U.S. Supreme Court Defines "Principal Place of Business" for Diversity Jurisdiction
Yesterday, in the case of Hertz v. Friend, the U.S. Supreme Court ruled on the issue of what constitutes a principal place of business under a diversity jurisdiction analysis. In a unanimous decision, the Supreme Court held that a corporation’s principal place of business is its “nerve center” -- the place where the corporation maintains its headquarters, so long as the headquarters serves as the actual center of direction, control, and coordination of the corporation’s business operation.
The location of a corporation’s principal place of business is an important consideration in the determination of whether a federal court has jurisdiction to hear a case. As federal courts are of limited jurisdiction, they can only hear cases if there is federal question jurisdiction (i.e., the plaintiff has alleged a violation of the U.S. Constitution or a law of the United States) or diversity jurisdiction (i.e., the amount of money at issue is at least $75,000 and none of the plaintiffs are from the same state as any of the defendants.) Under a diversity jurisdiction analysis, a corporation is treated as a citizen of any State in which it is incorporated and of the State where it has its principal place of business.
For years, practitioners and courts alike have struggled with a uniform test for determining a corporation’s principal place of business, particularly in instances where corporate headquarters and executive offices were located in one State but plants or other centers of business activity were located in other States.
While I agree that yesterday’s Supreme Court decision should bring greater clarity to the issue of what constitutes a corporation’s principal place of business, the “nerve center” test is far from perfect. As technology evolves and businesses become increasingly mobile (and, in some instances, virtual), the task of determining a company’s nerve center will be easier said than done.
For more information on this case, you can read Frank Steinberg’s post on the New Jersey Employment Law Blog or Tony Mauro’s article in the National Law Journal. If you have a lot of free time on your hands with nothing better to do, you can read the official hearing transcript.
Virginia Federal Court: "First Material Breach" Rule Precluded Defendant's Enforcement of Contract
The Virginia Federal Court in Alexandria recently issued a decision on the “first breach rule” in a contract dispute case. In Tandberg Inc. v. Advanced Media Design Inc., the defendant was precluded from enforcing the contract against plaintiff because it committed the first material breach by failing to pay invoices. Not only was the defendant prevented from recovering for subsequent breaches by the plaintiff, the Court summarily awarded the plaintiff over $3 Million for its unpaid invoices.
The Court noted that the Virginia cases applying the first material breach rule are not entirely uniform. However, the decision recognized the weight of authority supporting application of recent Virginia Supreme Court cases which precluded enforcement of a contract by the contractual party committing the first material breach, even where the parties continued performing under the contract.
In order for the "first breach rule" to be applicable, the party must have committed a material breach. What is a material breach? A breach that is “so fundamental to the contract that the failure to perform that obligation defeats an essential purpose of the contract.”
This case stands for two propositions - (1) failure to pay invoices in a timely fashion will almost certainly constitute a material breach; and (2) the contractual party to commit the first material breach of an agreement releases the other party's subsequent contractual obligations.
How To Avoid A Lawsuit
Fellow Virginia attorney Tim Hughes has provided six simple (but excellent) tips that businesses can follow to reduce the likelihood of getting sued. Among Tim’s pointers are to be likeable, honest, and to document everything. Tim’s post was in response to an article by mediator Victoria Pynchon, who provides an insightful perspective on how mismanaging risk can increase the odds of a lawsuit.
I couldn’t agree more with Tim and Victoria. Although lawsuits are often the price of doing business (if you are in business long enough, chances are you will eventually get sued), you can take proactive steps that will not only reduce the probability of getting sued but will substantially reduce your potential liability in the unfortunate event that you are sued.
Virginia Business Executive Arrested in Foreign Corrupt Practices Act Bribery Case
The FBI recently arrested twenty-two business executives and employees for violations of the anti-bribery provisions of the Foreign Corrupt Practices Act (FCPA), which prohibits any U.S. person from making a corrupt payment to a foreign official for the purpose of obtaining or retaining business. This investigation hits close to home as one of the individuals arrested is the founder and vice president of a Woodbridge, Virginia company that supplies security-related articles for law enforcement agencies and governments worldwide. It is the largest investigation and prosecution against individuals in the history of the law.
The recent arrests are the result of the first extensive use of undercover federal agents related to the FCPA. In this investigation, the FBI undercover agent posed as a sales agent representing the defense minister of an African nation. After making contact with the defendant, the agent relayed that he had been tasked with obtaining a variety of military and law enforcement products for the African nation’s presidential guard. Allegedly, the $15 million deal struck with each defendant included a 10% payment going directly to the defense minister and another 10% going to the “sales agent.” In addition to allegedly attempting to pay the FBI agent improper “commissions,” the indictment also alleges that the undercover agent met the executives in luxury hotels and expensive restaurants, that the executives provided inflated price quotes for the products and wired bribe money to the “sales agent.”
The Department of Justice (DOJ) has clearly become more aggressive in its enforcement of the FCPA. Notably, the DOJ and Securities Exchange Commission (SEC) have brought substantially more cases against individuals in the past couple of years. In 2008, the Corporate Crime Reporter reported the Deputy Chief of the Justice Department’s Fraud Section as stating that prosecution of individuals is on the rise because of explicit Department policy – sending people to jail will have a credible deterrent effect.
Clearly, business executives and owners of companies who engage in international business transactions must operate with a heightened degree of scrutiny and take considerable measures to prevent their companies from violating the FCPA.
Complying with the FCPA
In general, if your company operates internationally, particularly in high-risk countries or industries, then a rigorous FCPA compliance program is warranted. The elements of such a program depend on many factors, but typically include a comprehensive FCPA policy prohibiting improper payment to foreign officials, education of employees regarding the law, monitoring employee actions for compliance, and procedures and policies related to reporting potential violations.
Virginia Business Litigation Claims: Part 3 - Breach of Fiduciary Duty
The next installment in our six-part series on business litigation claims in Virginia is the claim for breach of fiduciary duty. Although there are several types of relationships that can give rise to a breach of fiduciary duty lawsuit, this post will focus on the claim in the context of the employer-employee relationship.
Over the past 15 years, the employer-employee relationship has changed dramatically. Long gone are the days when an employee would spend an entire career with the same employer. Instead, in this day and age of monster.com, employees are just one click away from their next employment opportunity.
As a result of the transient nature of today’s workforce, employers have turned to Virginia courts for redress. In addition to filing lawsuits for theft of trade secrets or an employee’s breach of a non-compete agreement, employers are increasingly pursuing claims against former employees for breach of fiduciary duty.
What is an employee’s fiduciary duty to an employer?
An employee has a general duty to perform his job faithfully and in furtherance of the employer’s business.
How is an employee’s fiduciary duty created?
Unlike other business litigation claims that are based on a statute or a contract, an action for breach of fiduciary duty arises from the relationship between an employer and an employee.
Although all employees (regardless of title, pay, or rank) have a general duty to refrain from any action that is adverse or contrary to the interests of an employer, employees who are held in an esteemed position of trust or confidence (e.g., corporate officers, employees with substantial knowledge or unique skills) carry a greater fiduciary obligation to their employer.
How is a fiduciary duty breached?
The determination of whether a fiduciary duty is breached is highly dependent on the facts and circumstances at hand. However, in general, courts will find that an employee has breached his fiduciary duty in instances where the employee has used his knowledge or position of trust for personal gain or for the benefit of a competitor.
For example, Virginia courts have found that an officer breached his fiduciary duty by making plans to compete with his current employer, recruiting co-workers to join him in a new venture, and by organizing a mass resignation from the employer.
Virginia courts have also found that an employee breached a fiduciary duty by using a former employer’s confidential information for the competitive advantage of a new employer.
Given the transient nature of employees in today’s marketplace, a claim for breach of fiduciary duty is an additional weapon that employers can use to mitigate any damages resulting from an unfaithful key employee. As fiduciary duty claims are factually intensive, (and therefore more likely to survive a demurrer or summary judgment), they also provide employers with a viable cause of action in instances where the facts may not fully support other business claims.
Stay tuned for Part 4 of the Virginia business litigation claims series, which will focus on tortious interference with a contract.
Fourth Circuit: Testimony of Other Women in Sexual Harassment Case is Admissible
In a recent decision, the Fourth Circuit Court of Appeals affirmed the trial court’s admission of testimony by female employees, other than the plaintiff, regarding their own experiences of sexual harassment by the defendant. The Court stated that such testimony is often relevant to a plaintiff’s hostile work environment claim and the employer was not unfairly prejudiced – even though the testimony did not in any way involve the actions of the defendant against the plaintiff.
In King v. McMillan, a former deputy in the Sheriff’s Office for the City of Roanoke, VA alleged that the Sheriff sexually harassed her. Other women testified at trial that the defendant made inappropriate sexual remarks to them as well, asked for kisses and hugs, and touched them in ways that made them feel uncomfortable. The Court determined that the testimony of the other women was relevant to two elements in a hostile work environment claim: (1) whether the defendant’s unwelcome conduct toward the plaintiff was because of the plaintiff’s sex, and (2) whether the unwelcome conduct toward the plaintiff was sufficiently severe or pervasive to create a hostile work environment.
The important aspect of this decision is the determination by the Fourth Circuit that the evidence was relevant and its admission was not a violation of Rule 403 of the Federal Rules of Evidence, which excludes relevant evidence if its probative value is substantially outweighed by the danger of unfair prejudice, confusion of the issues, or misleading the jury. The appeals court noted that proper jury instructions were provided on this issue and unfair prejudice was further avoided by only admitting testimony of harassment that occurred during the same timeframe of the plaintiff’s employment. Thus, the Sheriff’s Office was not able to limit the evidence to matters involving the plaintiff. The trial court specifically acknowledged that disaggregating the experience of its employees was not the law.
What can you do to prevent a sexual harassment claim against your company? In addition to establishing and implementing a comprehensive sexual harassment policy, you and your human resources department should learn to recognize the patterns of sexual harassment. As was apparent from this case, some harassers are adroit at protecting themselves from disclosure and rely on threats or rewards to prevent complaints. Regular training of all employees and establishing clear communication lines for employees to report behavior anonymously will certainly assist in preventing such legal entanglements.
Government Contracting Trends To Watch In 2010
I recently read an interesting post on the ExecutiveBiz blog on the top 10 predictions for government contracting in 2010. Unlike the typical mundane prediction lists that clutter the blogosphere at the beginning of a new year, the predictions in this post consist of quotes from a who’s who of leaders in the government contracting industry. As Virginia (particularly Northern Virginia along the Dulles Technology Corridor) is home to many government contracting businesses, I thought it would be useful to provide a brief summary of a few predictions that caught my attention.
Industry will compete with government
Norm Augustine, the retired Chairman and CEO of Lockheed Martin Corp., predicts that “heightening fiscal pressures” on the procurement process will result in the government contracting industry finding itself “more and more a competitor with government” than a partner.
National security contracts will remain a focus
Paul Cofoni, the President and CEO of CACI, predicts that there will be “continued demand” for “proven solutions to keep our nation safe and implement efficient and cost-effective solutions to modernize federal agencies.”
Collaboration between industry and government will remain strong
Renny DiPentima, the former President and CEO of SRA, predicts that the relationship between industry and government “will continue to be robust over the next decade” as “[g]overnment depends upon contractors in large part to get its jobs done and contractors depend upon government to keep their companies financially sound.”
Government will expect more secure offerings from industry
According to Melissa Hathaway, the President of Hathaway Global Strategies, LLC, the “seams between private networks and government networks will continue to blur” thereby requiring “industry and government to share details on vulnerabilities of and security threats to our infrastructures and information assets.” As such, she predicts that “the government will demand from industry more secure software products and services.”
New cyber czar will help industry challenges
Stan Sloane, President and CEO of SRA, predicts that a new cyber czar will lead to “some progress on the policy front, as well as collaboration with industry on intellectual property protection.”
Modest growth and productivity gains for sector
Ralph Shrader, Chairman, CEO and President of Booz Allen Hamilton, predicts that “2010 will be a year of modest growth and productivity gains for the economy as a whole, and for the government contracting sector.” However, these gains will require industry and government to work together “toward the same goals.”
I concur with many of the predictions expressed by the leaders of the government contracting industry. Although fiscal pressures will continue to squeeze the procurement process in 2010, communication and collaboration amongst all segments of the government contracting industry can mitigate these economic challenges. While the continued demand for efficient measures to address national security concerns will help drive the sector, it will take a unified effort by government and industry alike to realize any gains in 2010.
Virginia House of Delegates Approves Ban on Human Microchips
Yesterday, the Virginia House of Delegates approved a ban on forced implantation of human microchips. The law makes it illegal to implant an identification or tracking device into a person’s body without their written consent. California, North Dakota and Wisconsin have already passed laws prohibiting employers and others from forcing anyone to have a radio-frequency identification device implanted under their skin, and Georgia and Tennessee are considering doing the same.
Both the private and government sectors are concerned with ensuring that private information and physical locations are secure. And for that reason, identification devices are becoming more and more prevalent and important in our era of information technology. Some employers already take advantage of the great progress in the areas of biometrics and smart technologies, which enable them to provide identification systems that are fast, secure, and nearly error free. Some believe that the next inevitable step is the use of human microchips in the commercial market.
The Virginia law prohibits the forced implantation of a microchip device into a person as a condition of employment. Thus, the potential benefits of a passive or active microchip device may never be realized by employers. Some applications of this technology are apparent – increasing security at certain locations (nuclear plants, military bases) and ensuring that only the right people have access to confidential company information – and some applications are yet to be accomplished – tracking children and fugitives and controlling the spread of disease.
However, Virginia lawmakers recognized that these benefits would come at the expense of various rights we enjoy as citizens of this country - privacy, Fourth Amendment protection against unreasonable searches and seizures, Fifth Amendment protection against self-incrimination, etc. In addition, the continuous intrusion into one's life and the potentials for abuse of the technology are just some of the social and ethical considerations which disfavor such advancements.
Does your Company Have an Inclement Weather Policy?
With forecasts for the Northern Virginia region calling for nearly two feet of snow, many Virginia business owners will have to decide whether to take a “snow day.” For small businesses in particular, this decision is confounded by operational and logistical factors, including the absence of a means to timely communicate with employees (to advise them of a closing) and the potential disruption to critical business processes. Instead of playing the “should I close” decision by ear, businesses should take the proactive step of adopting an inclement weather policy.
Corey Riley, the facility administrator of DaVita Dialysis in Arlington, recommends that small businesses identify in advance which employees are critical to sustain business operations. “Given the nature of our business and that, for our customers, our services are literally a matter of life or death, we cannot afford to make decisions at the last minute. It is important that each of our employees knows precisely what to do well in advance of a winter storm,” said Riley. “On occasions like this weekend, we will rent an SUV and then have a team member pick up the employees who are essential to the operation of the center.”
“The safety of each employee should be a primary consideration in a company’s inclement weather policy,” said Talulla Newsome, a recent retiree and the former head of Colgate Palmolive’s Global Technology Center in Piscataway, New Jersey. “The policy should be flexible enough to allow employees to make a decision that is best for their own personal circumstance. Most importantly, regardless of the policy, there must be open communication between each employee and the employee’s direct supervisor.”
So what should your inclement weather policy consist of? In reality, there isn’t a “one size fits all” answer to this question. However, every inclement weather policy should:
- State that it is the company’s policy to remain open during inclement weather and that employees should make every reasonable effort to get to work (or telecommute if the company has a telecommuting policy in place).
- Detail how and when the company will communicate closings or delayed openings to employees.
- Address potential issues relating to hourly employees, such as whether they will be paid (or disciplined) for not reporting to work when the business is open.
For business continuity and employee safety, every business should have an inclement weather policy in place. Once a policy is in place, make sure that it is kept up-to-date and that it is regularly communicated to employees.
Virginia Business Litigation Claims: Part 2 - Breach of Non-compete
As noted in previous posts on Virginia Business Law Update, this blog is running a six-part series on Virginia business litigation claims. This week, the featured Virginia business litigation claim is breach of non-compete agreements.
In this age of intense competition, businesses have a legitimate interest in preventing former employees from gaining a competitive advantage by using the relationships, information or skills acquired during their employment with the company. Non-compete and non-solicitation agreements are an effective means to protect the business’s confidential information and investment into its employees.
As an attorney practicing in this area, it is apparent that the use of such agreements has been on the rise over the past decade. Their use is practically in every industry – from technology, government contractors, service and retail companies, to entertainment. As most of you have heard, Conan O’Brien recently ended his non-compete “fracas” with NBC. It is apparent from news reports that O’Brien had restrictions in his contract regarding his on-the-air television appearances after leaving the network. Each state’s laws are somewhat different in this area, and we focus on Virginia courts’ analysis of these types of restrictive covenants in this post.
What is a non-compete agreement?
A non-compete agreement prevents a former employee from pursuing a similar position in competition with the company. Since the agreement is a contract, it is bound by all the traditional contract requirements including consideration. Typically, covenants not to compete are executed at the time of hire, and the offer of employment will be sufficient consideration to enforce the agreement. Non-solicitation agreements are sometimes generally described as a covenant not to compete as well, but the obligations for the employee are different for this type of covenant. Non-solicitations restrict former employees from soliciting employees or customers of a business, and by their nature are more precise regarding the terms of the prohibition.
How do Virginia courts analyze the enforceability of non-compete agreements?
In Virginia, courts have scrutinized non-compete agreements in three areas to determine their reasonableness: (1) duration of the restriction; (2) geographic scope of the restriction; and (3) the scope of the restricted activities. An overall consideration is that the restriction must be no greater than necessary to protect the company’s legitimate business interests, such as safeguarding its proprietary information or trade secrets.
In structuring a non-compete agreement, the restriction must not encompass any activity in which the employer is not engaged or which the employee did not perform while employed by employer. If the court determines that the non-compete agreement is too broad a restriction, then it will not be enforced. However, an agreement that is reasonable and consistent with public interest will likely be enforced. In this instance, not only may an employer obtain an immediate injunction preventing the former employee from violating the agreement, but the company may also obtain monetary damages for the employee’s breach.
Many factors must be considered in drafting a non-compete in order to withstand court scrutiny. Thus, companies should not rely on standard form non-compete clauses but should exercise great care and caution in determining the appropriate restrictions and terms for such an agreement.
As with misappropriation of trade secret cases, it is important to note that it is common for the former employee’s new employer to be brought into a non-compete dispute. The business alleging breach of the non-compete may bring a tortious interference with contractual relations claim against the new employer. In doing so, the former employer alleges that the competitor disrupted the ability of the employee from performing his/her obligations under the contract. To protect your business against such potential liability, it is imperative to require new employees disclose any restrictions related to their employment with the company.
Stay tuned for Part 3 of the Virginia business litigation claims series, which will focus on breach of fiduciary duty.
Virginia Businesses Rejoice: SCC Rolls Out First Wave of E-Filing
For any Virginia business owner who has attempted to navigate the State Corporation Commission’s (SCC) website, the news of a more user friendly experience is certainly reason to rejoice! According to an article in Virginia Lawyers Weekly, the SCC has launched the first wave of a “suite of electronic filing capabilities.”
Although the new “eFile” functionality is currently limited to changing registered agent information, Virginia businesses can expect several additional changes in the coming months. For instance, businesses will soon be able to eFile Uniform Commercial Code (UCC) financing statements, corporate annual reports, and corporate formation documents. Eventually, businesses will be able to pay filing fees online.
In addition to launching the eFile initiative, the SCC is also revamping its antiquated Clerk’s Information System. When complete, the new system will significantly improve user experience by making it easier to conduct name searches and obtain information about existing Virginia businesses.
These changes are long overdue but, thankfully, the SCC will soon join the rest of us in the 21st century!
Q & A: Buy-Sell Agreements In Virginia
As a lawyer with a small business clientele in Virginia, I am frequently asked about Buy-Sell Agreements. Although most small business owners are generally familiar with the concept of a Buy-Sell Agreement, I find that most do not truly understand the purpose of a Buy-Sell Agreement or the form in which these contracts typically exist. Accordingly, here is a brief primer on Buy-Sell Agreements in Virginia.
What is a Buy-Sell Agreement?
A Buy-Sell Agreement is a contractual arrangement between the owners of a business (e.g., a corporation, limited liability company, or partnership) that sets forth the process by which an ownership interest can be sold upon the occurrence of certain triggering events (e.g., retirement, divorce, bankruptcy, disability, death, or a third-party offer) as well as the price or formula for such sale.
Is a Buy-Sell Agreement a stand-alone contract?
Not necessarily. A Buy-Sell Agreement can either be a stand-alone contract or a series of provisions that are incorporated into the governing documents of a business (e.g., By-Laws for a corporation or the Operating Agreement for a limited liability company).
What are the advantages of having a Buy-Sell Agreement?
By having a Buy-Sell Agreement in place, the owners of a company can completely control the disposition of an ownership interest in the business as well as control the composition of the ownership group. In a closely-held company (such as a small, family-owned business), the ability to restrict the transfer or sale of an owner’s interest in the company is an extremely important consideration as it keeps outsiders from assuming a share of the business.
What are the types of Buy-Sell Agreements?
There are three types of Buy-Sell Agreements:
- Redemption Agreement: The selling owner must either sell his ownership interest to the company or provide the company with a right of first refusal. In essence, the company is “redeeming” the shares of the owner.
- Cross-Purchase Agreement: The selling owner must either sell his ownership interest to the remaining owners or provide the remaining owners with a right of first refusal.
- “Hybrid” Agreement: A Hybrid Agreement is simply a blend of a Redemption Agreement and a Cross-Purchase Agreement.
How is a purchase funded under a Buy-Sell Agreement?
Many small businesses do not have the capital reserves to fund the purchase of an ownership interest. As such, a common approach (utilized by businesses and individuals alike) is to purchase and maintain an insurance policy from which the proceeds (upon the disability, death, or retirement of an owner) are used to purchase the available ownership interest. Other funding options include installment plans and loan arrangements.
For one reason or another, every small business is eventually confronted with the loss of an owner. As such, whether you have a startup company or an existing small business, it is of critical importance that you have a well-drafted Buy-Sell Agreement in place to maintain business continuity and to proactively limit any issues relating to the departure of an owner.
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