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How will California treat exculpatory v limitation of liability provisions
December 21, 2023
How will California treat exculpatory v limitation of liability provisions    
          The 9th Federal Court of Appeals has just asked the California Supreme Court to answer a question of law regarding enforcement of limitation of liability clause, as opposed to exculpatory clause, for intentional wrongdoing, in this case outright breach of confidentiality, trade secrets between company and its subcontractor.  Yes, this case can impact the alarm industry.
          The federal court noted:
          “In general, limitation of liability clauses are permissible. See Lewis v. YouTube, LLC. However, California Civil Code Section 1668 limits the permissible scope of such clauses. It provides that "[a]ll contracts which have for their object, directly or indirectly, to exempt anyone from responsibility for his own fraud, or willful injury to the person or property of another, or violation of law, whether willful or negligent, are against the policy of the law." Cal. Civ. Code § 1668. The California Supreme Court has explained that an "exculpatory clause [that] affects the public interest" is invalid under this statutory provision. See Tunkl v. Regents of Univ. of Cal., (invaliding an exculpatory provision in a hospital-patient contract); Henrioulle v. Marin Ventures, Inc., (invalidating exculpatory provisions in residential leases). In addition, the California Supreme Court has held that provisions exculpating all liability for "intentional wrongdoing" and "gross negligence" are invalid under Section 1668. See Westlake Cmty. Hosp. v. Superior Ct(holding that a bylaw that "bar[red] . . . plaintiff's claim based on the intentional wrongdoing of the hospital or its staff" was invalid under Section 1668 (emphasis in original)); City of Santa Barbara v. Superior Ct., (holding "that an agreement made in the context of sports or recreational programs or services, purporting to release liability for future gross negligence, generally is unenforceable as a matter of public policy"). Accordingly, Section 1668 will "invalidate[] contracts that purport to exempt an individual or entity from liability for future intentional wrongs," "gross negligence," and "ordinary negligence when the public interest is involved or . . . a statute expressly forbids it." Spenser S. Busby, APLC v. BACTES Imaging Sols., LLC, (internal quotation marks omitted) (quoting Frittelli, Inc. v. 350 N. Canon Drive, LP.”
          The court then framed the question for California’s highest court:
          “However, the California Supreme Court has not addressed the precise question at the center of this appeal: whether a limitation of liability clause that exempts a party from liability for some but not all possible damages is permissible under California Civil Code Section 1668.”
          Alarm company owners, like most businesses, dread competition from employees and subcontractors, especially when the employee or subcontractor blatantly violates clear confidential information.  The facts of this case are particularly damning:
          “In 1999, NECF began selling a barbeque sauce with several proprietary aspects to Trader Joe's, which in turn sold it to the public. After initially manufacturing the product itself, NECF entered into an "Operating Agreement" with Vanlaw, whereby Vanlaw agreed to manufacture NECF's barbeque sauce. Near the end of the agreement, Vanlaw offered to "clone" NECF's barbeque sauce and sell it directly to Trader Joe's, effectively undercutting NECF. Trader Joe's subsequently accepted and terminated its 19-year relationship with NECF as a result. Vanlaw was ultimately unable to clone the barbeque sauce, and Trader Joe's pursued an alternative option.
          The contractual relationship between NECF and Vanlaw was governed by a Mutual Non-Disclosure Agreement and Operating Agreement. NECF contends that the Mutual NonDisclosure Agreement forbade Vanlaw from reverse engineering NECF's barbeque sauce. NECF therefore sued Vanlaw, asserting five causes of action: (1) breach of contract, for breaching the prohibition on reverse engineering in the Mutual Non-Disclosure Agreement and the implied covenant of good-faith and fair dealing; (2) intentional interference with contractual relations; (3) intentional interference with prospective economic relations; (4) negligent interference with prospective economic relations; and (5) breach of fiduciary duty. In its initial complaint, NECF sought past and future lost profits, attorneys' fees, litigation costs, and punitive damages”
          The federal court provided further explanation of its confusion by the following message to the California Supreme Court:
          “The statutory language of Section 1668 seems susceptible to both readings. The use of the word "exempt" in the statute may indicate that only provisions that categorically bar all liability are invalid. However, when read within its broader context-that "all contracts which have for their object, directly or indirectly, to exempt anyone from responsibility"-the term "exempt" may be interpreted to mean that even liability provisions that bar only certain kinds of damages run afoul of this statute, because they could have the indirect effect of effectively exempting a party from liability. The guidance of the California Supreme Court on this issue is critical to clarifying the meaning of this statutory language.
          This unresolved issue of state law is pivotal in this case and important for all parties who contract under California law. Count Two, intentional interference with contractual relations, and Count Three, intentional interference with prospective economic relations, are intentional wrongs. See Ramona Manor Convalescent Hosp. v. Care Enters. Count Five, breach of the fiduciary duty of loyalty, is "a willful injury to the . . . property of another under Civil Code [S]ection 1668." Neubauer v. Goldfarb.
If the limitation of liability clauses in the Operating Agreement are permissible under Section 1668, the district court's decision to dismiss these causes of action must stand. However, if a limitation of liability clause cannot limit material damages for intentional wrongs, the district court's decision must be reversed, and these causes of action must be permitted to proceed.
          Thus, whether a limitation of liability clause that limits some or even most, but not all, damages for intentional wrongs is permissible will determine whether plaintiff is permitted to proceed with these claims. Accordingly, we certify this question to the California Supreme Court.” ]Emphasis added]
Case is NEW ENGLAND COUNTRY FOODS, LLC, a Vermont Limited Liability Company, Plaintiff-Appellant, v. VANLAW FOOD PRODUCTS, INC.

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Ken Kirschenbaum,Esq
Kirschenbaum & Kirschenbaum PC
Attorneys at Law
200 Garden City Plaza
Garden City, NY 11530
516 747 6700 x 301