Selected Developments In Business Law — Drafting Business Contracts: Principles, Techniques & Forms

Courtesy of CEB, we are bringing you selected legal developments in areas of California business law that are covered by CEB’s publications.  This month’s feature is from the August 2019 update to Drafting Business Contracts: Principles, Techniques & Forms.  References are to the book’s section numbers.  See CEB’s BLS Landing Page for special discounts for Business Law Section members. 

August 2019 Update

The drafter should keep in mind that under California law the “words of a contract are to be understood in their ordinary and popular sense” unless it is clear that the parties intended a special or technical meaning. CC §1644; Mountain Air Enters., LLC v Sundowner Towers, LLC (2017) 3 C5th 744, 752; G & W Warren’s, Inc. v Dabney (2017) 11 CA5th 565, 575; Wind Dancer Prod. Group v Walt Disney Pictures (2017) 10 CA5th 56, 69. See §2.8.

Class action waivers in arbitration clauses in consumer adhesion contracts and in employment agreements are generally enforceable after the U.S. Supreme Court’s decision in Epic Systems Corp. v Lewis (2018), ___ US ___, 137 S Ct 809. In Epic Systems, the Court held that the arbitration agreements at issue were enforceable as written. The savings clause in the Federal Arbitration Act (FAA), 9 USC §2, was inapplicable, and the National Labor Relations Board’s interpretation was not entitled to deference. See §3.14A.

In McGill v Citibank, N.A. (2017) 2 C5th 945, 956, the court ruled that waivers of claims under the Consumers Legal Remedies Act (CLRA) (CC §§17501784), the Unfair Competition Law (UCL) (Bus & P C §§1720017210), or the false advertising law (Bus & P C §§1750017509) were invalid and unenforceable. See §3.14A.

In Medina v South Coast Car Co., Inc. (2017) 15 CA5th 671, 682, the court stated that “courts must avoid an interpretation that will make a contract extraordinary, harsh, unjust, or inequitable.” See §7.14.

Employees paid on commission must be separately compensated for rest breaks unless they are guaranteed minimum hourly wages for all hours worked, including rest periods. Vaquero v Stoneledge Furniture, LLC (2017) 9 CA5th 98. See §8.13A.

Interest rates may be subject to statutory restrictions. For example, interest rates on consumer loans of less than $2500 made by a finance lender or finance broker covered under the California Finance Law (CFL) (Fin C §§2200022780) are limited to (Fin C §22303)

  • 2.5% per month on the first $225 loaned;
  • 2% per month on the loan amount over $225 but not over $900;
  • 1.5% per month on the loan amount over $900 but not over $1650; and
  • 1% per month on the loan amount over $1650 but less than $2500.

The CFL includes exemptions for a variety of lenders (such as banks and trust companies) and loan transactions. Fin C §§2205022068. For further information on the CFL and the California usury exemptions, see Goldfarb & McCurnin, Usury and the California Financing Law: Knowing the Exemptions and Avoiding the Traps, 33 CEB Cal Bus L Prac 1 (Winter 2018). Where CashCall made $2600 loans to high-risk borrowers in order to avoid the CFL interest rate restrictions, charging annual interest rates of 96% to 135%, the California Supreme Court held that the loans could be found unlawful as unconscionable under Fin C §22302. De La Torre v CashCall, Inc. (2018) 5 C5th 966. See §8.29A.

The California Civil Code includes specific requirements for contracts utilized in many different types of California businesses, mainly (but not exclusively) contracts that involve consumer transactions. In addition to requiring specific contract terms and disclosures, the statutes regulate other business practices and sometimes provide a right of civil action to redress statutory violations, which may include injunctive relief, rescission or cancellation rights, damages, and attorney fees. Some statutes include restrictions on contractual limitations of liability. Many statutes provide that any purported waiver of the statutory provisions is void. To the extent that the regulated transactions involve sales of goods, these Civil Code requirements operate in addition to the requirements of Division 2 of the Commercial Code. For a chart of the applicable Civil Code statutes that regulate the terms of a number of different types of contracts, see California Law of Contracts §6.39 (Cal CEB). See §9.5A.

Contract clauses that prohibit a departing employee from soliciting the remaining employees of his or her former employer have been closely scrutinized by the courts. In AMN Healthcare, Inc. v Aya Healthcare Servs, Inc. (2018) 28 CA5th 923, the court held that an agreement that prohibited the defendants, who were recruiters for a nurse staffing agency, from soliciting any employee of their former employer was void under Bus & P C §16600, because it restrained the recruiters from practicing their chosen profession. The court did not hold that all nonsolicitation agreements are unenforceable, but it did state that, after Edwards v Arthur Andersen LLP (2008) 44 C4th 937 (see §9.10), it doubted the continuing validity of cases applying a reasonableness standard to nonsolicitation agreements. See §9.11A.

A provision shortening the limitation period is valid if the shortened period is not so short as to be unreasonable or to give the party seeking to enforce it an undue advantage. Wind Dancer Prod. Group v Walt Disney Pictures (2017) 10 CA5th 56, 73. See §§15.21, 17.21.

Courts recognize certain circumstances when nonsignatories to an agreement containing an arbitration clause can be compelled to arbitrate under that agreement. See Benaroya v Wilis (2018) 23 CA5th 462. A nonsignatory may be bound to arbitrate based on (a) incorporation by reference; (b) assumption; (c) agency; (d) veil-piercing or alter ego; (e) estoppel; and (f) third-party beneficiary. Suh v Superior Court (2010) 181 CA4th 1504. See also §§16.5–16.9. The issue must be decided by the trial court, however, not by the arbitrator. Benaroya v Wilis (2018) 23 CA5th 462. See §16.21.

The presence of a merger or integration clause may be conclusive proof that the writing was intended as an integrated agreement. If so, parol evidence to show that the writing was not intended as an integrated agreement will be excluded. A merger or integration clause will be given great weight, although it may not in itself be determinative. Kanno v Marwit Capital Partners II, L.P. (2017) 18 CA5th 987,1001 (presence of integration clause is not conclusive but is a factor). See §17.11.

In Western Sur. Co. v La Cumbre Office Partners, LLC (2017) 8 CA5th 125, the court held that, under Corp C §17703.01(d), an LLC that was the sole manager of another LLC did not have actual authority to execute an indemnity agreement on behalf of the LLC that it managed. However, the agreement was valid and binding because the other party did not have actual knowledge of the manager’s lack of authority. See §18.10.

In Meyer v Uber Technols., Inc. (2d Cir 2017) 868 F3d 66 (applying California law), the Second Circuit upheld an arbitration clause in the context of a mobile app in which the text of the terms and conditions was reachable only via a hypertext link. The court held that the hyperlink was conspicuous and put users on inquiry notice of the terms, including the mandatory arbitration provision. The court explained that inquiry notice depends on the “[c]larity and conspicuousness of arbitration terms” and that “clarity and conspicuousness are a function of the design and content of the relevant interface.” 868 F3d at 75 (citations omitted). The court focused on the “uncluttered” appearance of the mobile app screen, the clarity of the request made to the user (to click a button marked “Register” underneath text that read “by creating an Uber account you agree to the TERMS OF SERVICE & PRIVACY POLICY” with hyperlinks to the Terms of Service and Privacy Policy), and the use of prominent contrasting text. 868 F3d at 78. See §18A.4.

A general indemnity agreement does not provide indemnification for the indemnitee’s active negligence, unless the circumstances of the case and the language of the agreement evince a different intent by the parties. Oltmans Constr. Co. v Bayside Interiors, Inc. (2017) 10 CA5th 355, 362. See §11.17.