The Medical Marijuana Regulation and Safety Act: The Stakes Have Never Been Higher For California’s Medical Marijuana Growers And Operators

by Peter B. Langbord – Partner, and Jacqueline Karama – Law Clerk, Foley & Mansfield Los Angeles

The smoke has finally cleared. Nearly twenty years after California became the first state in the nation to legalize medical marijuana, California  approved the first statewide regulation of medical marijuana. On October 9, 2015, Governor Jerry Brown signed three medical marijuana bills (AB 243, AB 266, and SB 643) into law. These three bills, collectively known as the Medical Marijuana Regulation and Safety Act (MMRSA), created a uniform statewide licensing and operating rules for individuals and businesses in the commercial medical marijuana industry. Specifically, the MMRSA did three things: established provisions for dual licensing, addressed law enforcement concerns, and protected the autonomy of cities and counties in regulating medical marijuana businesses within its borders,

Dual  Licensing

The MMRSA has established 17 types of licenses for growing, distributing, transporting, testing, manufacturing, and dispensing commercial medical marijuana. Under the MMRSA, holders of certain license types cannot simultaneously hold other licenses and only two licenses may be held in any one category. The Bureau of Marijuana Regulation (BMMR or “BUMMER”), the California Department of Food and Agriculture (DFA), and the Department of Public Health (DPA) are the designated state licensing authorities. These state agencies are slated to accept state licensing applications in 2018. In 2018, anyone engaged in commercial cannabis activity must obtain both a state license and a local license or permit.

To qualify for state licensing, the applicant must provide proof of local approval and evidence of a legal right to operate in the proposed location. Additionally, licensees with 20 or more employees must abide by terms of a labor peace agreement. Lastly, applicants must submit fingerprints to the Department of Justice for a criminal background check. It should be noted that applicants who obtain a state license may not begin to operate until that applicant also obtains a license or permit from the city or county in which he or she plans to operate. Further, applicants whose local license or permit is revoked will be prohibited from operating under a state license.

A facility or entity that can demonstrate to the authority’s satisfaction that it was operating and in good standing with the local laws by January 1, 2016, will receive priority state licensing in 2018. The MMRSA does not specify what is needed to demonstrate good standing to the “authority’s satisfaction.” However, since February of 2007, the California State Board of Equalization (BOE) has issued special notices informing medical marijuana sellers, growers, and dispensaries that they are subject to tax and are required to hold a seller’s permit. Thus, it is likely that a facility or entity that acquired a seller’s permit with the BOE by January 1, 2016 and satisfied all their tax obligations will be able to demonstrate good standing to the authority’s satisfaction.

Further, a facility or entity operating in compliance with local zoning ordinances and other state and local requirements on or before January 1, 2018, will be allowed to operate until its application for state licensure is approved or denied. Thus, a facility or entity interested in participating in the future commercial cannabis industry should acquire a seller’s permit with the BOE by January 1, 2018 and satisfy all their tax obligations. Currently, there is no fee to register for a seller’s permit and as of July 15, 2015, commercial cannabis business owners may pay their tax liability to the BOE in cash. This protects business owners who are concerned about obtaining bank accounts for their commercial cannabis business due to the risk of having their funds seized by the federal government. Moreover, a facility or entity must also ensure that they are operating in compliance with local zoning ordinances, pay local taxes, and otherwise comply with local requirements pertaining to medical marijuana businesses. This will allow them to operate in 2018 while waiting for their state licensure application to be considered.

Law Enforcement Concerns

Under the MMRSA, licensed individuals or businesses engaged in commercial cannabis activities permitted by a state license and local regulations are protected from state criminal prosecution. Previously, under Senate Bill 420, only qualified patients, persons with valid identification cards, and their primary care givers were protected from state criminal prosecution.

City and County Autonomy

The MMRSA explicitly provides that cities and counties have an unrestricted right to establish local ordinances and tax policies regulating medical marijuana businesses within its borders. Likewise, a city or county that previously banned medical marijuana businesses from operating within its borders may continue to do so. Authorizing cities or counties to form their own medical marijuana regulations resulted in several cities and counties imposing bans on medical marijuana cultivation, dispensaries, and delivery services within their borders.

In light of this, qualifying for both local and state licensing can be a real bummer for growers and operators. For instance, a facility or entity that  was  legally operating in the city or county prior to the ban, must either leave the city or operate illegally within that city or county. Although relocating a business is costly, it is recommended that facilities or entities that find themselves in this predicament should relocate to a city or county with more favorable laws towards medical marijuana businesses. Complying with local ordinances and requirements now will allow the facility or entity to continue to operate legally in 2018 while waiting for their state licensure application to be considered. Furthermore, a facility or entity that complies with local regulations can avoid arrest and criminal prosecution. Under the MMRSA, applicants may be denied state licensing if the applicant has been convicted of an offense substantially related to qualifications, including: (1) felony conviction for the illegal possession for sale, manufacturing, transportation, or cultivation of a controlled substance; (2) a violent or serious felony conviction; (3) a felony conviction for fraud, deceit or embezzlement; and (3) any sanctions by a local licensing authority in the past 3 years.

What Growers and Manufacturers Should Know

The DFA will issue growers licenses and the DPH will issue manufacturing licenses. Under the MMRSA, licensed growers and manufacturers must keep accurate records related to commercial cannabis activities and their facilities must be at least 600 feet from schools. In addition, growers and manufacturers must submit their products to a licensed distributor, who transports the products to a licensed lab testing entity for quality assurance. Distributors are entitled to collect a fee from growers for their services. After testing is completed, and depending on the contract entered into, the distributor can either transport the product to a licensed dispensary or return the product to the grower.

Since distributors are slated to serve as the middleman in the cannabis industry, it is very important that growers and manufacturers form close relationships with distributors now. This will help ensure a smoother and quicker process when contracting for the price and quantity of the products to be distributed as well as fees for the distributor’s services.  Moreover, growers and manufacturers who intend to sell their products directly to dispensaries should form close relationships with a dispensary owner. If a dispensary owner knows who you are and is aware of the quality of your product, more likely than not the dispensary owner will recommend your product to consumers. Likewise, to ensure higher quality product, growers should contract with distributors and begin testing their product to remedy any current problems with mold or pesticides.

Under the MMRSA growers and manufacturers must package or seal all their products in tamper-evident packaging and use a unique identifier. The DFA is slated to start a “track and trace program” that will track these products from the growing or manufacturing facility to a dispensary. Further, growers and manufacturers will have to comply with strict standards for packaging and labeling medical marijuana products. Failure to abide by those rules may result in civil and criminal penalties. In light of the packaging and labeling regulations, it is apparent that branding will be important for growers and manufacturers who want their products to remain compliant and stand out to consumers. Thus, it is advised that growers and manufacturers who want to protect their logos or ideas obtain a trademark. While the United States Patent and Trademark Office will not register trademarks for marijuana products, growers can register a medical marijuana trademark with the state.

Lastly, growers are subject to local land use regulations and permits. The MMRSA authorized several regulatory entities, such as the State Water Resources Control Board, to enact regulations in order to protect the state from environmental degradation as a result of illegal water diversion from marijuana cultivation. It is recommended that all growers become familiar with environmental requirements to ensure their operations do not impact water sources. Likewise, although edible medical marijuana products are not considered “food” or “drugs” subject to California’s food or drug safety standards, manufacturers should still ensure that their products conform to established food and drug safety standards. This will protect their consumers and avoid lawsuits for contaminated products.

What Distributors and Testers Should Know

The MMRSA authorized the BMMER to issue testing and distributer licenses. Licensed distributors and testers are prohibited from having a financial ownership interest in other licensed facilities. After receiving products from growers and manufacturers, distributors must submit the products to a licensed tester for laboratory testing and certification. Testers should ensure that they are complying with standard operating procedures and test all cannabis plants for concentration, pesticide, mold, or other contaminants. Additionally, it is recommended that a licensed tester develop a close relationship with distributors in order to gain more business.

After testing is completed, a licensed tester must return the product to the distributor for final inspection. Based on contract terms, the distributor can directly sell the product to dispensaries or return the product to the grower or manufacturer. It is highly recommended that distributors build close relationships with local growers and manufacturers. By doing so, you will have a better chance of contracting with them to sell their products directly to dispensaries and you can charge fees and applicable taxes for these services. Lastly, the MMRSA explicitly prohibits anyone except a transporter from transporting medical marijuana products from one licensed facility to another. Thus, it is recommended that those who apply for a distributor license should also apply for a transporter license.

What Dispensaries and Transporters Should Know

The BMMER is authorized to issue dispensing and transporter licenses. Applicants can obtain two types of dispensary licenses – a general Type 10 dispensary license and a Type 10 A dispensary license which allows for no more than three retail sites. A Type 10 A dispensary license holder may also apply for a growing, or manufacturing license. If the dispensary provides delivery service to consumers, the local government must approve of such a service. Currently,  dispensaries are not required to obtain a separate delivery service license.

Under the MMRSA, dispensaries are also authorized to organize as a for-profit entity. However, applicants should check their city or county local rules to ensure that the city or county allows for-profit medical marijuana businesses. Moreover, prior to selling cannabis products, dispensaries should ensure that the products were tested, have proper labels and are in tamper-evident packages. Further, the MMRSA explicitly provides that dispensaries “must implement sufficient security measures to both deter and prevent unauthorized entrance into areas containing medical cannabis or medical cannabis products and theft of medical cannabis or medical cannabis products at the dispensary.”

Lastly, the MMRSA provides that transporters may only apply for a Type 11 distributors license and “must license and register each location where the product is stored for the purpose of distribution.” However, transporters “only need to obtain licenses for each physical location where the licensee conducts business while not in transport, or any equipment that is not currently transporting medical cannabis or medical cannabis products, permanently resides.” Further, transporters must transmit an electronic shipping manifest to the state and carry a physical copy with each shipment. Since the MMRSA permits distributors to contract directly with growers and manufacturers, it is highly recommended that those applying for a transporters license should also apply for a distributors license. Otherwise, in order to gain a large consumer base, transporters should form close relationships with local distributors and dispensaries.

Conclusion

The MMRSA has established a detailed, complex regulatory scheme which will necessitate growers and operators to seek the advice of skilled counsel well versed in the intricacies of the MMRSA and other areas of the law. Counsel will be required to interface with city or county government as well as state agencies to obtain state and local licensing and permits. Further, growers and operators will need counsel to help with the following:

  • Marijuana Business formation

-Corporate formation

-Business license application

-Business Contracts

-Partnership agreements

-Business planning

  • Labor and employment laws
  • Land use and zoning expertise
  • Intellectual property and trademark services
  • Federal government prohibition and seizure of funds in bank accounts held by medical marijuana business ownersTax consequences and deductions of business expenses
  • Maintaining compliance with environmental regulations

 

For more information or assistance, contact Peter Langbord-plangbord@foleymansfield.com.

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FINRA’s New Recruitment Disclosure Rule – What Brokers Should Know

The Financial Industry Regulatory Authority (FINRA) filed its broker recruitment-disclosure rule (Rule 2273) with the Securities and Exchange Commission (SEC )on December 16, 2015. Rule 2273 requires brokers to deliver a FINRA-created “educational communication” to former customers when the broker is contacting the customer to try to bring the former customer to the broker’s new firm. Rule 2273 is a revised version of the rule which FINRA originally filed on March 10, 2014 (Rule 2243) and withdrew in June 2014. The past version required brokers to disclose to former customers detailed information about the broker’s compensation, including any bonuses for recruiting the former customer.

What Does the Rule Do?
Rule 2273 would require brokers to send a FINRA-created “educational communication” to former customers when attempting to recruit former customers to transfer their accounts to the broker’s new firm or when a former customer transfers his or her account to the broker’s new firm without the broker contacting the customer.

What Problem is FINRA Trying to Solve with this Rule?
When a broker leaves his or her firm, the broker often contacts former customers and encourages them to bring their accounts to the broker’s new firm. FINRA is concerned that the broker’s former customers may be only considering their relationship with the broker, at the exclusion of other important factors, when making their decision to transfer their accounts. FINRA believes that brokers are not motivated to disclose any less-than-sunny effects of a customer transferring his or her account when recruiting the customer to come to the new firm. To remedy this, Rule 2273 would require the broker to deliver a FINRA-created “educational communication” to the former customer. The educational communication highlights key factors the customer should consider when deciding whether to transfer their assets.

What Information Does the Required Disclosure Contain?
The education communication encourages investors to consider the following factors:

(1) Whether the broker has any financial incentives for recruiting the former customer that present a conflict-of-interest;
(2) The cost involved in transferring assets that are not directly transferable;
(3) Potential costs in transferring accounts, including price differences between the client’s current firm and the new firm; and
(4) The differences in services provided by the client’s current firm and the new firm.

FINRA hopes that the educational communication will encourage former customers to ask the broker more probing questions.

What Must a Broker Do to Comply With the Rule?
For a period of three months after a broker moves to a new firm, Rule 2273 requires the broker to deliver the educational communication to former customers when:

(1) The broker individually contacts the former customer to recruit him or her to transfer assets to the new firm; or
(2) The former customer, without being individually contacted by the broker, transfers his or her assets to an account at the broker’s new firm.
If the individualized contact is in writing, the broker must include the educational communication.
If the individualized contact is oral, the broker must orally explain to the customer that he will be providing an educational communication by mail or electronically. The broker must then provide the educational communication within three business days of the conversation.

If the former customer contacts the broker first, the broker must still deliver the educational communication with the customer’s account transfer documents.

Exemptions to Rule 2273
The rule exempts brokers from delivering the educational communication when a customer’s account is moved en masse with other customer accounts as a result of a merger or acquisition. The rule also exempts a broker from the delivery requirement if the only change is the broker of record (meaning there as been no transfer of the customer’s assets).

Concerns with the Rule
The Financial Cost of Compliance
Rule 2273 presents brokers and firms with yet another communication requirement. Like other SEC regulations, Rule 2273 requires brokers and firms to swallow the cost of sending the educational communication to customers. Fortunately, the educational communication can be send electronically.
Firms will need to establish procedures to ensure that they stay in compliance with Rule 2273, which requires time and resources. Firms will need to track whether and when former customers have been contacted and whether the delivery of the educational communication is needed. The cost of ensuring that the firm is in compliance will depend on the size and organization of the firm.

Discerning when the Obligation to Deliver is Triggered
The first scenario where the broker’s obligation to deliver the educational communication is triggered is when the broker individually contacts the former customer about transferring assets. There is industry concern that this requirement will be difficult to comply with because brokers who use representatives would need to rely on the representatives to report contacts with former customers. There is also industry concern that there may be scenarios where a customer transfers their assets without or prior to individualized contact by the broker – making it unclear whether or not the broker has an obligation to send the educational communication.

Rule 2273’s Interaction with Regulation S-P
There is industry concern that the educational communication will prompt customers to ask representatives questions that the representative will be unable to answer because Regulation S-P or other privacy agreements limit the representative’s ability to access the customer’s information. FINRA has stated that in such a situation, FINRA expects the representative to explain the situation to the customer. FINRA’s position is that Rule 2273 should have no effect on compliance with Regulation S-P or other privacy agreements.

Conclusion
Rule 2273 is an improvement on its initial form as proposed as Rule 2243 in March 2014, which required significant detailed disclosures by brokers of their financial interests in the recruitment of customers. Rule 2273 provides a succinct and simple educational piece to investors. However, the very succinct and simple nature of the educational communication raises the question of its necessity. FINRA does not give a lot of credit to the intelligence of investors or to the merits of the broker-investor relationship.

The factors noted in the educational communication are laughably basic. What investor does not consider and compare costs of the new firm when thinking of transferring his or her account? What investor does not realize there may be differences in services from firm to firm? What investor believes that a broker is entirely without financial incentives when trying to recruit his or her account to the new firm?

In a quality broker-investor relationship, the investor should expect the broker to act in the investor’s best interest and should be comfortable with asking the broker questions about the change in firms. Moreover, the broker is incentivized to make the customer aware of any negative effects of transferring because of the value the broker places in retaining the customer’s business.
FINRA should ask itself, is this statement-of-the-obvious that is the educational communication really worth the months of time, the cost of promulgation, and the use of the SEC’s and FINRA’s resources? FINRA should be a regulatory body, not an overprotective smothering parent to investors.

The opportunity for the public to comment on Rule 2273 closed on January 20, 2016. The SEC has an initial deadline of until March 8, 2016 to approve or disapprove the rule. The SEC may use its discretion to extend its deadline to approve or disapprove to April 27, 2016. If the SEC approves the rule, it will become effective within 180 days of the approval.

You may read the text of Rule 2273 here. The Federal Register notice for the publication of Rule 2273 can be found here.

Sarah Holm, a law clerk at the Minneapolis office of Foley & Mansfield, is a student at Mitchell Hamline School of Law and is a managing editor of the Mitchell Hamline Law Review. She can be reached via E-mail at sholm@foleymansfield.com.

 

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Strict Liability and 3D-Printed Medical Devices

Product liability issues related to 3D printing – read F&M law clerk Eric Lindenfeld’s co-authored article in the Yale Journal of Law and Technology.

Read the story here!

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LA Office Serves Veterans Through Los Angeles County Bar Association’s Veterans Project

On August 19, 2015,  Foley & Mansfield sponsored an event for veterans through the Los Angeles County Bar Association’s Veterans Project.  Nine F&M attorneys from the Los Angeles office volunteered for this pro bono work, assisting in helping approximately 60 veterans on legal issues ranging from traffic tickets and expungements to handling misdemeanor citations.

We will be continuing to partner with the Veterans Project in the Los Angeles office and plan to sponsor additional events throughout the year.

The Veterans Project was created in coordination with LACBA’s Armed Forces Committee and has partnered with U.S. VETS and Los Angeles County to provide pro bono legal services at the historic Patriotic Hall in downtown Los Angeles.  The program targets veterans who are unemployed and at risk of homelessness in Los Angeles County, considered to be  the homeless veterans’ capital of America.  The Veterans Project provides assistance to address specific legal issues which can become obstacles to full employment, which is critical for lifting veterans our of homelessness, and for preventing it in many cases.

Our appreciation to all of our attorneys who participated in this inaugural event:  Keith Ameele, Holly Acevedo, Noelle Natoli-Duffy, Judy Zipkin, Amadea Groseclose, Maryam Danishwar, Marissa Franco, Melanie Ayerh, and event organizer Lou Klein.

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Foley & Mansfield Named Among Florida’s Best Companies to Work For

bc15_sFoley & Mansfield is pleased to announce the firm was named among Florida’s 2015 Best Companies To Work For. Featured in the August issue of Florida Trend magazine, the firm ranked #8 in the large company category.   This is the sixth consecutive year the firm has made the Best Companies list.

The annual list is compiled following an evaluation of workplace policies, practices, philosophy, systems and demographics, including a survey to measure employee satisfaction. The combined scores determined the top companies and the final ranking.

The Best Companies To Work For In Florida program was created by Florida Trend and Best Companies Group and is endorsed by the HR Florida State Council. For a list of the 100 Best Companies To Work For In Florida, go to http://www.floridatrend.com/article/18708/best-large-companies.

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Architects Subject to Suit by Homeowners Despite Lack of Contractual Relationship

Architects in California may believe they are immune from a direct lawsuit by homeowners where their only contract is with the builder, and certainly where their contract with the builder disclaims any third party beneficiary rights.  Not so says the California Supreme Court.  In Beacon Residential Community Ass’n v. Skidmore, Owings & Merrill LLP (2014) 59 Cal.4th 568, the Court held that the prime architect on a condominium project owes a duty of care to future homeowners with whom it has no contractual relationship, even if the architect does not make final decisions regarding construction.  Pursuant to a contract with the owner and developer, the defendants/architects in Beacon provided architectural and design services for a 595 unit condominium building in San Francisco, knowing the finished construction would be sold as condominiums.  The homeowners association later sued the architects and others for various defects, including “solar heat gain” allegedly caused by the use of less expensive, substandard windows and an overall design that caused inadequate ventilation.  The architects challenged the complaint on the grounds they owed no duty of care to the Association or its members.

The Supreme Court relied on a 1958 decision, Biakanja v. Irving (1958) 49 Cal.2d 647, in analyzing whether the architects owed a duty of care despite a lack of contract between them and the plaintiffs.  The Court concluded that (1) the architects’ work was intended to benefit the homeowners living in the units, (2) the homeowners were among the class of persons who would foreseeably be harmed by negligently designed units, (3) the homeowners suffered injury due to the design defects, (4) given the nature of the architects’ role as the sole architects on the project, there was a close connection between their conduct and the injury suffered, (5) there was significant moral blame attached to the architects’ conduct, (6) and the policy of preventing future harm supported a finding of duty of care.  In their defense, the defendants argued that the plaintiff could sue the developer who could in turn sue the architects or the developer could seek an assignment of the developer’s rights against the defendants.   The Court noted that “the chief interest of prospective homeowners is to avoid purchasing a defective home, not only to have adequate redress after the fact” and found that holding the architects directly accountable would best vindicate this interest.

It remains to be seen how the Beacon decision will impact construction litigation going forward or, for example, how it will impact architects when they are not the sole project architect being paid $5 million for their services.  But certainly the class of potential claimants has been expanded.  Architects must be prepared to deal not just with developer’s cross-claims, but with plaintiff’s direct claims as well.

 

For additional information, contact Darren Johnson in our Los Angeles office at djohnson@foleymansfield.com.

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Miami Jury Rejects $18.6 Million Claim in Asbestos-Related Wrongful Death Trial

On August 3, 2015, after less than 3 hours of deliberations, a Miami-Dade County jury found Caterpillar Inc., and Dana Co. LLC, not liable for the death of a mechanic who died of mesothelioma after allegedly working with asbestos-containing parts manufactured by the companies. The six-member jury unanimously rejected the $18.6 million dollar claim against Caterpillar and co-defendant Dana Co. LLC.

The decedent, Pablo Gonzalez, died at age 79 in 2011, less than three months after being diagnosed with mesothelioma. The suit, brought by his surviving family, sought $18.6 million in damages. Closing arguments ended in this 14-day trial with the defendants arguing there was no proof that the decedent had developed mesothelioma from the use of their products.

The trial team defending Caterpillar Inc. consisted of lead attorney Jose Gaitan of The Gaitan Group PLLC, and Timothy J. Ferguson and Beranton J. Whisenant, Jr. of Foley & Mansfield, PLLP.

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Six F&M Attorneys Named to the 2015 Minnesota Super Lawyer / Rising Star lists

Foley & Mansfield is pleased to announce that six attorneys in the firm’s Minneapolis office have been named to the 2015 Minnesota Super Lawyers® and Rising Star® Lists.

Recognized on the 2015 Minnesota Super Lawyers list, which is comprised of no more than five percent of the lawyers in the state, are:

  • Founding partner Kyle B. Mansfield, Alternative Dispute Resolution
  • Partner Lisa M. Lamm Bachman, Employment Litigation
  • Partner Thomas W. Pahl, Business Litigation
  • Partner Janet G. Stellpflug,  Civil Litigation

Recognized on the 2015 Minnesota Rising Star list, comprising no more than 2.5 percent of Minnesota lawyers, are:

  • Partner Jamie L. Habeck Paz, Business Litigation
  • Attorney Wyatt S. Partridge, Real Estate

Many of the firm’s Minneapolis attorneys have been recognized on the Super Lawyers and Rising Stars lists for more than a decade. We invite you to learn more about these remarkable  attorneys and their practices.

Super Lawyers, a Thomson Reuters business, is a rating service of outstanding lawyers from more than 70 practice areas who have attained a high degree of peer recognition and professional achievement. The annual selections are made using a patented multiphase process that includes a statewide survey of lawyers, an independent research evaluation of candidates and peer reviews by practice area.

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FOLEY & MANSFIELD OPENS PORTLAND OFFICE; VETERAN LITIGATOR DIANE BABBITT JOINS FIRM

dbabbittNational Firm Enhances Services Through Expansion in Pacific Northwest

Foley & Mansfield announced today that it has expanded its profile in the Pacific Northwest with the addition of experienced litigator Diane C. Babbitt, a former partner and head of the Northwest litigation practice at Jackson Jenkins Renstrom. Babbitt will work in the Firm’s new Portland office.

“Our new Portland operations, coupled with the addition of such an experienced professional in that market, is a critical first step in the firm’s strategic growth initiative for the region,” says founding partner Kyle Mansfield. In addition to Babbitt, the firm currently has three attorneys licensed in Oregon who serve clients both regionally and on a national basis.

“Diane is an accomplished trial attorney who has consistently achieved excellent results for clients in bet-the-company product liability, toxic tort and construction litigation,” adds Scott Wood, managing partner of Foley & Mansfield’s Seattle and Portland offices. “We are very pleased to both welcome her to the firm and to enhance the service we provide to all of our clients.”

Foley & Mansfield’s Portland office is located at 1500 SW 1st Avenue in the southwest water front area of downtown Portland, just steps from the Willamette River and Tom McCall Waterfront Park.

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Architects Subject to Suit by Homeowners Despite Lack of Contractual Relationship

Architects in California may believe they are immune from a direct lawsuit by homeowners where their only contract is with the builder, and certainly where their contract with the builder disclaims any third party beneficiary rights.  Not so says the California Supreme Court.  In Beacon Residential Community Ass’n v. Skidmore, Owings & Merrill LLP (2014) 59 Cal.4th 568, the Court held that the prime architect on a condominium project owes a duty of care to future homeowners with whom it has no contractual relationship, even if the architect does not make final decisions regarding construction.  Pursuant to a contract with the owner and developer, the defendants/architects in Beacon provided architectural and design services for a 595 unit condominium building in San Francisco, knowing the finished construction would be sold as condominiums.  The homeowners association later sued the architects and others for various defects, including “solar heat gain” allegedly caused by the use of less expensive, substandard windows and an overall design that caused inadequate ventilation.  The architects challenged the complaint on the grounds they owed no duty of care to the Association or its members.

The Supreme Court relied on a 1958 decision, Biakanja v. Irving (1958) 49 Cal.2d 647, in analyzing whether the architects owed a duty of care despite a lack of contract between them and the plaintiffs.  The Court concluded that (1) the architects’ work was intended to benefit the homeowners living in the units, (2) the homeowners were among the class of persons who would foreseeably be harmed by negligently designed units, (3) the homeowners suffered injury due to the design defects, (4) given the nature of the architects’ role as the sole architects on the project, there was a close connection between their conduct and the injury suffered, (5) there was significant moral blame attached to the architects’ conduct, (6) and the policy of preventing future harm supported a finding of duty of care.  In their defense, the defendants argued that the plaintiff could sue the developer who could in turn sue the architects or the developer could seek an assignment of the developer’s rights against the defendants.   The Court noted that “the chief interest of prospective homeowners is to avoid purchasing a defective home, not only to have adequate redress after the fact” and found that holding the architects directly accountable would best vindicate this interest.

It remains to be seen how the Beacon decision will impact construction litigation going forward or, for example, how it will impact architects when they are not the sole project architect being paid $5 million for their services.  But certainly the class of potential claimants has been expanded.  Architects must be prepared to deal not just with developer’s cross-claims, but with plaintiff’s direct claims as well.

Darren Johnson is an attorney in Foley & Mansfield’s Los Angeles office, where he focuses his practice in commercial litigation, including construction litigation.

He can be reached at djohnson@foleymansfield.com or 213.283.2100.

 

 

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Harder Prevails in HOA Dispute

Foley & Mansfield partner Thomas A. Harder won a victory for the defense in a long running dispute between his client, a Minnesota homeowner’s association, and plaintiff, an adjoining retail association.

The plaintiff was a retail association that shared common property with the homeowner’s association.  Following a series of failed negotiations over construction defect and related financial issues, the plaintiff filed a motion against our client seeking to have a receiver appointed over the homeowner’s association, as well as for declaratory and injunctive relief relating to alleged construction defects at their shared property.

After argument, the Court ruled from the bench that the plaintiff failed to establish even one of the three required factors for appointing a receiver (insolvency, waste, and insufficient security).  The Court also denied the plaintiff’s motion for declaratory and injunctive relief, holding that there were no exigent circumstances requiring immediate Court intervention, and suggested the parties work together to resolve their differences.  The ruling from the bench was significant for our client as it confirms its right to make decisions concerning the property.

Harder was assisted by attorney Kyle Eidsness, both of the firm’s Minneapolis office.

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Lamm Bachman Wins in Closely-Held Shareholder Dispute

It was a case of modern-day piracy, in which a minority investor attempted to steal credit for patented technology and take control of a company.  However, Foley & Mansfield Minneapolis partner Lisa Lamm Bachman, assisted by attorney Tessa Mansfield, successfully defended our client in this highly convoluted and contentious closely-held shareholder dispute, fraught with false representations and bad faith on the part of the plaintiff.

After literally years of dealing with plaintiff’s false assertions and continued demands, a series of compromises were made, with the parties entering into a confidential settlement agreement providing the plaintiff with substantial equity in the company and allowing him to assume a leadership role. This was in exchange for promised access to millionaire investors, a release of his claims, his promised connections with large manufacturers, and an end to the distractions he had caused for the company.

Fast-forward to the matter at hand – with the plaintiff  seeking to enforce this settlement agreement and seeking reinstatement as the CEO of the company, despite the fact that the shareholders voted in favor of his removal due to breach of alleged fiduciary duties, among other factors.

In defending the matter, our client, as well as the company’s corporate lawyer who had documented the transaction, asserted that the settlement agreement had been mutually rescinded at the plaintiff’s request.  At the time, the plaintiff was undergoing a contentious divorce and did not want his ex-wife to discover that he had received additional shares in the company that could have been considered marital property.

Bachman was able to effectively discredit the plaintiff on the stand, demonstrating numerous contradictions in testimony provided to the court, during depositions, and in statements made during his divorce proceedings and to state auditors.

After a three-day bench trial, the judge issued his ruling from the bench dismissing all of plaintiff’s claims against our client in their entirety. In doing so, the court found that the plaintiff lacked any credibility and the evidence demonstrated that he had engaged in unconscionable conduct which operated to bar any equitable relief. The judge went so far as to state that in his many years both on the bench and as a practicing trial attorney, he had never seen a less credible witness than the plaintiff. The court also determined that the evidence demonstrated the settlement agreement had been mutually rescinded by the parties.

While the burden of proof for rescission is “clear and convincing,” the court found that in this case, rescission of the settlement agreement was proved “beyond a reasonable doubt.”  The ruling also awarded our client $50,000 for his counterclaim against the plaintiff for plaintiff’s conversion of sale proceeds for the sale of our client’s personal shares of company stock. Our client will also be allowed to make application for an award of attorneys’ fees and costs incurred in the defense of this matter.

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Arbitrary Tiered Water Rates Violate California Constitution – Capistrano Taxpayers Association v. City of San Juan Capistrano – What the Appellate Court’s Ruling Means

Arbitrary Tiered Water Rates Violate California Constitution

Today, the California Court of Appeal, 4th District, Division 3, issued its long-awaited opinion in the Capistrano Taxpayers Association v. City of San Juan Capistrano water rates case.  Louis C. Klein, a partner in Foley & Mansfield’s Los Angeles office, represented Amicus Curiae Mesa Water District in this case siding with the taxpayers association which sought to invalidate the City’s tiered water rates.

Capistrano Tax Payers Association v. City of San Juan Capistrano
California Court of Appeal
4th Appellate District, Division 3
Case No. G048969

Today, the California Court of Appeal, 4th District, Division 3, issued its long-awaited opinion in the Capistrano Taxpayers Association v. City of San Juan Capistrano water rates case. The ruling sheds much needed light on the State Constitutional requirements for determining how municipalities and water districts can set water rates.  Proposition 218, enacted by the voters in 1996, set certain constitutional limitations on the ability of government agencies to generate revenues without taxpayer approval.

First, and most importantly, the Court’s ruling does not invalidate all tiered water rates.  Instead, in line with many state, regional and locally-instituted conservation efforts, as well as Governor Brown’s recent mandate to cut water usage by more than 25% in California, the Court’s ruling only invalidates arbitrary rate structures, whether tiered, blocked or flat, that do not meet the mandatory requirements found in Proposition 218.

Commentators should not read the Court’s ruling as a death knell for water conservation.  It is not.  Harmonizing Proposition 218 with water conservation efforts are not mutually exclusive endeavors.  Water conservation as mandated by the California Constitution, Article X, section 2 is not at odds with Proposition 218 so long as conservation is attained in a manner that does not exceed the proportional cost of service attributable to the owner’s property.  As such, legal conservation efforts to reduce water usage is not in jeopardy by the Court’s ruling.  The Court’s ruling only covers those government agencies who, for expediency’s sake or to arbitrarily generate revenue and create slush funds, circumvent strict constitutional standards and protections for California’s citizens without first providing proper notice, rate making documentation and calculations, and an opportunity to be heard.  This is what the City of San Juan Capistrano failed to do.  Instead, the City created a rate model that jumped exponentially between tiers creating inherent inequalities, without any explanation, justification, or backup data to support its model – a rate model that was never disclosed to the City’s rate payers and never warranted as Proposition 218 compliant.

Compliance with the mandates of Proposition 218 is not an exceptionally difficult endeavor. Reliable and credible rate models and calculations that take into account Proposition 218 standards will more than likely be given credence by the courts.  Arbitrary and untrustworthy rate models will not, purely revenue-generating rate models will not, and rate models that are not proportional to the cost of service will not.  If the costs of service increase due to constrictions in water supplies as envisioned by the Governor and the State’s water suppliers, then these increased costs can be passed through to the rate payers through Proposition 218’s constitutional safeguards, not in spite of them.  This is the rub for most government agencies – to take the steps needed to draft, vet and create credible rate models and to expend sufficient effort to ensure accountability under Proposition 218.

The Court’s ruling today only emphasizes the need for government agencies to follow the State’s Constitution in creating and implementing water rates so that all Californians have a say in how they utilize, pay for and conserve one of the State’s most precious commodities.

Below is a chart of the legal issues and the rulings of the Court of Appeal, 4th District, Division 3

LEGAL ISSUES  RULING

1.  Are Tiered Water Rates Constitutional?  Yes.  Tiered water rates are constitutional as long as they (1) satisfy the proportionality and revenue-neutrality provisions of Proposition 218, (2) relate to a service that is immediately available, and (3) have been disclosed to the public prior to implementation.  Allocation-based conservation pricing consistent with California Constitution, article X, section 2, and Water Code section 372, is not at odds with Proposition 218 so long as conservation is attained in a manner that shall not exceed the proportional cost of the service attributable to the parcel and there is adequate support for the inequality between tiers, depending on the category of user.

2.  Are the City’s tiered water rates compliant with Proposition 218?  No.  The City failed to present credible evidence that the arbitrary and incremental increases between its tiered rates were compliant with Proposition 218.  First, the City failed to provide any specific financial data to support its tiered rates.  Second, the City’s significant rate jumps between tiers are not cost-related.  Finally, the tiered rates are not proportional to the cost of service to each parcel.

3.  Are the City’s tiered rates a penalty?  No. The City’s tiered water rates cannot be considered a penalty because such a theory would be inconsistent with the Constitution.  Penalty rates that bear no relationship to the actual cost of providing water service would make a “mockery of the Constitution.”

4.  Does the City bear the burden of proof in demonstrating compliance with the mandates of Proposition 218?  Yes.  Proposition 218 expressly provides that the challenged agency (the City) bears the burden of proving compliance with Proposition 218.  It is clear that the voters intended to reverse the usual deference accorded governmental action and to reverse the presumption of validity by placing the burden on the governmental agency.

5.  Can the City charge rate payers for non traditional, non-potable water services (recycled water)?  Yes.  The Court found that providing recycled water is not a fundamentally different kind of service from providing traditional potable water. When each kind of water is provided by a single local agency that provides water to different kinds of users, some of whom can make use of recycled water while other can only make use of traditional potable water, providing each kind of water is providing the same service.  Non-potable water for some customers frees up potable water for others.  Since water service is already immediately available to all customers of the City, there is no violation of Proposition 218 (Constitution, Article XIII(D), section 6(b)(4) requiring that a service is actually used by, or immediately available to, the owner of the property.)

6.  Is there sufficient evidence to determine whether residential rate payers who are lower than average water users are being required to pay for recycling facilities that would not be necessary but for above-average consumption?  Insufficient evidence.  The Court remanded this issue back to the trial court for further findings on whether charges to develop the City’s nascent recycling operation have been improperly allocated to users whose levels of consumption are so low that they cannot be said to be responsible for the need for that recycling.

Read the ruling here. For more information, contact Louis Klein at 213.283.2112 or lklein@foleymansfield.com.

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California’s New Paid Sick Leave Law: What Employers Should Know

California’s new paid sick leave law, the Health Workplaces, Healthy Family Act of 2014 (“Paid Sick Leave Law”) came into effect on January 1, 2015. Starting July 1, 2015, the new law entitles an employee to accrue up to three paid sick days in a 12-month period for the diagnosis, treatment or care of an existing health condition or for preventative care for the employee or the employee’s family members. Because the new Paid Sick Leave Law brings about significant changes regarding sick leave, employers should be aware of the changes and ensure that their sick leave policies and procedures are compliant with the new law.

Who is covered by the law?

All California employees, including part-time, per diem, and temporary employees, are covered by the law, as long as they work 30 days or more within a year. The law applies to both exempt and non-exempt employees, and there is no minimum number of employees needed in a workplace for the Paid Sick Leave Law to apply.

Only four groups of employees are exempt from coverage: (1) employees covered by collective bargaining agreements with specific paid leave provisions, (2) providers of publicly-funded in-home supportive services, (3) employees in the construction industry covered by a valid collective bargaining agreement, and (4) flight deck and cabin crew members of air carriers that receive compensation for time off equivalent under the new law.

How is paid sick leave earned?

Employees accrue paid sick leave at the rate of at least one (1) hour per every thirty (30) hours worked beginning either July 1, 2015 or on the first date of employment – whichever comes later. An employee may accrue up to 24 hours (or three days) per each 12-month employment year. Exempt employees accrue at least one (1) hour every forty (40) hours worked.

How much paid sick leave may an employee take?

Employees may request and use accrued paid sick days beginning on the 90th day of employment. Employers must allow employees to carry over paid sick days to the following year of employment up to six (6) days or forty-eight (48) hours of paid leave, but can limit the number of sick leave days used up to three (3) days in any one year. Employees may take as little as two (2) hours at a time in paid sick leave.

How is sick leave pay calculated?

The rate of sick leave pay is the employee’s hourly wage. If, during the 90-day period of employment before taking accrued sick leave, the employee had differing hourly pay rates, was paid by commission, or was a non-exempt salaried employee, then an employer must calculate the sick leave pay by dividing the employee’s total wages (not including any overtime pay), by the employee’s total hours worked in the full pay periods worked during the 90-day period.

What must an employer do to comply with the Paid Sick Leave Law?

Beginning January 1, 2015, an employer must provide notice to employees of their rights under the Paid Sick Leave Law when they are first hired and must place a poster informing employees of their rights in a conspicuous place in the office. Beginning July 1, 2015, an employer must comply with the sick day accrual, carry over, and use requirements. An employer cannot deny an employee the right to use accrued sick days and cannot discharge, demote, or discriminate against an employee for using accrued sick days. Further, an employer must provide notice on an employee’s itemized wage statement of the number of available sick days. Finally, an employer must keep records which document the number of hours worked, the number of paid sick days an employee has accrued, and the number of paid sick days an employee has used for at least three years.

For those employers that already have sick leave policies in place, changes are not necessarily required, so long as the policies provide no fewer than three paid sick days (24 hours) annually, allow for sick leave to carry over year to year up to six (6) days or forty eight (48) hours per year, and allow sick leave to be used for the employee and their family members, including parents-in-law, grandparents, grandchildren, and siblings.

Conclusion

The new Paid Sick Leave Law is significant, since California had no mandatory sick leave (paid or otherwise) prior to this law coming into effect. All California employers – no matter the size – should examine their sick leave policies and ensure they are in compliance prior to July 1, 2015, when the accrual period starts.

Amadea Groseclose, an attorney in the Los Angeles office, of Foley & Mansfield, is a member of the firm’s national employment law group. For more information or assistance, Amadea can be reached at 213-283-2100 or mgroseclose@foleymansfield.com.

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Los Angeles Attorneys Joseph Macha and Maryam Danishwar Obtain Defense Verdict in Los Angeles County Superior Court

Joseph Macha and Maryam Danishwar of Foley and Mansfield’s Los Angeles office received a defense verdict on behalf of a client after a 3 ½ week jury trial in Los Angeles County Superior Court.

Plaintiff was an employee of a Southern California utility company who worked primarily on pipelines.  Plaintiff sued our client, a sub-contractor to the utility company at issue, claiming that Defendant’s removal of an asbestos containing product exposed him to asbestos, causing his asbestosis.

The jury deliberated for 1½ days before returning a defense verdict on September 26, 2014 finding that our client did not act in a negligent fashion.

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