California choice-of-law cheat sheet

Any attorneys’ fees provision is treated as a prevailing-party provision

See Cal. Civ. Code § 1717 (accessed 2010-01-29).

Facts recited in a contract are conclusively presumed true as between the parties

The recitals and representations of a contract may carry special weight in California, whose evidence code section 622 provides: The facts recited in a written instrument are conclusively presumed to be true as between the parties thereto, or their successors in interest; but this rule does not apply to the recital of a consideration. (Hat tip to commenter “Kazu” at the AdamsDrafting blog.)

Consequential damages exclusion disappears if exclusive remedy fails of its intended purpose

In its Hawaiian Telephone case, the Ninth Circuit explained its prior decision applying California law in RRX Industries, Inc. v. Lab-Con, Inc., 772 F.2d 543 (9th Cir. 1985):

In RRX Industries we affirmed the trial court’s award of consequential damages notwithstanding a provision in a computer software contract which limited the seller’s liability to the contract price.

The seller in RRX Industries completed installation of a computer software system for the buyer, but was unable to get the bugs out of the system or make it operate reliably.

We noted that “the software never functioned as intended …[, the seller] failed to correct adequately programming errors …[, and] did not provide [the buyer's] employees with sufficient training.” Id. at 546.

We held this evidence supported the trial court’s finding of a breach of the contract and that the trial court properly found the default by the seller “so total and fundamental that its consequential damages limitation was expunged from the contract.” Id. at 547

(Emphasis and extra paragraphing added.)

Automated renewals in consumer contracts are restricted

See the statutory provisions quoted in this compilation by the Equipment Leasing and Finance Association. [ADDED 2010-01-15; hat tip: Winston & Strawn LLP]

Contractors can be liable for wages of employees of unlicensed subcontractors

California courts have looked to Cal. Lab. Code § 2750.5 to hold that a contractor that uses an unlicensed subcontractor is responsible for unpaid wages, withholding, and worker’s compensation premiums of the subcontractor’s employees; see generally this Pillsbury Winthrop memo.

Liquidated-damages clauses are presumptively valid in business contracts

In California, “a provision in a contract liquidating the damages for the breach of the contract is valid unless the party seeking to invalidate the provision establishes that the provision was unreasonable under the circumstances existing at the time the contract was made.” Cal. Civ. Code § 1671(b); see also this post.

Non-competition clauses: Some of the most common ones are almost per se unenforceable

Post-employment non-competition clauses are pretty much verboten in California; the state is fiercely protective of "open competition and employee mobility." Edwards v. Arthur Andersen LLP, 44 Cal.4th 937, 189 P.3d 285, 81 Cal. Rptr.3d 282 (2008) (affirming court of appeals ruling that post-employment non-competition covenant was void).

Even putting a non-competition clause in a California employment agreement is deemed unfair competition under Cal. Bus. & Prof. Code § 17200 – see Applied Materials, Inc., v. Advanced Micro-Fabrication Equipment (Shanghai) Co., No. C 07-05248 JW (N.D. Cal. May 20, 2009) (granting defendant’s motion for summary judgment on its counterclaim for unfair competition); see also this post.

On the other hand, the California Supreme Court has held that an employer can require an employee who resigns (or is terminated for cause) to forfeit unvested restricted stock that the employee elected to accept in lieu of a portion of the employee’s cash compensation, along with cash to be used to purchase such stock. See Schachter v. Citigroup, Inc., No. S161385 (Cal. Nov. 2, 2009) (in effect affirming summary judgment in favor of employer). [ADDED 2009-11-17; hat tip: Sidley Austin LLP]

Resale price maintenance (“vertical price fixing”) can cause serious trouble under state law

Drafters of distributor- and reseller agreements should be extremely cautious about agreeing to the pricing that the “downstream” party will charge to its own customers. See a spring 2010 article by Scott Martin of Greenberg Traurig at http://goo.gl/eAky.

Unfair competition law has teeth

California’s legendary unfair competition law was once abused as a shakedown tool by certain lawyers, some of whom were disbarred as a result.

California voters amended the law in 2004 by approving Proposition 64, so that under section 17204, standing to sue is now limited to private plaintiffs who suffered injury in fact and lost money or property as a result of the unfair competition, along with the attorney general, district attorneys, and certain other government attorneys.

Regardless, the UCL still has significant teeth, and should be kept in mind by companies that might be amenable to suit in California.

Starting licensed work without a license may cost big bucks

In California, a contractor that undertakes work required to be done by a licensed contractor (e.g., certain construction- or remodeling work), but that does not itself have the proper license(s) at all times while performing the work, may forfeit its right to be paid for any of the work. See, e.g., Great West Contractors, Inc., v. WSS Industrial Construction, Inc., 162 Cal.App.4th 581, 76 Cal.Rptr.3d 8, No. B191662 (Cal. App. Apr. 28, 2008) (reversing $220,000-plus judgment in favor of subcontractor, on grounds that subcontractor had not obtained the required license when it prepared initial shop drawings and did other preliminary work).

Moreover, under a 2002 ‘disgorgement’ amendment to the California statute, such a contractor might have to repay any payments it did receive for the work. See Kyle A. Ostergard, California Contractors Beware: You Must Be Properly Licensed at All Times! for more analysis and cautions.

Indemnity obligation may implicitly require claim defense

The California Supreme Court has held that, under that state’s statutory law, unless the parties to a contract agree otherwise, a party having an indemnity obligation under the contract is also obligated, upon request, to provide a defense for the protected party. See Crawford v. Weather Shield Mfg. Inc., No. S141541 (Cal. Jul. 21, 2008) (affirming court of appeal’s affirmance of trial-court judgment).