The Hedge | Brutal Honesty Over Hype Since 2008

California law requires HOAs and their members to attempt internal dispute resolution and alternative dispute resolution before filing civil lawsuits against each other in most circumstances. This pre-litigation requirement is designed to resolve disputes faster and at lower cost than courtroom litigation — and for homeowners in disputes with their associations, it creates specific procedural leverage that many don’t use.

Internal Dispute Resolution (IDR)

California Civil Code Section 5900 requires associations to offer a fair, reasonable, and expeditious procedure for resolving disputes between members and the association. Either party can invoke IDR — the member or the association. IDR typically involves a meeting between the member, a board member or manager, and sometimes a neutral facilitator, to discuss the dispute and attempt resolution. Associations must respond to an IDR request within a reasonable time. If the association refuses to participate in IDR, the member can use that refusal as evidence of bad faith in any subsequent legal proceeding.

Alternative Dispute Resolution (ADR)

If IDR fails, California Civil Code Section 5925 requires the parties to consider ADR — typically mediation with a neutral mediator — before filing a civil lawsuit. Either party can refuse ADR, but the refusing party must explain their refusal to the court if litigation follows, and courts may consider an unreasonable refusal to participate in ADR when awarding attorney’s fees. The ADR requirement applies to disputes between members and associations over enforcement of the governing documents, assessments, and other association-member matters.

Using IDR and ADR Strategically

Don’t treat IDR as a bureaucratic hurdle to clear before “real” litigation. Use it as a genuine opportunity to resolve the dispute at lower cost. Bring documentation, be specific about your legal position, and make a concrete proposal. Many HOA disputes that would cost both parties tens of thousands in litigation fees resolve in IDR for a fraction of that cost. If IDR fails, the mediation process in ADR similarly provides a less adversarial setting where creative solutions are more achievable than in court. The pre-litigation requirements exist as opportunities, not just obstacles.

The Hedge has been cutting through financial and business noise since 2008. Brutal honesty over hype — always.

The Hedge | Brutal Honesty Over Hype Since 2008

California Business and Professions Code Section 16600 has provided one of the country’s most employee-friendly non-compete regimes for over a century: contractual restrictions on an employee’s right to work after leaving employment are void as a matter of public policy. Recent legislation strengthened this position further. Yet both employers and employees routinely misunderstand what California’s non-compete law actually prohibits and what it permits.

What California Prohibits

SB 699, effective January 1, 2024, made California’s non-compete prohibition explicit and strengthened it in two important ways. First, it applies to non-compete agreements regardless of where the agreement was signed or where the employee worked — a California employer cannot enforce a non-compete against a California employee even if the agreement was signed in a state where non-competes are legal and the employee previously worked there. Second, it created a private right of action for employees to sue to void non-compete agreements and recover attorney’s fees. The prohibition is not merely a defense — it’s now an affirmative claim.

What California Permits

California does permit: non-disclosure agreements protecting genuine trade secrets (but not general knowledge and skills acquired during employment); non-solicitation of customers the employee directly worked with (narrowly construed); non-solicitation of co-workers in some circumstances; and non-compete agreements in connection with the bona fide sale of a business or a substantial ownership interest. The sale of business exception is the most significant carve-out — a seller of a business can agree not to compete with the buyer in the same type of business for a reasonable time and geographic area.

The Practical Implications

For California employers: stop including non-compete clauses in employment agreements — they are void and their inclusion may now create liability. Focus instead on robust confidentiality agreements covering specific trade secrets, and non-solicitation provisions drafted carefully within the narrow scope California permits. For California employees who signed non-competes (especially those who moved to California from other states): those agreements are void and unenforceable against you in California, and under SB 699 you can sue to have them voided and recover attorney’s fees.

The Hedge has been cutting through financial and business noise since 2008. Brutal honesty over hype — always.

The Hedge | Brutal Honesty Over Hype Since 2008

Architectural review committees (ARCs) are the HOA bodies responsible for approving or denying member requests to make changes to their units or homes. In California-governed associations, the architectural review process has specific requirements — and a denial without following proper procedures can be challenged and overturned.

The Application and Review Timeline

California Civil Code Section 4765 requires HOA governing documents to include an architectural review process with a reasonable timeline for responding to member applications. If the governing documents are silent on the timeline, Davis-Stirling provides a 45-day default — the association must either approve, conditionally approve, or deny an application within 45 days. Failure to respond within the required period can be construed as approval by operation of law in some circumstances.

Required Written Denial with Reasons

When an ARC denies an architectural application, the denial must be in writing and must state the specific reasons for the denial with reference to the specific provision of the governing documents or the architectural guidelines that the proposed work fails to meet. A denial that says only “your request does not comply with our standards” without specifying what standard and why the proposal fails to meet it is procedurally deficient. You have the right to know specifically why you were denied — so you can either appeal or modify your proposal to address the specific concern.

The Appeal Process and IDR

Most HOA governing documents provide an appeal process for denied architectural applications. Use it — bring additional documentation, photos of comparable properties, or professional opinions supporting your application. If the internal appeal fails and you believe the denial was arbitrary, outside the scope of the CC&Rs, or discriminatorily applied, you can request IDR and ADR under Davis-Stirling. Courts reviewing ARC decisions apply a reasonableness standard — a denial that is arbitrary, capricious, or based on factors not related to the governing documents can be overturned.

The Hedge has been cutting through financial and business noise since 2008. Brutal honesty over hype — always.

The Hedge | Brutal Honesty Over Hype Since 2008

California is an at-will employment state — in theory. An employer can terminate an employee at any time, for any reason, without cause. In practice, California’s network of statutory protections, common law wrongful termination claims, and aggressive plaintiff’s bar has made terminating a California employee one of the most legally fraught business activities in the state. Understanding the specific risks allows employers to manage them; ignoring them invites expensive litigation.

The At-Will Doctrine and Its Exceptions

While California is at-will, the exceptions to at-will termination are so numerous that they effectively limit the doctrine significantly. You cannot terminate an employee: in retaliation for filing a workers’ compensation claim, reporting workplace safety violations, or taking protected leave (CFRA, FMLA, PDL); for reasons that constitute illegal discrimination based on any protected characteristic under FEHA; in violation of an implied contract created by an employee handbook, verbal promises, or company policies that implied job security; or in violation of public policy (firing a nurse for refusing to perform an illegal procedure, for example). Each of these exceptions is a potential wrongful termination lawsuit.

The Documentation Imperative

The single most important employer protection in a termination dispute is contemporaneous documentation. Performance issues, warnings, and improvement plans documented in real time — before any termination decision is made — are far more credible than documentation created or revised after the fact. A personnel file that shows a consistent pattern of documented performance issues, escalating warnings, and clear communication of consequences is the employer’s best defense. A personnel file that contains glowing reviews followed by a sudden termination is an invitation to wrongful termination litigation.

The Pre-Termination Checklist

Before terminating any California employee, run through: all applicable WARN Act notice requirements (for layoffs of 50+ employees at a single location within 30 days); final pay obligations (immediate for involuntary termination, including all accrued vacation); COBRA notice requirements; separation agreement considerations (if you want a release of claims, you must provide consideration, adequate time to review, and specific ADEA language for employees over 40); and a review of whether any protected characteristic, protected activity, or protected leave was a factor in the decision. The 30 minutes spent on this checklist before a termination can prevent months of litigation. The Hedge covers the complete checklist in the accompanying sidebar.

The Hedge has been cutting through financial and business noise since 2008. Brutal honesty over hype — always.

The Hedge | Brutal Honesty Over Hype Since 2008

Pet restrictions are among the most contested HOA rules in California — and among the most frequently challenged as unenforceable. Whether a particular pet restriction is enforceable depends on where it appears (CC&Rs vs. rules), when it was adopted, and whether it conflicts with California civil rights law. Understanding the enforceability framework protects both homeowners who own pets and associations trying to maintain reasonable standards.

CC&R Restrictions vs. Board Rules

Pet restrictions that appear in the original CC&Rs are generally enforceable against all current and future owners who bought with notice of the restriction. Restrictions adopted later as board rules — not CC&R amendments — are more vulnerable to challenge, particularly if they significantly restrict rights that owners had when they purchased. A board that adopted a new “no pets over 25 pounds” rule through a board resolution rather than a member-approved CC&R amendment may have acted outside its authority, depending on what the existing CC&Rs say about the board’s rule-making power.

The Assistance Animal Exception

Under both the Fair Housing Act and California’s FEHA, an HOA must make reasonable accommodations for residents with disabilities who require assistance animals — including emotional support animals — regardless of what the CC&Rs say about pets. An ESA is not a “pet” under fair housing law; it is an accommodation for a disability. The HOA must engage in an interactive process to evaluate accommodation requests and can only deny a request if it would create an undue hardship or a direct threat to others’ health and safety. A flat “no animals, no exceptions” policy that refuses to accommodate ESAs violates state and federal fair housing law.

Grandfathering Existing Pets

When an HOA adopts or tightens pet restrictions, California courts have been skeptical of applying new restrictions to pets that residents owned before the restriction was adopted. Applying new restrictions to existing pets is considered particularly harsh — forcing residents to choose between their home and a pet they already own. If your association adopted new pet restrictions and is trying to apply them to your existing pet, consult an attorney about the grandfathering argument before complying with the enforcement demand.

The Hedge has been cutting through financial and business noise since 2008. Brutal honesty over hype — always.

California employers know the rule by heart: non-competition agreements are void in this state. Business and Professions Code section 16600 has been on the books for over a century, and the Legislature doubled down in 2024 with SB 699 and AB 1076, making it unlawful even to attempt to enforce a non-compete and requiring employers to send notices to employees who had signed them. The conventional wisdom that follows is that when a competitor raids your workforce — or when your star branch manager walks out the door with your team and your customers — there is nothing you can do about it.

Readers of this blog know that the conventional wisdom is wrong. As I wrote last June in “Noncompetition Agreements Remain Unenforceable in California — But Employers Still Have Tools to Protect Company Assets”, the end of the non-compete did not leave California employers defenseless: the Labor Code’s duty of loyalty (sections 2860 and 2863), interference claims, and other statutory and common law remedies remain available to protect company assets. A new published Court of Appeal decision now shows just how much force those tools carry.

In Guild Mortgage Company LLC v. CrossCountry Mortgage LLC (4th Dist., Div. One, May 27, 2026, D085036/D085273), the court made clear that while California protects employee mobility after the employment ends, employees owe their employer an undivided duty of loyalty while they are still employed — and managers entrusted with running the business may owe full fiduciary duties on top of that. A competitor that helps employees breach those duties can be liable for aiding and abetting the breach. Here are five takeaways from the decision for this Friday’s Five.

1. The facts: a branch “gutted” from the inside

Guild and CrossCountry (CCM) are rival nationwide residential mortgage lenders. According to Guild’s complaint, over an 18-month period CCM induced and conspired with several of Guild’s branch employees — including the branch manager, a senior loan officer, and the branch operations manager — to gut the branch by recruiting their Guild colleagues to come work for CCM, diverting Guild’s customers to CCM, and converting Guild’s pipeline of active loan applications to CCM. Critically, all of this allegedly occurred while those employees were still employed, and being paid, by Guild. The conspirators also allegedly accessed Guild’s computer systems without authorization and copied confidential customer financial information, loan-level data, and employee compensation information.

The result was a mass resignation of virtually all of the dozens of employees at the branch. Guild first arbitrated against the three ringleaders and won — the arbitrator ordered the branch manager alone to pay over $10.6 million. Guild then sued CCM. The trial court sustained CCM’s demurrers and dismissed the entire case, concluding the employees owed Guild no actionable tort duty and that the remaining claims were displaced by California’s Uniform Trade Secrets Act (CUTSA). The Court of Appeal reversed across the board.

2. Every employee owes a duty of loyalty — not just executives

The centerpiece of the decision is its reaffirmation that “an employee, while employed, owes undivided loyalty to his employer.” The court grounded this in longstanding case law (Huong Que, Inc. v. Luu (2007); Fowler v. Varian Associates, Inc. (1987); Stokes v. Dole Nut Co. (1995)) and in Labor Code section 2863, which requires an employee who has business of his own similar to that entrusted to him by his employer to “always give the preference to the business of the employer.”

The court drew the line that matters for employers and employees alike: California law permits an employee to seek other employment and even to make some preparations to compete before resigning — but it “does not authorize an employee to transfer his loyalty to a competitor.” Recruiting your coworkers for a competitor, steering customers away, and moving the company’s active business pipeline to a rival while still drawing a paycheck crosses that line.

Significantly, the court declined to follow AMN Healthcare, Inc. v. Aya Healthcare Services, Inc. (2018), which some defendants have read to mean that an employee’s obligations to an employer sound only in contract, not tort. The Guild Mortgage court held that AMN never considered the contrary authority or Labor Code section 2863, and that disloyalty of this kind violates a social policy meriting tort remedies. This is a meaningful clarification: the duty of loyalty exists by operation of law, with tort remedies attached, whether or not the employee signed anything.

3. Fiduciary duty turns on function, not title

CCM argued that the branch manager could not owe fiduciary duties because he was “merely a branch manager,” not a corporate officer. The court rejected the argument, relying on GAB Business Services, Inc. v. Lindsey & Newsom Claim Services, Inc. (2000): an officer or manager who participates in the management of the company and exercises some discretionary authority is a fiduciary as a matter of law, while a purely “nominal” officer with no management authority is not. As GAB put it, the test “is not control; it is, instead, merely participation in management” — a low threshold.

The Guild Mortgage court distilled the principle into a sentence every employer should remember: what matters is not the title, “but rather the levels of trust, confidence, and discretion reposed by the employer.” Guild had entrusted its branch manager with stewardship of a sizable branch, supervision of dozens of employees, and safeguarding sensitive customer financial information. That was enough to plead a fiduciary relationship — and a competitor that knowingly assists a fiduciary’s betrayal can be liable for aiding and abetting the breach.

4. CUTSA does not swallow the case

The trial court had dismissed Guild’s interference claims and its claim under Penal Code section 502 (the Comprehensive Computer Data Access and Fraud Act, or CCDAFA) on the theory that CUTSA displaced them. The Court of Appeal disagreed on both fronts, and these holdings are important for any employer litigating employee-raiding cases.

First, on the interference claims, the court applied the “gravamen” test: courts look at the gist of the complaint to determine whether a claim is really just a repackaged trade secret claim. Here, the heart of Guild’s case was not the taking of confidential information — it was a coordinated scheme to sabotage a branch by appropriating its personnel, customers, and business pipeline while the key players were still on Guild’s payroll. The data theft was in aid of that scheme, not the scheme itself. Claims with that independent factual basis survive.

Second, in a holding of first impression in the published California case law, the court held that CUTSA does not displace civil claims under the CCDAFA at all. The two statutes target different social ills — CUTSA protects intellectual property; the CCDAFA protects the integrity of computer systems and data. The court found it implausible that the Legislature created (and later expanded) the section 502 civil remedy only to have it swallowed by CUTSA, enacted in the same month in 1984. For employers, this confirms that unauthorized access to company systems by departing employees supports a standalone statutory claim with its own remedies, regardless of whether the information taken qualifies as a trade secret.

5. Practical steps for employers — on both sides of the raid

For employers worried about being the target of a raid:

• Ensure your employment agreements with managers and key employees include enforceable provisions — duties of confidentiality, agreements not to solicit or divert clients and employees during employment, and acknowledgments of the trust and discretion placed in managerial roles (the Guild employees had exactly these provisions, and they supported the interference-with-contract claim).
• Maintain and enforce computer access policies, since unauthorized access and copying is what triggers CCDAFA liability.
• Monitor for the warning signs — unusual data downloads, coordinated resignations, customers suddenly moving to a competitor — and act quickly, because Guild’s prompt arbitration against the individual employees produced a substantial award before the case against the competitor was even decided.

For employers doing the hiring: this decision is equally a warning. Recruiting from a competitor is lawful — California protects employee mobility, and nothing in Guild Mortgage changes that. But there is a difference between hiring a competitor’s employees after they resign and enlisting a competitor’s current employees to recruit their colleagues, divert customers, and move business while still on the competitor’s payroll. Aiding and abetting a breach of the duty of loyalty or fiduciary duty exposes the new employer to the full range of tort remedies, including potential punitive damages. Train your recruiters and managers on where that line sits, and document that candidates are not bringing data, customer lists, or active business with them.

The lesson of Guild Mortgage is that California’s hostility to non-competes was never a license for disloyalty. The non-compete ban governs what employees may do after they leave; the duty of loyalty governs what they may do before they leave. Employers should make sure their agreements, policies, and litigation strategies account for both.

The post Poaching Employees, Customers, and Pipelines: Five Things California Employers Must Know After Guild Mortgage v. CrossCountry Mortgage appeared first on California Employment Law Report.

The Hedge | Brutal Honesty Over Hype Since 2008

California’s Healthy Workplaces Healthy Families Act requires employers to provide paid sick leave to virtually all employees — and the specific requirements have evolved through multiple legislative amendments since the original 2015 law. Employers who haven’t updated their sick leave policies to reflect the 2024 amendments are out of compliance right now. Here is what changed and what you need to fix.

The 2024 Amendment: 5 Days or 40 Hours

Effective January 1, 2024, SB 616 increased California’s mandatory paid sick leave accrual from 3 days (24 hours) to 5 days (40 hours) per year. Employers using an accrual method must allow employees to accrue at least 1 hour of sick leave per 30 hours worked, and employees must be allowed to accrue at least 40 hours annually. Employers using an upfront grant method must provide at least 40 hours (5 days) at the beginning of each year of employment. Employers who haven’t updated their policies to reflect the 5-day requirement since January 1, 2024 are in violation — and each employee affected by the violation has a PAGA claim waiting.

Carryover and Cap Rules

Under the accrual method, employees carry over unused sick leave from year to year. Employers can cap the carryover at 80 hours (10 days) — anything above that can be forfeited at year-end. But the cap on use remains at 40 hours per year — an employee who has 80 hours accrued can still only use 40 in any given year. The interaction between the carryover cap and the use cap is a common source of confusion and non-compliance. Your sick leave policy must clearly state both the accrual cap and the use limit.

The Notice and Documentation Requirements

California’s wage notice requirements require employers to include sick leave information on each employee’s pay stub: the number of hours of sick leave available as of the pay period (or a reference to the employer’s separate sick leave policy document if the policy meets specific requirements). Failure to include this information is a wage statement violation — which carries PAGA exposure of $100 per employee per pay period for initial violations. For a 20-person company on biweekly payroll, an ongoing wage statement violation accumulates to $52,000 in theoretical PAGA penalties annually.

The Hedge has been cutting through financial and business noise since 2008. Brutal honesty over hype — always.

The Hedge | Brutal Honesty Over Hype Since 2008

HOA elections in California are governed by specific Davis-Stirling requirements designed to ensure that member voting is secret, fair, and verifiable. These requirements were enacted specifically because of widespread complaints about election manipulation in HOA communities. Understanding the correct election procedures — and recognizing when they’re violated — is essential for any homeowner who wants meaningful democratic participation in their association’s governance.

The Secret Ballot Requirement

California Civil Code Section 5120 requires that all HOA elections use a double-envelope secret ballot process. Members receive two envelopes: an outer envelope with the member’s identifying information and an inner envelope for the actual ballot. The member completes the ballot, seals it in the inner envelope, places the inner envelope in the outer envelope, signs the outer envelope, and returns it to the association. The inspector of elections opens outer envelopes first to verify membership, then opens inner envelopes to count votes — ensuring that votes cannot be traced to individual members. A board that counts votes itself without using this double-envelope process has violated the election procedures.

The Inspector of Elections Requirement

HOA elections must be conducted by an independent inspector of elections — not a board member, not a management company employee with a conflict, and not anyone who has a stake in the outcome. The inspector is responsible for: receiving and safeguarding ballots, verifying member eligibility, counting votes, reporting results, and retaining ballot materials for one year after the election. A board that appoints a conflicted inspector or counts votes itself has a compromised election that members can challenge.

Challenging a Defective Election

If you believe an HOA election was conducted improperly — improper notice, compromised inspector, failure to use secret ballot procedures — you can challenge it through: a written demand to the board identifying the procedural defects; IDR and ADR under Davis-Stirling; or a civil petition to the superior court to invalidate the election and order a new one. Courts have ordered HOA election do-overs when procedural violations were substantial. The one-year ballot retention requirement means evidence of election irregularities can be examined after the fact.

The Hedge has been cutting through financial and business noise since 2008. Brutal honesty over hype — always.

The Hedge | Brutal Honesty Over Hype Since 2008

Early-stage companies that can’t afford market-rate salaries routinely offer equity compensation — stock options, restricted stock, or phantom stock — to attract and retain key employees. The tax and legal treatment of these instruments is complex, and California adds layers that most founders and employees don’t understand. Here is the framework that matters.

Incentive Stock Options

Incentive stock options (ISOs) are the preferred equity compensation tool for early-stage companies because they offer favorable tax treatment to employees: no ordinary income tax at grant or exercise, capital gains treatment on sale (if holding requirements are met). The catch: California does not conform to federal AMT treatment for ISOs, and California taxes ISO exercise spread as ordinary income in the year of exercise — even if the employee hasn’t sold the shares and has no cash to pay the tax. This California-specific tax trap has caught many early employees of successful startups with large tax bills on illiquid stock.

Phantom Stock: Flexibility Without Equity

Phantom stock — also called a “synthetic equity” arrangement — gives employees the economic benefit of equity appreciation without actually transferring shares. The employee receives a promise to pay cash equal to the increase in share value (or the full share value) at a defined trigger event. From the company’s perspective, phantom stock avoids the complications of actual equity issuance, cap table management, and shareholder rights. From the employee’s perspective, phantom stock payments are taxed as ordinary income — less favorable than ISO treatment, but without the California AMT complexity.

The 83(b) Election for Restricted Stock

When employees receive restricted stock that vests over time, the default tax treatment is ordinary income tax at the fair market value of shares as they vest. The Section 83(b) election allows an employee to elect to be taxed on the full grant at the time of issuance — at the typically low current value — rather than at vesting when the value may be much higher. This election must be filed with the IRS within 30 days of the grant. Missing the 30-day window is a permanent, irreversible mistake with no exceptions. The 83(b) election is one of the most time-sensitive decisions in startup compensation planning.

The Hedge has been cutting through financial and business noise since 2008. Brutal honesty over hype — always.