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ACCA Brown Bag Program Developments in the Law That Affect CA In-house Counsel

Renee R. Deming, Shareholder, Heller Ehrman Raymond H. Hixson, Jr., Shareholder, Heller Ehrman Michael S. Kagnoff, Shareholder, Heller Ehrman July 26, 2007

Employment Law Update


Raymond H. Hixson, Jr., Shareholder, Heller Ehrman

Employment Law Update


Release Agreements
Taylor v. Progress Energy, Inc. (4th Cir. July 3, 2007)
Employee took medical leave due to problems with her leg Employee laid off in workforce reduction Employee accepted $12,000 severance payment and signed release agreement Employee sued Progress Energy moved for summary judgment

Taylor v. Progress Energy, Inc. (4th Cir. July 3, 2007) (contd)


Holding:
Employee allowed to proceed with lawsuit

Courts rationale:
FMLA is subject to FLSA enforcement provisions FLSA and FMLA claims may be settled only under supervision of:
The U.S. Department of Labor, or Court

Release of FMLA Claims


Split of authority with federal Fifth Circuit
Faris v. Williams WPC-I, Inc., 332 F.3d 316, 320-21 (5th Cir. 2003)

What about California law?


CFRA claims: apparently can be waived No Ninth Circuit Ruling under FMLA

Recommendations
Flag terminations of employees who may attempt to assert FMLA claims If offering severance, evaluate whether to: (a) seek DOL approval, or (b) take the risk Review release agreement forms:
Consider adding disclaimer that the release does not apply to claims that cannot lawfully be waived Severability clause Watch out for special release requirements in layoffs

Heads Up On Other Issues


Mandatory vacation use during holiday shutdowns
Advance notice requirement: greater of 90 days or one full fiscal quarter

Sexual harassment training


Second installment due for most employers before the end of 2007

New Law on No-Hire Clauses


VL Systems, Inc., v. Unisen, (Cal. Ct. App. June 25, 2007)
VLS provided computer consulting to Star Trac Agreement prohibited Star Trac from hiring any VLS employee for 12 months after contract terminated Within the 12 months, Star Trac hired VLS employee who had not rendered services to Star Trac Court holding: No-hire clause unlawful

VL Systems, Inc., v. Unisen, (Cal. Ct. App. June 25, 2007) (contd)
Courts rationale:
Cal. B&P Section 16600 invalidates such restraints on trade No-hire clauses impact third party rights Employee had not rendered services to Star Trac Liquidated damages provision did not spare the contract Court declined to rule on whether a more narrow no-hire clause might be lawful in California

Recommendations
Review employee and third party agreements for no-hire clauses
Consider replacing with employee non-solicitation clauses

Also, review customer non-solicitation clauses


Under California law, must be limited to prohibiting use of trade secrets to solicit customers

Review employee agreements for stock option claw back provisions


Recent California case law indicates they may now be unlawful

Hiring A Competitors Employees


Raymond H. Hixson, Jr., Shareholder, Heller Ehrman

Hiring A Competitors Employees


Contractual Obligations
Non-competition agreements Customer non-solicitation clauses Employee non-solicitation clauses Non-disclosure obligations

Trade Secrets Duty of Loyalty

Non-competes and the Race to the Courthouse


Estee Lauder v. Batra, (S.D.N.Y. 2006) California employee signed non-compete with New York choice of law clause Estee Lauder sued to enforce in New York Holding: New York law applied Agreement enforced, but shortened to 5 months

Trade Secret Laws


The Uniform Trade Secrets Act Prohibits:
Actual use or disclosure Threatened use or disclosure Inevitable disclosure Most jurisdictions likely would recognize the inevitable disclosure doctrine. California: rejects the doctrine. (Schalge Lock Co. v. Whyte)

Recommendations
Perform adequate due diligence on the candidate before hiring Take reasonable precautions and document them Suggested tools: Sample Due Diligence Questions Sample Precautionary Measures Memo

Defending Competitive Hiring Claims


Typical First Sign of a Claim: Cease and Desist Letter
Most Cease and Desist Letters Are Bluffing the Threat of Legal Action

Gauging Whether Its a Bluff: Financial Position of Competitor Strategic Reasons to Sue: Losing Business Losing Employees Sensitive deals pending Does Competitor Have a Pattern of Filing Lawsuits? Failure to Seek TRO Quickly is a Trail Sign

Defending Competitive Hiring Claims


Responsive Action to Cease and Desist Letter: Assess Risk to Determine Whether to Respond With General Assurance of Legal Compliance Offer to Negotiate

Defending Competitive Hiring Claims


Other Possible First Sign of Claim: Lawsuit Filed Seeking TRO on 24 Hours Notice If this happens: Engage litigation counsel immediately Court appearance could be required as soon as 8:00 a.m. the next morning! Whats in store: Quick TRO hearing Potential expedited discovery Preliminary Injunction hearing within a several weeks

Defending Competitive Hiring Claims


What if the cease and desist letter/lawsuit is directed only against our new employee? Should the company support the employee, or let the employee fend for himself? Employer Should: Investigate Immediately Whether Claims Have Merit Investigator Should Be Someone Who Would Be a Good Choice as a Witness If Claims Appear to Have Merit: Employer Should Take Immediate Corrective Action Let Employee Fend for Himself/Herself If Claims Appear to Have No Merit: Employer Should Normally Provide Legal Counsel and Support Employee

What if a competitor poaches your employees?


Conduct due diligence to uncover any impropriety Pros & cons of filing litigation:
Pros Stem employee departures Take reasonable precautions to protect trade secret information Send a message to: current employees former employees competitors

Cons of Filing Litigation


Cost Requirement to identify at-issue trade secrets C.C.P. 2019(d) and corollaries Employee morale: Employees not always supportive of suing a popular colleague

Speaker Biography
Ray Hixson is an experienced litigator who regularly represents employers before state and federal courts, and governmental agencies. He also provides strategic advice to employers on matters such as terminations, hiring, compensation, employment agreements, and personnel policies. He is retained frequently to present legal compliance training programs, including programs regarding prevention of sexual harassment.

IRC Section 409A 2007 Year-End Compliance Matters


Renee R. Deming, Shareholder, Heller Ehrman Michael S. Kagnoff, Shareholder, Heller Ehrman

Background
IRC Section 409A redefines "deferred compensation" expansively Statute enacted October 3, 2004, applies to compensation amounts paid or vesting in 2005 Final regulations published on April 20, 1007 Transition period ends December 31, 2007 Significant penalties for non-compliance
20% tax and other penalties on deferred compensation owed by employee and interest on underpayment amount Withholding and reporting problems for employers (and potentially for company insiders individually w/r/to w/holding)

Deferred Compensation Defined


Deferred compensation includes any arrangement that establishes in one year a legal, binding right to receive a compensatory amount, where the service provider does not actually or constructively receive the amount until a later year, examples:
Enter into contract to receive vested amount in one year, where amount is paid in a later year Vest in (or other substantial risk of forfeiture lapses as to) right to receive amount in one year, where amount is paid in later year

But exceptions where amounts are paid within short time after legal right arises or after vesting

Discounted Stock Awards


Discounted stock options ARE deferred compensation
"Discounted" means award has exercise price that is less than FMV of stock as of grant date Award could be subject to 20% tax and other penalties owed by individual, plus withholding-related penalties Puts increased pressure on companies to be able to support the valuation used There are ways to structure discounted awards to comply with Section 409A, BUT they differ from (and won't be as attractive as) typical option structures These concerns also apply to stock appreciation rights, but generally do not apply to ISOs or restricted stock awards

Private Company Valuations


Final Sec. 409A Regulations set forth protective presumptions regarding valuations
Proposed regulations generally require that private company stock be valued by a "reasonable application of a reasonable valuation method" Proposed regulations do not require that all private companies get third party valuations If companies follow guidance in proposed regulations by satisfying an available presumption, a valuation will be presumed reasonable and therefore easier to defend should IRS challenge it These presumptions offer protection; it is not required that companies avail themselves of the presumptions and there may be other ways to support reasonable valuations

Public Company Valuations


FMV must be based on the trading price of the stock on the applicable securities market and can be based upon one of the following:
Last sale before or the first sale after the grant date The closing price on the trading day before or the trading day of the grant The arithmetic mean of the high and low prices on the trading day before or the trading day of the grant Any other reasonable method using actual transactions in the stock as reported by the applicable market Can also use average selling price over specified period if certain conditions met

Section 409A Transition Period Ends 12/31/07


Documents that must be structured to comply with 409A requirements must be amended to so comply by that date Arrangements that may require amendment:
Agreements providing for severance benefits
Might be several ways that the arrangements comply More complicated than it should be Good Reason triggers (need to qualify as an involuntary termination) facts and circumstances analysis Very helpful guidance in the final regulations Disability and Change of Control definitions Six-month delay for public company specified employees if cannot qualify for exceptions

Section 409A Transition Period Ends 12/31/07, contd


Severance pay arrangements
Will not be subject to 409A if an involuntary termination AND fits into an exception:
Short term deferral exception payment by 15th day of 3rd month after end of fiscal year Two times exception payments spread over time up to statutory limit (lesser of 2x compensation and IRS qualified plan limit = $450,000 in 2007) and are fully paid by end of 2nd calendar year after year of termination Can use both exceptions

Section 409A Transition Period Ends 12/31/07, contd


Arrangements that may require amendment (contd):
Stock Options and SARs that were granted at a discount
Can take several weeks to fix discounted awards (tender offer process)

Post-employment reimbursement programs


Need to specify date by which payments must be made

Retiree medical benefits programs Bonus arrangements where payments made after year earned Tax gross up arrangements

Section 409A Transition Period Ends 12/31/07, contd


Arrangements that may require amendment (contd):
Stock plans and related form award agreements Indemnification provisions in which employees are advanced or reimbursed for costs incurred in claims defense
Need to specify date by which payments must be made

Tandem election arrangements where participant election under tax-qualified plan affects arrangements under a nonqualified deferred compensation plan Traditional nonqualified deferred compensation plans
Cash or stock deferrals

Split dollar insurance arrangements

Section 409A Transition Period Ends 12/31/07, contd


Must consider the non-409A effects of amending agreements
Other tax issues (ISO rules, Section 162(m)) Contract issues Approval issues Communication issues Disclosure issues (public companies)

Private companies: Consider valuation strategy in light of final regulations

Section 409A Transition Period Ends 12/31/07, contd


Public companies: Consider procedures to determine specified employees Prepare for reporting and withholding on noncompliant arrangements at year-end 2007
Affects 2005 and 2006 Still waiting for definitive guidance from IRS re calculation of amounts to be included in income and reporting and withholding on those amounts
Good faith efforts required IRS Notice 2006-100 and Notice 2005-1

Required Tax Disclaimer


IRS Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any tax advice contained in this communication (including any attachments) was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding any tax penalty or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

Speaker Biographies
Renee Deming has extensive experience with both private and public companies in the areas of tax and securities law related to employee benefit and equity compensation programs, including stock option plans, stock purchase plans, restricted stock plans, health and welfare plans, 401 (k) plans and executive compensation planning. She also provides advice to employers on labor and employment law matters. Ms. Deming is an active speaker on equity compensation topics.

Mike Kagnoff's practice focuses on general corporate representation of established and emerging technology companies, biotech and medical device companies, as well as communications and networking companies. He has extensive experience in public offerings, mergers and acquisitions, venture capital financing, strategic partnerships and licensing agreements. Mr. Kagnoff has represented some of Californias most prominent venture funds for their investments in portfolio companies.