Tag: Ninth Circuit

A Dark Day for Franchising: Ninth Circuit Reinstates its Misguided Vazquez Decision, Undermining the Franchise Business Model

In the course of a politically-charged frenzy to eliminate the misclassification of employees as independent contractors, the franchise business model has been trampled without respect by both the courts and the legislature in California, disrupting commercial relationships that have been a vital driver of the state’s economy for more than fifty years.  Only five years ago, the California Supreme Court acknowledged the vital importance of franchising to the California economy in generating “trillions of dollars in total sales,” “billions of dollars” of payroll and the “millions of people” franchising employs.  Patterson v. Domino’s Pizza, LLC (2014) 60 Cal.4th 474, 489.

Taking into account the “ubiquitous, lucrative, and thriving” franchise business model and its “profound” effects on the economy, the Patterson court held that the usual tests for “determining the circumstances under which an employment or agency relationship exists” could not be applied to franchises.  Id. at 477, 489 and 503.  To avoid disruption of the franchise relationship and turning the model “on its head,” a different test that took into account the practical realities of franchising had to be applied to franchise relationships.  Id. at 498, 499 and 503.  The “imposition and enforcement of a uniform marketing and operational plan cannot automatically saddle the franchisor with responsibility.”  Id. at 478.  A franchisor is liable “only if it has retained or assumed a general right of control over factors such as hiring, direction, supervision, discipline, discharge, and relevant day-to-day aspects of the workplace behavior of the franchisee’s employees.”  Id. at 497-98.  The special rule for franchising has been commonly referred to as the “Patterson gloss.”

On September 25, 2019, a panel of the Ninth Circuit Court reinstated an opinion it had previously published on May 2, 2019, then withdrew on July 22, 2019, recklessly undermining the delicate framework of the franchise business model in derogation of the California Supreme Court’s “Patterson gloss.”  Vazquez v. Jan-Pro, 923 F.3d 575 (9th Cir. May 2, 2019), opinion withdrawn, 2019 US App. Lexis 21687 (July 22, 2019), opinion reinstated, 2019 BL 357978 (9th Cir. September 24, 2019).

The “Patterson gloss” arose from the California Supreme Court’s subtle appreciation for the historical development of the franchise business model.  At the heart of all franchise relationships is a trademark license.  At common law, trademark licenses were seen as a representation to the public of the source of a product.  An attempt to license a trademark risked the forfeiture of any right to royalties and the abandonment of the licensed mark.  See Lea v. New Home Sewing Mach. Co., 139 F. 732 (C.C.E.D.N.Y. 1905); Dawn Donut Co. v. Hart’s Food Stores, Inc., 267 F.2d 358, 367 (2d Cir. 1959).

Although the Trademark Act of 1905 did not allow for the licensing of trademarks, the Trademark Act of 1946, the Lanham Act, 15 U.S.C. § 1051, did allow a trademark to be licensed, but only where the licensee was “controlled by the registrant. . . in respect to the nature and quality of the goods or services in connection with which the mark is used.”  15 U.S.C. § 1127.   After the passage of the Lanham Act, a trademark could be licensed, as long as “the plaintiff sufficiently policed and inspected its licensees’ operations to guarantee the quality of the products they sold under its trademarks to the public.”  Dawn Donut, at 367.  After the Lanham Act had legitimized trademark licensing, the franchise model began to emerge in the 1950s, as the Patterson court noted (at 489), leading to the explosive growth of franchising over the last seven decades.

“Franchising is a heavily regulated form of business in California.”  Cislaw v. Southland Corporation (1992) 4 Cal.App.4th 1284, 1288.  Franchisors must provide prospective franchisees with detailed pre-sale disclosure documents under the California Franchise Investment Law, Corporations Code § 31000 et seq. and the FTC Rule, 39 Fed. Reg. 30360 (1974).  There are criminal, civil and administrative consequences for failure to comply.  Franchisees’ rights are protected by the California Franchise Relations Act, Business & Professions Code § 20000, et seq., which includes recently enhanced penalties for non-compliance.

Over the years, California courts have acknowledged the fundamental obligation of franchisors to impose controls over their licensees and have uniformly held that such controls do not create an employment or agency relationship.  See, e.g., Cislaw, 4 Cal.App.4th at 1295 (the owner of a brand may impose restrictions on a licensee “without incurring the responsibilities or acquiring the immunities of a master, with respect to the person controlled.”); Kaplan v. Coldwell Banker (1997) 59 Cal.App.4th 746, (“If the law were otherwise, every franchisee who independently owned and operated a franchise would be the true agent or employee of the franchisor.”).  This doctrine came to be known as the “Patterson gloss” and is the glue that holds the franchise business model together—allowing the franchisor to exert the controls necessary to license a trademark without incurring the responsibilities of an employer.

In its September 25, 2019 decision in Vazquez, the Ninth Circuit once again discarded the Patterson gloss like an extra part found in the bottom of an Ikea box after the hasty assembly of an end table.  According to the Vazquez court, Patterson had no relevance because it was just a vicarious liability decision, not an employment decision.  But Patterson was an employment case.

Patterson was a Fair Employment and Housing claim brought by a teenage girl after her supervisor had repeatedly groped her breasts and buttocks.  Patterson, at 479.  It is hard to understand why the Vazquez court considered the wage order claims before it to be more significant than Taylor Patterson’s right to pursue legal claims for sexual harassment.

Even more disturbingly, the Vazquez court disregarded the “Patterson gloss” because Dynamex [Dynamex Operations West, Inc. v. Superior Court of Los Angeles (2018) 4 Cal.5th 903] had favorably cited two Massachusetts decisions that applied the ABC test in the franchise context.  Id. at 39.  The Massachusetts cases were cited in Dynamex only as examples of cases where it had been more efficient to address “the latter two parts of the [ABC] standard” on a dispositive motion, rather than all three prongs.  Dynamex, 4 Cal.5th at 48.  The court never mentions franchising or the inconsequential fact that the parties in cited cases were franchises.  The Dynamex court could not be fairly understood to have abandoned its stalwart embrace of the franchise business model in its 2014 Patterson decision, without ever bothering to mention the case or to make any reference to franchising.  Yet the Vazquez court concluded that a passing citation to cases that happened to involve franchise companies in the Dynamex opinion—to make a procedural point that was unrelated to franchising in any way—was an occult signal from the California Supreme Court that the “Patterson gloss” had been abandoned by implication five years after its creation.

Nor was it valid for the Vazquez court to confine the “Patterson gloss” to vicarious liability cases.  As Witkin points out, California law on vicarious liability and employment developed together, so that most “of the rules relating to duties, authority, liability, etc. are applicable to employees as well as other agents.”  Witkin, Summary of California Law (10th ed., Agency & Employment, § 4).  The core obligation to control a trademark licensee—hard-wired by the Lanham Act into every franchise relationship—must be respected in both vicarious liability and employment cases if the franchise business model is to be preserved.

The Vazquez court had it right when it withdrew and de-published its original decision on July 22, 2019.  When the court certified the retroactivity issue to the California Supreme Court that day, it could have also certified the franchise issue back to the court that created the Patterson gloss, but it did not do so.  Franchisors are now left to wonder how they are to maintain existing long-term commercial relationships and to continue to sell franchises after the Vazquez opinion has taken from them the fundamental right to license trademarks without incurring the unintended liabilities of employers.

© 2019 Bryan Cave Leighton Paisner LLP

Read more on the topic on the National Law Review Franchising Law page.

Facebook “Tagged” in Certified Facial Scanning Class Action

Recently, the Ninth Circuit Court of Appeals held that an Illinois class of Facebook users can pursue a class action lawsuit arising out of Facebook’s use of facial scanning technology. A three-judge panel in Nimesh Patel, et al v. Facebook, Inc., Case No. 18-15982 issued an unanimous ruling that the mere collection of an individual’s biometric data was a sufficient actual or threatened injury under the Illinois Biometric Information Privacy Act (“BIPA”) to establish standing to sue in federal court. The Court affirmed the district court’s decision certifying a class. This creates a significant financial risk to Facebook, because the BIPA provides for statutory damages of $1,000-$5,000 for each time Facebook’s use of facial scanning technology was used in the State of Illinois.

This case is important for several reasons. First, the decision recognizes that the mere collection of biometric information may be actionable, because it creates harm to an individual’s privacy. Second, the decision highlights the possible extraterritorial application of state data privacy laws, even those that have been passed by state legislatures intending to protect only their own residents. Third, the decision lays the groundwork for a potential circuit split on what constitutes a “sufficiently concrete injury” to convey standing under the U.S. Supreme Court’s landmark 2016 decision in Spokeo, Inc. v. Robins, 136 S. Ct. 1540 (2016). Fourth, due to the Illinois courts’ liberal construction and interpretation of the statute, class actions in this sphere are likely to continue to increase.

The Illinois class is challenging Facebook’s “Tag Suggestions” program, which scans for and identifies people in uploaded photographs for photo tagging. The class plaintiffs alleged that Facebook collected and stored biometric data without prior notice or consent, and without a data retention schedule that complies with BIPA. Passed in 2008, Illinois’ BIPA prohibits gathering the “scan of hand or face geometry” without users’ permission.

The district court previously denied Facebook’s numerous motions to dismiss the BIPA action on both procedural and substantive grounds and certified the class. In moving to decertify the class, Facebook argued that any BIPA violations were merely procedural and did not amount to “an injury of a concrete interest” as required by the U.S. Supreme Court’s landmark 2016 decision in Spokeo, Inc. v. Robins, 136 S. Ct. 1540 (2016).

In its ruling, the Ninth Circuit determined that Facebook’s use of facial recognition technology without users’ consent “invades an individual’s private affairs and concrete interests.” According to the Court, such privacy concerns were a sufficient injury-in-fact to establish standing, because “Facebook’s alleged collection, use, and storage of plaintiffs’ face templates here is the very substantive harm targeted by BIPA.” The Court cited with approval Rosenbach v. Six Flags Entertainment Corp., — N.E.3d —, 2019 IL 123186 (Ill. 2019), a recent Illinois Supreme Court decision similarly finding that individuals can sue under BIPA even if they suffered no damage beyond mere violation of the statute. The Ninth Circuit also suggested that “[s]imilar conduct is actionable at common law.”

On the issue of class certification, the Ninth Circuit’s decision creates a precedent for extraterritorial application of the BIPA. Facebook unsuccessfully argued that (1) the BIPA did not apply because Facebook’s collection of biometric data occurred on servers located outside of Illinois, and (2) even if BIPA could apply, individual trials must be conducted to determine whether users uploaded photos in Illinois. The Ninth Circuit rejected both arguments. The Court determined that (1) the BIPA applied if users uploaded photos or had their faces scanned in Illinois, and (2) jurisdiction could be decided on a class-wide basis. Given the cross-border nature of data use, the Court’s reasoning could be influential in future cases where a company challenges the applicability of data breach or data privacy laws that have been passed by state legislatures intending to protect their own residents.

The Ninth Circuit’s decision also lays the groundwork for a potential circuit split. In two cases from December 2018 and January 2019, a federal judge in the Northern District of Illinois reached a different conclusion than the Ninth Circuit on the issue of BIPA standing. In both cases, the Northern District of Illinois ruled that retaining an individual’s private information is not a sufficiently concrete injury to satisfy Article III standing under Spokeo. One of these cases, which concerned Google’s free Google Photos service that collects and stores face-geometry scans of uploaded photos, is currently on appeal to the Seventh Circuit.

The Ninth Circuit’s decision paves the way for a class action trial against Facebook. The case was previously only weeks away from trial when the Ninth Circuit accepted Facebook’s Rule 23(f) appeal, so the litigation is expected to return to the district court’s trial calendar soon. If Facebook is found to have violated the Illinois statute, it could be held liable for substantial damages – as much as $1000 for every “negligent” violation and $5000 for every “reckless or intentional” violation of BIPA.

BIPA class action litigation has become increasingly popular since the Illinois Legislature enacted it: over 300 putative class actions asserting BIPA violations have been filed since 2015. Illinois’ BIPA has also opened the door to other recent state legislation regulating the collection and use of biometric information. Two other states, Texas and Washington, already have specific biometric identifier privacy laws in place, although enforcement of those laws is accomplished by the state Attorney General, not private individuals. A similar California law is set to go into effect in 2020. Legislation similar to Illinois’ BIPA is also currently pending in several other states.

The Facebook case will continue to be closely watched, both in terms of the standing ruling as well as the potential extended reach of the Illinois law.

© Polsinelli PC, Polsinelli LLP in California

For more in biometric data privacy, see the National Law Review Communications, Media & Internet law page.

“Bikini Baristas” Ordered to Cover-Up

The 9th Circuit court of appeals has enforced the City of Everett, Washington’s Dress Code Ordinance and amendments to the Lewd Conduct Ordinances. These ordinances require employees of “Quick-Service” facilities to cover “minimum body areas” (the dress code ordinance specifically stated that it was targeting an apparent influx of “bikini barista stands”). The owner of “Hillbilly Hotties,” a coffee stand where employees wear only bikinis, and several of the bikini baristas themselves challenged the ordinances as unconstitutionally vague. Plaintiffs also alleged that the Ordinances violated their First Amendment right to free expression.

The Court of Appeals reversed a lower court ruling that prohibited enforcement of the Ordinances on the ground that they are unconstitutionally vague. The appeals court explained that a person of ordinary intelligence would be able to understand the terms in the Ordinance and would be adequately informed of which body areas cannot be exposed or displayed.

The Ninth Circuit also concluded that Plaintiffs’ first amendment claim faltered based upon their failure to show a great likelihood that their intended message would be understood by those who received it. The court found that the baristas’ acts of wearing pasties and g-strings in close proximity to customers did not necessarily convey the baristas’ purported message of female body confidence and empowerment.

Read the full decision here.

 

© 2019 Proskauer Rose LLP.
This article was written by Anthony J Oncidi and Cole D. Lewis of Proskauer Rose LLP.
For more on First Amendment questions please see the National Law Review Constitutional Law page.

Intentional Accidents: California Supreme Court Announces that General Commercial Liability Policies Apply to Negligent Hiring, Training, and Supervising Claims for Failing to Prevent Intentional Torts

In a recent decision, the U.S. Court of Appeals for the Ninth Circuit observed that under California law, there was an unresolved question as to whether a commercial general liability (“CGL”) insurance policy covers an employer-insured for negligently failing to prevent an employee’s intentional misconduct. In essence, it was unclear whether such an incident constituted an “occurrence” that only covers “accidents,” as an intentional act cannot, by definition, be an accident. Through a certified question from the U.S. Ninth Circuit Court of Appeals, the California Supreme Court answered that such insurance policies indeed cover negligent hiring, training, and supervision claims because the crux of inquiry is the insured’s negligence—not the employee’s intent.

In Liberty Surplus Insurance Corporation, et al. v. Ledesma and Meyer Construction Company, Inc., No. 14-56120 (9th Cir. Oct. 19, 2018), the insured construction company was sued because its employee sexually abused a minor. Ledesma and Meyer Construction Company, Inc. (“L&M”) had been retained by a school district to oversee the construction of a middle school. During the course of construction, an employee sexually abused a 13-year-old student. The student sued L&M alleging claims of negligent hiring, training, and supervision of the employee that committed the intentional tort.

L&M’s CGL carrier filed a declaratory judgment action in federal district court, alleging that the claim against L&M was not covered by the insurance policy because it was premised on an intentional act. The district court granted summary judgment in favor of the plaintiff insurer. It reasoned that, because the policy covered “bodily injury” that was “caused by an occurrence,” and because an “occurrence” is defined as an “accident,” the claims for negligent hiring, training, and supervision were too attenuated from the intentional injury-causing conduct to trigger coverage.

On appeal, the Ninth Circuit certified the question of coverage to the California Supreme Court. The Supreme Court rephrased the question as follows: “When a third party sues an employer for the negligent hiring, training, and supervision of an employee who intentionally inured that third party, does that suit allege an ‘occurrence’ under the employer’s commercial general liability policy?” The Supreme Court answered in the affirmative, reasoning that, “[b]ecause the term ‘accident’ includes negligence, a policy which defines ‘occurrence’ as an ‘accident’ provides ‘coverage for liability resulting from the insured’s negligent acts.’” (internal citations omitted). On the basis of this answer, the Ninth Circuit reversed the district court’s decision and remanded for further proceedings.

This decision solidifies what amounts to an expansion of insurance coverage in the Ninth Circuit over an employer-insured’s employee’s intentional acts, where the claims are premised on the employer-insured’s negligent hiring and supervision of the employee. Underwriters should take note and consider appropriate exclusions and/or pricing of premiums of insured risks in California and elsewhere in the Ninth Circuit.

 

©2011-2018 Carlton Fields Jorden Burt, P.A.

Are You Ready for the Next Downturn? Ninth Circuit “Cramdown” Cases Affecting Real Estate Lenders

Plan Approval in a Multi-Debtor, Single-Plan Context

In In re Transwest Resort Properties, Inc., the Ninth Circuit addressed the Chapter 11 reorganization plan approval process where a single plan was proposed for multiple affiliated debtor entities whose cases were being administered jointly. Generally, for “cramdown” plans, the Bankruptcy Code requires that at least one class of impaired creditors vote in favor of a plan for it to be approved. In Transwest, a mezzanine lender who was the sole creditor for two of the five debtor entities and whose loan would be extinguished under the single, jointly administered plan, argued that impaired class approval had to occur on a per debtor basis, and that since it was the only impaired class member for two of the debtors, its votes against the plan in those debtor cases barred confirmation (as there were no impaired classes of creditors in those cases voting in favor of the plan). The bankruptcy court, the district court, and the Ninth Circuit rejected that position, holding instead that impaired class approval applied on a per plan basis, and that the votes of the impaired class of creditors of the other three debtors established consent from an impaired class across all debtors, and supported plan confirmation. The Ninth Circuit is the first circuit-level court to address this issue, and the lower bankruptcy courts remain split on the issue.

Potential Impact

Lenders, particularly mezzanine lenders, who lend to one or more isolated borrowing entities within a corporate group of debtor entities may not have the voting control in the plan confirmation process they assume exists to block “cramdown”, and should factor that reality into their risk assessments.

“Cramdown” Value = Replacement Value (even if it’s less than foreclosure value)

In In re Sunnyslope Housing Limited Partnership, the Ninth Circuit, in an en banc opinion, addressed how a secured creditor’s interest should be valued in the context of a “cramdown,” i.e. where the debtor seeks to retain and use creditor’s collateral in the reorganization plan and the value of that collateral is to be determined based on the proposed use of the property. Valuation of the property in the “cramdown” context was critical to how much the secured creditor would recover under the proposed plan, given that amount of its secured claim would be determined by the value of the property. The Sunnyslope case presented a highly unusual circumstance where the foreclosure value of the apartment complex collateral was significantly higher than its replacement or use value due to the existence of low-income housing covenants that would be extinguished in a prospective foreclosure.

Despite the higher foreclosure value supported by the secured creditor, the Ninth Circuit affirmed application of the replacement value standard for determining the secured creditor’s present value of its claim under the plan. In doing so, the Ninth Circuit affirmed prior precedent holding that only a property’s replacement value – to be determined in light of its “proposed disposition or use” – could be utilized for determining the amount of a secured claim in the cramdown context. In applying its replacement value standard in Sunnyslope, the Ninth Circuit confirmed that the highest and best use of collateral may not dictate the value of a creditor’s secured claim, even where the replacement value, as determined by the collateral’s anticipated use or disposition, is lower than its foreclosure value.

Potential Impact

Lenders facing a potential “cramdown” of its secured claim, based on present value of its claim against real property, should carefully analyze the potential difference between a property’s foreclosure value and its replacement value and adjust expectations accordingly.

© 2010-2018 Allen Matkins Leck Gamble Mallory & Natsis LLP

This post was written by Michael R. Farrell of Allen Matkins Leck Gamble Mallory & Natsis LLP.

Ninth Circuit Issues Decision in Novel Clean Water Act Case

The Ninth Circuit issued its long-anticipated decision in the Hawai’i Wildlife Fund v. County of Maui case yesterday. County of Maui affirmed a decision awarding summary judgment to environmental groups based on what the court viewed to be undisputed proof that four effluent disposal wells at a wastewater disposal facility were known to discharge into the Pacific Ocean and that the County of Maui had failed to secure an National Pollutant Discharge Elimination System (NPDES) permit for them.

We have previously blogged regarding existing regulatory uncertainty under the Clean Water Act (CWA). In this case, the Ninth Circuit’s decision focuses on whether a CWA “point source” that indirectly transfers material to relevant waterways falls within the statute. The Ninth Circuit essentially rejected the connection that the wells were “indirect,” instead holding that they were analogous to stormwater collection systems, which had previously been found to be regulated by the CWA.

The court supported this conclusion based on the evidence that the County of Maui knew from the time the wells were constructed “that effluent from the wells would eventually reach the ocean some distance from shore.” The court also noted that the fact that “groundwater plays a role in delivering the pollutants from the wells to navigable water does not preclude liability under the statute.”

 

© 2018 Schiff Hardin LLP
This post was written by J. Michael Showalter of Schiff Hardin LLP.
Read more Environmental News on the National Law Review Environment News page.

The Ninth Circuit Asks the California Supreme Court to Weigh in on Bag Checks

On August 16, 2017, the Ninth Circuit Court of Appeals issued an order certifying a question regarding an important wage and hour issue to the California Supreme Court: Is time spent on an employer’s premises waiting for and undergoing required exit searches of bags or packages voluntarily brought to work for purely personal convenience by employees compensable as “hours worked” under California law?

The question arose in Frlekin v. Apple, Inc., an appeal in a wage and hour class action brought against Apple, Inc., by current and former nonexempt California retail store employees. In the suit, the plaintiffs sought compensation for time that they spent waiting for and undergoing exit searches whenever they left Apple’s retail store locations, pursuant to the company’s Employee Package and Bag Searches policy. The at-issue policy, which is similar to ones in place at many other large retailers, required that employees undergo unpaid, manager-performed bag/package checks before leaving the stores—at breaks or at the end of their shifts.

In July 2015, a district court certified the case as a class action. However, in November 2015, the district court granted Apple’s motion for summary judgment and denied the plaintiffs’ motion for summary judgment and ruled that time spent by class members waiting for and undergoing exit-related bag searches pursuant to Apple’s policy was not compensable as “hours worked” under California law because such time was neither “subject to the control” of the employer nor time during which the class members were “suffered or permitted” to work.

On appeal, the plaintiffs argued that employees are under the control of the employer while waiting for and undergoing the bag checks because they are required whenever entering or leaving the premises. Apple countered that the time is not compensable because employees are not required to bring bags to work, and may avoid the searches altogether by not bringing a bag or package to the workplace. In its order certifying the issue for the California Supreme Court, the Ninth Circuit noted that Apple’s position “finds strong support” in the seminal California Supreme Court decision Morillion v. Royal Packing Co., 22 Cal. 4th 575 (2000), in which the court held that time spent by employees using employer-mandated transportation to get to a worksite was compensable, while noting that time spent on “optional free transportation” would not be compensable. However, the Ninth Circuit expressed questions about whether differences in context—i.e., employer-provided transport to and from the workplace versus searches at the worksite—rendered Morillion distinguishable.

Although the U.S. Supreme Court previously determined that similar bag checks were not compensable in Integrity Staffing Solutions, Inc. v. Busk, 135 S. Ct. 513 (2014), the California Supreme Court has not addressed the compensability of bag checks under California’s wage and hour laws, which involve a somewhat different definition of compensable work time. As the Ninth Circuit noted in its order, the consequences of any interpretation of California law with respect to bag searches “will have significant legal, economic, and practical consequences for employers and employees” throughout California and will materially affect the outcome of many pending lawsuits. For the time being, employers should consult with qualified employment counsel to mitigate risk while we wait for the California Supreme Court to weigh in.

This post was written by Philippe A. Lebel of  Drinker Biddle & Reath LLP.
Read more on litigation of wage and hour issues at the National Law Review.

Ninth Circuit Weighs In: Nevada “Superpriority” Law for HOA Superliens Violates Due Process

HOA superliensIn a 2-1 decision, the United States Court of Appeals for the Ninth Circuit overruled the 2014 decision from the Nevada Supreme Court about which we previously wrote. In Bourne Valley Court Trust v. Wells Fargo Bank, N.A., (August 12, 2016), the federal appellate court holds that the non-judicial foreclosure of Nevada HOA superliens cannot constitutionally extinguish a mortgage lender’s security interest.

In 2014, the Nevada Supreme Court held that, as a matter of lien priority, the foreclosure of a superlien for HOA assessments can extinguish a first mortgage. However, the Nevada Supreme Court did not address whether the provisions of Nevada state law governing notice to purported junior lienholders, including mortgagees, were constitutional.

In Bourne Valley, the home in question had a mortgage loan for $174,000 from Plaza Home Mortgage. The beneficial interest in the noted and deed was subsequently assigned to Wells Fargo, N.A. in 2011.  After the homeowner fell behind on her HOA payments, the HOA recorded a notice of delinquent assessment lien for $1,298.57 in August 2011.  In October 2011, the HOA recorded a notice of default and election to sell the home. Then, on April 9, 2012, the HOA recorded a notice of trustee/foreclosure sale against the property.  The Horse Pointe Avenue Trust then paid $4,145 for the home at a foreclosure sale, before conveying its interest in the property to the Bourne Valley Court Trust, which then filed an action to quiet title and extinguish any other junior liens.

In Bourne Valley, the Ninth Circuit panel notes that Nevada state law requires a purported junior lienholder to “opt in” before receiving notice of an HOA foreclosure sale, which the Court calls a “peculiar scheme” for providing mortgage lenders with information about when an HOA intended to foreclose on a property.  “Even though such foreclosure forever extinguished the mortgage lenders’ property rights, the [Nevada] statute contained “opt in” provisions requiring that notice be given only when it had already been requested,” the Court noted.  “Thus, despite that only the homeowners’ association knew when and to what extent a homeowner had defaulted on her dues, the burden was on the mortgage lender to ask the homeowners’ association to please keep it in the loop regarding the homeowners’ association’s foreclosure plans,” the Court continued. “How the mortgage lender, which likely had no relationship with the homeowners’ association, should have known to ask is anybody’s guess.”

Therefore, the Court concludes, Nevada’s laws violate the Due Process Clause of the U.S. Constitution.  From the Court’s decision:

Nevada Revised Statutes section 116.3116 et seq. strips a mortgage lender of its first deed of trust when a homeowners’ association forecloses on the property based on delinquent HOA dues. Before it was amended, it did so without regard for whether the first deed of trust was recorded before the HOA dues became delinquent, and critically, without requiring actual notice to the lender that the homeowners’ association intends to foreclose.

We hold that the Statute’s “opt-in” notice scheme, which required a homeowners’ association to alert a mortgage lender that it intended to foreclose only if the lender had affirmatively requested notice, facially violated the lender’s constitutional due process rights under the Fourteenth Amendment to the Federal Constitution. We therefore vacate the district court’s judgment and remand for proceedings consistent with this opinion.

The Court gets specific:

But that the foreclosure sale itself is a private action is irrelevant to Wells Fargo’s due process argument. Rather than complaining about the foreclosure specifically, Wells Fargo contends—and we agree—that the enactment of the statute unconstitutionally degraded its interest in the property. Absent operation of the statute, Wells Fargo would have had a fully secured interest in the property. A foreclosure by a homeowners’ association would not have extinguished Wells Fargo’s interest. But with the statute in place, Wells Fargo’s interest was not secured. Instead, if a homeowners’ association foreclosed on a lien for unpaid dues, Wells Fargo would forfeit all of its rights in the property.

For now, the Bourne Valley opinion is binding on all Nevada federal courts. It will also serve as strong persuasive authority (at the very least) in actions pending in Nevada state court, as well as throughout the U.S. in states with similar paradigms.

Delta, Boarding Line

“HOA liens, the elderly, and those with military service may now board.”

Copyright © 2016 Womble Carlyle Sandridge & Rice, PLLC. All Rights Reserved.

Ninth Circuit “Twists” Things Up for IP Protection in Yoga

In a recent decision, the U.S. Court of Appeals for the Ninth Circuit held that a certain yoga sequence developed by legendary yoga teacher Bikram Choudhury was not eligible for copyright protection.  The Court’s decision was based on the fundamental copyright principle known as the “idea/expression dichotomy,” which states that copyright protection is limited to the expression of ideas, and cannot extend to the ideas themselves.  The Court concluded that because the yoga sequence is an idea, process or system designed to improve health, copyright can protect only the words and pictures that are used to describe the yoga sequence (i.e. the book in which the sequence is described), but cannot be extended to protect the idea of the sequence itself.

Meditation

As a bit of interesting background, Bikram Choudhury, founder of the worldwide Yoga College of India, began his yoga career in India at the ripe age of four years old.  After he immigrated to the US in the 1970s, he opened a yoga studio and began offering classes in which a sequence of twenty-six yoga poses and two breathing exercises (known as the “Sequence”) was practiced over the course of ninety minutes in a room heated to 105 degrees Fahrenheit (intended to mimic the climate of India).  Bikram soon became a central figure in the yoga community in the US, including among the celebrity circuit and professional athletes.  In 1979 he published a book titled Bikram’s Beginning Yoga Class, in which the Sequence was described. Bikram registered the book with the Copyright Office in 1979, and in 2002 registered a “compilation of exercises” contained in the book.

The roots of the present dispute were planted in the 1990s, when Bikram introduced the “Bikram Yoga Teacher Training Course.”  The defendants in the present case completed Bikram’s course, and subsequently began offering “hot yoga” classes in their own studio, in which a style of yoga similar to the Sequence was taught.  Bikram then filed a complaint alleging that the defendants infringed Bikram’s copyright.

Of course, to prove a claim of copyright infringement, a plaintiff must first prove it has a valid copyright.  This is where Bikram did a “downward dog.”

First, the Court noted that the Sequence is a “system” or “method,” which was designed to “systematically work every part of the body, to give all internal organs, all the veins, all the ligaments, and all the muscles everything they need to maintain optimum health and maximum function.”  Thus, the Court went on, Bikram’s attempt to secure copyright protection for a healing art, or a system designed to yield physical benefits and a sense of well-being, was precluded by the idea/expression dichotomy. Essentially, the idea/expression dichotomy, which is codified in 17 U.S.C. § 102(b),

strikes a definitional balance between the First Amendment and the Copyright Act by permitting free communication of facts [and ideas] while still protecting an author’s expression.

The Court next addressed Bikram’s contention that the Sequence was entitled to copyright protection as a “compilation.”  A compilation is “a work formed by the collection and assembling of preexisting materials or of data that are selected, coordinated, or arranged in such a way that the resulting work as a whole constitutes an original work of authorship.”  17 U.S.C. § 101.  The Court noted that while a compilation may be eligible for copyright protection, it must nevertheless represent an “original work[] of authorship,” as required by Section 102. The Court held that the fact that the Sequence may possess many constituent parts did not transform it into a proper subject of copyright protection.

The Court then rejected Bikram’s argument that the Sequence was entitled to copyright protection as a “choreographic work.”  Although a “choreographic work” is a statutory category of work entitled to copyright protection, this term has not yet been defined in the copyright context by the Court or by Congress.  Nevertheless, the Court noted that defining the term was not necessary, since regardless of category, the work must meet the originality requirement imposed by Section 102.    Thus, the Court held:

The Sequence is not copyrightable as a choreographic work for the same reason that it is not copyrightable as a compilation: it is an idea, process, or system to which copyright protection may in no case extend.

As long as this case law is upheld and followed, proprietors of yoga sequences and similar matter will have a difficult time in getting past the “idea/expression dichotomy” hurdle, and may have to say “neti-neti” to copyright protection.  However, other forms of intellectual property protection may be available.  For example, in this case, the Court specifically noted that “if [the Sequence] is entitled to protection at all, that protection is more properly sought through the patent process.”  Additionally, proprietors can adopt and develop good will in a brand for the specific services associated with their sequences or similar matter (such as educational services in which the matter is taught), and rely on trademark law to prevent others from offering similar services under a similar mark.

Until the next yoga move in the IP arena, Namaste.

Article By Beth A. Seals of Squire Patton Boggs (US) LLP

© Copyright 2015 Squire Patton Boggs (US) LLP

Ninth Circuit Rules NCAA Violates Antitrust Law-Strikes Down Proposed Remedy

A three-judge panel of the Ninth Circuit Court of Appeals, in San Francisco, affirmed in part and reversed in part Judge Claudia Wilken’s August 2014 district court decision that NCAA rules restricting payment to athletes violate antitrust laws.

The Ninth Circuit agreed with Judge Wilken’s conclusion that NCAA rules restricting payment to athletes violated antitrust laws and authorized NCAA schools to provide athletic scholarships that cover the full cost of attendance. However, the Ninth Circuit rejected a key component of Judge Wilken’s decision which authorized the payment of $5,000 per year in deferred compensation for the use of individual athletes’ names, images and likenesses.

The opinion, written on behalf of the panel by Judge Jay Bybee, stated,

“NCAA is not above the antitrust laws, and courts cannot and must not shy away from requiring the NCAA to play by the Sherman Act’s rules….In this case, the NCAA’s rules have been more restrictive than necessary to maintain its tradition of amateurism in support of the college sports market.”

A more detailed analysis of the decision and its potential impact will be posted shortly.

Article By Gregg E. Clifton & Benjamin A. Tulis of Jackson Lewis P.C.
Jackson Lewis P.C. © 2015