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Spring 2013

Achieving Success Together

Contractual Indemnification: Active or Passive Indemnitors
By: Richard E. Blasco, Esq.

When it comes to indemnification, it's not only what you say, but how you say it that counts.

California law adheres to the general rule of contractual indemnification, which provides that in the case of a loss with multiple indemnitors, all indemnitors are liable to the indemnitee. However, as among the indemnitees, California's courts have also considered whether an indemnitee was actively or passively negligent, in allocating liability among the indemnitees. By way of example, where a partnership has agreed to indemnify another from the partnership's own negligence, the partner that commits an affirmative act of negligence which resulted in the loss would be considered actively negligent, while other partners who share the liability of the loss would be considered passively negligent.

This distinction can yield varying results, depending on the contractual language which created the indemnity obligation. A provision expressly requiring one company to indemnify another, even if the loss arises from the indemnitee's own negligence, will be enforced regardless of whether the indemnitee was actively or passively negligent. In contrast, a provision purporting to indemnify a party for all claims and damages, but failing to expressly mention the indemnitee's own negligence, will cover a loss arising from the indemnitee's passive negligence, but not its active negligence.

Furthermore, a provision requiring one party to indemnify the other for losses arising from the indemnitor's negligence, but which fails to address losses arising from causes other than the indemnitor's negligence, will not cover any losses arising from the negligence of the indemnitee, whether active or passive.

Finally, it is recognized in both California and Delaware that a party to a contract may agree to indemnify the other for losses resulting from such party's breach of contract. These types of first party breach of contract indemnity provisions, depending upon how they have been drafted, can expand the scope of damages recoverable for a breach of contract which the nonbreaching party can recover from the breaching party, beyond the scope of damages generally recoverable for a breach of contract. There are many types of commercial contracts which contain a so called "limitation of liability" provision, which limitation of liability provision can be voided by the existence of an express provision indemnifying the non-breaching party from a breach of the contract by the other party.

The lesson, of course, is that a company's indemnification clauses must be consider not only in light of the general rules in the state in which it operates, but must also take into consider the effect that an indemnification provision for breach of the agreement may have on other provisions in the contract which attempt to limit the parties liability to each other.


Reducing the Risk in Comparative Advertising
By: Robert S. Hawekotte, Esq.

The idea of comparative advertising can simultaneously excite and worry a business. Your marketing team wants nothing more than to highlight the weaknesses of your competition. Inhouse counsel and management, however, may believe that this type of advertising will expose them to liability. A recent federal court decision, however, reiterates that, if you use your competitor's trademark in a nominative fashion, a comparative advertising campaign does not have to be a risky proposition.

In, Ebates, an online retail marketing company sued its competitor, Integral, when the latter displayed Ebates' trademarks on Integral's web site in a comparative ad that advertised to Ebates customers that Integral gives them more and better benefits. Ebates moved for a temporary restraining order, complaining, as most plaintiffs do in such lawsuits, that Integral's advertising would irreparably damage the reputation, customer trust, and goodwill associated with the Ebates' trademarks. Ebates' motion was denied.

A likely underlying reason for the Court's ruling is the fact that Integral used Ebates' trademarks in a nominative fashion, i.e., merely to identify Ebates and its competing on'line services. Had Integral used Ebates' trademarks in a manner to suggest that Integral was affiliated with Ebates or if Integral had misrepresented the parties' respective trademarks and services in some manner, then a Court would likely have ruled in favor of Integral.

Comparative advertising can be an effective tool to gain an edge in the marketplace. The key is to balance the creativity of the advertising with the facts communicated to your potential customers. Be clear in drawing a distinction between the products and services sold under your trademarks and sold under your competitor's trademarks. Finally, if touting qualitative or quantifiable difference, be sure to have the data and tests to support your advertising claim.


Construction Law Changes in 2012
By: Richard E. Blasco, Esq

A comprehensive review and revisions of the state's construction statutes which began nearly ten years ago by the California Law Review Commission, resulted in Legislation in 2012 adopting some of the most significant changes to California's construction laws in the past 40 years. The following are some of the changes:

Changes in Terminology
"Original contractor" has been changed to "Direct Contractor."
"Materialman" has been changed to "Material Supplier."
"Preliminary 20-Day Notice" has been changed to "Preliminary Notice."
"Stop notice" has changed to "Stop Payment Notice."

Change in Definition of Completion
"Completion," which is important because it starts the clock on the deadline to record a Mechanics Lien, serve a Stop Payment Notice, or make a Bond Claim, has been changed to no longer include the event of acceptance by the Owner as completion of the project.

Changes in Notice of Completion
The deadline to record notices of completion changed from 10 days to 15 after actual completion of the project. Owners may now record separate notices of completion where there are multiple Direct Contractors.

Changes in Preliminary Notices
The required language for Preliminary notices has been changed. and must include a "Notice to Property Owner." Direct Contractors must serve a preliminary notice on Construction Lenders, if any. Direct Contractors are required to provide the name and address of the owner and any construction lenders. If a construction loan is obtained after commencement of the work of improvement, the Owner is required to provide the name and address of the construction lender to all persons who have served a preliminary notice on the Owner.

Mechanics Lien and Stop Payment Notices
Mechanics liens have new required language and must now include a "Notice of Mechanics Lien" and a "Proof of Notice Affidavit." Stop payment notices have new required language.

Waiver and Releases Upon Progress and Final Payments
The statutory language required in conditional and unconditional waiver and releases, for both progress and final payments, has changed.

Design Professional Liens
There will no longer be design professional liens, but design professionals will still be able to record mechanics liens for work performed before commencement of the project. Landscape architects are now included in the definition of "design professional."

Release Bonds
The bond amount required to release a Mechanics Lien has been reduced from 150% to 125%.

Petition to Expunge Mechanics Lien
The $2,000 limit on attorney's fees to expunge a Mechanics Lien has been repealed. Owners can now recover all "reasonable" attorney's fees incurred. However, Owners must first make a demand that the lien claimant withdraw the lien at least 10 days before filing a petition to expunge a mechanics lien.

Retention on Public Works Projects
The maximum amount that can be withheld in retention has now been statutorily capped at 5% of the contract price on public works projects, subject to certain exceptions.

Prompt Payment Penalties
The deadline for Direct Contractors to make progress payments has been reduced from 10 days to 7 days upon receipt of payment from the owner. The former law governing prompt payment of progress and retention payments by Owners to Direct Contractors and retention payments by Direct Contractors to Subcontractors and Suppliers remain the same (i.e. Progress Payments by Owners to Direct Contractors: 30 days from demand for payment. Retention Payments by Owner to Direct Contractors: 45 days from completion on private works projects and 60 days from completion on public works projects. Retention Payments by Direct Contractors to Subcontractors and Suppliers: 10 days from payment by Owner on private projects and 7 days from payment by Owner on public works projects.

The penalty for failing to promptly make payments remains the same at 2% per month subject to the right of the payor to withhold up to 150% of any amount disputed in "good faith" or where there is a "bona fide" dispute.

Payment Bond Claims
Payment bond claimants who do not have a direct contractual relationship with the Direct Contractor may still make a claim on a Payment Bond, with certain exceptions. Notice, however, must be given within 15 days after a Notice of Completion is recorded or, if no Notice of Completion is recorded, within 75 days after Completion of the project.

Indemnity Provisions
For contracts entered into, on, or after January 1, 2013, Type I indemnity clauses in which a downstream contractor indemnifies an upstream contractor or owner from the upstream contractor's or owner's "active negligence," will be void and unenforceable, with certain 5 Exceptions, in all construction contracts. Type I indemnity clauses were already unenforceable in residential construction contracts, and in contracts with contractors and Material Suppliers of all tiers on public works projects.

As indicated above, these are just a few of the changes that were made to the California's construction law last year. If you have a question regarding any of the changes to the California construction law, you need to contact an attorney who is well versed in this area of the law, because it is very complex.


Protection of Intellectual Property
By: Richard E. Blasco, Esq.

Intellectual assets, which include patents, copyrights, trademarks, trade secrets, and marketable ideas and processes, can account for as much as 80 percent of a company's total market value. As a result, companies with intellectual assets are increasingly confronted with intellectual-property- and technology-related disputes, as both a defendant and as a plaintiff. Such disputes include deceptive trade practices, misappropriation of trade secrets, breach of contract, common law conversion, tortious interference, unfair competition, civil conspiracy, defamation and aiding and abetting. Moreover, shareholder lawsuits brought against companies and their boards of directors in conjunction with mergers and acquisitions are becoming more common as intellectual property continues to gain recognition as a valuable asset class that can be utilized by an acquiring company to maximize corporate revenues.

As the great inventor and statesman Benjamin Franklin said: "An ounce of prevention is worth a pound of cure," recognizing that it is better to stop something bad from happening than it is to deal with it after it has happened. Every company needs to recognize and protect the value of its intellectual assets by having agreements with employees, vendors, vendees, consultants and accountants which identify the companies intellectual assets, impress upon the recipient the value that the intellectual asset has to the company, and impose a duty to protect them from disclosure to or unauthorized use by others.

© Blasco & Hawekotte General Counsel Services LLP 2013. All rights reserved.
No portion of this article may be copied, retransmitted, reposted, duplicated or otherwise used without the express written approval of the Blasco & Hawekotte General Counsel Services LLP.

This article is not legal advice and is not intended as legal advice. This article is intended to provide only general, non-specific legal information. This article is not intended to cover all the issues related to the topic addressed. The specific facts that apply to your matter may make the outcome different. This article is based on United States and California law. You should consult with an attorney familiar with the issues and the laws of your state. This article does not create any attorney client relationship.