On November 2, 2009, the California Supreme Court issued its decision in Schacter v. Citigroup, 47 Cal.4th 610 (Cal. 2009) and in so doing shed some light on a previously murky area of employment law. Specifically, the court addressed the complex issue of when, exactly, the mere expectation of an employment-related reward or bonus actually matures into a fully vested property right.

As an employee for Defendant, Plaintiff David Schacter voluntarily entered into a company-offered employee compensation plan which provided employees with shares of restricted stock options in lieu of a portion of their annual cash compensation. See Id. at 614. Employees participating in the plan could elect to receive as little as 5% or as much as 25% of their total compensation in the form of restricted stock. Id. Pursuant to the policy, if an employee remained with the company for two years following their purchase of the stock, the title of the shares vested fully without restriction. See Id. However, if an employee quit or was terminated for cause prior to the expiration of the two-year period, the employee was forced to forfeit his or her stock in addition to the percentage of annual income allocated for the purchase of the stock. See Id.

Plaintiff, who elected to receive 5% of his total compensation in restricted stock while employed by Defendant, resigned from Defendant’s employ prior to the expiration of the mandatory two year period for vesting of the restricted stock. See Id. at 615. As a result, pursuant to the terms of the compensation plan, he forfeited both the restricted stock and the percentage of income he allotted to the purchase of the stock. See Id.

Following this forfeiture, Plaintiff filed a class action lawsuit alleging that the compensation plan, on its face, violated California Labor Code §§201 and 202 which unambiguously require that an employer promptly pay all unearned wages upon termination or resignation. See Id. Plaintiff further alleged that the compensation plan’s forfeiture provision violation Labor Code § 221, which prohibits an employee from returning wages to an employer. See Id.

The Supreme Court disagreed, affirming the Court of Appeal’s decision. While the Supreme Court determined that the term “wages”, as used in the Labor Code, should be broadly construed to include not only monetary compensation, but also other benefits flowing from employment, including accrued vacation pay, and even restricted stock, it also found that Plaintiff voluntarily entered into the compensation plan knowing that the restricted stock would not vest for two years. See Id. The Court further found that the only compensation to which Plaintiff was being denied, was that which, as a result of resigning before two years had elapsed, he had never earned, to wit, fully vested company stock. See Id.

In finding that the restricted, unvested stock was compensation that Defendant never actually earned, the court noted that “[p]ayment of incentive compensation may be contingent upon the happening of a future event, such as continued employment.” See Id. at 617. The Court went on to make the analogy “[h]e who shakes the tree is the one to gather the fruit.”See Id. at 622. In other words, certain forms of compensation, including incentive payments and restricted stock, do not necessarily accrue over time, but rather can be fully conditioned by an employer on things such as loyalty and length of service.

The Schacter decision, in affirmatively establishing an employer’s right to place conditions on certain forms of employee compensation, can be considered a win for employers. However, it should also serve as a lesson to employees, that they must fully apprise themselves of any conditions which might be placed on incentive compensation, and accordingly, do everything in their power to avoid unnecessary forfeiture.

Lawmakers in Washington are working to gain support for passage of legislation that will allow injured patients to hold manufacturers of dangerous and defective medical devices accountable in state courts. Last year, Representatives Henry Waxman (D-CA), Frank Pallone (D-NJ), and the late Senator Edward Kennedy (D-MA), introduced the Medical Device Safety Act to Congress. If passed, this legislation will work to nullify the United States Supreme Court’s 2008 decision in Riegel v. Medtronic, Inc.,1 which strips consumers of their right to bring civil suits against medical device manufacturers in state courts.

Let us first consider the unfortunate facts in Riegel. In 1996, Charles Riegel underwent angioplasty. During the procedure, Riegel’s doctor used an Evergreen Balloon Catheter to dilate his coronary artery. After several inflations, the Catheter burst, causing Riegel to develop a heart block, be placed on life support, and require emergency coronary bypass surgery. Riegel suffered serious and permanent disabilities and subsequently sued Medtronic, the manufacturer of the catheter for negligent design, manufacture, and labeling. The Supreme Court held that the preemption clause contained in Section 360k(a)2 of the Medical Device Amendments of 1976 (MDA)3 bars injured claimants like Riegel from bringing tort law claims against manufacturers of Class III medical devices that have received “premarket approval” from the Food and Drug Administration (FDA).

The Riegel decision is a major setback for injured patients and consumers. The following section will examine the role of the FDA in regulating, classifying, and approving medical devices.

The Food and Drug Administration – Regulation, Classification, and Approval of Medical Devices

The Federal Food, Drug, and Cosmetic Act of 19384 gave the federal government power to regulate food and medical drugs. However, the FDA did not have power to regulate medical devices until passage of the MDA in 1976.5

As directed by the MDA, the FDA classifies medical devices into three different categories based on the level of risk associated with each device. Class I devices present minimal potential for harm to the user and are simpler in design. Common examples of Class I devices are elastic bandages and enema kits. Class II devices make up 47% of medical devices and include devices such as powered wheelchairs and pregnancy test kits. Class III categorization is reserved for devices which sustain or support life, are implanted into the body, or present potential or serious risk of illness or injury. Approximately 10% of medical devices are classified as Class III devices.6

Because Class I devices pose little to no risk to consumers, they are subject to general FDA controls such as registration and product listing, record maintenance, adherence to good manufacturing procedures, and agency imposed limitations on distribution and use. Class II devices pose moderate risk and are subject to special controls such as post-market studies, patient registries, and other additional guidelines. Class III devices pose the highest degree of risk to patients and are therefore required to undergo a “regime of premarket approval”7 prior to marketing. A new Class III device will only be marketed to the general public if it can pass one of two FDA-mandated review processes: 1) Substantial Equivalence (510(k) review), or 2) Premarket Approval (PMA).8

Substantial Equivalence/510(k) Review

If a device is substantially equivalent to an already approved and marketed medical device, a manufacturer will be subject to the much less rigorous 510(k) review. A 510(k) application requires that the manufacturer identify a comparable device on the market, a description of the device’s function and physical characteristics, and statement of its intended use.9 The 510(k) review standard is much less laborious for the manufacturer and discourages monopolies by allowing introduction of “copycat” devices on the market.

Premarket Approval

Medical devices that are not substantially equivalent to other devices on the market must undergo premarket approval (PMA). In order to receive PMA, the manufacturer of a proposed medical device must provide the FDA with “sufficient valid scientific evidence to assure that the device is safe and effective for its intended use(s).”10 Perhaps it is significant and worthwhile to note that it is the manufacturer who has the burden of conducting its own studies and presenting findings to the FDA for final approval. While the FDA contends that the PMA application is highly involved and that over 1,200 hours are spent reviewing each application,11 patients like Charles Riegel continue to be harmed and are evidence that such safeguards are not sufficient.

Passage of Medical Device Safety Act – A Priority in 2010

Injured victims must have the opportunity to hold manufacturers of medical devices accountable for defective and dangerous products. Passage of the Medical Device Safety Act will not only guarantee justice for patients, but will provide medical device manufacturers strong incentive to ensure product safety. It is now up to members of Congress to defend consumers and make this important issue a priority in 2010.

1552 U.S. 312 (2008).
221 U.S.C. §360(k) of the Medical Device Amendments of 1976 includes a preemption provision which states: “Except as provided in subsection (b) of this section, no State or political subdivision of a State may establish or continue in effect with respect to a device intended for human use any requirement – 1) which is different from, or in addition to, any requirement applicable under this chapter to the device, and 2) which relates to the safety or effectiveness of the device or to any other matter included in a requirement applicable to the device under this chapter."
321 U.S.C. §360.
421 U.S.C. §201.
5David C. Vladeck, Preemption and Regulatory Failure, 33 Pepp. L. Rev. 95, 102 (2005) (noting that pre-MDA, the FDA did not have screening authority for medical devices, even though it had possessed the same authority over medical drugs for decades).
6Food and Drug Administration, Learn if a Medical Device Has Been Cleared by FDA for Marketing, http://www.fda.gov/MedicalDevices/ResourcesforYou/Consumers/ucm142523.htm.
7Riegel at 317.
8Medtronic, Inc v. Lohr, 518 U.S. 470, 477-78 (1996).
921 C.F.R. §807.92(a) (2009).
10FDA, Medical Devices, Premarket Approval, http://www.fda.gov/medicaldevices/deviceregulationandguidance/ howtomarketyourdevice/premarketsubmissions/premarketapprovalpma/default.htm (last visited March 1, 2010).
11Riegel at 318.

Many attorneys feign interest when dealing with anything involving numbers or calculations; however, all attorneys must follow a few basic principles when handling client money. Client trust accounting, defined as the actual accounting done by attorneys with regard to money held in trust (i.e. in an IOLTA), means more than simply depositing money into that IOLTA. Attorneys must keep detailed records and an up-to-date accounting of each client’s money held in trust.

The California Rule of Professional Conduct 4-100 does not lay out a detailed set of recordkeeping requirements, rather it simply requires that an attorney maintain sufficient records to enable a detailed accounting of all money being held in trust for a client at any given time. Whether or not you personally maintain the bookkeeping for the trust accounts or employ someone to do so, you remain personally liable, as the attorney, for any money held in trust.

What happens when the attorney receives money related to a client?
All money received from a client or on behalf of a client must be deposited into a trust account until the attorney completes a proper accounting of the money. If the attorney receives property, other than money, on behalf of a client, the attorney must label the property, identify the property in written records, and maintain the property in a safe location (e.g. safe deposit box). The trust account must be maintained in California unless the attorney receives consent in writing from the client to keep the money elsewhere. Attorneys should promptly notify clients upon receipt of money held in trust. No money belonging to the attorney or to the attorney’s law firm can ever be deposited into the trust account. No commingling is permitted.

What about the fees the attorney has earned that are part of the money held in trust?
The attorney must withdraw all fees from the trust account as they are earned, meaning as soon as the attorney’s interest in that portion of the money becomes fixed. However, the attorney cannot withdraw any fees if disputed by the client until the dispute has been resolved.

How long should attorneys keep records related to client trust accounting?
Attorneys must maintain a copy of all records related to client trust accounting for at least five years. Records must be maintained for all money, securities, and other property received from or on behalf of a client.

What types of records must the attorney maintain, at a minimum, under Rule 4-100?
The attorney must maintain a written client ledger for each client, detailing the inflow and outflow of money, and other property, held for the client. There must be a written journal of each trust account maintained by the attorney or the attorney’s law firm. A copy of all bank statements and monthly reconciliations must also be maintained for at least five years.

What money must the attorney put into the trust account?
An attorney must keep the following in the trust account: (1) money that belongs to the client; (2) money in which the attorney and the client have a joint interest; (3) money in which the client and a third party have a joint interest; and (4) money that doesn’t belong to the client but the attorney holds as part of the representation.

This article only provides a brief snapshot of the basic principles all attorneys must follow with regard to client trust accounting. For more information please visit the State Bar of California Website, http://calbar.ca.gov/state/calbar/calbar_home.jsp, click on "Attorney Resources" in the upper left-hand corner and then search under “Ethics Information” on the left-hand side.

Adam Kerns
As the firm’s Controller, Adam brings almost a decade of experience working as an attorney, finance consultant, and certified public accountant to KPA. He obtained his J.D. from Temple University Beasley School of Law, and a B.S. in Accountancy, summa cum laude, from Villanova University. Adam is admitted to the State Bars of Pennsylvania and New Jersey, and is a Certified Public Accountant (inactive). He can be reached at akerns@kpalawyers.com.