Virginia Federal Jury Awards $26 Million in Trade-Secret Case
A Virginia Federal Jury in Alexandria recently awarded a mining tire design development company $26 million against two foreign companies for conspiracy to steal trade secrets and other related claims.
This case involves the alleged theft and misappropriation of tire designs. The plaintiff in this case, Tire Engineering and Distribution, LLC (“TED”), designs, develops and distributes highly specialized tires for underground mining vehicles. All of TED’s underground mining tires were designed and developed by the company’s founder and Chief Executive Officer, Jordan Fishman.
According to TED’s allegations, large tire companies, such as Goodyear and Michelin, abandoned the underground mining tire market and TED became the leader in this specialized area. TED took precautions to safeguard its one-of-a-kind designs and markings for its tires, its customer lists, pricing information, production schedules, and other proprietary and confidential trade secrets. Moreover, Fishman obtained copyrights for the tire designs, a trademark for one of the tire’s distinctive names, and had a patent pending for a special tire design.
TED’s trouble began when it employed a long-time acquaintance of Fishman, Sam Vance, as marketing manager to sell its underground mining tires. Vance was entrusted with access to all of TED’s trade secrets and other confidential business information that only Fishman and one other employee had access to. According to the plaintiff, Vance began working with TED’s China-based joint venture partner and tire manufacturer to cut plaintiff out of the business. The China-based company received manufacturing specifications for plaintiff’s tires and customer and pricing information, and stopped shipping tires for TED.
Moreover, Vance also met with principals of a Dubai-based international tire distributor in Richmond, Va and offered to provide plaintiff’s customer lists, pricing information and the blueprints for molds of the tires. Within a year, the Dubai company was distributing an almost full line of tires using the stolen designs and other proprietary information.
We’ve previously discussed the issue of employee theft of trade secrets on Virginia Business Law Update. As we noted, misappropriation of trade secrets cases are often brought not only against the former employee who took the trade secrets but also against the company who hired the employee and may have benefited from use of the trade secret – as was done in this case. The plaintiffs in this matter also separately pursued a case against Vance in Florida and prevailed. But, unfortunately for TED, this judgment was vacated on jurisdictional grounds since Vance never lived in Florida. Now, Vance is living in China, which makes collection of any monies from him appear unlikely.
Virginia Federal Court: Title VII Native Corporations Exception Does Not Apply to Indirect Subsidiary in Racial Discrimination Case
The Eastern District of Virginia, Alexandria Division, recently decided a case of apparent first impression involving the Native Corporations exception to Title VII’s prohibition on unlawful employment practices. The Court concluded that there were too many layers of ownership between the employer defendant and the exempt Native Corporations company, and thus, the race discrimination case against it could go forward to trial.
In Tony Fox v. Portico Reality Services Office, a former foreman at Portico’s Manassas, Virginia office alleged he was treated differently from other non-African-American employees. During his employment with Portico, he claimed that he was the subject of numerous offensive racial remarks, was not given a regularly-scheduled pay raise like other employees, and was eventually discriminatorily fired from his job.
Portico requested summary dismissal of the discrimination claim on the basis that it was a wholly-owned, indirect subsidiary of NANA Regional Corporation, an Alaskan Native Corporation. Certain groups and entities, such as Indian tribes, private membership clubs and Alaska Native Corporations are not considered to be “employers’ under Title VII’s statutory definition, and thus, are not subject to its prohibitions. Alaska Native Corporations play special roles in controlling lands and funds for Alaskan Natives, and the underlying purpose of its exception was to permit hiring favoritism toward Alaska Natives without violating Title VII.
Here, Portico is an Alaska limited liability company, but with its principal place of business in Virginia. Portico’s sole member, Qivliq LLC is a wholly-owned subsidiary of NANA Development Corporation. NANA Development is a wholly-owned subsidiary of NANA Regional Corporation - the Native Corporation. In interpreting the statute narrowly, the Court ruled that the Native Corporation exception applies to subsidiaries only where the Native Corporation directly owns the subsidiary.
It is important to note that Section 1981 of the Civil Rights Act of 1866, which provides a separate and independent basis for relief for race discrimination in private employment, contains no similar exception for Alaska Native Corporations. Thus, even Native Corporations and their direct subsidiaries may be held liable under this statute.
Virginia Supreme Court Adopts New Appellate Procedure Rules
On Friday, the Virginia Supreme Court adopted new rules of appellate procedure for both the Court and the Virginia Court of Appeals. The comprehensive revisions were over four years in the making. In 2005, an appellate rules advisory committee was convened by Justice Donald Lemons, and a report was issued mid-2008. Many of the Lemon Commission recommendations were eventually adopted by the Court.
The new rules seek to promote uniformity in the roles of both courts. A fundamental change is the requirement that petitions for appeal to either court requires “assignments of error.” Previously, “assignments of error” were only required for appeal petitions to the Virginia Supreme Court. The chief function of such an assignment is to identify errors made by the circuit court with reasonable certainty so that the court and opposing counsel can consider and address points on which an appellant seeks reversal of a judgment. They also enable the parties to determine which portions of the trial record should be included in the joint appendix. Revisions also included changes in the form and appearance of the rules to make them more user-friendly.
The new rules will take effect on July 1, 2010.
Virginia Supreme Court To Decide Fairfax County Metrorail Expansion Tax Case
The Virginia Supreme Court has granted the appeal of a Fairfax County business who is challenging a controversial special tax established to fund the extension of the Metrorail to Dulles International Airport. FFW Enterprises, a commercial real estate company in Tysons Corner, filed the appeal after a Fairfax County Circuit Court judge granted the Fairfax County Board of Supervisors’ motion for summary judgment in June of last year.
At issue in the case is whether the Fairfax County Board of Supervisors’ creation of a special tax district to fund the county’s share of the Dulles Metrorail expansion project is constitutional. The county charged commercial and industrial real estate owners in the special tax district 22 cents per $100 of assessed property value (in addition to their normal property taxes), but exempted residential property owners.
It is FFW Enterprises’ position that the tax is unlawful because the Virginia Constitution requires a uniform application of taxes, so that tax burdens are equally distributed amongst commercial, residential, and industrial tax payers.
This is an important case for Fairfax County businesses and residents alike as the Virginia Supreme Court’s determination will have a substantial impact on how Fairfax County finances its share of the Metrorail expansion project.
A decision from the Virginia Supreme Court should come later this year. We will keep you updated on any new developments with this case.
Court Dismisses Bid Protest Against the City of Harrisonburg
A Virginia trial court recently dismissed a contractor’s bid protest against the City of Harrisonburg on jurisdictional grounds. In the case of General Excavation, Inc. v. City of Harrisonburg, the contractor’s bid was rejected along with all the other bids. Thus, the Court determined that there wasn’t any award for a bidder to challenge under the Virginia Public Procurement Act.
The bid by General Excavation, Inc. (GEI) for the road-improvement contract worth approximately $20 million was one of seven rejected by the City. After the City declined to award the contract to anyone, GEI filed suit pursuant to the Virginia Public Procurement Act and the City’s own purchasing manual alleging that the City’s action was done solely to avoid awarding GEI the project.
However, the Court noted that the plain language of the Virginia Public Procurement Act allows contractors to bring an action in the appropriate circuit court challenging only a proposed award or the award of a contract – not the rejection of all bids.
Although the alleged conduct of the City appeared to be in violation of Virginia Code section 2.2-4319, which allows a public body to reject all bids but not solely to avoid awarding a contract to a particular bidder, the Court declined to exercise jurisdiction. It noted that the General Assembly created relief mechanisms for those aggrieved under the Public Procurement Act, and it would not enlarge the scope of those remedial statutes.
It should be noted that the City claimed that its decision had nothing to do with a desire not to award GEI the project. Rather, the City official recommended the rejection of all bids based on the city, state and federal transportation representatives’ determination that the contract documents were probably not clearly understood by the bidders. However, the Court's interpretation of the Virginia Public Procurement Act's jurisdiction eliminated the contractor's ability to receive a fair and impartial hearing on whether the City's actions were opportunistic and an unlawful rejection of all bids.
Virginia Governor Proposes to Reinstate Tax Deduction for Employers
Governor McDonnell announced today that he will propose reinstating a tax deduction for Virginia employers in the biennial budget in hopes of spurring economic development. Since 2004, Virginia law has allowed companies to claim the federal Internal Revenue Code Section 199 Domestic Production Activity Deduction, which encouraged U.S. manufacturing. The tax break initially allowed a 3 percent deduction, and was increased to 6 percent then 9 percent. However, this deduction is set to gradually phase out by 2014. Governor McDonnell asserts that the elimination of the deduction would result in an estimated $30 million tax increase for Virginia employers, and is proposing an amendment to prevent this result.
McDonnell said in a statement that “[t]his is a pro-job creation amendment that will help keep employers in the commonwealth, encourage businesses to locate in Virginia and give us a further advantage over other states.” Major employer, Northrop Grumman, which is weighing whether to locate its headquarters in Virginia or Maryland, would qualify for the tax break.
The amendment will have no fiscal impact in FY 2011, according to the Governor, and an estimated $10 million in FY 2012. The Governor has until midnight Tuesday to send any further amendments to the budget to the legislature, which will be considered on April 21.
EEO Guidelines for Small Businesses with Federal Contracts
Small businesses with Federal contracts have to be especially mindful of ensuring compliance with equal employment opportunity (EEO) requirements. The failure to comply with the EEO guidelines set forth in Executive Order 11246 (which prohibits employment discrimination by Federal contractors and subcontractors as well as federally-assisted construction contractors and subcontractors) may very well result in the cancellation of a contract, termination, suspension (in whole or in part), or the debarment of the contractor. As the Office of Federal Contract Compliance Programs (OFCCP) requires contractors to engage in their own internal EEO compliance analysis, small businesses often run afoul of satisfying their obligations under Executive Order 11246.
To ensure compliance with the basic EEO requirements imposed by Executive Order 11246 -- and to avoid the wrath of the OFCCP – contractors should adhere to the following OFCCP guidelines:
Don’t Discriminate! Contractors must refrain from engaging in workplace employment discrimination on the basis of race, color, religion, sex, or national origin. Although most people think of intentional discriminatory acts, employment discrimination can also arise when a neutral policy or practice has an adverse impact on the members of any race, sex, or ethnic group.
Post an EEO Poster. Federal contractors must post OFCCP’s EEO poster in a location that is easily seen (e.g., a lunchroom, break room, or locker room).
Include an EEO Tag Line in Employment Advertising. Contractors should include a sentence in all solicitations and advertisements for employment stating that “all qualified applicants will receive consideration for employment without regard to race, color, religion, sex or national origin.”
Keep Records. Contractors must maintain their personnel records and employment records including job descriptions, job postings, job offers, applications and resumes, interview notes, tests and test results, written employment policies and procedures, personnel files, and time-keeping records.
Develop and Maintain an Affirmative Action Program. Contractors with 50 or more employees and a contract of $50,000 or more must develop and maintain a compliant affirmative action program (AAP).
Small businesses with Federal contracts should regularly review their EEO policies and procedures to ensure that they are compliant with Executive Order 11246. Certainly, given the potential penalties, it is better to be safe than sorry!
Terminated Professor Denied Injunction by Virginia Federal Court
The Virginia Federal Court sitting in Big Stone Gap recently applied the tougher preliminary injunction standard set forth by the U.S. Supreme Court in Winter v. Natural Resources Defense Council, Inc. In doing so, it denied a professor’s request for an injunction against his employment termination in Holbrook v. The University of Virginia’s College at Wise. The Court recognized that the repudiation of the traditional “balance of the hardships” test formulated in Blackwelder Furniture Co. of Statesville, which had been relied upon for 30 years, places a difficult burden on the party seeking the injunction as it requires a party to meet all four prongs of the injunction test.
In this case, the professor was unable to meet the prong – likelihood of irreparable harm. The professor claimed that the Faculty Handbook required that he be allowed to work at the College for another year after being denied tenure. Therefore, he sought an injunction against his termination pending the outcome of his claims for violations of his federal and constitutional rights. He argued that obtaining future employment while without a job was difficult at best, and therefore an injunction was needed to prevent further harm. Although sympathetic to his situation, the Court reasoned that there was the possibility of adequate compensation for the year of employment at a later date in the case, which weighed heavily against a claim of irreparable harm.
Although in this case the Virginia Federal Court focused on the irreparable harm prong, litigants seeking injunctions will most likely find the requirement in the Winter test that a party demonstrate a likelihood of success on the merits the most problematic. The Blackwelder standard required only that a party demonstrate a grave or serious question for litigation and it allowed more interplay between the standard’s prongs. The Winter test is not as flexible.
We’ve also discussed the new, tougher standard in relation to non-competes and as it related to a Virginia state court case in previous posts on Virginia Business Law Update.
Virginia Court Finds Non-Compete Agreement Unenforceable
A recent decision from a Virginia Circuit Court serves as a worthwhile reminder to Virginia employers that not all non-compete agreements are enforceable. Although there was a non-compete agreement in place between a wholesale business and a former employee (who served as an account representative), the court in Specialty Marketing, Inc. v. Lawrence dismissed the breach of contract action because the agreement was geographically and functionally overbroad.
As we recently detailed in our series on business litigation claims, restrictive covenants (e.g., non-compete agreements) are disfavored in Virginia as they are restraints on trade. As such, it is the employer’s burden to prove that the restrictions are: 1) no greater than necessary to protect the employer’s legitimate business interest; and 2) not unduly harsh or oppressive in curtailing an employee’s ability to earn a livelihood. To determine whether an employer has met its burden, a Virginia court will look at the function, geographic scope, and duration of the non-compete agreement.
In Specialty Marketing, Inc. v. Lawrence, the non-compete agreement at issue provided that the employee could not “be employed by . . . any business competitive with Specialty in areas where Specialty has a market for its business.” The court concluded that this language was overbroad and unenforceable because it was unlimited in functional scope and far exceeded whatever limitation was necessary to protect the employer’s business interests. Additionally, the non-compete agreement was geographically overbroad as it was not limited to the area formerly serviced by the employee; nor was the agreement limited to a specific mile radius from the employee’s former territory.
As this case illustrates, simply having an agreement in place may not properly protect a Virginia business from competition by a former employee. To be upheld under Virginia law, the non-compete agreement must be narrowly tailored in terms of function, geographic scope, and time.
4th Circuit Vacates Tortious Interference Judgment
The Fourth Circuit Court of Appeals recently reversed a large judgment in favor of a computer security solutions company headquartered in Virginia, which involved a claim of tortious interference with a business expectancy.
The dispute began between Worldwide Investigations & Research, Inc. (Worldwide) and BNX Systems Corporation (BNX) over the intellectual property rights to software BNX developed under a contract with Worldwide. While a Florida case over the issue was pending, BNX filed for bankruptcy protection in the Eastern District of Virginia, Alexandria Division and sought to liquidate its assets. Worldwide objected to the sale of assets that it claimed ownership over; however, such claim was rejected by the Bankruptcy Court.
Shortly thereafter, Worldwide filed a complaint seeking a determination of the ownership rights to some of BNX’s assets, and a separate objection to BNX’s motion to sell its assets. Moreover, the president of Worldwide asserted in a letter to the U.S. Department of Commerce that the sale would violate export restrictions. The latter action resulted in a government inquiry and caused a delay in the sale process.
As a result of Worldwide’s actions and court filings, BNX asserted a claim against it for abuse of process and tortious interference with business expectancy. In its counterclaim, BNX argued that Worldwide intentionally interfered with the sale of its assets by filing false claims. Most importantly, it claimed that Worldwide and its president filed false claims in order to delay the sale process in hopes that Worldwide would be able to purchase the assets at a reduced price. The bankruptcy court ruled in favor of BNX, awarding it over $300,000 in damages.
However, the Appeals Court vacated the entire award. The Court determined that BNX failed to prove the existence of a business expectancy – noting that a business expectancy must be “based upon something that is a concrete move in that direction.” BNX’s argument that it had a business expectancy in having an auction process free from the effects of improper filings was rejected by the Court.
Given the interests of competing companies in today’s marketplace, it is not surprising that tortious interference claims are routinely seen in courts. As this case illustrates, claims for tortious interference with business expectancy will be dismissed where the plaintiff merely alleges, in general terms, that a defendant has interfered with potential business opportunities. Virginia courts have also held that the following also do not satisfy this standard: sales to unidentified potential buyers; retroactive promotions; and continuing to do or remaining in business.
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