By: David Shaub
Part II: The Hague Evidence Convention and Letters of Request
(Part I located here)
The Hague Convention on the Taking of Evidence Abroad in Civil or Commercial Matters, March 18, 1970 (the “Convention”, 23 U.S.T. 2555, TIAS no. 7444; 28 U.S.C. § 1781) became effective in the United States on October 7, 1992. The Convention is a revision of portions of earlier conventions on civil procedure dealing with international judicial assistance regarding the taking of evidence abroad. The Convention made improvements upon the previous procedures relating to Letters of Request which are used when evidence needs to be compelled, increased the powers of consul, introduced the common law concept of a court appointed commissioner, and preserves less restrictive practices and procedures arising out of local law or from other conventions, both bilateral and multi-lateral. Further, the Convention adopted rules on languages, established a Central Authority, and made provision for privileges and immunities of witnesses as well.
A Letter of Request, which is issued by the court presiding over the litigation, may seek testimony or documentary evidence. For document discovery under the Hague Convention, the court where the action is pending shall issue a Letter of Request and transmit it to the “Central Authority” of the jurisdiction where the discovery is located. The Central Authority is then responsible for transmitting the request to the appropriate judicial body for a response. The Hague Convention, arts. 1 & 2. Deposition testimony may be obtained by means of a Letter of Request, by a request that the testimony be taken before a diplomatic or consular officer, or by a specially appointed commissioner in the non-U.S. jurisdiction. The Hague Convention, art. 3.
The Convention is only available in civil and commercial matters. Criminal matters that arise in a foreign country are handled by the Criminal Division’s Office of Internal Affairs (“OIA”).
While most of the signatories to the Convention have agreed to allow some form of discovery of documents and testimony pursuant to Letters of Request, Article 23 of the Convention permits a ratifying party to opt out from the application of the Convention to pretrial discovery and production of documents by permitting a contracting State to “declare that it will not execute Letters of Request issued for the purpose of obtaining pre-trial discovery of documents as known in Common Law countries.” As a result, more than half of the signatories have executed some form of declaration under Article 23 modifying the wide breadth of discovery allowed under U.S. standards. This, in turn, severely restricts the ability of a party in the United States to obtain documents under the Convention.
A Letter of Request must be issued by a court or other judicial authority and must be in aid of a pending or contemplated judicial proceeding. It may not be used to obtain evidence which is not intended for use in a judicial proceeding, including a proceeding before a legislative or administrative agency or before a non-judicial arbitration proceeding. A Letter of Request may seek the examination of witnesses or the inspection of documents or things (real or personal property). (See the Convention, Article 3(e)-(g)). Written questions may be prepared to be submitted to the persons to be examined and a request can be made that a preferred special method or procedure be followed. Under Article 9, while the judicial authority which acts upon and executes a Letter of Request shall apply its own law as to the methods and procedures, it will follow a request specifying a special method or procedure unless incompatible with the internal law of the country or made impossible of performance by reason of its practice and procedure or practical difficulties. Thus, written interrogatories, requests for admissions, and other procedures which may be unique to civil discovery practice in the United States may be sought or even required. See Pierburg GmbH & Co. v. Superior Court (1982) 137 C.A.3d 238, 186 C.R. 876 (plaintiff required to resort to convention in obtaining answers to written interrogatories). Further, a Letter of Request must specify certain information or else it will be returned as non-conforming.
A Model Letter of Request can be found here
By: David Shaub
Part I: Basic Considerations
It may be necessary to discover evidence abroad because a party to an action lives in a foreign country or is a foreign corporation, events occurred in a foreign jurisdiction, documents or witnesses are located in a foreign country, or United States citizens or residents are located in or have moved to a foreign country.
A party seeking discovery of evidence abroad initially should consider the general principles and procedures of its state’s civil discovery rules and the Federal Rules of Civil Procedure. Many of the provisions of State and Federal rules direct counsel as to the use of procedures governed by international conventions or similar procedures where no multi-national or bilateral treaties or agreements exist. These sources will cover the basic procedures for methods of discovery of evidence abroad.
In determining a plan of discovery concerning evidence abroad, counsel first should determine the character, location and content of the evidence sought. Before seeking the discovery of documents or the taking of depositions of witnesses in foreign countries, it should be determined as to whether copies of the documents are available in the U.S. If they are not available in the U.S., it should be determined whether the records can be obtained from a subsidiary, branch or affiliate of a foreign corporation, or from any of its officers or employees who are located in the U.S.
Because of hostile foreign reactions to the broad scope of discovery permitted in the U.S., any discovery requests of evidence abroad should be narrowly drawn so as to intrude as little as possible. In addition, any discovery that can be conducted in the United States, whether through the aid of court process or informally, should be initiated and concluded prior to seeking to obtain the evidence abroad.
In preparing a discovery plan and outlining the various sources of the evidence which is sought, it should be determined whether the country in which documents or witnesses are located is a signatory to any convention such as the Hague Convention, or any bilateral treaty which permits and governs the procedure concerning discovery amongst the parties to the convention or treaty. If no convention or treaty exists, it should be determined whether protocols or diplomatic notes may exist which would facilitate the discovery of evidence in the foreign jurisdiction.
In making these determinations, it is essential that the law and practices of the foreign country where the evidence is sought are understood. Blocking statutes, privileges concerning the illegality of production of documents to foreign persons, expansive protection of information, and internal remedies affording protective measures may preclude discovery in many foreign countries. Thus, it is critical that local counsel be consulted on the particulars of their country’s laws and practice that may aid in or bar the discovery of the evidence sought.
Because of the complexities occasioned by diplomatic channels and the consequent delays in discovery abroad, the expenses of that discovery must be estimated and taken into consideration. Linguistic barriers also raise the cost of production and often require the engagement of interpreters, transcribers and translators in order to obtain testimony and review documents produced.
Once these determinations have been made and discovery abroad is initiated, counsel should determine if model forms, such as those adopted for the Hague Convention, have been approved for use in obtaining discovery abroad. Because of the abhorrence by many foreign jurisdictions of what they style as “fishing expeditions” in respect to pre-trial discovery, document and other discovery requests should be narrowly drawn and should emphasize that the documents sought are for the purpose of trial. As a general rule, the parties should seek a court order for the requested discovery as it often is imprudent to rely simply upon a stipulation without an order or to proceed upon notice without a confirming order.
If examinations or inspections are sought abroad, it is crucial that counsel confer with local counsel to anticipate claims of privilege by non-resident aliens or foreign corporations who are requested to provide examinations, inspections, tests or other actions with regards to physical evidence. For a list of signatories to the Hague Convention visit: http://www.hcch.net/index_en.php?act=states.listing
More about the author:
David Shaub is Founder and Senior Partner of Shaub & Williams, LLP; member of the CA State Bar Association; formerly chair of the LA County International Law Section and member of the International Law Section of the CA State Bar.
by Katya Mezek
Determining whether a new hire is an independent contractor or an employee is a critical decision that can have serious consequences if made incorrectly. The reason that companies would rather classify employees as independent contractors is because this means that they do not have to pay payroll taxes, minimum wage or overtime, comply with other wage and hour law requirements such as providing meal periods and rest breaks, or reimburse their workers for business expenses incurred in performing their jobs. Further, employers do not have to cover independent contractors under workers’ compensation insurance, and are not liable for payments under unemployment insurance, disability insurance, or social security. This is what makes classifying a potential hire as an independent contractor so appealing. However, misclassifying a potential hire as an independent contractor can lead to serious penalties, fines, and back taxes.
A relatively new California law, California Labor Code Section 226.8, which went into effect on January 2, 2012, adds another layer of repercussions for the noncompliant employer. California Labor Code Section 226.8 imposes new penalties on employers who willfully misclassify their employees as independent contractors. Willful misclassification is defined as “voluntarily and knowingly misclassifying that individual as an independent contractor.” The law also penalizes employers who charge fees or make deductions from compensation to an individual who has been willfully misclassified as an independent contractor.
Therefore, the determination of whether to classify a new hire as an independent contractor or an employee is not a decision to take lightly and should include a thorough analysis of each potential new hire on a case-by-case basis.
Standards for classification:
Be forewarned, a contract can be drafted with whatever language you want and the title could say Independent Contractor Agreement, bolded, highlighted in bright yellow and underlined but this will not mean anything if, in reality, the person is being treated like an employee. So, in order to determine whether a worker is an employee or an independent contractor the courts will apply a common law multi-factor test and applying it to the reality of the working relationship. While no one factor is determinative, all the factors must be weighed against each other and considered in light of the total circumstances. These factors are:
1) Who has the right to control the worker’s manner and means of performing his or her duties – an independent contractor has more control over the day-to-day details of his or her job than an employee;
2) The skill required in the worker’s job – independent contractors often perform highly skilled jobs;
3) Whether the worker is engaged in a distinct business or occupation – if the worker is engaged in a distinct business or occupation, it is more likely the worker is an independent contractor;
4) Whether the work is done under supervision – the more an employer is directly supervising the worker, the more likely he or she is an employee;
5) Whether the worker can be discharged at will or for cause – allowing discharge at will often weighs in favor of an employer-employee relationship;
6) Who supplies the tools, instrumentalities and place of work – if the worker supplies these, he or she is more likely an independent contractor;
7) The length of time the services are to be performed – discrete jobs are generally performed by independent contractors;
8) The method of payment, whether by time or by the job – payment by time generally signals an employee relationship;
9) Whether the work is part of the regular business of the principal – if it is, the worker is more likely an employee;
10) Whether the parties subjectively believe they are creating an employer-employee relationship.
See S. G. Borello & Sons, Inc. v. Dep’t of Indus. Relations, 48 Cal.3d 341, 350-51 (1989); 38 Cal. Jur. 3d Independent Contractors §3.
Though not dispositive, the most important factor in the analysis is who has the right to control the worker’s manner and means of performing his or her work. This is referred to as the “right to control test.”
Penalties for Misclassification:
On a federal level, unintentionally failing to withhold federal income tax will mean that the employer will be subject to a penalty of 1.5% of the wages paid, which will then be doubled to 3% if the employer did not file a Form 1099-MISC for the worker with the IRS. The penalty for unintentionally failing to withhold the employee’s share of Social Security and Medicare taxes is 20% of the employee’s share of the tax. The penalty is doubled to 40% if the employer did not file a Form 1099-MISC for the worker with the IRS.
On the California State level, penalties include repayment of back payroll taxes, subject to interest and a 10% penalty on the unpaid taxes. Failure to withhold and pay payroll taxes can also result in a misdemeanor charge, and the employer can be fined up to $1,000 or sentenced to jail for up to one year, or both.
If the misclassification is found to be willful under California Labor Code Section 226.8, fines between $5,000 and $15,000 per violation of the law will be imposed but these fines will increase to $10,000 to $25,000 per violation if the employer has engaged in a pattern of violating this law. In addition to fines, a violating employer must post notice of its violation in a prominent location on its website for 1 year. If the employer does not have a website, it must post notice of the violation in each location where the violation occurred, in a prominent area accessible to all employees and the public.
For more information you can visit the following websites:
On July 9, S&W members Leslie Williams and Sandra Becker took part in Germany Trade and Invest’s Clean Technology Event, held in Santa Monica, California.
The presentations included not only updates on Germany’s continued implementation of a national plan to reduce carbon and increase renewable energy production, but also highlights of areas of opportunity for California’s green tech firms to expand their customer base into Germany. Thomas Grigoleit, the head of division for Germany Trade and Invest, and with whom Leslie Williams has cooperated for a number of years, detailed his agency’s services to assist California companies which wish to enter the German market, including identifying and introducing them to German partners or distributors, German provided tax incentive and funding.
Complimenting the German side of the evening, the President of the LA Business Council, Mary Leslie , spoke about the renewable energy program in Southern California and especially Los Angeles and Orange Counties. Locally, there is a major push to install as much solar (distributive and utility size installations) as possible prior to the federal tax credits’ expiration ,which barring renewal , will occur at the end of 2016. The plan is to increase local power from 50 MW to 1500 MW in the short term.
Shaub & Williams has assisted German renewable energy producers, and green tech firms in entering the California market or expanding their businesses here. The firm has also worked with California firms locally and with regard to their expansion into the German market and other EU countries, and is able to provide assistance in accessing resources and people to facilitate the start up process abroad.
Devising an intellectual property (IP) strategy is often times one of the issues left on the back burner of a start-up company’s business. While start-ups may have good ideas, working prototypes, and potential public interest, these companies frequently put off seeking IP protection for some of their most valuable assets. Intimidated by the potential expenses of obtaining a patent, start-ups will, instead, expend time and resources into developing their idea and wait until they receive additional funding to seek patent protection. However, by that time, companies may find themselves in the unfortunate situation of waiting too long and being past the time in which they can lawfully file for a patent because of public disclosures or on-sale bars.
With the open source patent movement recently gaining traction in various industries, including biotechnology, startups with limited funds also often question whether they should even go through the motions of protecting their proprietary technology with patents. If large companies, such as Google, Tesla, and Toyota are willing to give the public their patents for free, the question arises – why apply for a patent in the first place?
On March 28, 2013, Google rocked the patent world by announcing a new initiative, the Open Patent Non-Assertion (OPN) Pledge, whereby it pledged not to sue any user, distributor or developer of open source software for infringement of specified patents from its wide-ranging portfolio. Google’s Senior Patent Counsel, Duane Valz, explained that the company is “committed to an open Internet – one that protects real innovation and continues to deliver great products and services,” and encouraged other companies to follow their lead.
However, it is important to note some important limitations to Google’s pledge. Google’s entire patent arsenal is not up for grabs. To date, Google has identified 245 patents that it is contributing to this initiative, which is a small sliver of the tens of thousands of patents it currently owns and the thousands of patents it continues to apply for at the USPTO and acquire from other companies. Most significantly, Google’s pledge still leaves room for it to assert its patent rights and litigate against certain infringers of the pledged patents, if it chooses to. The pledge only covers open source software projects and allows Google to sue users, distributors and/or developers of closed source products. Further, by pledging not to sue “unless first attacked,” Google warns that the pledged patents can still be used as defense weapons.
Most recently, other industries seem to be dipping their toes in the open source patent movement as well. On May 28, 2015, Ford announced that it would open its portfolio of electric vehicle patents to its competitors, which includes more than 650 patents and 1,000 applications that are still pending. The media commented that this appeared to follow Tesla’s pledge on June 12, 2014 and Toyota’s pledge on January 5, 2015 to allow its competitors to use Tesla’s electronic vehicle patents and Toyota’s hydrogen fuel cell patents, respectively, for free. In a blog post similar to Google’s announcement, Tesla’s CEO, Elon Musk, explained that it removed the wall of patents in the lobby of its Palo Alto, CA headquarters “in the spirit of the open source movement, for the advancement of electric vehicle technology.” Unlike Tesla and Toyota, however, Ford’s patents do not come for free. Instead, Ford will be licensing its electric vehicle patents to competitors for a fee, which is simply a traditional patent licensing structure and not an open source patent initiative after all.
Google, Tesla, and Toyota companies and now, Ford, teach an important lesson that patents are not a wasted effort or asset. While collectively opening thousands of patents to be used by their competitors, they have retained hundreds of thousands of patents for which they are ready and willing to assert their rights against competitors. Those companies are extremely large, public companies with tens of thousands of patents covering numerous technologies and continue to accumulate hundreds more each year. By not giving away all of their parents, corporate giants such as Google are cognizant that the patents they have retained remain important offensive weapons against competitors. They further teach that the patents they have promised not to take an offensive stance on are still important defensive weapons against patent infringement suits by their competitors. Retaining or obtaining a patent for defensive purposes allows a company to use those patents to force a quick settlement, to countersue the competitor with those patents, and/or use those patents for licensing as a form of settlement.
Moving forward, start-ups should speak with a patent attorney early on to determine whether the idea is patentable and if so, whether it is worth patenting. This should be done prior to disclosing the idea with the general public, which may end up barring a company from obtaining a patent. The process of filing a patent is a lot less daunting than it seems. The U.S. Patent and Trademark Office offers significantly reduced fees for small entities to file a patent. Moreover, inventors have the option of filing a provisional patent application to establish an early filing date without having to file a regular non-provisional patent application until one year later.
By properly filing a provisional patent and obtaining an early filing date, a start-up will have the freedom to publicly disclose its technology with VCs and other funding sources. If the company has limited finances, it can still file a provisional patent application on the idea before the product is ready to market or fully developed. Doing so may leverage the business and encourage investors in the company to complete the product and bring it to market. In obtaining the patents, investors will gain confidence in the company’s business strategy and potential success of the product, which is likely to draw additional investment. As assets of the company, patents may also be used as collateral for loans or private investors.
Even if the product or company does not take off, the patents remain valuable assets that can be sold to competitors. In fact, on April 27, 2015, Google announced a Patent Purchase Promotion program as an experimental marketplace for patent owners to sell its patents to the company. Although the program only lasted for two weeks in May, it validates the importance of obtaining patents and provides promise to start-ups that their patents can be purchased and utilized by Google.
In March, the renewable energy division of Germany Trade and Invest (GTAI) forwarded to Shaub & Williams its most recently released short documentary about Germany’s ambitious plan to transition the country to substantially renewable energy sources. Shaub & Williams has actively led efforts to link Germany’s wide range of green technologies with the West Coast’s green tech firms. The German government and private sector will create a smart grid for energy production and distribution, while solving the well known problems of storage and transmission. While the film informs about German industry’s strengths and resources to accomplish its goals, it is also designed to highlight the opportunities for foreign firms and investors to cooperate with their German counterparts or to introduce novel solutions which are not yet contemplated. Government support as well as private sector incentives enhance the appeal for investment. GTAI’s renewable energy head, Thomas Grigoleit, will be in Los Angeles this coming July to promote this opportunity and meet with interested parties. Shaub & Williams will post more on the details of this July event soon.
Once you have determined that your business is conducting intrastate business within the meaning the meaning of Revenue and Taxation Code (R&TC) section 23101, there are certain steps you must take to qualify to do that business within California.
There are two California entities that have requirements one must follow when seeking to conduct business in California: The California Secretary of State (“SOS”) and the California Franchise Tax Board (“FTB”).
Steps to Qualify to do Business in California:
California Secretary of State Requirements
A foreign business entity can qualify/register to transact business in California by filing the applicable form, depending on the entity type, with the California Secretary of State. There will also be further deadlines once the foreign entity is qualified to do business, which also depend on the entity type. For example, a foreign LLC that wishes to do business in California would first file its Articles of Organization and then its Statement of Information would be due within 90 days of the qualification.
California Franchise Tax Board Requirements
In addition to qualifying with the SOS, franchise tax fees must be paid to the FTB which states that LLCs classified as disregarded entities or as partnerships are required to pay at least an $800 franchise tax if they are:
- Incorporated or organized in California;
- Qualified or registered to do business in California; or
- Are doing business in California, whether or not they are incorporated, organized, qualified, or registered under California law.
Such payment of franchise tax fees for an existing foreign LLC must be made by the 15th day of the 4th month of the LLC’s tax year. If, however, the foreign LLC registers or commences business in California after the 15th day of the 4th month of their tax year must pay the annual tax by one of the following, whichever is first: (a) immediately when they commence business in California; or (b) when they register with the SOS.
Implications of Failing to Qualify to do Business in California if Required
Monetary Penalties and Bar from Doing Business
If the foreign company were not to adopt changes in its methods of doing business in California, and continued to do business without qualifying, its privileges to do business with the state could be revoked unless and until it qualifies and pays any back tax and penalties (California Corporations Code sections 2105 and 2203(c)).
In addition, the Corporations Code also provides that a penalty of $20 a day may be imposed upon the foreign corporation for each day in which unauthorized intrastate business is transacted. (California Corporations Code Section 2203 (a)). Therefore, qualifying would entail not only applying for a qualifying certificate from the secretary of state, but also paying any license fees and penalties owing for having conducted intrastate business in a non-qualified manner. Moreover, at the time of qualification the foreign company would be required to pay to the FTB a fee for the privilege of doing business in California which also would trigger the requirement of filing annual tax returns whether or not there was any reportable income.
Inability to File Lawsuits
One purpose of Section 2105 of the California Corporations Code is to ensure that the foreign corporation has an agent for service of process within the state. The section provides that if a foreign corporation transacts intrastate business without being qualified, it is deemed to have consented to the jurisdiction of the California courts for any civil action in which it is named as a party defendant. However, a non-qualifying foreign corporation which tries to sue on any transaction within the state availing itself of the California state courts can be barred from bringing such suit unless and until it is qualified. (California Corporations Code Section 2203 (c)).
On March 18, 2015, S&W partner Leslie Williams presented at The Royal Jungle: a new, unique Tech Startup Event took place in Munich, Germany, at one of the city’s most famous tourist sites, the Royal Residenz Palace. Not only was the setting regal and one any Californian start up event would envy, but the line up of speakers included many of the best Bavaria has to offer in investors, accelerators and start up companies. Munich, long known for its IT prowess, teamed with a number of well known names in investing from California and in particular, Silicon Valley.
Of note to California firms and investors is the nature of investment support. Accelerators, such as Wayra and BMW Start up Garage are sponsored or funded in large part by large German companies, which vet and then fund start ups they think may hold promise. More noteworthy is the potential for increased business between Germany and California, provided California investors and firms look at the technical excellence and business potential for many of Germany’s younger businesses, and the Germans gain a greater appreciation of how to market themselves and take investment risks. LMU Entrepreneurship Center and German Accelerator, for example, are working to increase the education and capacity for entrepreneurship within the German business culture.
Prior to the evening keynote speakers view to creating a new model to accelerate innovation and turn it into reality, Uschi Joshua announced the launch of a Munich chapter of the German American Business Association (GABA) , a business association originating in Silicon Valley between California and Germany. S&W partner Leslie Williams then endorsed the start of this chapter as an excellent forum to meet and develop a firm’s team for doing business in California or Germany. By definition, a firm entering a new market is a start up, and all the key players, from technical to management, and legal to tax are needed to create a successful launch and growth. For more on The Royal Jungle, and its upcoming summer 2015 event, see www.theroyaljungle.com.
Shaub & Williams Prevails for Xycarb Ceramics, Inc. in Reconsideration of Claim Construction Based On Intrinsic and Extrinsic Evidence
Often times, the outcome of a patent infringement case depends on the particular meaning of individual words and terms. As established by the Federal Circuit in Markman v. Westview Instruments, Inc., claim construction is exclusively a matter of law and courts alone must construe patent claims before infringement is submitted to the jury. 52 F.3d 967 (Fed. Cir. 1995), aff’d, 116 S. Ct. 1384 (1996). The recent Supreme Court decision in Teva Pharmaceuticals USA, Inc. v. Sandoz, Inc. further held that with regard to findings of fact related to patent claim construction, the Federal circuit must defer to the district court under a “clear error” standard of review. Teva Pharmaceuticals USA Inc., et al. v. Sandoz Inc., et al., 574 U.S. (2015).
Previously, the Federal Circuit had ruled that deciding what a patent means, whether legal or factual, is a strictly legal issue to be reviewed de novo. In Teva, the Supreme Court disagreed and ruled that a district court will often have to decide factual questions as well in order to understand a patent. While intrinsic evidence will still be reviewed de novo on appeal, extrinsic evidence will be reviewed for clear error. As a result, a district judge’s determination of factual findings becomes particularly imperative to claim construction, which will now be more difficult to overturn on appeal. Teva teaches us that litigants should thoroughly consider and explore both avenues of law and fact in pursuing construction of their claims, even in the face of difficult motions for reconsideration.
Xycarb Ceramics, Inc., represented by Shaub & Williams LLP, achieved this objective, resulting in a significant decision by the Northern District of California regarding findings of law and fact by the trial court on reconsideration.
In Lam Research Corp. v. Schunk Semiconductor, No. 03-1335 (N.D. Cal. April 7, 2014), the dispute focused on Lam’s patented electrode assembly and the meaning of the claim term “bonded,” prompting an eleven-year battle regarding whether the “shrink-fit” mechanism of Xycarb’s electrode assembly fit into the scope of bonding within Lam’s patent.
Lam Research Corporation filed suit in 2003 seeking preliminary injunctive relief, alleging infringement of U.S. Patent No. 5,074,456 (later reissued as RE 41,266), by Xycarb and Schunk Semiconductor. Following an expedited claim construction proceeding, Judge Charles R. Breyer issued an initial claim construction order on August 8, 2003 that specifically construed “bonded” as not encompassing a “shrink fit” connection. On November 18, 2003, Judge Breyer granted Lam’s motion for reconsideration regarding the meaning of the term “bonded.” Contrary to his prior claim construction order, Judge Breyer held that the claims did not support the Court’s previous exclusion of “bonded by means of a shrink fit” from the meaning of “bonded” in claim 18.
11 years later – which included a stay in the action, combined reexamination/reissue proceedings, a reissue of the ‘456 Patent, and reassignment of the case to Judge Edward Chen – Xycarb filed a motion for reconsideration of Judge Breyer’s revised claim construction based upon a change in law and facts. Xycarb raised issues of reconsideration on all fronts: a change in law brought by Phillips v. AWH Corp., 415 F.3d 1303 (Fed. Cir. 2005), the introduction of new intrinsic evidence regarding admissions made by Lam in the reissue proceedings, and extrinsic evidence regarding admissions made in other Lam patents.
Judge Chen granted Xycarb’s motion for reconsideration. Noting that the Court could not determine whether Judge Breyer’s revised claim construction relied on the portion of law overturned by Phillips, Judge Chen denied reconsideration on the basis of a change of law. Reconsideration was granted by Judge Chen, however, on the basis of new intrinsic evidence presented by Xycarb.
As argued by Xycarb, Judge Chen found that Lam had unequivocally and unambiguously disavowed “unbonded surfaces clamped together with a mechanical structure” from the scope of the ‘266 patent during the reissue proceedings. Judge Chen held that this prosecution history disclaimer by Lam warranted narrowing of Judge Breyer’s prior construction of the term “bonded.” Lam continued to assert that “bonded” should not be narrowed to exclude shrink fit. However, Xycarb argued that the specification and claims of the ‘266 reissue patent require bonding materials or a bonding layer, but shrink fitting does not. Xycarb further argued that the ‘266 reissue patent requires a differential coefficient of thermal expansion for bonding and shrink fit does not. Judge Chen agreed with Xycarb’s contentions and specifically held that, “the claims and specification exclude shrink fitting from bonding.”
Xycarb’s responsive claim construction brief also pointed to extrinsic evidence, namely Lam’s 6,073,577 patent, to also argue that the meaning of the claim term “bonded” does not include shrink fit. Xycarb argued that its shrink fit electrode assembly was created and developed in direct response to the defective bonding method of the ‘456 patent lamented by its customers, including IBM. As stated by Lam’s ‘577 patent, Lam found that, “metallurgical bonds [of the ‘456 patent]… cause the electrode to warp due to differential thermal expansion/contraction of the electrode, the part to which the electrode is bonded,” and that “metallurgical bonds fail at high plasma processing powers due to thermal fatigue and/or melting of the bond.” As a result of these issues with the ‘456 electrode, in the late 1990’s IBM requested Xycarb to create an improved version of Lam’s electrode that did not infringe the ‘456 patent. Judge Chen found that this extrinsic evidence “tends to show that a person skilled in the art would not understand from the ‘266 Patent that the bonding could be achieved by shrink fit.”
Further, Xycarb pointed out that the ‘577 states, “The ‘456 patent discloses an electrode… bonded to a support frame by adhesive, solder, or brazing layer.” Accordingly, Judge Chen also agreed with Xycarb in holding that “Lam’s own description of the ‘266 Patent tends to show ‘bonded’ in the ‘266 Patent does not include shrink fit.”
In the wake of Teva, litigants engaged in claim construction should follow Xycarb’s lead in not only focusing on intrinsic evidence – which courts have traditionally treated as more dispositive than extrinsic evidence – but also favorable findings of fact that would be harder to overturn on appeal.
- Published in Litigation
The determination of whether it is necessary to register to do business in a particular state is not an easy one. It is an important decision, however, as a requirement to register will most likely trigger certain requirements and responsibilities on the entity taxpayer and a failure to register when it is necessary may lead to certain penalties or corrective actions.
While the relevant case law in California is sparse and highly fact dependent, there are sources from which to determine whether the method of doing business of a foreign company constitutes “doing business” in California. This is based upon the objectives of the California statutory scheme, although interpretative rulings and regulations do not exist to definitively resolve the issue and also upon inferences drawn from cases on closely related issues, such as the test for personal jurisdiction in California of foreign corporations.
Revenue and Taxation Code (R&TC) section 23101 was amended to change the definition of doing business in California for taxable years beginning on or after January 1, 2011. Thus, for taxable years beginning on or after January 1, 2011, a taxpayer is doing business in California if it actively engages in any transaction for the purpose of financial or pecuniary gain or profit in California or if any of the following conditions are satisfied:
- The taxpayer is organized or commercially domiciled in California.
- Sales, as defined in subdivision (e) or (f) of R&TC 25120, of the taxpayer in California, including sales by the taxpayer’s agents and independent contractors, exceed the lesser of $500,000 or 25 percent of the taxpayer’s total sales. For purposes of R&TC Section 23101, sales in California shall be determined using the rules for assigning sales under R&TC 25135, R&TC 25136(b) and the regulations thereunder, as modified by regulations under Section 25137.
- Real and tangible personal property of the taxpayer in California exceed the lesser of $50,000 or 25 percent of the taxpayer’s total real and tangible personal property.
- The amount paid in California by the taxpayer for compensation, as defined in subdivision (c) of R&TC 25120, exceeds the lesser of $50,000 or 25 percent of the total compensation paid by the taxpayer.
- For the conditions above, the sales, property, and payroll of the taxpayer include the taxpayer’s pro rata or distributive share of pass-through entities. “Pass-through entities” means partnerships, LLCs treated as partnerships, or S corporations.
According to the California FTB, an out-of-state taxpayer that has less than the threshold amounts of property, payroll, and sales in California may still be considered doing business in California if the taxpayer actively engages in any transaction for the purpose of financial or pecuniary gain or profit in California.
Example 1: Partnership A, an out-of-state partnership, has employees who work out of their homes in California. The employees sell and provide warranty work to California customers. Partnership A’s property, payroll, and sales in California fall below the threshold amounts. Is Partnership A considered to be doing business in California?
Answer 1: Yes. Partnership A is considered doing business in California even if the property, payroll, and sales in California fall below the threshold amounts. Partnership A is considered doing business in California through its employees because those employees are actively engaging in transactions for profit on behalf of Partnership A.
Example 2: Corporation B, an out-of-state corporation, has $100,000 in total property, $200,000 in total payroll, $1,000,000 in total sales, of which $400,000 was sales to California customers. Corporation B has no property or payroll in California. Is Corporation B doing business in California?
Answer 2: Yes. Although Corporation B’s California sales is less than the $500,000 threshold, Corporation B’s California sales is 40 percent of its total sales which exceeds 25 percent of the corporation’s total sales ($400,000 ÷ 1,000,000 = 40%.)
B. Case Law
While mere solicitation of sales within the state where acceptance takes place without the state is excluded from intrastate business, conducting sales through agents located in the state, having an office or a telephone listing or bank account, or servicing products in addition to transacting sales within the state will contribute to a positive finding that a foreign corporation is conducting intrastate business.
Two California cases on point held precisely in this way. In one case, mere solicitation of sales by a foreign corporation was held not to constitute doing business (Horner v. Selective Cam Transmission Company (1960) 180 Cal.App.2d 89).
In the second case, a Texas firm, Neogard Corporation, brought suit against a California firm with which it had been doing business. The court prevented the firm from doing so until it had qualified with the Secretary of State to do business in the state, and paid any license fees, taxes and penalties owing. (Neogard Corp. v. Malott & Peterson-Grundv (1980) 106 Cal.App. 213).
The court based its finding of doing business in California on the following factors: 1) Neogard hired a California firm to obtain projects for it and paid a commission to the firm’s representatives for any project using the Neogard system; 2) Neogard sales reps accompanied the California company’s reps on sales calls on a majority of occasions; 3) Neogard supervised performance of the construction projects in California, provided an application manual on its process and trained the California firm’s employees thoroughly in its processes; 4) Neogard conducted inspections to ensure the quality standard Neogard desired was provided; 5) Neogard provided an ongoing warranty on its work, which the court thought should be provided normally only by the local contractor on the project.
Although Neogard did not maintain inventory, an office, a bank account, a phone number or have payroll employees in the state, the court ruled that the ongoing business relationship between Neogard and the California firm constituted “an inter-connected pattern of inseparable business transactions” and that Neogard transacted intrastate business in California.
Neogard’s facts may differ from other foreign company activities in California with regard to the commission/agent structure Neogard used and the constant supervision by Neogard’s employees over the California firm’s solicitation of business and performance of the contracts using Neogard products. Moreover, Neogard sued a local firm, using the state courts, and the defendant raised the issue of Neogard’s qualification to do business, compelling the court to decide the issue by looking at any and all conduct which showed Neogard’s contacts with the state.
While some foreign companies’ sales are through independent distributors or dealers who handle the majority of their new business on their own, they often have a regional sales manager who travels to California and makes sales presentations to customers, as needed, together with the distributors or dealers. The sales manager also provides other ancillary assistance in sales to the distributors or dealers in California.
The foreign company also may on occasion provide training sessions to the distributors or dealers and accompany them at customer job sites in the state.
They also often provide a standard warranty of repair or replacement on their products for an initial period of 12 months from the date of the product’s installation and ongoing warranty services as well, although said services are generally performed by the distributors or dealers and not the foreign company.
A foreign company further provides assistance to distributors or dealers in the latter’s efforts to lobby state and local governments for new or revised industry regulations so as to promote compatibility between the standards and specifications of their products and local codes.
A foreign company also often participates in trade shows throughout the United States, including California.
While acceptance of orders outside of California and title to the product passes to the independent distributors or dealers abroad, an ongoing, regular and systematic pattern of business dealings with the state contribute to a finding in favor of transacting intrastate business, even if specific indicia are missing, such as offices, bank accounts, and agents or employees of the company actually transacting sales.
A foreign company may be considered to be doing intrastate business on the basis of the above analysis and may have been “doing business” with California for a long time without having addressed this issue. The risks for that company of qualifying at this point are that the application will raise the issue of back license fees and penalties for having conducted business without being qualified, and past taxes, penalties and interest.
The foreign company should take prompt action, after thoroughly discussing these issues with a competent attorney in this area, to avoid imposition of back taxes and penalties, and even forfeiture of the right to do business. One cannot advise a foreign company to avoid qualification unless it takes corrective action. Should it decide against qualifying for the present, a restructuring of its business activities should be undertaken so that it does not continue transacting business in California.
More about the authors:
David Shaub: Founder and Senior Partner of Shaub & Williams, LLP; member of the CA State Bar Association; formerly chair of the LA County International Law Section and member of the International Law Section of the CA State Bar.
Katya Mezek: Associate at Shaub & Williams, LLP; member of the CA State Bar Association; member of the UCLA Alumni Association.