Baker's Choice: September 2008

Summer has come and gone, the presidential campaign has reached a fever pitch, our friends in the south have faced more hurricanes and all of us are dealing with the reverberations of the crisis on Wall Street. With so much of our world in flux, we're linking you to some legal developments that have actually (dare we say it) "gone final."

• Finally, the definitive word on noncompetes in California: NO. As we've predicted (and predicted, and predicted. . . .), the California Supreme Court ultimately ruled in Edwards v. Arthur Andersen LLP that there is no such thing as a "narrow restraint" exception to California's statutory -- and public policy --prohibition on restraints against trade. Although the California rule has always been clear, in 1999 the Ninth Circuit ignored the established body of law and created its own in IBM v. Bajorek. That misguided decision gave rise to almost ten years of confusion; we can now say with authority that (except for cases that fall within specfic statutory exceptions) all post-employment noncompetes, including noncompetes masquerading as customer nonsolicits, are illegal in California. The Supreme Court's opinion also addresses other interesting issues regarding employee rights. We've written up our views on its impact for those of you who would like to know more. But a word to the wise: don't confuse the right to compete with the right to use your former employer's trade secrets. A recent plea agreement entered into by a former IBM-to-HP exec that could result in as much as 10 years in prison serves as a tough reminder that trade secrets are always off-limits.
  


• The final deadline for full compliance with Section 409A looms. We know you've heard it before, but this time everyone is (sort of) sure that the January 1, 2009 effective date is for real. This means that all deferred compensation plans (including individual agreements that include deferral provisions) must be amended by December 31, 2008 to conform to the final regulations. Our clients need to be especially aware that under the final regulations, severance payments (including certain performance bonuses) received under a separation agreement can raise Section 409A issues. Anyone who thinks there is the slightest chance that their agreement includes a noncompliant deferral better act now. After January 1, failure to comply can result in current taxation on income that would otherwise have been deferred, plus a 20% excise tax and interest charges.
  


• Binding arbitration awards may never really be final.We're not that keen on mandatory arbitration agreements in the employment dispute context, as we've discussed in previous articles. However, at least the parties to such agreements used to get finality. No more. As of August 2008, the California Supreme Court changed the current law by holding in Cable Connection, Inc. v. DirectTV, Inc. that a "binding arbitration" agreement can nonetheless provide for judicial review of the arbitrator's decision. Rick thinks this is a bad idea for many reasons, which he's written up for you here.
  


• We think these are final. Stock option information reporting: After almost 25 years of limbo, IRS information reporting on ISOs and ESPPs under Section 6039 goes into effect in 2009, with the first returns required to be filed with in 2010. Of course, the regulations themselves are still just proposed. . . . but hopefully it won't take another quarter century to finish them up. Backdating settlements: a sampling of settlements announced since the last e-letter includes: Mercury Interactive (SEC v. Kohavi et al)(September 17, 2008); UnitedHealth Group (Krause v. UnitedHealth Group)(September 10, 2008); Apple (SEC v. Heinen)(August 14, 2008). Lots more still pending, so the fall-out from backdating is far from over.
  


• And finally. I had a great time speaking to The CMO Club dinner in New York City earlier this month, and there's even a little post-talk video clip on the club's website for your amusement. For the more serious-minded among you, feel free to download my annual Equity Compensation Legal Update, which just appeared in the Journal of Employee Ownership and Finance.