center, p. 44
Tel. 310-247-2637 www.jacktrimarco.com
Tel. 213-972-0700
Law Offices of Rock O. Kendall, p. 48
The Suit Closet, p. 6
Tel. 949-365-5844 www.dmv-law.com
Tel. 213-747-2829 www.thesuitcloset.com
Kent Gibson Forensic Audio, p. 47
UngerLaw, P.C., p. 14
Tel. 323-851-9900 www.forensicaudio.org
Tel. 310-772-7700 www.ungerlaw.com
Jeffrey Kichaven, p. 19
Verizon Wireless, p. 2
Tel. 213-996-8465 www.jeffkichaven.com
Tel. 866-899-2862 www.verizonwireless.com
Laguna Beach Visitor & Conference Bureau, p. 5
Vision Sciences Research Corporation, p. 40
www.lagunabeachinfo.com
Tel. 925-837-2083 www.contrastsensitivity.net
Lake Arrowhead Resort and Spa, p. 43
West Group, p. 11, Back Cover
Tel. 909-336-1511, 800-800-6792 www.laresort.com
Tel. 800-762-5272 www.westgroup.com
La Quinta Resort & Club, p. 42
Witkin & Eisinger, LLC, p. 32
Tel. 760-564-4111 www.laquintaresort.com
Tel. 310-670-1500
CLE Preview
Ethics 2006
ON SATURDAY, DECEMBER 9, the Los Angeles County Bar Association and the
Professional Responsibility and Ethics Committee will present a program on
legal ethics developments of 2006. Speakers Diane Karpman, David Parker,
John W. Amberg, Stanley W. Lamport, Judge Michael D. Marcus, Joel A.
Osman, Ellen A. Pansky, Jon L. Rewinski, and Harry B. Sondheim will discuss
the proposed amendments to the Rules of Professional Conduct, a year-end
review of ethics highlights, the ethics of electronic discovery (including
metadata), and limits on a lawyer’s right of self-defense. The program will
take place at the LACBA Conference Center, 281 South Figueroa Street,
Downtown. Reduced parking is available with validation for $9. On-site
registration and the meal will begin at 8:30 A.M., with the program
continuing from 9 A.M. to 1:30 P.M. The registration code number is 009379.
The prices below include the meal.
$75—CLE+PLUS members
$100—LACBA members
$120—all others
4 CLE ethics hours
COMPUTER HARDWARE
AND SOFTWARE
FOR ATTORNEYS
ON THURSDAY, JANUARY 11, the Los
Angeles County Bar Association will
host a lecture by Russell Jackman
explaining the process of purchasing
and maintaining computer systems for
the law office. This course will teach
what the parts that make up computers
are, why attorneys need to know about
them, what to do if the computer isn’t
working, and where to find out more.
The program will take place at the
LACBA Conference Center, 281 South
Figueroa Street, Downtown. Reduced
parking is available with validation for
Complex Courts Seminar
$9. On-site registration and the meal
ON SATURDAY, DECEMBER 9, the Litigation Section will host an in-depth study of
the complex courts of California. Judge Victoria Chaney, Judge Emile H. Elias, Joe
Helfrich, Warren Hernand, Paul R. Kiesel, Judge Carolyn B. Kuhl, Judge Peter D.
Lichtman, Judge Anthony J. Mohr, Judge Wendell R. Mortimer Jr., Wayne G. Nitti,
James R. Robie, Ricardo A. Torres, and Carl J. West will address technology in the
complex court; complex case designation after January 1, 2007; JCCP
applications; checklists; and use of protective orders/sealing of documents. The
seminar will take place at the Southwestern University School of Law, 675 South
Westmoreland Avenue, Los Angeles. On-site registration will begin at 8 A.M.,
with the program continuing (with a lunch break) from 9 A.M. to 4 P.M. The
registration code number is 009554. The prices below include the meal.
$75—CLE+PLUS members
$150—Litigation Section members
$175—LACBA members
$200—all others, including at-the-door registrants
6 CLE hours
will begin at 4:30 P.M., with the
program continuing from 5 to 8:45 P.M.
The registration code number is
009380. The prices below include the
meal.
$65—CLE+PLUS members
$100—LACBA members
$125—all others
3.5 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 December 2006 51
Closing Argument
BY JON D. MEER AND ERIC S. BEANE
To Settle or Not to Settle?
AT SOME POINT, ALMOST EVERY COMPANY doing business in a business that prevails in a claim under the CDPA.7
California will face a meritless lawsuit for alleged “disability
An award of attorney’s fees can be a significant deterrent to
discrimination.” Increasingly, this occurs when a claim is brought future lawsuits. Courts have granted large attorney’s fee awards to
for “accessibility discrimination” under the Americans with Disa- businesses even when the business could have settled the case for
bilities Act (ADA) 1 and the California Disabled Persons Act an amount much less than the fees incurred. For example, in the
(CDPA).2 In these cases, a person with a disability claims that he recent case of Jones v. Wild Oats Markets, Inc.,8 the plaintiff
or she was “discriminated against on the basis of disability in the alleged that she had encountered 43 ADA and CDPA violations
full and equal enjoyment of goods, services, facilities, privileges, during a single visit to the defendant’s grocery store. After the
[or] advantages” in a business that operates as “a place of public plaintiff filed her complaint, she proposed a settlement of $25,000.
accommodation.” 3 Places of public accommodation include The defendant, however, refused to settle, based on its detervirtually every business and facility that
allows public visitors. Plaintiffs can file
discrimination claims under the ADA or
A court has no discretion to deny fees to a business that prevails
CDPA based on a long list of regulations
that covers everything from the number
of required handicapped parking spaces
in a claim under the CDPA.
to the size of a toilet paper dispenser.
Frivolous lawsuits under the ADA
and CDPA are becoming more common,
led by a growing group of parasitic plaintiffs, some of whom have mination that the plaintiff’s claims had no factual support. After
as many as 100 cases on file. Rather than seeking merely to resolve approximately 18 months of litigation, the court granted the
alleged barriers to accessibility, these plaintiffs also seek monetary defendant’s summary judgment motion, holding that many of the
damages and attorney’s fees. Recently, courts have become aware plaintiff’s claims were “frivolous” or “borderline frivolous” under
that many of these lawsuits are nothing more than shakedowns. the ADA. Because the defendant was also the “prevailing party”
Indeed, in Doran v. Del Taco, Inc.,4 the court noted that ADA under the claims brought under the CDPA, it filed a motion for
litigation has created a “cottage industry” whereby unscrupulous attorney’s fees. Ultimately, the court entered a final order for the
law firms send disabled individuals to as many businesses as recovery of $198,634.84 in attorney’s fees and litigation expenses.
Unfortunately, collecting fees may be difficult, as very few
possible in order to generate lawsuits alleging ADA violations.
Businesses may find it tempting to settle one of these cases, plaintiffs are likely to have assets to pay a six-figure award.
since the plaintiff typically makes a relatively low settlement Businesses may have to go through a lengthy process of wage
demand consisting of statutory damages and attorney’s fees. Many garnishments and liens in an effort to collect their money.
companies can dispose of these lawsuits with settlement payments However, by not settling frivolous cases, businesses can take solace
of under $25,000, since mandatory statutory damages under the in knowing that the same plaintiff or plaintiff’s counsel probably
CDPA are $4,000 per visit to the location where the alleged will not sue them again. Sometimes, avoiding future legal expenses
■
discrimination took place. Unfortunately, these settlements are is more valuable than recovering fees already expended.
often little more than a quick fix that can lead to more lawsuits in
the future, because no settlement agreement can restrict a 1 Americans with Disabilities Act, 42 U.S.C. §12101.
plaintiff’s lawyer from filing additional lawsuits. Indeed, some 2 California Disabled Persons Act, CIV. CODE §51.5.
3
plaintiff’s lawyers may even conclude that a company is an easy 4 42 U.S.C. §12182.
Doran v. Del Taco, Inc., 373 F. Supp. 2d 1028, 1030 (S.D. Cal. 2005).
target after it pays a quick settlement.
5 42 U.S.C. §12205.
Before deciding to settle, businesses should assess the validity of 6 See, e.g., Brown v. Lucky Stores, Inc., 26 F. 3d 1182, 1190 (9th Cir. 2001).
the lawsuit. If the business has not violated the ADA or CDPA, the 7 CIV. CODE §55. See, e.g., Goodell v. Ralph’s Grocery Co., 207 F. Supp. 2d
business should consider fighting the lawsuit with the potential of 1124, 1126 (E.D. Cal. 2002).
8 Jones v. Wild Oats Markets, Inc., Case No. 04-cv-1018 WQH (WMc) (S.D.
recovering its attorney’s fees. Under the ADA, the “prevailing
Cal. 2006).
party” may recover its reasonable attorney’s fees, including
5
litigation expenses and costs. For a business to recover against a
plaintiff under the ADA, the lawsuit must be found to have been
Jon D. Meer chairs the Los Angeles section of the labor and employment
“frivolous, unreasonable or without foundation.”6 The CDPA
practice of DLA Piper US LLP. Eric S. Beane, a DLA Piper associate, represents
provides for a mandatory award of attorney’s fees to any
employers and management in courts and before administrative bodies.
“prevailing party.” Thus, a court has no discretion to deny fees to
Meer represented the defendant in Jones v. Wild Oats Markets.
52 Los Angeles Lawyer December 2006
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