Know Your Collateral When Perfecting Security Interests 

Creditors routinely take security interests in collateral as a hedge against a borrower’s failure to satisfy outstanding debt obligations. For creditors, the importance of perfecting these security interests cannot be understated. The reason: perfecting a security interest (essentially, putting the world on notice of a creditor’s superior rights in identified property) gives the secured creditor a priority claim on specified collateral as compared to another party’s unsecured claims on a debtor’s assets.  

This begs the question: how does a creditor go about perfecting its security interest in personal property? The answer: it depends upon the collateral at issue, but in all cases, the Uniform Commercial Code (UCC) governs the method of perfection. 

Certificated and Uncertificated Securities 

Shares (or comparable equity interests) in a corporation, business trust, or similar entity are defined as a “security” for purposes of Article 8 of the UCC and “investment property” under Article 9. Where a share is represented by a physical certificate, it is characterized as a certificated security. 

A security interest in a certificated security—or any uncertificated security, for that matter—can be perfected by the proper filing of a UCC-1 financing statement. Alternatively, a secured party can perfect an interest in a certificated security by control of the certificate. To do so in the case of a stock certificate, for example, the secured party (or the secured party’s intermediary) must obtain actual possession —or take delivery—of it, along with an executed stock power indorsed to the secured party (or in blank), which allows the secured party to transfer the certificate in the event the collateral is foreclosed upon.  

Of course, in our digital age, ownership in an equity interest is not always evidenced by a physical certificate. Rather, electronic certificates may be entered in a company ledger. This is an example of an uncertificated security, in which ownership is evidenced by account statements issued by the company, the company’s transfer agent, or a broker-dealer. 

Not unlike a certificated security, a security interest in uncertificated securities can be perfected two ways: (1) by properly filing a UCC-1 financing statement or (2) by control. As for control of an uncertificated security, it is obtained by either re-registering the investment property in the name of the secured party or by the execution of a control agreement with the issuer of the uncertificated security.  

Limited Liability Companies and Limited Partnerships  

Equity interests in limited liability companies and limited partnerships are treated as either “general intangibles” or “investment property” under Article 9 of the UCC.  

In order for a secured party to treat an interest in an LLC or LP as a “security” and “investment property” under the UCC and be able to perfect its security interests accordingly, the issuer must take additional steps to effectively opt-in to Article 8. Of note, an Article 8 opt-in provision can generally be found in the issuer’s governing document (generally, the operating, LLC or LP agreement) or on the face of the certificate of a certificated LLC or LP interest, and to be effective, the opt-in provision must expressly provide that the LLC or LP interest at issue is being treated as a “security” pursuant to the UCC.  

In the absence of an effective Article 8 opt-in provision, an LLC or LP interest will be characterized as a “general intangible” (whether or not the equity interest is certificated), and the only method of perfecting a security interest in a “general intangible” is to properly file a UCC-1 financing statement. Parenthetically, the priority rule of first to file a UCC-1 financing statement will apply in the event of multiple security interests in the LLC or LP interest in question. 

So that an LLC or LP interest is treated as a “security” and not a “general intangible” for purposes of perfecting the interest, a secured party may want to request the issuer to opt in to Article 8 and further require a provision to be added to the governing documents that prohibit the issuer from later opting out. 

The Takeaway  

It bears repeating: the UCC grants priority to a perfected secured creditor over other creditors, including those who hold unperfected security interests. As such, perfecting security interests should always be top of mind for creditors, whether by (1) by properly filing a UCC-1 financing statement or (2) by control, depending, of course,  upon the type of collateral.  

This blog post is not offered, and should not be relied on, as legal advice. You should consult an attorney for advice in specific situations. 

Clarity in Delaware About a Corporate Officer’s Duty of Oversight 

When it comes to corporate officers, it has long been an open question whether the scope of their fiduciary duties is the same as those imposed upon company directors. In Delaware, those questions have now been answered by the state’s Court of Chancery, which held late last month that under Delaware law, officers and directors are on equal footing, both owing the same fiduciary duties to their companies, including a duty of oversight.

This was the determination in In re McDonald’s Corporate Stockholder Derivative Litigation, a headline-grabbing ruling that will surely reverberate through C-suites and boardrooms nationwide.

In re McDonald’s Corporate Stockholder Derivative Litigation: a Bit of Background

From 2015 until his termination with cause in 2018, David Fairhurst served as Executive Vice President and Global Chief People Officer of McDonald’s Corporation. In that capacity, Fairhurst was responsible for ensuring that McDonald’s fostered a safe and respectful workplace environment. In a derivative lawsuit filed by company shareholders, it was asserted that he failed to do so. More specifically, Fairhurst was alleged to have breached his fiduciary duties owed to McDonald’s—specifically, the duty of oversight—by fostering a corporate culture that condoned sexual harassment.

According to company shareholders, Fairhurst’s duty of oversight required him to make a good faith effort to establish a system that would generate the information necessary to manage the human resources function at McDonald’s. And with that information, he was duty-bound to report to the company’s Chief Executive Officer and board of directors known instances of sexual harassment and misconduct. Trouble was, Fairhurst allegedly chose not to do so.

In their derivative action, McDonald’s shareholders claimed Fairhurst breached his duty of oversight by consciously ignoring red flags and, in effect, disabling himself from being informed of risks or problems requiring his attention. In opposition, Fairhurst attempted to have the lawsuit dismissed, asserting that Delaware law—as set forth in in the seminal case of In re Caremark International Inc. Derivative Litigation—did not impose on officers any obligations equivalent to the duty of oversight. By way of its ruling on January 25, the Delaware Court of Chancery disagreed.

In re McDonald’s Corporate Stockholder Derivative Litigation: the Court’s Ruling

As previewed above, the court in Delaware has made clear that officers owe the same fiduciary duties as directors, and that includes a duty of oversight—a function that may be better suited to corporate officers who are responsible for managing a corporation’s day-to-day operations. Given that officers are responsible for managing and maintaining systems to detect and identify red flags and are further tasked with correcting wrongdoing in the workplace, the court concluded that a duty of oversight should attach to officers who now, under Delaware law, can be sued derivatively by shareholders.

The Scope of an Officer’s Duty of Oversight

In the wake of the ruling in In re McDonald’s Corporate Stockholder Derivative Litigation, a new question arises: What exactly is the scope of an officer’s oversight responsibilities under Delaware law? Truth is, there is no “one-size-fits-all” answer.

The parameters of an officer’s duty of oversight will be largely dependent upon facts and circumstances and, as a result, the course of conduct that must be taken to rectify a given situation will vary based on context. For example, a CEO with company-wide responsibility will likely have a broader duty of oversight as compared to a Chief Financial Officer solely responsible for a company’s finances or a Chief Legal Officer in charge of a corporation’s in-house legal department. By extension, a Chief Marketing Officer will not likely be on the hook for deficiencies in financial or legal reporting systems or related oversight. That being said, should a red flag be overtly obvious and particularly egregious, then any officer could potentially have a duty to report it even if the subject matter of the red flag falls outside his or her domain.

Whatever the case may be, officers must be vigilant, even before claims are asserted. For purposes of illustration, consider data privacy. It is clear that a data breach could have catastrophic implications to a corporation’s business. Indeed, in the wake of a hack and under Delaware law, stockholders of a company impacted by cybercriminals could now sue an officer in charge of data privacy for the breach of his or her duty of oversight—were it found or alleged that the cybersecurity officer had failed to make a good faith effort to put adequate data privacy protections in place or had otherwise ignored clear weaknesses, or red flags, in the organization’s overall data security operation. In the aftermath of the decision in In re McDonald’s Corporate Stockholder Derivative Litigation, officers should anticipate the possibility of this type of exposure (even beyond the cybersecurity realm) and act accordingly.

Takeaways for Officers of Delaware Corporations

Clearly, by virtue of the court’s determination in In re McDonald’s Corporate Stockholder Derivative Litigation, officers of Delaware corporations must be mindful of their expanded fiduciary duties and, as just mentioned, vigilant. Yet there is no need for them to panic. To be subject to oversight liability, an officer must consciously (1) fail to make a good faith effort to establish information systems or (2) ignore red flags. As such, despite the imposition of a duty of oversight, the standard to prove that an officer has acted in bad faith is quite high.

Nonetheless, in light of the expansion of an officer’s fiduciary duties, executives working for Delaware corporations should be aware that they could be exposed to personal liability if a breach of oversight obligations can be established. Still, it remains unclear what might trigger an action for breach of the duty of oversight, especially if red flags fall outside the scope of an officer’s identified roles or areas of expertise. Also unanswered is whether the business judgement protection rule will extend to officers in these cases, thus shielding them from liability.

What we do know is that this area of law continues to evolve, and officers of Delaware corporations should be sure to consult with legal counsel if and when faced with a potential claim. Likewise, it would be prudent for them to review the terms of their companies’ D&O insurance policies to check if they need to be updated in light of this expanded liability exposure.

Of course, the lawyers in our Corporate & Securities Practice Group are here to answer any questions you may have about the impact of In re McDonald’s Corporate Stockholder Derivative Litigation and its aftermath.

This blog post is not offered, and should not be relied on, as legal advice. You should consult an attorney for advice in specific situations.

Non-Compete Agreements Under Federal Scrutiny

Non-Compete Agreements Under Federal Scrutiny

Contact: Derrick Fong-Stempel

Non-compete clauses as we know them may be a thing of the past if a rule proposed by the Federal Trade Commission becomes final. This is particularly significant news for employers nationwide and across industries.

Cutting to the chase, the FTC’s proposed rule would serve to ban non-compete provisions, except in limited circumstances. By way of this alert, we answer specific questions raised by the FTC’s ongoing action.

Q. What is a non-compete clause?

A. As set forth in the proposed rule, a “non-compete clause means a contractual term between an employer and a worker that prevents the worker from seeking or accepting employment with a person, or operating a business, after the conclusion of the worker’s employment with the employer.” Otherwise known as restrictive covenants, these provisions are routinely included in contracts in an effort to prohibit one party from entering into or starting a similar profession or trade in competition against another party.

Q. What does the FTC’s proposed rule seek to prohibit?

A. By way of its rulemaking, the FTC is working to effect a sweeping ban prohibiting employers from entering into post-employment non-compete clauses with workers. Though it would generally not apply to other types of employment restrictions, like non-disclosure agreements, the FTC has made clear in its proposed rule that “other types of employment restrictions could be subject to the rule if they are so broad in scope [as to] function as non-competes.” Two examples have been provided by the FTC:

(1) a non-disclosure agreement between an employer and a worker that is written so broadly that it effectively precludes the worker from working in the same field after the conclusion of the worker’s employment with the employer, and

(2) a contractual term between an employer and a worker that requires the worker to pay the employer or a third-party entity for training costs if the worker’s employment terminates within a specified period, where the required payment is not reasonably related to the costs the employer incurred for training the worker.

Additionally, the proposed rule states that it is an unfair method of competition “for an employer to enter into or attempt to enter into a non-compete clause with a worker; maintain with the worker a non-compete clause; or represent to a worker that the worker is subject to a non-compete clause where the employer has no good faith basis to believe that the worker is subject to an enforceable non-compete agreement.”

If the proposed rule is adopted in its present form, disputes will certainly arise over whether NDAs, customer non-solicitation provisions, or other possible restrictions an employer might impose will pass muster under the FTC’s imprecise “functional test.”

Q. Does the FTC’s proposed rule look to impose any other requirements upon employers?

A. Yes. If finalized, the proposed rule would also require employers to rescind existing non-compete agreements and actively inform workers accordingly. This means employers would have to provide notice to workers that existing non-compete clauses are no longer in effect or enforceable—notice that would need to be sent individually and in writing to current and former workers and furnished within 45 days of rescinding the non-compete clauses.

Q. Are there exceptions to the FTC’s proposed rule?

A. Yes. The proposed rule contains an extremely narrow sale-of-business exception, but this only applies to sellers having at least a 25% ownership interest in the business being sold. In such a circumstance, the proposed rule would not apply to any non-compete clause that is entered into by a person selling all or substantially all of a business entity’s operating assets.

In addition, certain employers would not be subject to the proposed rule, including banks, savings and loan institutions, federal credit unions, common carriers, air carriers and foreign air carriers, and persons and businesses subject to the Packers and Stockyards Act, 1921 (subject to certain exceptions).

Q. Does the FTC’s proposed rule apply to all workers?

A. The prohibition against the use of restrictive covenants would apply to employees, independent contractors, interns, and volunteers.

Q. If finalized, how would the FTC’s proposed rule impact existing state laws?

A. The proposed rule would supersede all contrary state laws.

Q. What are the next steps in terms of the FTC’s proposed rule becoming finalized?

A. Now that the rule has been proposed by the FTC, the public is invited to comment on it through March 10 (unless the FTC extends that deadline). Once the comment period has come to a close, the FTC can issue a new proposed rule, terminate its rulemaking, or finalize the rule as proposed.

If and when finalized, the rule would be published in the Federal Register, but would not take effect until it was sent to Congress and the Government Accountability Office for review and oversight. If approved, the proposed rule would become effective 60 days thereafter, but employers would have 180 days to comply.

Q. What should employers do during this process?

A. First, employers should understand that we are a long way from a blanket prohibition of non-compete provisions. The FTC rulemaking is in its early stages, with the public comment period just beginning. And even if the FTC rule as proposed is ultimately issued, it will surely be subject to litigation aimed at deeming such a sweeping ban on restrictive covenants unlawful. Legal challenges could result in revisions to the general scope of the rule, enumerated exceptions, and perhaps modification of the notice and rescission requirements. Michelman & Robinson, LLP will monitor any relevant litigation in real-time.

Regardless, as we await an outcome, employers wanting to impose non-compete clauses should do what they can to draft them reasonably (in terms of duration and geographic scope) and narrowly with an eye toward protecting legitimate business interests (e.g., trade secrets, confidential information, or customer goodwill).

Of course, the employment team at Michelman & Robinson, LLP will keep you apprised of significant developments related to the proposed FTC rule. In the meantime, feel free to reach out with any questions you may have about restrictive covenants and their proper use.

This blog post is not offered, and should not be relied on, as legal advice. You should consult an attorney for advice in specific situations.

New Employment-Related Laws In California

With the new year have come a slew of new laws impacting employers throughout California. Here’s an overview: 


Minimum wage continues to increase in California. 

Beginning on January 1, all employees in the Golden State are required to be paid at least $15.50/hour. As of the summer of 2022, the minimum wage is even higher in certain cities, as follows:

  • Los Angeles County: $15.96/hour 
  • City of Los Angeles: $16.04/hour and $18.86/hour for hotel employees working in properties with 60 or more rooms
  • Malibu: $15.96/hour  
  • Pasadena: $16.11/hour  
  • Santa Monica: $16.96/hour and $18.17 for hotel employees  
  • West Hollywood: $17.50/hour (businesses with 50 or more employees), $17.00/hour (businesses with fewer than 50 employees) and $18.35/hour for hotel employees (starting July 2023, employees in all three categories must be paid at least $18.86)

Note that employers should remain alert for further updates as many city minimum wage increases occur mid-year. Also, other cities and industries, not referenced above, may also have their own minimum wages. 


The scope of bereavement leave rights has been expanded. 

Bereavement is now a protected leave category in California. Employees are permitted to take up to five days of bereavement leave for the death of a family member. This leave may be unpaid, but employees can avail themselves to available vacation, personal leave, accrued sick leave, or compensatory time off. 

Employees may take leave to care for a “designated person.” 

Additionally, leave has been expanded so that an employee can care for “designated persons” (defined as any individual related by blood or whose association with the employee is the equivalent of a family relationship)—this under the California Family Rights Act. Employees may identify one “designated person” every 12 months.  


California identifies a new protection for reproductive health decision-making. 

Under the California Fair Employment and Housing Act, it is now unlawful to discriminate against an individual in hiring or employment decisions based on “reproductive health decision-making,” which includes use of a particular drug or medical service. 


Employers will face heightened pay transparency requirements. 

As of January 1, employers are required to make additional disclosures on pay data reports and provide pay ranges on job postings. This new mandate impacts almost all employers and there will be large civil penalties for non-compliance, up to $10,000 per violation. 

Pay scale disclosure requirements mean employers must (1) include the applicable pay scale on all job postings; (2) not use salary history as a factor in employment decisions; and (3) maintain records of job title and wage rate information for the duration of an employee's employment, plus an additional three years.  

For employers with 100 or more employees, annual pay data reports must be submitted (this year by May 10) to the California Civil Rights Department setting forth the number of employees by race, ethnicity and sex, along with information on these employees’ earnings, pay rate and hours worked. 


Employee information is placed under heightened protection. 

Under the California Privacy Rights Act, certain employers now have increased obligations to ensure protection of employees’ information in the same way they have been expected to protect consumer data. The CPRA applies to employers that either (1) had annual gross revenues in excess of $25 million (as of January 1 of the calendar year); (2) annually buy, sell or share the personal information of 100,000 or more consumers or households; or (3) derive 50 percent or more of its annual revenues from selling or sharing consumers’ personal information. 

Under the CPRA, “personal information” is “information that identifies, relates to, describes, is reasonably capable of being associated with, or could reasonably be linked, directly or indirectly, with a particular consumer or household,” including professional or employment-related information. 

Key employee rights under the CPRA include (1) notice of collection of personal information; (2) the right to delete and correct personal information; (3) the right to know what information is sold and shared; (4) the right to opt out of the sale of personal information; and (5) the right to restrict uses of personal information.  


Prohibition of retaliation for failure to work during an emergency condition. 

As of January 1, employers cannot retaliate against employees who refuse to report for work or leave work during an “emergency condition” (which includes conditions created by natural forces or a criminal act, but not a health pandemic) if there is a reasonable belief that the workplace is unsafe. Likewise, employers are now prohibited from stopping employees from accessing their mobile devices to seek emergency services, assess safety concerns or communicate others to confirm their safety.  


Cal-WARN notice requirements expand to call centers. 

Existing notice requirements under Cal-WARN have been expanded to call center employers that intend to relocate their call center(s) or one or more operating units. The Labor Commission is authorized to enforce this law.  


Notice requirements for outbreaks are now more limited. 

Employers are no longer required to notify a local public health agency in the event of a COVID-19 outbreak. However, employers must continue to notify employees of potential exposure. Previously, employers had to provide written notice to all employees the day of exposure. Now, employers must simply display a notice in a prominent place for 15 days.  

Supplemental paid sick leave expires.  

Employer requirements to provide COVID-19 Supplemental Paid Sick Leave expired on December 31, 2022. Employees on leave at the time of expiration may finish taking the amount of leave then available. Having said that, certain cities and counties have their own SPSL policies that may still be in effect.  

COVID-19 remains an “injury” for purposes of workers’ compensation.  

Under existing law that was set to expire in January 2023, illness or death from COVID-19 is an “injury” for purposes of workers’ compensation and there is a rebuttable presumption that such an injury has arisen in the course of employment, making it compensable. Under AB 1751, this law has been extended through January 2024.  


California Supreme Court may walk back requirement to arbitrate representative actions. 

Since the U.S. Supreme Court’s decision in Viking River Cruises v. Moriana, representative actions brought pursuant to the California Private Attorneys General Act (PAGA) are now subject to individual arbitration. Nevertheless, in June 2022, the California Supreme Court granted review in Adolph v. Uber Technologies, which review will likely examine whether an employer may compel the arbitration of PAGA claims under California law. We will continue to monitor the Adolph case and report back when a decision has been issued.  


Some employers may be faced with even more burdens around employee scheduling and pay. 

We await Mayor Karen Bass’s signature enacting the Fair Work Week Ordinance. If it becomes law as expected, retail businesses in Los Angeles or establishments employing 300 or more employees worldwide will face increased obligations around employee scheduling and pay. 

Pursuant to the law if enacted, (1) employers will have to provide a good faith estimate of their would-be employees’ work schedules before hiring; (2) employees can request preference for work hours and location; (3) employers must furnish written notice of an employee’s schedule at least 14 days in advance; (4) deviations from the provided schedule could result in overtime, or even double time pay; (5) employers will need to offer existing work to current employees before hiring additional workers; (6) employees cannot be required to find coverage for their shifts; (7) employees cannot be required to work two shifts with less than 10 hours between them; and (8) employers must retain records for at least three years, including work schedules, copies of written offers to employees for additional work, and other correspondence with employees regarding scheduling 

If approved, the Ordinance is to take effect in April 2023, it will not be subject to waiver, and violations will result in civil penalties up to $500 per infraction. Not only that, employees will also have a private right of action in the event of an alleged infraction. 


Sick leave for West Hollywood employees. 

As has been the case since July 2022, employers in West Hollywood are required to provide full-time employees with at least 96 paid hours each year for sick leave, vacation or personal necessity, plus a minimum of 80 hours of unpaid sick time. Part-time employees must accrue paid time off in proportional increments, and once accrued, their paid time off must carry over, though it can be capped at 192 hours. Unused accrued unpaid time off must carry over as well but can be capped at 80 hours. 


Increased requirements on hotels to prevent human trafficking. 

Hotel employers continue to be required to provide staff with at least 20 minutes of training on how to recognize human trafficking. On top of this, hotel operators are now subject to civil penalties if a supervisory employee “knew of or acted with reckless disregard of the activity constituting sex trafficking” within the hotel and failed to inform a proper authority (e.g., law enforcement or the National Human Trafficking Hotline). 

Increased protection for hotel workers in the City of Los Angeles. 

In Los Angeles, the Hotel Worker Protection Ordinance became effective last August. The law is meant to ensure hotel workers are equipped with personal security devices and supported in their ability to report criminal and threatening behavior. It also contains provisions to ensure fair compensation and deter overly burdensome work. And while the application of certain provisions is dependent upon the size of a given hotel, the Ordinance creates at least some new requirements for all hotels in Los Angeles.  

Key provisions of the law include (1) providing certain workers with a personal security device; (2) staffing a position to respond to distress calls; (3) conducting trainings around security measures; (4) providing notice to staff and guests of these safety policies; (5) limiting mandatory overtime; (6) record retention; (6) limiting the ability to implement programs not to clean or sanitize rooms daily; and (7) limiting workload for room attendants.  

West Hollywood enacted a similar law—the Hotel Worker Protection Ordinance—that also became effective in 2022. As such, hotels in that city should continue to ensure compliance with the Ordinance by (1) protecting hotel workers from violent or threatening conduct; (2) providing fair compensation depending upon workload; (3) ensuring the right of hotel worker recall and retention; and (4) providing public housing training. 


In light of all of the new laws referenced above, employers would be wise to do all of the following right away: 

  1. Review base salaries for all exempt employees to ensure they meet the applicable salary requirements and confirm that non-exempt employees are being paid at least the applicable minimum wage.  
  2. Update employee handbooks to reflect changes in the law.
  3. Create pay scales for all employee positions to be used in job posting or upon request by an employee.  
  4. Review city- and industry-specific laws to ensure compliance.  
  5. Work with those responsible for payroll and legal counsel to meet the May 10 deadline for California’s pay data reporting requirement, including aggregating pay data by position and protected characteristic. 

Of course, the employment team at Michelman & Robinson, LLP is always available to answer your employment-related questions.  

This blog post is not offered, and should not be relied on, as legal advice. You should consult an attorney for advice in specific situations. 

Determining Ownership of Pore Space Based on the Nature of Underground Caverns

With our collective consciousness focused on a greener and cleaner environment, companies within the energy space are working to reduce their carbon footprints. One solution toward that end is Carbon Capture Utilization and Sequestration (CCUS), an innovative technology implemented to minimize man-made greenhouse gases.

The promise of CCUS as a tool to slow down global warming by recycling carbon dioxide (CO2) emissions is undeniable, but with it comes certain unintended concerns for players in the energy industry. One of these has to do with ownership of the subsurface pore space in which CO2 is injected and stored.

This issue continues to be debated in Texas and, most recently, an appellate court determined that pore space ownership belongs to the holder of the surface estate rights. Yet this may not be the final word on the topic. A request is currently pending before the Texas Supreme Court to review the recent appellate court decision captioned Myers-Woodward, LLC v. Underground Services Markham, LLC.

At the heart of Myers-Woodward is the novel question of whether pore space ownership should be determined based on the nature of the underground cavern at issue—a naturally occurring cavern formed out of dirt and rock versus an artificially created cavern formed out of solid minerals. This article takes a deep dive into that query pending the Texas Supreme Court’s decision to hear the case.

The Meyers-Woodward Decision

Myers-Woodward involves a dispute between Myers-Woodward, LLC, a surface estate owner, and two other companies, the mineral interest owners, regarding cavern space resulting from brine mining operations. The mineral interest owners sought a declaration from the trial court that they had the right to store oil, gas, and other gases or liquids in the cavern space created when they extracted salt from the subsurface. Myers-Woodward contended that it owned the subject tract in its entirety, including all geological structures in the subsurface, and that the mineral interest owners did not have the right to use the cavern for storage of hydrocarbons or other products or substances.

The trial court agreed with the mineral owners, ruling they were the owners of the subsurface caverns created by virtue of their salt mining activities. Myers-Woodward appealed, arguing that it owned all the physical land—all meaning the surface, subsurface, the matrix underlying the earth, and the reservoir storage space beneath the surface. In response, the mineral owners argued on appeal that (1) naturally occurring caverns should be distinguished from ones artificially created and (2) because the cavern at issue was a byproduct of their salt mining operations that required their maintenance to be utilized for storage operations, they should be entitled to subsurface ownership rights.

In support of their position, the mineral owners relied on Texas case law precedent; namely, Mapco, Inc. v. Carter, in which it was determined that the holders of the mineral estate owned all rights to pore space where the cavern was formed out of the underground mineral salt being mined. However, despite the precedent established in Mapco, the appellate court ruled in favor of Myers-Woodward because of “well-recognized, decisional law” in Texas holding that “the mineral interest owner owns the minerals but not the subsurface.”

Of note, the appellate court did not delve into a discussion regarding the distinction between naturally occurring and artificially created caverns. Instead, it explained that a mineral owner is merely entitled to a fair chance to recover and extract subsurface minerals, not to subsequently use the subsurface for its monetary gain after those minerals are extracted.

Request for Review from the Texas Supreme Court

On August 1, 2022, the mineral interest owners requested that the appellate court reconsider its decision. In their briefing, the companies argued they possess an unrestricted mineral estate in all minerals, including the salt, in, on, or under Myers-Woodward’s property, and the salt caverns created from mining operations. The companies again distinguished between naturally occurring caverns, which they alleged belonged to the surface owner, and artificially created caverns, which the companies alleged belong to the mineral owner.

More particularly, the companies explained that caverns created by the mining of solid minerals (i.e., salt) are composed of the actual minerals themselves, whereas caverns created by the mining of non-solid minerals (i.e., liquid oil or natural gas) are pre-existing and composed of non-mineral earth, like dirt or rock. With that by way of background, they reasoned that mineral owners should own the artificially created caverns made up of minerals, while surface owners should have ownership of naturally occurring caverns composed of dirt and rock.

It is for this reason, according to the companies, that the appellate court should have followed Mapco, which specifically involved salt mining operations, rather than the “well-recognized decisional law” involving liquid oil and gas operations.

Notwithstanding these arguments, the appellate court denied the request to reconsider its opinion in Myers-Woodward. That denial led to a petition for review with the Supreme Court of Texas, which is calendared to be filed on January 20, 2023.

It is suspected that the companies will make the same argument for pore space ownership to the Texas Supreme Court that was made to the appellate court. If the Texas Supreme Court grants the petition for review, a ruling overturning the Myers-Woodward decision could pave the way to changing the law regarding pore space ownership not only in Texas, but potentially across the country.

An Interim Solution to the Pore Space Ownership Debate

As we await the Texas Supreme Court’s pronouncement on the ownership of subsurface pore space, steps can be taken by parties seeking to engage in underground storage after existing wells or mines have been depleted. First among them, the negotiation of provisions in mineral leases addressing these rights.

One of the main arguments advanced by the surface owner in Myers-Woodward was that the mineral lease executed in that case only granted to the lessee the right to mine, drill, and operate for minerals and maintain facilities necessary for producing, treating, and transporting them. Arguably then, at least as far as the surface owner was concerned, nothing in the leases could have been interpreted to grant the lessees the right to use the subsurface structures for storage.

Hence, a seemingly clear interim takeaway from Myers-Woodward: negotiating the right to engage in subsurface storage  when the mineral lease is executed could prevent these disputes altogether.

This blog post is not offered, and should not be relied on, as legal advice. You should consult an attorney for advice in specific situations.

Tax Increases on High-Value Real Estate Deals in L.A. Are on the Horizon

Effective April 1, 2023, the City of Los Angeles will impose a so-called “Mansion Tax” upon commercial and residential property sales exceeding $5 million (certain housing, non-profit, and public entities will be exempt).

The new tax rate of 4% will apply to qualifying properties sold for more than $5 million but less than $10 million. Commercial and residential real estate traded for $10 million or more will be subject to a 5.5% tax rate. The Mansion Tax will not replace or modify existing documentary transfer taxes in L.A. Instead, it is to be an additional documentary transfer tax calculated based on the gross sale amount of property—existing debt will not reduce the tax basis.

By way of example, after April 1, the seller of a $10 million multi-family property in L.A. will be hit with a Mansion Tax bill of $550,000 (5.5% of the sale price)—this in addition to ordinary city and county transfer taxes that can total ~$56,000. Proceeds generated by the Mansion Tax—estimated to be between approximately $600 million and $1.1 billion annually—are intended to address the city’s homeless problem by funding affordable housing and tenant assistance programs.

As the April 1 effective date fast approaches, those thinking about selling real property in L.A. may want to act now to avoid the imposition of the Mansion Tax. That being said, the real estate professionals at Michelman & Robinson, LLP stand ready to provide any counsel you may need.

City of LA Passes Fair Work Ordinance

It looks as though retail businesses employing 300 or more workers globally will soon be subject to a new set of requirements related to their employees within the City of Los Angeles.

Last week (on November 29), the L.A. City Council passed the Fair Work Week Ordinance, intended to “promote the health, safety, and welfare of retail workers in the City by providing them with a more predictable work schedule that ensures stability for themselves and their families and the opportunity to work more hours.” The Ordinance now goes to Mayor Eric Garcetti for his signature and if signed into law, as expected, qualifying retailers in L.A. will be faced with even more burdens around employee scheduling and pay. In anticipation of this apparent inevitability, Michelman & Robinson, LLP provides this overview of the new law.

Affected Employers

As referenced, the Ordinance applies to retail businesses or establishments that employ 300 or more employees worldwide. This includes, but is not limited to, motor vehicle and parts dealers, building material and garden equipment dealers, food and beverage retailers, grocery retailers, and electronics and appliance retailers. For purposes of this alert, all references to employer(s) are intended to be limited to qualifying dealers and retailers.

Affected Employees

The Ordinance applies to any individual employed by an employer. To the extent an employer contends that the Ordinance does not apply in any given circumstance, it has the burden of showing that a worker is not an employee under the law.

Requirements Under the Ordinance

Good Faith Estimate: Before hiring, employers must provide a good faith estimate of their would-be employees’ work schedules. Employers that deviate too far from this estimate in actual scheduling will need to provide a legitimate business reason to explain the deviation.

Right to Request Change: Employees have the right to request preferences for work hours and location. Employers may accept or deny these requests but must provide a reason for any denials in writing.

Work Schedule: Employers must provide employees with written notice of their work schedules at least 14 days in advance. Further, employers must provide written notice of any change that occurs after the two-week notice requirement. Employees have the right to decline any schedule changes. If an employee accepts a proposed change, the acceptance must be in writing.

Predictable Pay: If an employee agrees to a schedule change that does not result in loss of time or results in 15 or more minutes of additional work, the employer shall give an extra hour of pay at the employee’s regular rate. For example, if an employee is scheduled to work four hours on a Monday and agrees instead to work four hours on the following Tuesday, the employee will be eligible to be paid for an extra hour. Further, if the employee’s hours are reduced 15 or more minutes from what was indicated on a schedule, the employee shall receive half time for any time not worked. These pay requirements will not apply in certain circumstances including, but not limited to, (1) where an employee requests a change or (2) extra hours require overtime pay.

Additional Work Offerings: Before hiring new employees or using outside workers, employers must first offer existing work to current employees if one or more is qualified to do the job and the additional work would not result in overtime pay. Employers must make this offer of employment 72 hours before hiring someone new and must give current employees at least 48 hours to accept in writing.

Coverage: Employers cannot require employees to find coverage if they miss a shift for a reason covered by law.

Rest Between Shifts: Employers cannot schedule any employee for two consecutive shifts with less than 10 hours of rest in between them without written consent of the employee. If the employee does consent, he/she/they will be paid time and a half for the second shift.

Retention of Records: Employers must retain records for at least three years demonstrating compliance with the Ordinance as it pertains to current and past employees. Upon request, the Designated Administrative Agency (DAA)— in this case, the Office of Wage Standards (OWS) of the Bureau of Contract Administration—must be given access to these records, which include work schedules, copies of written offers to employees for additional work, and other correspondence with employees regarding scheduling.

Posting Notice: Employers must post notices about the Ordinance to be provided by the DAA in English, Spanish, Chinese (Cantonese and Mandarin), Hindi, Vietnamese, Tagalog, Korean, Japanese, Thai, Armenian, Russian and Farsi, and any other language spoken by at least five percent of employees at any given workplace.

Retaliation Prohibited: Employers may not retaliate against employees for exercising their rights under the Ordinance.

If approved, the Ordinance will take effect in April 2023. Assuming it becomes law, the Ordinance will not be subject to waiver and violations will result in civil penalties up to $500 per infraction. Not only that, employees will also have a private right of action in the event of an alleged infraction. Of course, we will continue to monitor the progression of the Ordinance and report back if and when the Mayor signs it into law. In the meantime (and given the potential for legal exposure), it is essential that employers prepare for the enactment of the Ordinance as soon as is practicable.

An Uber to Prison: Lessons Learned from a Convicted CSO

The fate of a former member of Uber’ C-suite should serve as a wake-up call for company stakeholders across industries. 

Earlier this month, Uber’s ex-chief security officer, Joseph Sullivan, was found guilty of obstruction of justice and concealment of a felony, and he is now staring down the barrel of a prison sentence that will likely range from 24 to 57 months. Sullivan’s troubles stem from his response to a data breach that Uber fell victim to back in November 2016, which placed at risk the personal information of nearly 60 million Uber individuals—drivers and customers alike. 

A Tale of Two Breaches 

Hackers penetrated Uber’s AWS S3 bucket in 2016 and then demanded a six-figure ransom to prevent the release of the stolen data online and ensuing publicity that the company suffered a massive data breach. 

As it turns out, when this demand was made, Uber was being investigated by the Federal Trade Commission in connection with another data breach that was discovered by Uber two years prior, in September 2014. That incident was reported to the FTC in February 2015 and Sullivan was an integral part of Uber’s subsequent response to and settlement negotiations in connection with the FTC’s related investigation. Of note, the FTC’s inquiry into the data breach of 2014 was ongoing at the time of the 2016 infiltration. In fact, just days before he learned about that second data breach, Sullivan provided testimony under oath to the FTC about the 2014 episode. 

More particularly, Sullivan had outlined to the FTC the steps Uber had taken to fix and improve the company’s security program in the wake of the 2014 incident, going so far as to claim that measures were put in place to prevent any additional breaches that targeted the same vulnerabilities. The 2016 breach proved this to be untrue, which is why Sullivan sought to hide the event from the FTC by paying the 2016 attackers $100,000 in bitcoins not only to prevent the release of the stolen data, but also to buy their silence while Uber was under the FTC’s microscope. 

 That payment was made through Uber’s bug bounty program as pretext for their ability to assert that a reportable data breach never occurred in 2016. In order to ensure their cooperation, the hackers were required to sign a nondisclosure agreement drafted by Sullivan and Uber’s in-house lawyer that included a false “promise” and statement that the hackers “did not take or store any data during or through [their] research.”  

Ultimately, In November 2017, new management within Uber ’s executive team divulged the 2016 data breach to the FTC, leading to Sullivan’s arrest by the FBI and ultimate prosecution and conviction. 

Lessons Learned 

There is much for company stakeholders and data security professionals to learn from Sullivan’s legal woes. But first, and important preface: merely failing to disclose a data breach is not, by itself, a crime. What Sullivan did to invite trouble was overtly obstructing a regulatory investigation into a cyber incident and actively concealing it from regulators. Which leads to lesson number one—data breaches and ransom payments should never be kept from governmental agencies or internal and external stakeholders. Instead, companies falling victim to cybercrime should immediately consult with outside counsel who can make the legal call to contact and notify law enforcement. 

Sullivan also ran afoul of the law by misusing Uber’s bug bounty program to cover up a data breach and a subsequent ransom payment. Without question, bug bounties are a critical tool to discover security and network vulnerabilities, but they must be used in adherence with specific policies that identify permissible activities and payment parameters. Thus, lesson number two— bug bounty programs should be leveraged in furtherance of legitimate security research and never to conceal evidence of a crime or a cybersecurity breach. 

Finally, the case against Sullivan demonstrates the clear emphasis law enforcement agencies and regulators are placing on (1) company disclosure obligations in the aftermath of cybercrimes, and (2) individual accountability of in-house counsel and IT for corporate misconduct. Stakeholders should understand that prosecution decisions as they pertain to a given organization are influenced by that entity’s history of compliance, its current compliance programming, the company’s proactive Incident Response Plan, and whether the organization has furnished prompt and complete disclosure of misconduct by individuals associated with its compliance program. Those in C-suites and on boards would be wise to seek outside counsel and act accordingly. 

Of course, should you have any questions, concerns or needs in terms of data security and incident response, the cyber pros at Michelman & Robinson are here to help. 

Supplemental Paid Sick Leave in California Extended to December 31

The employment team at Michelman & Robinson, LLP has some important news for California employees: Governor Gavin Newsom signed Assembly Bill 152 into law last week, which, effective immediately, serves to extend Supplemental Paid Sick Leave (SPSL) for covered employees—those unable to work because of certain COVID-19 reasons—to December 31, 2022. Prior to the swipe of Governor Newsom’s pen, SPSL in California was due to expire on September 30. 

No New Responsibilities for Employers  

AB 152 does not impose any additional or new leave bank for employees or create further obligations or restrictions upon employers as compared to its previous incarnation. Accordingly, employees that have used all their available SPSL hours before October 1 and experience other qualifying absences between now and year-end will need to use different pay or wage replacement benefits (e.g., non-COVID paid sick leave, vacation time or California Disability Insurance) to receive payment. However, employees who still have SPSL remaining will have access to this benefit for the remainder of 2022, assuming they experience a qualifying absence.  

Right to Request Follow-Up Testing Revamped 

Of note, an employer’s SPSL obligations are not without condition. Previously—under California’s 2022 COVID-19 SPSL law in place prior to AB 152—when an employee requested SPSL after an initial positive test, employers were only authorized to require another test five days later. The rub was that employees could remain on SPSL for several days thereafter so long as they tested positive, and employers were left with no form of recourse. This is no longer the case, which is a positive for management. Do not hesitate to contact Lara Shortz or Derrick Fong-Stempel for details on this development. 

Relief Program for Small Businesses 

Beyond all of the above, AB 152 includes the California Small Business and Nonprofit COVID-19 Supplemental Paid Sick Leave Relief Grant Program, established to give up to $50,000 to qualifying small businesses and nonprofits to pay for SPSL. This portion of the law—set to be repealed on January 1, 2024—includes several exemptions that exclude certain entities from eligibility. If interested in learning more, please reach out to Lara or Derrick.

AB 152: the Takeaway for Employers 

Now that AB 152 is on the books, employers should be prepared to do all of the following: 

  • Pay SPSL to eligible employees; 
  • Continue to report SPSL payments on wage statements;  
  • Consider amending existing COVID paid leave policies and procedures; and 
  • Pay for all COVID-19 testing and compensate non-exempt employees for related time. 

Of course, the employment lawyers at M&R are here to answer any COVID-19-related questions you may have.  

This blog post is not offered, and should not be relied on, as legal advice. You should consult an attorney for advice in specific situations.

When it Comes to Fast-Food, There’s a New Sherriff in Town

There is groundbreaking news to report in the fast-food industry, at least in California. This month, Governor Gavin Newsom signed into law a bill (AB 257, the Fast-Food Accountability and Standards (FAST) Recovery Act) that puts the power to set minimum wages and working conditions for fast-food workers into the hands of a new council of employees, employers and union activists.

Formerly the domain of state and federal lawmakers, governance of the fast-food employment landscape will now be tasked to a 10-member government-appointed council that will operate within the California Department of Industrial Relations. This group will set minimum standards on wages, maximum allowable hours of work, working conditions, and training for fast-food restaurant employees.

The new law is a big win for unions. Pursuant to the terms of the bill, the council can authorize an increase of the minimum wage earned by fast-food employees up to $22 an hour in 2023. For 2024, the council can raise the hourly minimum wage by another 3.5% or a figure pegged to the U.S. consumer price index. In addition, the law now provides employees with another direct pathway to sue employers. Specifically, it authorizes fast-food restaurant workers to bring causes of action for discharge, discrimination, or retaliation for exercising rights under the FAST Recovery Act.

While a boon for more than 550,000 fast-food workers operating in approximately 30,000 locations throughout the Golden State, franchise owners may be hit hard by the law giving workers a seat at the table in terms of compensation and workplace health and safety. Importantly, the bill's requirements only apply to fast-food establishments consisting of 100 or more locations nationally—those that (1) share a common brand or are characterized by standardized options for decor, marketing, packaging, products, and services; and (2) provide food or beverage for immediate consumption on or off premises to customers who order and pay for food before eating, with items prepared in advance or with items prepared or heated quickly, and with limited or no table service.

Going forward, fast-food operators outside California may want to pay close attention to this development, as the law may well serve as a model in other jurisdictions throughout the country. Of course, if you have any questions about AB 257 or any other employment-related inquiries, the employment specialists at Michelman & Robinson, LLP are here with answers.

This blog post is not offered, and should not be relied on, as legal advice. You should consult an attorney for advice in specific situations.