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ACCA Brown Bag ProgramDevelopments in the Law That Affect CAIn-house Counsel

Renee R. Deming, Shareholder, Heller EhrmanRaymond H. Hixson, Jr., Shareholder, Heller EhrmanMichael S. Kagnoff, Shareholder, Heller Ehrman

July 26, 2007

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Employment Law Update

Raymond H. Hixson, Jr., Shareholder, Heller Ehrman

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Taylor v. Progress Energy, Inc. (4th

Cir. July 3, 2007) (contd)

Holding:

Employee allowed to proceed with lawsuit

Courts rationale:

FMLA is subject to FLSA enforcement provisions

FLSA and FMLA claims may be settled only under

supervision of: The U.S. Department of Labor, or

Court

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Release of FMLA Claims

Split of authority with federal Fifth Circuit

Faris v. Williams WPC-I, Inc., 332 F.3d 316, 320-21

(5th Cir. 2003)

What about California law?

CFRA claims: apparently can be waived

No Ninth Circuit Ruling under FMLA

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Recommendations

Flag terminations of employees who may attempt to

assert FMLA claims

If offering severance, evaluate whether to: (a) seek DOL

approval, or (b) take the risk

Review release agreement forms:

Consider adding disclaimer that the release does not apply to

claims that cannot lawfully be waived

Severability clause

Watch out for special release requirements in layoffs

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Heads Up On Other Issues

Mandatory vacation use during holiday

shutdowns

Advance notice requirement: greater of 90 days or

one full fiscal quarter

Sexual harassment training

Second installment due for most employers before

the end of 2007

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New Law on No-Hire Clauses

VL Systems, Inc., v. Unisen, (Cal. Ct. App.

June 25, 2007) VLS provided computer consulting to Star Trac

Agreement prohibited Star Trac from hiring any

VLS employee for 12 months after contract

terminated

Within the 12 months, Star Trac hired VLSemployee who had not rendered services to Star

Trac

Court holding: No-hire clause unlawful

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VL Systems, Inc., v. Unisen, (Cal. Ct.

App. June 25, 2007) (contd)

Courts rationale:

Cal. B&P Section 16600 invalidates such restraintson trade

No-hire clauses impact third party rights

Employee had not rendered services to Star Trac

Liquidated damages provision did not spare the

contract

Court declined to rule on whether a more narrow

no-hire clause might be lawful in California

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Recommendations Review employee and third party agreements for

no-hire clauses

Consider replacing with employee non-solicitation clauses

Also, review customer non-solicitation clauses

Under California law, must be limited to prohibiting use of trade

secretsto solicit customers

Review employee agreements for stock option clawback provisions

Recent California case law indicates they may now be unlawful

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Hiring A CompetitorsEmployees

Raymond H. Hixson, Jr., Shareholder, Heller Ehrman

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Hiring A Competitors Employees

Contractual Obligations

Non-competition agreements

Customer non-solicitation clauses

Employee non-solicitation clauses

Non-disclosure obligations

Trade Secrets

Duty of Loyalty

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Non-competes and the Race to the

Courthouse

Estee Lauder v. Batra, (S.D.N.Y. 2006)

California employee signed non-compete with NewYork choice of law clause

Estee Lauder sued to enforce in New York

Holding:

New York law applied

Agreement enforced, but shortened to 5 months

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The Uniform Trade Secrets Act Prohibits:

Actual use or disclosure

Threatened use or disclosure

Inevitable disclosure

Most jurisdictions likely would recognize the

inevitable disclosure doctrine.

California: rejects the doctrine. (Schalge Lock

Co. v. Whyte)

Trade Secret Laws

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Recommendations

Perform adequate due diligence on the candidate

before hiring

Take reasonable precautions and document them

Suggested tools:

Sample Due Diligence Questions

Sample Precautionary Measures Memo

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Defending Competitive Hiring Claims

Typical First Sign of a Claim: Cease and Desist Letter

Most Cease and Desist Letters Are Bluffing the Threat of Legal Action

Gauging Whether Its a Bluff:

Financial Position of Competitor

Strategic Reasons to Sue:

Losing Business

Losing Employees

Sensitive deals pending

Does Competitor Have a Pattern of Filing Lawsuits?

Failure to Seek TRO Quickly is a Trail Sign

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Responsive Action to Cease and Desist Letter:

Assess Risk to Determine Whether to Respond With

General Assurance of Legal Compliance

Offer to Negotiate

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Other Possible First Sign of Claim:

Lawsuit Filed Seeking TRO on 24 Hours Notice

If this happens:

Engage litigation counsel immediately

Court appearance could be required as soon as 8:00 a.m. the

next morning!

Whats in store:

Quick TRO hearing

Potential expedited discovery Preliminary Injunction hearing within a several weeks

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What if the cease and desist letter/lawsuit is directed only against our newemployee?

Should the company support the employee, or let the employee fend forhimself?

Employer Should:

Investigate Immediately Whether Claims Have Merit

Investigator Should Be Someone Who Would Be a Good Choice as aWitness

If Claims Appear to Have Merit:

Employer Should Take Immediate Corrective Action

Let Employee Fend for Himself/Herself

If Claims Appear to Have No Merit:

Employer Should Normally Provide Legal Counsel and SupportEmployee

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What if a competitor poaches your

employees?

Conduct due diligence to uncover any impropriety

Pros & cons of filing litigation: Pros

Stem employee departures

Take reasonable precautions to protect trade secretinformation

Send a message to:

current employees

former employees

competitors

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Cons of Filing Litigation

Cost

Requirement to identify at-issue trade secrets

C.C.P. 2019(d) and corollaries

Employee morale: Employees not always supportive of suing a

popular colleague

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Speaker Biography

Ray Hixson is an experienced litigator who regularly

represents employers before state and federal courts, and

governmental agencies. He also provides strategic advice to

employers on matters such as terminations, hiring,

compensation, employment agreements, and personnel

policies. He is retained frequently to present legal compliance

training programs, including programs regarding prevention of

sexual harassment.

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IRC Section 409A

2007 Year-End ComplianceMatters

Renee R. Deming, Shareholder, Heller Ehrman

Michael S. Kagnoff, Shareholder, Heller Ehrman

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Background IRC Section 409A redefines "deferred compensation"

expansively

Statute enacted October 3, 2004, applies tocompensation amounts paid or vesting in 2005

Final regulations published on April 20, 1007

Transition period ends December 31, 2007

Significant penalties for non-compliance

20% tax and other penalties on deferred compensation owed byemployee and interest on underpayment amount

Withholding and reporting problems for employers (and potentiallyfor company insiders individually w/r/to w/holding)

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Deferred Compensation Defined

Deferred compensation includes any arrangement thatestablishes in one year a legal, binding right to receive

a compensatory amount, where the service providerdoes not actually or constructively receive the amountuntil a later year, examples:

Enter into contract to receive vested amount in one year,where amount is paid in a later year

Vest in (or other substantial risk of forfeiture lapses as to) rightto receive amount in one year, where amount is paid in lateryear

But exceptions where amounts are paid within shorttime after legal right arises or after vesting

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Discounted Stock Awards Discounted stock options ARE deferred compensation

"Discounted" means award has exercise price that is less thanFMV of stock as of grant date

Award could be subject to 20% tax and other penalties owedby individual, plus withholding-related penalties

Puts increased pressure on companies to be able to supportthe valuation used

There are ways to structure discounted awards to comply withSection 409A, BUT they differ from (and won't be as attractiveas) typical option structures

These concerns also apply to stock appreciation rights, butgenerally do not apply to ISOs or restricted stock awards

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Private Company Valuations

Final Sec. 409A Regulations set forth protectivepresumptions regarding valuations

Proposed regulations generally require that private companystock be valued by a "reasonable application of a reasonablevaluation method"

Proposed regulations do not require that all private companies

get third party valuations

If companies follow guidance in proposed regulations bysatisfying an available presumption, a valuation will bepresumed reasonable and therefore easier to defend should

IRS challenge it These presumptions offer protection; it is not required that

companies avail themselves of the presumptions and theremay be other ways to support reasonable valuations

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Public Company Valuations

FMV must be based on the trading price of the stockon the applicable securities market and can be based

upon one of the following: Last sale before or the first sale after the grant date

The closing price on the trading day before or the trading dayof the grant

The arithmetic mean of the high and low prices on the tradingday before or the trading day of the grant

Any other reasonable method using actual transactions in the

stock as reported by the applicable market Can also use average selling price over specified period if

certain conditions met

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Section 409A Transition Period Ends

12/31/07 Documents that must be structured to comply with 409A

requirements must be amended to so comply by that date

Arrangements that may require amendment:

Agreements providing for severance benefits

Might be several ways that the arrangements comply

More complicated than it should be

Good Reason triggers (need to qualify as an involuntary termination) facts and circumstances analysis

Very helpful guidance in the final regulations

Disability and Change of Control definitions

Six-month delay for public company specified employees if cannotqualify for exceptions

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12/31/07, contd

Severance pay arrangements

Will not be subject to 409A if an involuntarytermination AND fits into an exception:

Short term deferral exception payment by 15th day of

3rd

month after end of fiscal year

Two times exception payments spread over time up

to statutory limit (lesser of 2x compensation and IRS

qualified plan limit = $450,000 in 2007) and are fully paid

by end of 2nd calendar year after year of termination

Can use both exceptions

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12/31/07, contd

Arrangements that may require amendment (contd):

Stock Options and SARs that were granted at a discount Can take several weeks to fix discounted awards (tender offerprocess)

Post-employment reimbursement programs

Need to specify date by which payments must be made

Retiree medical benefits programs

Bonus arrangements where payments made after year earned

Tax gross up arrangements

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12/31/07, contd Arrangements that may require amendment (contd):

Stock plans and related form award agreements

Indemnification provisions in which employees areadvanced or reimbursed for costs incurred in claims defense

Need to specify date by which payments must be made

Tandem election arrangements where participant electionunder tax-qualified plan affects arrangements under anonqualified deferred compensation plan

Traditional nonqualified deferred compensation plans Cash or stock deferrals

Split dollar insurance arrangements

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12/31/07, contd

Must consider the non-409A effects of amending

agreements

Other tax issues (ISO rules, Section 162(m))

Contract issues

Approval issues

Communication issues

Disclosure issues (public companies)

Private companies: Consider valuation strategy in light

of final regulations

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12/31/07, contd

Public companies: Consider procedures to determine

specified employees

Prepare for reporting and withholding on noncompliant

arrangements at year-end 2007

Affects 2005 and 2006

Still waiting for definitive guidance from IRS re calculation

of amounts to be included in income and reporting and

withholding on those amounts Good faith efforts required

IRS Notice 2006-100 and Notice 2005-1

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Required Tax Disclaimer

IRS Circular 230 Disclosure: To ensure

compliance with requirements imposed by the IRS,

we inform you that any tax advice contained in this

communication (including any attachments) was

not intended or written to be used, and cannot be

used, for the purpose of (i) avoiding any tax penaltyor (ii) promoting, marketing or recommending to

another party any transaction or matter addressed

herein.

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Speaker Biographies

Renee Deming has extensive experience with both private and public

companies in the areas of tax and securities law related to employee

benefit and equity compensation programs, including stock option plans,

stock purchase plans, restricted stock plans, health and welfare plans,

401 (k) plans and executive compensation planning. She also provides

advice to employers on labor and employment law matters. Ms. Deming

is an active speaker on equity compensation topics.

Mike Kagnoff's practice focuses on general corporate representation of

established and emerging technology companies, biotech and medical

device companies, as well as communications and networking

companies. He has extensive experience in public offerings, mergers

and acquisitions, venture capital financing, strategic partnerships and

licensing agreements. Mr. Kagnoff has represented some of Californiasmost prominent venture funds for their investments in portfolio

companies.

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409A, Circular 230

Documents

Transcript of 409A, Circular 230