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B U C H A L T E R N E M E R
Social Networking: Is It Your Business?
Windfall or Peril? Intellectual Property in Bankruptcy
New Faces
Points from the President
Sidebar: Expedite Your Green Technology Patent Application
Defaulting and Holdout Lenders: Are You Protected?
Lis Pendens: Requires Civil Action in a Court of Law
Your Employee has Joined a Competitor: Now What?
Watch Payroll Tax Returns and Payments:A Trap for Employers and Business Insiders
Attorney Profiles
Continued on page
6Continued on page
WINTER 2010
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IN THIS ISSUE
POINTS& authorities
Q U A R T E R L Y N E W S L E T T E R
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New Year, New Decade New Era
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Social Networking: Is It Your Business?PAUL BRESSAN and JESSIE REIDER
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Windfall or Peril? Intellectual Property in BankruptcymICHAEL LOvITz and AUSTIN BARRON
Social networking—Facebook, Twitter, mySpace, LinkedIn, Blogs—has exploded. Never has information been disseminated so quickly, or so globally. This can be a tremendous marketing resource, but the advantages come at the price of increased risks for employers. Consider the following scenario: Shelly has a Facebook account, and she regularly posts status updates on what she has been doing at work. Through her Facebook account, Shelly is “friends” with co-employees, supervisors, customers/clients and a variety of other acquaintances. After a long week of 18-hour workdays, Shelly posts her status as, Longest week ever! BossLady made me work non-stop the whole week. How can I possibly produce quality work without rest? Guess quality isn’t that important to some people....As soon as this merger closes, home to sleep! Finally! Shelly’s post is quickly reviewed by many of her “friends,” and she receives some comments. The exchange of information reveals the identity of the other company in the merger. It also calls into question Shelly’s (and therefore her employer’s) quality of work on the merger. When Shelly’s “BossLady” learns of the posting, she does her own Internet search and finds some pictures of a scantily clad Shelly, surrounded by drug paraphernalia, taken during a time when Shelly was on sick leave from work. Shelly’s boss takes these pictures to Human Resources, demanding that the company fire Shelly immediately.
With the recent downturn in the local and global economies, many businesspeople have been introduced (some rudely) to a world previously unknown—bankruptcy. While the initial reaction when faced with a business or trading partner who is experiencing financial difficulty (or when facing financial difficulty yourself) is to worry about the dollars, other factors often play an equally large role in negotiating to a successful result. Not surprisingly, intellectual property has now taken on an increasingly significant role in bankruptcy cases, particularly as businesses move steadily into the electronic realms, including cyberspace, social networking and virtual reality.
The overlap of bankruptcy and intellectual property is thought by many to impact only those companies seeking the protections of the bankruptcy laws, or those to whom such companies owe money. The true impact, however, is broader than many companies may realize. Intellectual property rights may constitute valuable collateral
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New Faces
IvO kELLERSan FranciscoAssociateReal Estate(415) [email protected]
LESLIE BROWNESan FranciscoShareholderReal Estate(415) [email protected]
mICHAEL mUSE-FISHERLos AngelesAssociateLitigation(213) [email protected]
TYLER OHANIANLos AngelesAssociateReal Estate(213) [email protected]
JAmES ANDREWSan FranciscoShareholderReal Estate(415) [email protected]
JUNE DASHLos AngelesAssociateReal Estate(213) [email protected]
ALExANDRA kAzHOkINLos AngelesAssociateInsolvency & Financial Solutions(213) [email protected]
ELIzABETH BRIDGESSan FranciscoAssociateReal Estate(415) [email protected]
mICHAEL BRODYSan FranciscoShareholderInsolvency & Financial Solutions and Real Estate(415) [email protected]
DAvID kOzAkScottsdaleShareholderBusiness Practices(480) [email protected]
HOWARD ELLmANSan FranciscoShareholderReal Estate(415) [email protected]
WILLIAm GELmScottsdaleShareholderReal Estate(480) [email protected]
LESLIEANN HAACkEScottsdaleShareholderLitigation(480) [email protected]
kAmBIz IzADIOrange CountyShareholderBusiness Practices(949) [email protected]
RIkESH PATELSan FranciscoAssociateReal Estate(415) [email protected]
JAY PAxTONSan FranciscoShareholderReal Estate(415) [email protected]
THOmAS SHERWOODSan FranciscoShareholderBank & Finance and Real Estate(415) [email protected]
GLENN zWANGSan FranciscoShareholderLitigation(415) [email protected]
3POINTS & AUTHORITIES
This issue of Points and Authorities is the first of the New Year, and the first of a new decade.
Another first this year is our addition of a new group of talented attorneys in San Francisco, six Shareholders and three Associates, specializing in all matters of real estate—land use, entitlement, finance, development, litigation, leasing, and beyond—working throughout California and nationally, too. They join
our existing multifaceted and highly regarded Real Estate Practice Group, bringing its number to 30 attorneys, firmwide. We are delighted to welcome them and I invite you to read more about our new real estate attorneys on page 10.
The past three years were years of steady growth for the Firm, despite a difficult economic environment. Three of this issue’s articles address problems that we’ve dealt with throughout the tough times: how to handle intellectual property assets in bankruptcy (michael Lovitz/Austin Barron), defaulting and holdout lenders (Farhad Bahar/melissa korn), and employers making the tough (and very dangerous) choice of paying their employees before paying payroll taxes (Stuart Simon).
Apropos of this new decade is our cover article on social networking and its recent explosion onto the workplace scene, written by Paul Bressan and Jessie Reider. This new form of online media raises many unprecedented dilemmas for employers and employees alike, which will no doubt continue into the foreseeable future. Also, although employee raiding and trade secret theft have always been with us, we’ve witnessed a marked rise in recent years. So Rick Darwin, one of our experts in this area, offers a primer on how to protect yourself when one, or more, of your key employees leaves for a competitor. Finally, Nadav Ravid and Nicole Sahagen explain lis pendens--its power and its pitfalls.
We thank you for being with us this past decade, and we look forward to accompanying you in continuing growth and prosperity in the coming one, as well.
Points from the PresidentRICk COHEN
Rick CohenPresident and Chief Executive Officer
Expedite Your Green Technology Patent ApplicationSANDRA P. THOmPSON, PhD
On December 8, 2009, the U.S. Patent & Trademark Office (USPTO) began a year-long pilot program to expedite green technology-based patent applications by pulling them from the queue and advancing them to examination. The types of applications being pulled include technologies directed toward improvement of environmental quality, energy conservation, development of renewable energy resources and greenhouse gas emission reduction. For most applications, this means that as much as 10 to 24 months may be cut from the conventional patent examination process.
This program is available to both pending applications and future applications, however, the USPTO will only accept the first 3,000 petitions for current pending applications. If one of your patent applications meets the criteria, it is important to take advantage of this new program now. Future applications must be filed by December 8, 2010 to take advantage of the pilot program.
Additional requirements include:The application must be a non-reissue, non-provisional utility 1. application or an international application that has entered the national stage;
The application must be classified in one of the green 2. technologies considered acceptable by the USPTO; The application must contain three or fewer independent 3. claims and 20 or fewer total claims; The claims must be directed to a single invention;4. The petition must be electronically filed; 5. The petition must be filed before the first office action on 6. the merits is issued; andThe petition must be accompanied by a request for early 7. publication and a fee of $300.
The USPTO indicated that it will reevaluate the program at the end of 2010 to determine whether it should be renewed for another year or permanently enacted. If you have a patent portfolio containing U.S. and foreign applications, you may be able to expedite your patent applications through the Patent Prosecution Highway, even if it is not a green technology.
Sandra P. Thompson, PhD is a Shareholder in the Firm’sIntellectual Property Practice Group. She can be reached at(949) 224-6282 or [email protected].
S I D E B A R
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Defaulting and Holdout Lenders:Are You Protected?FARHAD BAHAR and mELISSA kORN
The adverse impact of the current economic crisis on many lenders has given rise to an increased risk of “holdout lenders” and “defaulting lenders.” This article addresses these two risks, and recommended provisions to be included in credit agreements to mitigate the impact upon other lenders within the same group or syndicate of lenders.
The Holdout LenderIf a proposed action by the agent or lender group needs majority or unanimous consent or authorization and a lender refuses to consent, that lender is deemed a “holdout lender.” Although it may not be practical or possible to do so in the current market, it is advisable to have provisions in your credit agreement allowing the agent or borrower to replace a holdout lender at par.
Your credit agreement should provide that if the holdout lender refuses to execute the necessary documentation to effect an assignment of its portion, then it will be deemed to have executed and delivered such documentation. Additionally, you will want to specify that until replaced, the holdout lender is still obligated to make its pro-rata share of advances and to purchase a participation, in an amount equal to its pro-rata share, for any letters of credit issued.
The Defaulting LenderA “defaulting lender” is commonly defined as a lender that fails to fund its portion of the loans to the borrower or to pay any other amount required under the credit agreement, or has given notice to the agent that it will not comply with its payment obligations under the credit agreement, or has become insolvent. It is important to remember that even when a lender in the syndicate defaults, the other lenders are generally not excused from their own obligations under the credit agreement. But, they are not responsible for the defaulting lender’s obligations.
You may want to consider expanding the definition of defaulting lender in your credit agreement to include the following additional matters that do not directly concern performance of a lender’s obligations under the credit agreement: failure by the lender to make payments under other credit agreements, failure by the lender’s affiliates to make payments under other credit agreements, bankruptcy of the lender’s parent company or affiliates, or deterioration in the credit rating of the lender, its parents or affiliates. This higher standard allows for added flexibility in exercising protective measures when it appears that a lender will default on its obligations under the credit agreement.
You should consider including a “yank-a-bank” clause in your credit agreement, which allows the borrower or the agent to remove a defaulting lender from the syndicate. The borrower or the agent can force a defaulting lender to assign its commitments and outstanding loans to another lender that is acceptable to
the borrower and agent. Practically speaking, however, it may be difficult to find another lender willing to assume the defaulting lender’s commitments.
Alternatively, you may want to include provisions that permit the non-defaulting lenders to fund the portion of the defaulting lender’s commitments. This may not be an attractive option to the lenders unless the credit agreement also provides that the defaulted portion will have payment priority. Another option is to permit the borrower to non-ratably reduce the commitment of a defaulting lender, but this may not be attractive to the borrower as it reduces the size of the facility.
In addition, you should include a provision specifying that a defaulting lender loses its right to vote, except for certain matters such as increases in that lender’s commitments. This may be achieved by providing that a defaulting lender is disregarded for matters requiring a required/majority lenders vote. Or, you may consider eliminating a defaulting lender’s voting rights, even for matters requiring approval by all lenders.
Furthermore, think about eliminating a defaulting lender’s right to receive commitment fees due under the credit agreement. You may also want to include a provision altering the payment priority for any prepayments made under the credit agreement when a lender is in default, thus allowing the non-defaulting lenders to share (on a pro rata basis) such prepayments up to the amount of the defaulted portion of the loan.
Finally, you should consider a provision requiring that if a lender defaults, the borrower will cash collateralize the defaulting lender’s portion of any letter of credit issued or swingline loan made, thereby insulating the credit issuer or swingline lender from additional credit risk. Alternatively, you may wish to simply eliminate the borrower’s right to obtain letters of credit or swingline advances.
ConclusionIn order to protect yourself against the higher risk of a holdout or defaulting lender in the current environment, it is prudent to review your credit agreement and other credit documents to make sure these important provisions are included.
Farhad Bahar is a Shareholder in the Firm’s Bank and Finance Practice Group. He can be reached at (213) 891-5103 or [email protected].
Melissa Korn is an Associate in the Firm’s Bank and Finance Practice Group. She can be reached at (213) 891-5029 or [email protected].
5POINTS & AUTHORITIES
Continued from page 1
Social Networking: Is It Your Business?PAUL BRESSAN and JESSIE REIDER
As this scenario shows, a number of employment and intellectual property issues can arise from an employee’s use of social networking sites, such as the following: 1. ConfidentialityIntentionally or unintentionally, network exchanges may reveal confidential company information, as well as confidential information of a company’s customers or clients. Such information could even include trade secrets that a company or its customers/clients have gone to great lengths to protect. 2. Discrimination/Defamation/HarassmentSocial networking exchanges may contain discriminatory, defamatory or harassing material. Depending on the circumstances, such postings could expose a company to claims that are based on this posted material. 3. PrivacyEmployees who post on social network sites, or who post their pictures on the internet, may not expect their employers to uncover this material, much less that they could subject themselves to disciplinary action (including termination of employment) for this activity. Such employees often have rude awakenings. A new term, “doocing,” has even evolved to reference the termination of an employee for the content of the employee’s Internet posting. Employers are equally dismayed when employees file claims against them for monitoring their Internet activity and taking disciplinary action against them for the activity. There are federal laws in place that control aspects of monitoring employee activity on the Internet, as well as common law and even constitutional protections in some jurisdictions (such as California) that protect privacy. The application of these protections often depends on whether the employee has a reasonable expectation of privacy, whether the social networking was on company time, with company equipment and with a company identified address, or whether the postings were done on an employee’s personal time, using an employee’s personal, password-protected account. Employers should take note of the fact that they may learn too much information (“TmI”) from the monitoring of an employee’s social networking activities, even if the monitoring is lawful. For example, an employer may obtain information regarding an employee’s religious beliefs or sexual orientation. If an employer were to take subsequent disciplinary action against that employee for a lawful and proper reason, the employee may nevertheless claim that the disciplinary action was unlawfully based on information obtained by the employer regarding the employee’s religious beliefs or sexual orientation. 4. ContentJust as with the spoken or written word, certain Internet speech is more protected than other forms of Internet speech. For example, an employee who is engaged in “whistle-blowing” likely enjoys
greater protection than an employee who is harassing another employee or who is revealing a company’s trade secret. moreover, there is an evolving body of law that seeks to protect an employee’s lawful off-duty activity. 5. Time ManagementAlthough a company allows its employees to engage in social networking using company resources, this does not give the employees the unfettered right to engage in this activity excessively throughout the day. Companies should take steps to ensure that its employees are not abusing this privilege.
6. PoliciesThe most important step that a company can take to maintain control of social networking on company time, with company property, is to promulgate a policy regarding the use of the Internet that includes provisions with respect to social networking. Among other things, this policy should specify the following:
Employees are fully responsible for any online activity using • the company’s address or using company resourcesEmployees should make certain that their postings are • accurate, and they should correct any inaccurate statements they makeEmployees have no expectation of privacy with respect to their • use of the company’s network systems, and the company may monitor their use to the fullest extent permitted by lawDiscrimination, defamation, harassment and other such • inappropriate material is strictly prohibitedThe use of copyrighted material must be authorized• Employees should never use the name of a customer/client • without proper written permissionEmployees must maintain the confidentiality of the trade • secrets and proprietary information of the company and its customers/clients
ConclusionAs companies allow their employees to use the various social networking vehicles to seek business opportunities, it becomes increasingly important for these companies to maintain proper control of this usage. In short: it is your business.
Paul Bressan is a Shareholder in the Firm’s Labor & Employment Practice Group. He can be reached at (213) 891-5220 or [email protected].
Jessie Reider is an Associate in the Firm’s Intellectual Property Practice Group. She can be reached at (213) 891-5031 or [email protected].
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Continued from page 1
Windfall or Peril? Intellectual Property in BankruptcymICHAEL LOvITz and AUSTIN BARRON
for lending agreements, and in many circumstances security interests may trump license rights. Thus, for example, users of a particular software program may end up losing the right to use that software after the developer goes through bankruptcy, or may be forced to renegotiate their license agreements. Thus, a business that relies on intellectual property licenses may experience unexpected vulnerability due to impact of the bankruptcy of another entity.
Companies experiencing their own financial difficulties also should be mindful of the potential impact of bankruptcy. An intellectual property portfolio will often be a valuable asset of a bankruptcy estate, and the bankruptcy laws may provide excellent tools to protect, regain control over, or even enhance the value of a company’s intangible assets, providing means to craft opportunity out of chaos. On the other hand, bankruptcy may also prevent companies that license their intellectual property from continuing to enjoy the benefits of such licenses, presenting another potential pitfall for any companies attempting to reorganize.
Although other areas of law involving intellectual property are perhaps equally as perilous for the uninitiated, bankruptcy presents a significant minefield for companies who depend on intellectual property or depend on companies that do. This arises from the often counter-intuitive ways that intellectual property rights are treated in connection with a bankruptcy case. As but one example, when a company files a petition under chapter 11, the debtor remains “in possession” of its assets and retains the ability to operate its business, subject to the various limitations and with certain powers granted by the Bankruptcy Code. Included in these is the power to “assume” or “reject” a debtor’s “executory contracts.” When a debtor assumes a contract, it cures any defaults and promises to perform going forward; when a debtor rejects a contract, it is no longer obligated to perform and the non-debtor party is allowed to assert a claim for whatever damages it has. most intellectual property licenses are considered executory contracts and therefore fall under the Bankruptcy Code’s scheme for assumption or rejection. While the decision to assume or reject a contract is often left to the judgment of the debtor, the Bankruptcy Code limits the debtor’s ability to assume most licenses of intellectual property, classifying them as a type of personal services contract. While classifying the software license for an off-the-shelf copy of Windows xP as a “personal services contract” may seem patently absurd, it is nonetheless accurate—a counterintuitive result of the confluence of intellectual property and bankruptcy law.
The practical impact is that the rules on intellectual property give debtors one more thing to worry about. Companies that manufacture goods under a licensed process, that distribute goods under a trademark license, that have a license to distribute movies or DvDs, that have a significant web presence, or that simply have a large number of computers in their business, have many more possible issues and negotiations in front of them if they file bankruptcy. On the other hand, parties who license their intellectual property to a debtor may discover they have significant leverage which can be brought to bear to solidify, or even improve, their position if the license is critical to the debtor’s business. It is important to note here that a license doesn’t necessarily have to arise under a written license agreement—where a company manufactures, stores or distributes trademarked items, for example, it may be operating under an oral license, or simply pursuant to standard (unwritten) industry practice. The additional wrinkles raised by intellectual property issues make it all the more important to plan early to minimize their impact on a successful reorganization, whether that involves your own company or an important trading partner. They should also cause any company thinking of entering into an intellectual property license to pause and consider fully the possible implications should one of the parties ever need to declare bankruptcy, particularly if that license or the intellectual property is a critical component to their business. The need for experienced legal counsel and early attention to these issues is all the more important when your rights and obligations may not be set forth in a written contract. Companies are well served to address these issues with their legal counsel at the start of the licensing process so that they can consider all options and alternatives while they are still available.
Michael Lovitz is a Shareholder in the Firm’s Intellectual Property Practice Group. He can be reached at (213) 891-5517 or [email protected].
Austin Barron is Senior Counsel in the Firm’s Insolvency and Financial Solutions Practice Group. He can be reached at (213) 891-5615 or [email protected].
Lis Pendens: Requires Civil Action in a Court of LawNADAv RAvID and NICOLE SAHAGEN
When an owner of real estate refuses to sell to a buyer or denies occupancy rights to a tenant, the buyer or tenant may sue to force the owner to specifically perform its obligations. If the owner then sells the property for value to a third party who is unaware of the buyer or tenant’s rights in the property, the third party, known as a bona fide purchaser, or BFP, may acquire the property free and clear. In other words, the buyer or tenant cannot force the BFP to honor the original owner’s obligations. Instead, the buyer or tenant would only be able to recover money damages from the original owner. To protect a buyer or tenant from this situation, the law allows the buyer or tenant to record a lis pendens. The lis pendens provides constructive notice to the world that the buyer or tenant has filed a lawsuit against the owner claiming an interest in the property. Following a lis pendens, a third party that purchases the property does so subject to the buyer or tenant’s rights. Consequently, the third party could now, unlike before, be forced to honor the original owner’s obligations if the buyer or tenant prevails in its lawsuit against the original owner. In the recent case of Manhattan Loft, LLC v. Mercury Liquors, Inc. 173 Cal. App. 4th 1040, a tenant recorded a lis pendens following a demand for arbitration. In response, the owner filed a slander of title action against the tenant alleging that the lis pendens was wrongfully recorded because the notice referred to an arbitration proceeding rather than to a civil action. The owner claimed that it sustained damages of $10 million because the recording of the lis pendens notice had scared away potential third-party buyers. The trial court ruled in the tenant’s favor. The court of appeal, however, reversed, holding that a lis pendens may only be filed when an action is pending in a court of law. The Court of Appeal explained that the Code of Civil Procedure Section 405.20 provides that a party to an “action” who asserts a real property claim may record a notice of lis pendens. But the tenant was not authorized to file the lis pendens because no “action” was filed in a court. The court emphasizes that Title 4.5 of the Code of Civil Procedure which governs recording notices of certain actions, “repeatedly uses the word ‘action’...and there is no reference to arbitration proceedings. This plain language compels the conclusion that a lis pendens may only be recorded when an action is pending in state or federal court.”
The Court of Appeal further reasoned that from a policy-related standpoint, this “plain language” reading is consistent with the legislative intent to narrowly construe the lis pendens statutes; and thus, the court refused to expand the definition of the word “action” to include arbitration proceedings. The Court added that the lis pendens statutory scheme is intended in part to protect property owners by allowing them to expunge or remove the lis pendens by way of an expedited “mini-trial.” This removal process, however, is only available by applying to the court in which the action is pending, as an arbitrator has no authority to expunge a lis pendens.
The court concluded that if its holding is “problematic,” it is up to the legislature to change the law so that arbitration is added as an appropriate “action” that supports the recording of a lis pendens.
Practice PointerCode of Civil Procedure Section 1298.5 provides that a party to an action who records a lis pendens does not thereby waive a right to arbitrate or compel arbitration. The court advised that by utilizing the procedure set forth therein, “all parties’ interests, vis-à-vis the lis pendens statutes and the right to arbitration, are protected.” Consistent with Section 1298.5, the tenant should have (1) filed an action in Superior Court, (2) recorded the lis pendens, and then (3) moved the court to stay the action to permit the parties to arbitrate the real property claims.
Nadav Ravid is a Shareholder in the Firm’s Real Estate Practice Group. He can be reached at (213) 891-5087 or [email protected].
Nicole Sahagen is an Associate in the Firm’s Real Estate Practice Group. She can be reached at (213) 891-5025 or [email protected].
7POINTS & AUTHORITIES
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Your Employee has Joined a Competitor: Now What?RICHARD DARWIN
The departure of an employee to pursue an opportunity with a direct competitor is not an uncommon event. Under California law, it is neither wrongful nor illegal for an employee to join or start a competing enterprise, and thereafter to compete for his or her former employer’s customers and business. However, employees frequently (and sometimes unknowingly) cross the line from fair competition to unfair and actionable conduct in the process of making a career move of this sort.
This article lays out steps that an employer can take to: (1) identify wrongful conduct committed in connection with an employee departure; (2) remedy the harm caused by wrongful conduct; (3) protect the company’s assets and (4) minimize the risk of harm from future departures.
The unexpected and/or unexplained departure of an executive, key employee, or group of employees should almost always raise a red flag, particularly when the individual resigns to join a direct competitor. All three situations implicate the same threat: that of a competitor attempting to gain a business advantage through unfair and wrongful means. That threat may be carried out through one or more of the following tactics:
Theft and misuse of trade secrets and proprietary 1. materials;Destruction of company assets and files;2. Recruitment of employees by unfair means;3. Disruption of business operations; and/or4. Interference with customer relationships.5.
The first step an employer should take is to investigate the circumstances surrounding the employee’s departure and secure important evidence. While not exhaustive, the following is a list of steps that should be taken as quickly as possible after you learn of the employee’s resignation. keep in mind that time is of the essence: delay will create a risk of lost, overwritten, or deleted data and evidence, and will also provide the departing employee with the time and opportunity necessary to exploit his or her wrongdoing.
Secure the defecting employee’s computer and make sure 1. no one uses it. It will be a primary source of information and evidence. If the IT department recycles back-up tapes, immediately 2. suspend that practice to avoid overwriting critical evidence. Check the office or workspace of the defecting employee 3. for missing documents and files.If the building has security cameras, secure or get copies of 4. the tapes or electronic files.
Pull all relevant employment agreements, non-disclosure 5. agreements, and employment policies signed by the departing employee.Interview coworkers. Quite often, someone has an axe to 6. grind, e.g., an employee who wanted to leave with the departing employee(s) but was left behind, or who was asked to join the defecting employee(s) but chose not to do so. These will be very important witnesses. If the departing employee is still on the premises, request an 7. exit interview and the preparation of a memo summarizing the status of his or her pending projects. Document any expenses and damages related to the 8. departures, e.g., headhunter fees, lost employees, lost business.Get an outside lawyer involved. 9.
key things to look for during this investigative phase include:
missing documents and files, as well as any other evidence • that the employee has physically removed company property or information;Evidence that data has been copied from a computer hard • drive or server onto CDs, DvDs, portable storage devices, or has been sent to an online storage site;Evidence that the employee began competing before he • or she resigned, e.g., recruited co-workers, or solicited clients.Evidence of data destruction, e.g., indications that the • employee engaged in the mass deletion of computer files, or “scrubbed” a hard drive.
Next, evaluate the company’s options. Ask the hard questions, e.g., has the company has suffered any real harm? Even if the investigation fails to uncover any evidence of wrongdoing, it is still a good idea to send a letter reminding the former employee of his or her obligations under any operative agreements, and demanding the return of any materials that he or she may still have in their possession.
If, on the other hand, you discover evidence that the employee engaged in wrongful conduct, you may need to take more aggressive measures. The first step is often a cease and desist letter, which may be used to demand the return of stolen materials, and/or to demand that the former employee stop soliciting customers, recruiting employees, and/or using confidential materials. On occasion, exigent circumstances may warrant immediate litigation and an application for temporary restraining order. All of these decisions will necessarily depend upon the results of your investigation and consultation with your litigation counsel.
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BUCHALTER NEmER9
In the tough times, there is temptation to delay payments and preserve cash. One obligation that must never be delayed is payroll taxes. The failure to file payroll tax returns and/or pay payroll taxes in a timely fashion will result in substantial penalties. As interest is charged on both unpaid taxes and penalties, the amounts due can rapidly compound to a point where it may not be possible to pay them.
This article reviews the basics of the payroll tax process and then discusses the penalties that result from noncompliance. Although the focus of this article is on Federal payroll taxes, please remember that state agencies, such as the California Employment Development Department, have similar requirements and penalties.
The Filing of Payroll Tax ReturnsThe primary payroll tax return for businesses is filed on Form 941, Employer’s Quarterly Federal Tax Return. This return is filed four times per year and is due on the last day of the month following the end of each calendar quarter. For example, the return for the quarter ending December 31, 2009 must be filed on or before January 31, 2010. The taxes reported and paid on Form 941 are the employer and employees’ FICA taxes, both Social Security and medicare taxes, and federal income tax withholdings.
The failure to timely file a payroll tax return will result in a penalty of 5 percent of the unpaid tax due with the return for each month or part thereof up to a maximum penalty of 25 percent of the tax due.
The Payment of Payroll TaxesPayments of payroll taxes are somewhat complicated as the timing of the payments vary from business to business depending upon the amount of taxes dues. For small businesses, with taxes of less than $2,500 per quarter, taxes may be paid with the Form 941, using the Form 941-v, Payment voucher. All other businesses are required to make deposits using the Electronic Federal Tax Payment System (“EFTPS”). The frequency of deposits depends upon the business’s payroll taxes during the previous four-quarter look-back period. If the quarterly amount in the look back period was $50,000 or less, but at least $2,500, taxes are deposited on a monthly basis. If the amount during the look-back period was more than $50,000, deposits must be made on a semiweekly basis. Deposits generally are due three business days after the employer’s payday. For deposits of $100,000 or more, the deposit is due the next banking day after the payday.
Failure to properly make deposits generates substantial penalties. Deposit penalties are determined using calendar days, starting from the due date of the liability. The penalty is 2 percent for deposits made one to five days late; 5 percent for deposits made six to 15 days late; 10 percent for deposits made 16 or more days late, and 10 percent for deposits made at an unauthorized financial institution, paid directly to the IRS, or paid with the tax return.
Amounts subject to electronic deposit requirements, but not deposited using EFTPS are subject to a 10 percent penalty. A 15 percent penalty is imposed on amounts still unpaid at the earlier of 10 days after the date of the first notice from the IRS asking for the tax due, or the day the employer received notice and demand for immediate payment.
In addition to deposit penalties, there is a failure-to-pay penalty if the payroll taxes are not paid by the due date of the payroll tax return. The failure-to-pay penalty is 0.5 percent per month or any part of a month for each month the taxes are unpaid. The maximum failure-to-pay penalty is 25 percent of the tax due.
Personal Liability for Payroll TaxesIf the portion of the payroll taxes representing the employees’ federal income, FICA Social Security or medicare taxes are not withheld, not deposited or not paid to the United States Treasury, responsible persons may be held personally liable for the taxes if the “trust fund recovery penalty” applies. The trust fund recovery penalty is equal to 100 percent of the taxes that were withheld from employees (the “trust fund taxes”). The trust fund recovery penalty applies jointly and severally to all persons who are determined to be responsible for collecting, accounting for, and paying over the trust fund taxes, and acted willfully in not doing so. A “responsible person” can be an employee, an officer of a corporation, a partner of a partnership, an accountant, a volunteer director/trustee or a sole proprietor. Essentially, a “responsible person” may be someone who signs checks for the employer or otherwise has the authority to cause the spending of business funds. “Willfully” means voluntarily, consciously and intentionally. A responsible person acts willfully if the trust fund taxes are not paid and any other creditor is paid.
There may be several responsible persons, but any of them can be held liable for the entire amount of the trust fund taxes. Once the trust fund recovery penalty is assessed, the government may use all collection methods to collect, including levying on bank and brokerage accounts and garnishing wages. In addition, the liability for trust fund taxes is not dischargeable in bankruptcy.
Stay Current on Payroll Tax ObligationsThe failure to pay payroll taxes can be devastating. The amount of unpaid taxes, coupled with penalties and interest can more than double the liability in a few years. With payrolls being paid two to four times a month and the payroll tax returns due quarterly, it takes little time for the unpaid taxes, penalties and interest to reach an overwhelming amount. The Internal Revenue Service aggressively pursues liabilities and shuts down businesses when it is concerned that the payroll taxes will not be paid and the amount of unpaid taxes will increase. Usually, the IRS will pursue responsible individuals for the trust fund penalty only after the liability can not be satisfied from the assets of the employer. From the perspective of an insider at a failing business, whether trust fund taxes are satisfied before the employer’s share of unpaid payroll taxes may be critical.
If cash flow is tight, do not fall behind on payroll tax returns and payroll tax deposits. Once a business falls behind in its payroll taxes or, even worse, receives notice from the IRS or other tax agency, tax counsel should be contacted as soon as possible.
Stuart Simon is Senior Counsel in the Firm’s Tax and Estate Planning Practice Group. He can be reached at (213) 891-5019 or [email protected].
Watch Payroll Tax Returns and Payments:A Trap for Employers and Business InsidersSTUART SImON
10POINTS & AUTHORITIES
Attorney Profiles
On January 1, 2010, a group of nine real estate and land use attorneys—six Shareholders and three Associates—joined Buchalter Nemer in San Francisco. This talented group of lawyers came to the Firm from Ellman Burke Hoffman and Johnson, a well-known San Francisco real estate boutique. The easy rapport and camaraderie among them is readily apparent and that same agreeability is present when meeting them one-on-one. That warmth, combined with their enthusiasm for the practice of real estate law, accounts in large part the good fit in ability and personality with Buchalter Nemer. Certain other commonalities run through the group as well—a passion for education, love of travel and the outdoors. Please meet our new San Francisco Shareholders:
James Andrew came to the law after serving in the Navy for five years. He had majored in law and economics in college, and knew that once out of the service, law school would be the next step. He has practiced land use and real estate exclusively for the entire 10 years of his practice, and his passion for the field is evident when he describes his involvement
on the Board of the San Francisco Planning and Urban Research Association (SPUR), and in the development of state land use policy, which includes testifying at committee hearings on issues ranging from urban sprawl to global warming. An avid soccer player who is now the father of two small children, Jim has replaced weekly soccer games with family time as his primary extracurricular activity.
Leslie Browne’s real estate practice has covered the gamut. She has been involved in leasing, purchases and sales, finance and development. The development aspect of her practice expanded into the international arena when she joined morrison and Foerster in San Francisco, working on global deals and traveling to Japan. She has since continued to focus
on development and redevelopment, working on projects such as the San Francisco museum of modern Art and the redevelopment of the Pleasanton BART station. An avid athlete, Leslie travels annually to the Canadian Rockies for back-country skiing, to the Sierras for mountaineering trips, and to other locations around the globe, such as Cuba, mexico and Chile for kayaking, whitewater rafting and surfing. She has dived in Australia’s Great Barrier Reef, traveled to India, Western and Eastern Europe, as well as Turkey and Costa Rica, before they became popular travel destinations. Between trips, Leslie cycles and runs, and has been known to ride her bike to the office from her home in marin.
michael Brody’s background as a real estate and mortgage broker who regularly hired and worked with counsel on loans entangled in bankruptcy, paved the way for his entry into the practice of law. A tall thoughtful man with a quiet demeanor and a wry sense of humor, he began his career at a bankruptcy boutique, then joined EBHJ. It was a good fit for his
practice, which remains about two-thirds real-estate finance and one-third bankruptcy with a real estate emphasis. michael is involved in continuing legal education, teaching and writing for CEB. He was active in establishing the first charter school in Contra Costa County, which received a distinguished school
award. michael worked with the school for six years. A jazz and music fan, and an amateur folk musician, he jams with friends for fun, and enjoys time with his family.
Focused and energetic, Howard Ellman can multitask while giving you his undivided attention. He was Chair of the real estate practice at Brobeck Phleger and Harrison for nine years before establishing his own firm, which grew to become EBHJ. Looking out of his office window, Howard can see many of the buildings for which he negotiated entitlements. His client base
has grown in size and sophistication to include, among others, the solar industry, an area in which he is looking forward to combining talent and resources with his new Buchalter partners. In addition to his thriving practice, Howard has written two historical novels, the second of which is going to print in February 2010. An avid outdoorsman, he loves to fish, and backpack in Alaska. Howard also qualified for the 1984 Olympic trials in skeet shooting.
Jay Paxton, who was managing Partner at EBHJ, remains managing Partner of the new Buchalter Nemer California St. office. He has also joined the BN Board of Directors. Jay served as Special Assistant to the Chancellor at U.C. Berkeley, where he studied both as an undergraduate and a law student. He began his law practice at a real estate firm in marin,
where his clientele grew and with it, the need to move into offices in San Francisco; a match was found with EBHJ. In addition to his practice, Jay sits on eight boards, among them, the Board of Trustees of the U.C. Berkeley Foundation and the Board of Directors of International House at U.C. Berkeley. He is also on the Executive Committee of the Fisher Center for Real Estate and Urban Economics at the Haas School of Business. Passionate about education, Jay served on the marin Community Foundation Board of Trustees for a number of years, focusing on educational reform. He has also traveled the globe, visiting India, China, South America, Southeast Asia, Europe and the middle East.
Thomas Sherwood has a twinkle in his eye and an easy smile. He comes from a law enforcement family, but his predilection for business and the organization of it, led him to combine the two into practice. Describing his evolution as a lawyer and his favorite projects, Tom’s enthusiasm is evident. For a client developing an industrial park, he was
involved in everything from the architectural control committee to negotiating the financing. As he put it, he loves “seeing things grow.” Tom joined EBHJ in the 1990s along with Jay from their marin County law firm in order to better serve their high-profile clients. Tom’s enthusiasm for his eight-year tenure on the marin County Board of Education was also evident, he was involved with establishing a new collaborative model for bargaining with the teachers union, one that ultimately, had great success. Tom, who also enjoys traveling, recently visited New zealand.
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Points & Authorities
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11POINTS & AUTHORITIES
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In the event of litigation, choose your claims wisely. The removal of documents and materials by a departing employee may or may not constitute trade secret misappropriation, depending upon the nature of the information taken and the method by which it removed and used by the former employee. Be aware that bringing a cause of action for trade secret misappropriation in bad faith, or purely anti-competitive purposes, can result in liability for the defendant’s costs and attorney fees.
It is always a good idea to evaluate the things the company can do before a departure to minimize the harm that a departing employee can potentially inflict, and to maximize its chances of prevailing in the event of litigation.
Review and update employee policies and handbooks. • Put key employees and executives under contract, if • appropriate. Identify the company’s trade secrets. •
make sure that the company is taking steps consistent • with those used by others in the relevant industry to maintain the secrecy of its confidential information, e.g., password protected computer networks, “confidential” stamps and footers on sensitive documents, and locked file cabinets.
Taking care of these things proactively will pay huge dividends down the line.
Rick Darwin is a Shareholder in the San Francisco office of Buchalter Nemer and frequently represents corporate and individual clients in the litigation of trade secret misappropriation, employee mobility, and corporate raiding cases. He can be reached at (415) 227-3555 or [email protected]
Your Employee Has Joined a Competitor: Now What?RICHARD DARWIN
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