Legal Update

Summer 2006

• ECJ Welcomes Intellectual Property Partner Alan Cyrlin
• What Your Business Can Learn From The Coca-Cola Company Espionage Story
• Clients on the Move
• E&O Carriers May Have To Help You Defend Against Mold And Other Excluded Claims, Even If Coverage Is Denied In Your Policy
• ECJ Victory Paves Way For 5-Star Hotel In Beverly Hills
• ECJ Welcomes Three New Associates

ECJ Welcomes Intellectual Property Partner Alan Cyrlin

ECJ is pleased to announce its newest partner, Alan Cyrlin. Alan is a partner in ECJ's Intellectual Property Law Department, and his areas of practice comprise all phases of copyright and trademark protection, including litigation as well as intellectual property selection, clearance, prosecution, maintenance, licensing and transactions. Mr. Cyrlin has assisted businesses and individuals to acquire and expand their trademark rights and has spoken at seminars and authored numerous articles.

Mr. Cyrlin graduated in 1991 with a J.D. from Loyola Law School, and graduated magna cum laude in 1988 with a B.A. from San Francisco State University. He is the President of the Rotary Club of Tarzana-Encino, an organization of business and professional leaders providing humanitarian service, encouraging high ethical standards in all vocations, and helping to build goodwill and peace throughout the world.

What Your Business Can Learn From The Coca-Cola Company Espionage Story

By Alan Cyrlin

Introduction

On July 5, 2006, a national news story broke about three individuals arrested by the FBI for allegedly attempting to sell stolen Coca-Cola company trade secrets to rival PepsiCo.

The details are still spilling out. According to the FBI's web-site, this is what allegedly occurred:

On May 19, 2006, PepsiCo provided to Coca-Cola a copy of a letter mailed to PepsiCo in an official Coca-Cola business envelope. The letter was from an individual identifying himself as "Dirk," who claimed to be employed at a high level with Coca-Cola and offered "very detailed and confidential information." Coca-Cola immediately contacted the FBI.

The source of Dirk's information was Joya Williams, an Executive Administrative Assistant at Coke in Atlanta, who had access to some information and materials described by Dirk. As the investigation progressed, Dirk provided to an FBI undercover agent 14 pages of Coca-Cola documents logo-marked "Classified- Confidential" and "CLASSIFIED -Highly Restricted."

Later Dirk produced other documents that Coca-Cola confirmed were valid trade secrets of Coca-Cola and highly confidential, and was to receive $5,000 for the documents as good faith money toward additional purchases.

Meanwhile, video surveillance showed Joya Williams at her desk going through multiple files looking for documents and stuffing them into bags. She also was observed holding a liquid container with a white label, which resembled the description of a new Coca-Cola product sample, before placing it into her personal bag.

On June 16, 2006, an FBI undercover agent met with Dimson (Dirk's actual name) at Hartsfield-Jackson International Airport, and Dirk provided a brown Armani Exchange bag containing one manila envelope with documents marked "highly confidential" and one glass bottle with a white label containing a liquid product sample. The undercover agent paid Dimson.

Dimson, Williams and Duhaney were arrested.

http://atlanta.fbi.gov/dojpressrel/pressrel06/coke070506.htm

What You Can Learn From the Story

Businesses can learn five valuable lessons from the Coca-Cola espionage incident.

1. You Must Not Knowingly Receive Or Use Another Company's Trade Secrets.

Why did PepsiCo refrain from purchasing the trade secrets? Why did they instead report the incident to the FBI?

While PepsiCo may have been motivated by a sense of business ethics, it is equally likely that the company knew that it could suffer severe civil - and possibly criminal - penalties if it took the bait.

Importantly, trade secret laws impose liability not only on those who initially stole the trade secrets, but also on third parties who knowingly benefitted from the theft through "misappropriation." In fact, a company that innocently receives another's trade secret information, but then uses or discloses the information after having a reason to know that it was acquired improperly, can be found liable for misappropriation of the trade secret. Cal. Civ. Code §3426.1(b)(2)(c).

If PepsiCo had purchased the allegedly stolen information, the penalties for the company could have been severe. Under the Economic Espionage Act of 1996 (18 U.S.C., §§1831 to 1839), an individual involved in trade secret misappropriation may be fined up to $500,000. Corporations may be fined up to $5 million. Violators also may be imprisoned for up to ten years. The government also may seize all property derived from the theft. Several states have enacted similar laws making trade secret misappropriation a crime.

Civilly, the remedies for trade secret misappropriation include an injunction and monetary recovery. In California, trade secret holders may recover for actual losses and unjust enrichment caused by misappropriation. Cal. Civ. Code §3426.3(a). If the misappropriation is willful or malicious, the court may grant up to two times the amount of the award, plus legal fees.

2. Trade Secrets Include More Than Just "Secret" Formula.

Ironically, the formula for Coca-Cola is often cited as an example of a trade secret. But a trade secret includes other information as well.

A trade secret may include any "information, including a formula, pattern, compilation, program, device, method, technique, or process, that: [d]erives independent economic value, actual or potential, from not being generally known to the public or to other persons who can obtain economic value from its disclosure or use." Cal. Civ. Code §3426.1(d). In other words, a trade secret is information that provides a business with a competitive advantage. The items stolen from the Coca-Cola Company would likely fall within this definition.

3. Trade Secret Protection Is Lost If A Business Fails To Maintain "Reasonable Efforts" To Safeguard The Information.

Did you notice how the FBI's press release emphasized that Coca-Cola attempted to protect the information by labeling it "CLASSIFIED - Highly Restricted" and "Classified - Confidential?"

This is no accident.

For confidential information to qualify as a "trade secret," a trade secret owner must make reasonable efforts to safeguard it. Many courts have found that this requirement is met where a company marks documents as "Confidential" and limits access to sensitive information on a "need to know" basis. Other methods found to be sufficient include developing a formal system for safeguarding trade secret information, utilizing confidentiality agreements, and advising personnel with access to the information that they are obtaining access to trade secret information.

4. Information Does Not Have To Be Completely Secret To Receive Protection.

On the other hand, trade secret law does not require information to be absolutely secret to be protected as a trade secret. Rather, the information must not be "generally known to the public or to other persons who can obtain economic value from its disclosure or use." Cal. Civ. Code §3426.1(d).

5. Trade Secrets Are Sometimes Stolen By Trusted Employees.

It is sad, but true. In the Coca-Cola trade secret case, the source of stolen information was allegedly Coca-Cola Company's administrative assistant.

What You Can Do to Protect Your Business

The Coca-Cola espionage story teaches that businesses can undertake specific tasks to protect their trade secrets. These include: (1) identify your trade secrets and label them as "confidential"; (2) educate employees as to the type of information the company believes is a trade secret and train employees concerning their duty to refrain from using or disclosing such information; (3) update employee handbooks to include the company's trade secret policies and procedures; (4) restrict access to sensitive information to those individuals having a "need to know"; (5) require anyone who may come into contact with trade secret information to sign confidentiality or non-disclosure agreements; (6) inform employees that they must refrain from disclosing or using the trade secrets of competitors and former employers; and (7) use exit interviews for departing employees to ensure return of confidential information and to emphasize confidentiality obligations.

Clients on the Move

Coastline Capital Partners, LLC, was founded in 2003 to identify, acquire and reposition under-utilized and/or mismanaged income-producing multifamily properties through renovation, rehabilitation and professional property management. Since inception, Coastline has acquired and is in escrow to acquire a total of approximately 1,500 units valued at $160,000,000.

Principals Eric Freedman and Steven Ludwig were featured on the magazine cover and quoted in an article entitled "Real Estate Careers Yield Great Return On Investment" in the Spring 2006 issue of Goizueta, Emory University Goizueta Business School's publication. Both graduates of Emory's Goizueta Business School, Eric and Steven were easily identified as experts in the real estate field for purposes of the article. Steven, who serves as the director of acquisitions and dispositions, was quoted as saying: "We joint venture the ownership in apartment dwellings, and our partners are large institutional investors." After working with Steven since 2003, Eric became a principal in 2006 and holds the title of director of portfolio management. Currently, Coastline focuses on apartment rentals for modest, average and luxury units in California, but would like to expand its business venture nationally.

E&O Carriers May Have To Help You Defend Against Mold And Other Excluded Claims, Even If Coverage Is Denied In Your Policy

By Robert M. Waxman

The increasing complexity of real estate transactions and the proliferation of regulations and disclosure requirements that practitioners must know have made errors and omissions insurance an essential part of doing business. Errors and omissions insurance provides a first line of defense against legal costs and potential liabilities that arise when a client or customer sues you. However, most E&O policies include a list of exclusions - incidents or activities that are not covered by the policy. Common exclusions include: fraudulent or criminal acts by the insured; discharge of or failure to identify pollution or mold; other environmental issues; misappropriation or commingling of funds; and discrimination. If coverage is excluded, the insurer will not pay for any judgments against you related to that area. If you lose in court, you alone will have to bear the costs.

Yet, even when coverage for a type of claim is excluded, you may have some recourse under your E&O policy. Courts have long held that an insurance company's duty to defend is triggered when the insurer is made aware of allegations or facts that give rise to a potential claim covered under the policy. For instance, in McCostis v. Home Insurance Company of Indiana (31 F.3d 110, 112, 2nd Cir. 1994), a New York court found that a lawyer who was sued for fraudulent overbilling was entitled to a defense under his professional liability insurance policy despite a policy exclusion for "return…of legal fees." The court made this decision because the complaint also charged the lawyer with a negligent breach of fiduciary duty. Because his E&O policy required the insurer to defend the lawyer for negligence, it was obligated to defend him at the trial, which involved both charges.

Similarly, in Church Mutual Ins. Co. v. U.S. Liability Ins. Co. (347 F.Supp.2nd S.D. Cal, 2004), the U.S. District Court ruled that an exclusion of claims rising out of breach of contract did not bar coverage for fraud under a nonprofit's professional liability policy. This requirement to defend does not necessarily require the carrier also to pay any claims if the insured loses the case.

In general, real estate practitioners facing claims that may be excluded from an insurance policy may not have to demonstrate the actual existence of coverage to obtain a defense from an insurer. Rather, they must show only the existence of a "potential for coverage." Although what exactly constitutes potential for coverage is open for debate in legal circles, there is a test that can determine whether potential for coverage exists. There is no potential for coverage, and thus no duty to defend, if the undisputed facts available to the insurer at the time of its coverage decision are sufficient to allow the court to rule against the insured. If this test is met, an insurer can safely deny a defense (Montrose Chemical v. Superior Court, 6 Cal 4th 287, 297, 300 (1993)). Thus, if the case of the lawyer described above had only involved charges of fraud - which were excluded by the policy - the insurer would have had no duty to defend. However, since the charges included both fraud and breach of fiduciary duty, the insurer was obligated to cover the lawyer's defense.

Real estate practitioners may also be able to require an insurer to defend against excluded claims as part of a larger suit. For example, mold-related claims are frequently joined with other issues that have nothing to do with mold and which in and of themselves may require a carrier to defend the entire lawsuit. As an example, California statutes entitled the "Real Estate Brokers and Salespersons; Inspections & Disclosures; Standards of Professional Conduct Act," require a real estate licensee to conduct a visual inspection of residential real property and disclose any observable problems. The statute also prohibits insurers from excluding coverage for failing to adequately conduct the required visual inspection and disclose visible defects. In such a case, a mold claim might be part of a suit against a licensee for failing to properly inspect a home and disclose the visual presence of mold or water leaks.

Because an insurer may have an obligation to at least defend a lawsuit in which excluded claims such as those based on mold or fraud are joined with other covered issues, you should immediately put your professional liability insurance carrier on notice from the date you first become aware of a possible malpractice claim against you. If the carrier denies coverage by virtue of a policy exclusion, consult your defense attorney or coverage counsel, since an E&O policy may provide at least some protection if you are found liable. You may not be covered ultimately, but, because many cases involve more than one charge, you may find that your insurer will be compelled to provide a defense that will help you avoid liability.

ECJ Victory Paves Way For 5-Star Hotel In Beverly Hills

On April 26, 2006, ECJ Partner and Litigation Department Chair, Allan B. Cooper, celebrated the decision of the California Court of Appeal in Beverly Hills Residential - Business Alliance for a Livable Community v. City of Beverly Hills (21 Civil B183973). In an unpublished opinion, the Court upheld the approvals granted by the City of Beverly Hills to ECJ's clients, the developers of the Montage Beverly Hills, a 228-room, 5-star hotel scheduled to open in 2008. Allan and ECJ Partner and Real Estate Department Chair, Lee I. Silver, had been instrumental in obtaining the approvals from the City. Funded by a competing hotel, the Alliance brought suit to have the approvals set aside for alleged non-compliance with the California Environmental Quality Act (CEQA). The trial court had upheld the approvals, and the Alliance appealed. The appellate court affirmed the trial court's judgment, holding the requirements of CEQA had been complied with and that the City acted appropriately in issuing the approvals to our clients. On August 2, 2006, the California Supreme Court rejected the Alliance's request to review the matter.

Allan, Lee and the rest of the family at ECJ congratulate our clients on this incredible victory and look forward to being "comped" when the hotel opens!

ECJ Welcomes Three New Associates

The firm is pleased to welcome its three newest associates, Angela P. Chan, Ryan M. Lapine and Jeffrey A. Merriam-Rehwald.

Angela P. Chan is an associate in ECJ's Business and Corporate Law Department where she focuses on corporate and securities matters, including public and private equity offerings, securities law reporting and compliance, mergers and acquisitions, venture capital financing, corporate governance, technology licensing and general business and corporate counseling. Ms. Chan graduated from Georgetown University Law Center in 2001 and received her B.S. degree in Business Administration from the University of Southern California in 1998, graduating summa cum laude.

Ryan M. Lapine is an associate in ECJ's Litigation Department where his areas of practice include business and commercial litigation, copyright, licensing and distribution law/mass media litigation, unlawful and unfair business practice litigation, sports law, health care law, wage and hour litigation and toxic torts. Mr. Lapine graduated from the University of California, Hastings College of Law, in 2004 and received his B.A. degree in Economics and Public Policy from the University of Chicago in 2001, receiving the Richter Grant for superior undergraduate research.

Jeffrey A. Merriam-Rehwald is an associate in ECJ's Estate Planning, Probate and Trusts Department where his areas of practice include estate planning with trusts and wills, probate of decedents' estates, probate litigation, trust administration and federal estate and gift tax planning. Mr. Merriam-Rehwald received his J.D. from Loyola Law School in 2001, cum laude, and his B.A. in Psychology from the University of California, Santa Cruz in 1995.

Legal Update is published by the law firm of Ervin, Cohen & Jessup LLP as a service to clients and friends of the firm. Articles are intended as summaries of the law and should not be relied upon as substitutes for legal consultation. Authors will, on request, be pleased to discuss in greater detail the information contained in their articles. Correspondence regarding information contained in this issue or address corrections should be addressed to Cynthia Kaiser, c/o Ervin, Cohen & Jessup LLP, 9401 Wilshire Boulevard, Ninth Floor, Beverly Hills, CA 90212-2974 or ckaiser@ecjlaw.com.