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 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.
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.
Ad Damnum Clauses in Virginia - Plaintiff's Cap on the Recovery Amount
The Virginia Supreme Court issued an order recently, reaffirming the rule that ad damnum clauses set the cap on the amount a plaintiff can recover in Virginia state courts. An ad damnum clause is part of the initial complaint which provides the amount in dollars that the plaintiff asks the court to award. States laws differ on whether the requested amount sets an absolute limit on the amount of damages recoverable in a case, but Virginia law is clear that it is.
Virginia Supreme Court rules require a plaintiff to inform the defendant of the true nature of a claim, which is a fundamental principle of due process. Virginia courts interpreting this rule have consistently held that in addition to describing the claim against a defendant, defendants are entitled to notice of the size and amount of the claim. This requirement is contrary to Federal practice, which does mandate that a complaint quantify the monetary damages sought. Under federal procedure, the court must award the full relief to which a plaintiff is entitled, regardless of the amount, if any, set forth in the complaint.
May a plaintiff increase the requested damages amount? Yes, a court may allow for an increase if later circumstances warrant it, but a plaintiff must promptly seek an amendment. A plaintiff will not be permitted to increase the damages post-verdict.
In deciding whether to grant the amendment of a pleading to increase the amount sought in the ad damnum clause a trial court considers whether the defendant will be prejudiced by allowing the amendment and whether such prejudice will affect the defendant’s ability to have a fair trial. In addition, the court considers the plaintiff’s right to be compensated fully for any damages caused by the defendant’s acts or omissions. This decision rests within the discretion of the circuit court and appeal review is limited.
The above rules may be somewhat burdensome to a plaintiff. But, on the flip side, the ad damnum clause is crucial to the defendant in order for it to formulate trial strategy and assess risks in defending the litigation.
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 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.
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 Court Rules That It Can't Dissolve An Unregistered Foreign Limited Partnership
In a case of first impression, a Norfolk, Virginia Circuit Court held that it could not order the dissolution of a limited partnership formed in another state.
In the matter of Valone v. Valone, the issue before the Court was whether a Virginia court could dissolve a limited partnership (“LP”) that was formed under Georgia law, but listed Norfolk, Virginia as the LP’s primary place of business on annual filings. Based on the evidence before the Court, there was no indication that the LP’s partners or assets were connected with Georgia.
Without the benefit of any legal precedent in Virginia, the Court relied on Virginia’s Revised Uniform Limited Partnership Act (RULPA) to support its ruling. Noting that the RULPA provides that the “circuit court of the locality in which the registered office is located may decree dissolution of a limited partnership,” the Court opined that the General Assembly did not intend for a Virginia court to dissolve an LP that did not have a registered office in Virginia.
I wholeheartedly agree with the Court’s decision. Under Virginia law, it takes more than simply listing a Virginia address on an annual filing to claim a Virginia City or County as a principal place of business. To transact business in Virginia, a foreign LP (i.e., an LP that is not formed in Virginia), must: 1) file an Application for a Certificate of Registration to Transact Business in Virginia with the State Corporation Commission; 2) pay the requisite filing fee; and, 3) pay an annual registration fee.
This case highlights an important consideration for all foreign businesses in Virginia (regardless of whether the business is a corporation, a limited liability company, or an LP) -- if a foreign business wants to avail itself of the protections and rights afforded to a Virginia business, then it must be properly registered to transact business in Virginia.
Supreme Court Decision Lifts Ban on Political Spending by Corporations in Candidate Elections
The U.S. Supreme Court overruled two precedents about the First Amendment rights of corporations by a 5-to-4 decision handed down yesterday in Citizens United v. FEC. Under previous Supreme Court precedent, corporations were barred from spending freely to support or oppose candidates. This decision has changed the law for corporate fundraising and will dramatically transform campaigning for president and Congress in the future.
Under the new decision, the government may not ban political spending by corporations in candidate elections. The decision does not specifically address unions; however, the lift of the ban of corporate political spending will also apply to them. The majority also struck down part of the Bipartisan Campaign Reform Act, also known as the 2002 McCain-Feingold campaign finance law, that banned corporations and unions for paying for political ads.
Not all restrictions for corporate political spending in candidate elections were lifted. Some of the limits that remain are: corporations cannot provide money directly to federal candidates or national party committees and nonprofit groups that advocate for political candidates must still comply with disclosure requirements.
Virginia Circuit Court Applies New, Tougher Preliminary Injunction Standard
The Richmond City Circuit Court appears to be one of the first Virginia state courts to adopt the tougher preliminary injunction standard set forth by the U.S. Supreme Court in Winter v. Natural Resources Defense Council, Inc. In the case of Strong Foundation Youth Initiative, LLC v. Robert Ashford, Jr., the Virginia Circuit Court considered its preliminary injunction ruling under the new Winters test concluding that the plaintiff in this matter satisfied all four prongs for an injunction –
- likelihood of success on the merits;
- likelihood that plaintiff will suffer irreparable harm in the absence of preliminary relief;
- the balance of equities tips in plaintiffs’ favor; and
- the injunction is in the public interest.
As we noted in a post last month on Virginia Business Law Update, the Fourth Circuit previously adopted the Winters test emphasizing that a preliminary injunction was an “extraordinary” remedy. In doing so, the Fourth Circuit overturned the Blackwelder standard which had been relied upon for over 30 years. Under Blackwelder, a preliminary injunction could be entered if the plaintiff made a strong showing of irreparable harm but had merely shown “serious questions” in the case, as opposed to likelihood of success. Thus, it provided some flexible interplay between the various factors considered at an injunction hearing. Flexibility which Winters has eliminated.
In light of this recent Virginia decision, businesses and their attorneys seeking preliminary injunctions in Virginia state courts should be now prepared to show the Judge that they satisfy every factor of the preliminary injunction test at the injunction hearing - rather than accentuating the facts supporting certain prongs.
Virginia Business Litigation Claims: Part 1 - Misappropriation of Trade Secrets
As noted last week, this blog is running a six-part series on Virginia business litigation claims. This week, the featured Virginia business litigation claim is misappropriation of trade secrets.
In light of the mobility of employees in today’s workforce, businesses face the arduous task of protecting their confidential and proprietary information. In Northern Virginia, through which technology companies of all sizes adorn the Dulles Technology Corridor, the issue of employee theft of trade secrets is one that routinely crosses an attorney's desk. Fortunately for Virginia businesses, the Virginia Uniform Trade Secrets Act provides an avenue of recourse to avenge an employee’s theft of a company’s trade secrets.
What is a “trade secret” under Virginia Law?
Although most people associate the term “trade secret” with technology or intellectual property, a trade secret can be as simple as a company’s customer list, pricing data, or marketing strategy. (The Trade Secrets Act provides that a trade secret can be a “formula, pattern, compilation, program, device, method, technique, or process.”) Under Virginia law, the determination as to whether a company’s information constitutes a trade secret is not based on the type of information at issue. The key is whether the information derives independent economic value (actual or potential) from being unknown and not readily available to someone who can obtain economic value from the use or disclosure of the information. Additionally, the company must take reasonable efforts to maintain the secrecy of the information.
A classic example of a trade secret is the formula for Coca-Cola. The formula has economic value because it is unknown and not available (i.e., if the formula were known, then anyone could make and sell Coca-Cola). And, Coca-Cola takes reasonable steps to keep its prized formula a secret. (According to urban legend, two executives know half of the formula but no one in the company knows the entire formula.)
What does it take to succeed on a trade secrets claim in Virginia?
To succeed on a trade secrets claim in Virginia, a company must not only prove in court that its information is, in fact, a trade secret, the company must also show that its trade secret was misappropriated. Generally, under the Trade Secrets Act, a misappropriation can occur through the acquisition, disclosure or use of a trade secret.
What damages are available for misappropriation of a trade secret?
If misappropriation of a trade secret is proven, the company can get an injunction to prevent its trade secret from being used or disclosed. Additionally, the company can recover damages for the actual loss caused by the misappropriation or for the unjust enrichment caused by the misappropriation. If the company can prove that the misappropriation was willful and malicious, it can also receive punitive damages (up to twice the amount of damages for actual loss and unjust enrichment).
It is important to note that 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. The addition of a company defendant typically ensures a deep pocket from which a judgment can be collected.
Stay tuned for Part 2 of the Virginia business litigation claims series, which will focus on breach of non-compete agreements.
Minority Shareholder Bound to Contract Venue Provision It Didn't Sign
Marc Ward posted an interesting article on his blog at the year's end involving a recent piercing the corporate veil decision in a U.S. District Court in Georgia. The issue did not involve liability, but the venue of the dispute. The Court decided in Rayonier Wood Products, LLC v. ScanWare, Inc. that although the shareholder was not a signatory to the contract at issue, it was still bound by the terms of the contract, including the choice of law provision limiting venue to the Georgia court. As a result, the Finnish company shareholder was forced to litigate the dispute in Georgia. We recently discussed forum selection clauses on Virginia Business Law Update, and noted the advantages to Virginia businesses of litigating in their home state. This case is another example of the importance of such a provision when dealing with foreign business partners.
Virginia Business Litigation Claims
As a Virginia attorney with a mix of business and litigation clients, I am often engaged by businesses to assess the viability of litigation claims. The first step in that assessment is ensuring that the client understands what it would have to establish in order to succeed in a court of law. Whether a business seeks to pursue litigation or has just received notice that it has been sued, it is important that it understand the nature of the claims. With that in mind, this blog will feature a post each week (over the next six weeks) on a different Virginia business litigation claim.
Part 1: Misappropriation of Trade Secrets (under the Virginia Trade Secrets Act)
Part 2: Breach of Covenant Not to Compete
Part 3: Breach of Fiduciary Duty
Part 4: Tortious Interference with a Contract
Part 5: Conspiracy to Injure a Business (under the Virginia conspiracy statute)
Part 6: Employer Liability for Employees’ Actions
Stay tuned! Part 1 of this blog’s Virginia Business Litigation Claims series will start next week!
U.S. Supreme Court Hears Arguments on Whether Debt Collector's Legal Error is a Defense against Culpability
The U.S. Supreme Court heard arguments yesterday on an important matter that will have a tremendous effect on the debt collection process. In Jerman v. Carlisle, the Court considered whether a debt collector’s legal error qualifies for the bona fide error defense under the Fair Debt Collection Practices Act (FDCPA). Under the FDCPA, debt collectors must, as part of their initial contact, provide consumers with certain prescribed notices.
In this case, the creditor issued a notice which it believed was in compliance with the Act. Unfortunately for the creditor, its collection notice requiring the person to contest the debt “in writing” violated the law. Under the FDCPA, both the Federal Trade Commission and consumers subjected to collection abuses may bring civil suits against debt collectors for violations of the Act, and subject creditors to damages. The law proscribes some exemptions for debt collectors - debt collectors can avoid liability if the act was done in conformity with any advisory opinion of the Federal Trade Commission or if the violation was not intentional and resulted in a bona fide error notwithstanding the maintenance of procedures reasonably adapted to avoid such error. The question in this case is whether this creditor’s misunderstanding of the law (i.e., requiring a writing to dispute the debt) fell within the bona fide error defense.
The homeowner successfully obtained the dismissal of the foreclosure lawsuit against her because her debt had already been fully paid. Thereafter, she pursued an action challenging the debt collection practices of the creditor under the FDCPA. She lost her case in both the trial court and appellate court based upon the creditor’s bona fide error defense, and appealed to the U.S. Supreme Court.
Ruling in favor of the homeowner here would result in monetary losses for some such good-faith debt collectors who accidentally violate the Act. But, as Justice Ginsburg noted during oral argument in this matter, there is no "Federal statute that makes mistake of law a defense." As we all know, rarely is ignorance of the law a defense to civil liability or criminal penalties.
If the U.S. Supreme Court rules against the creditor in this case, debt collectors who are unsure about the interpretation of the law will be forced to request and receive an advisory opinion from the Federal Trade Commission prior to any collection notice to receive protection from liability. There have only been seven instances of such requests and only four answered in the past decade. I have similar questions on this issue as Chief Justice Roberts posited during oral argument – why is the number of advisory opinions so small? Does receiving an advisory opinion take an unreasonable amount of time? Is this practical for debt collectors?
New Home for Supreme Court of Virginia Rules
The Rules of the Supreme Court of Virginia have a new online address. Whereas they were previously maintained on the General Assembly's legislative information system's website, they are now hosted on the site for Virginia's judicial system and are available in .pdf format. Happy downloading!
Perfunctory Due Diligence Foils Buyer's Fraud Claim over Company Purchase
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In reading the Virginia Lawyers Weekly Important Decisions of 2009, a Norfolk District Court case stood out as a reminder of the importance of a thorough due diligence examination by buyers in acquisitions of small and medium sized businesses and allocating risks in the purchase agreement. The buyer in the Norfolk case was an accountant and performed his own due diligence before his purchase of a Chesapeake accounting firm. It is apparent from the reading of the decision, however, that the buyer did not discover all material information necessary to fully understand the target company before signing on the dotted line. Such due diligence failure and the absence of risk-shifting provisions in the purchase agreement cost him a substantial sum in the end.
The accountant in White v. Nicholas L. Potocska P.C. claimed that the Seller made misrepresentations during the negotiation of the deal which resulted in the loss of one of the firm’s largest clients after closing. Unfortunately for the buyer, his fraud claims against the Seller did not even survive to reach a jury. The Judge summarily dismissed the Buyer’s claims against the Seller based upon the accountant’s curtailment of his due diligence investigation prior to the discovery of material facts. The Court opined that the failure of the buyer to uncover certain items did not suggest fraud by the seller.
This case highlights the risks inherent in the due diligence process. In Virginia, the buyer is responsible for “every piece of paper” available to him in due diligence – even the needle in the haystack. It is interesting to note that the accountant in this case was described as “one of the most diligent prospective buyers” by a business broker who worked with him. Perhaps the issues in this case had less to do with the accountant's "thoroughness" and more to do with the proper allocation of risks in the acquisition transaction documents. As we often see, sometimes it isn’t practical or cost efficient to discover all potential issues in a limited amount of time.
So, how can a buyer reduce risk in an acquisition absent a lengthy, exhaustive due diligence investigation? The purchase agreement can be crafted to shift certain due diligence risks to the seller, and make clear that all parties are relying on the seller’s statements. Moreover, if client retention is a part of the purchase price to be paid to the seller, the parties can incorporate an earn-out into the purchase price formula based upon company’s revenue after the closing.
Contract Forum Selection Clauses Are Critical When Doing Business with Out-of-State Companies
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In the event of a contract dispute, litigating the matter in Virginia has its advantages to Virginia businesses – Virginia litigation limits travel expenses to out-of-state jurisdictions, provides familiarity with judges and opposing counsel, and assists in the prevention of inconsistent application of laws to your business contract. However, the only way to ensure that you have the “home team” advantage is to incorporate a forum selection clause in your business contract.
A forum selection clause provides the particular location where any and all lawsuits relating to the contract will be litigated, and is critical when doing business with out-of-state vendors, customers and other business partners. If your business contract is silent with respect to where such disputes will be resolved, you may find yourself litigating in far away places.
Two recent cases involving eBay highlight the importance of a forum selection clause - Tricome v. eBay, Inc. and Universal Grading Service v. eBay Inc. In both cases, eBay business users attempted to sue eBay in their home jurisdiction on the East Coast. In response to the litigation, eBay moved to transfer the cases to Santa Clara County, California, based on the forum selection clause contained in the User Agreement between eBay and the plaintiffs. The Judge found that eBay could name the forum in its contracts with users and that the users assented to this jurisdiction when they clicked on the box acknowledging the terms and conditions of the User Agreement; thus, eBay prevailed and successfully forced these plaintiffs to litigate on its home turf.
If you are a Virginia business, you should make sure that all of your business contracts contain a forum selection clause that designates a Virginia court (preferably in the city or county where your office is located) as the forum for litigation.
Fourth Circuit: A Court Cannot Overturn an Arbitrator's Construction of Business Contract
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Based on a recent decision by the Fourth Circuit Court of Appeals, business owners may want to think twice before including an arbitration clause in a contract. In the case of PPG Industries, Inc. v. Int’l Chemical Workers Union Council, the Fourth Circuit considered whether a reviewing court must defer to an arbitrator’s construction of a contract even when the court believes that the arbitrator construed the contract incorrectly. In a decision that may be of some surprise to business owners, the Fourth Circuit held that even if a court is convinced that the arbitrator committed serious error, a court cannot overturn the arbitrator’s decision.
In its reversal of the district court, the Fourth Circuit held that, except in “very limited” instances, a court has no right to determine the correctness of an arbitrator’s award when the parties to a contract have agreed that disputes should be submitted to arbitration. Once the arbitrator has ruled, then the court’s only function, with respect to that decision, is to determine “whether the arbitrator did his job – not whether he did it well, correctly, or reasonably, but simply whether he did it.” Unless the arbitrator ignores “the plain language of the contract,” a court cannot overturn a clearly erroneous award.
Although the PPG Industries, Inc. decision isn’t new law, business owners should pay it special attention. Over the past couple of years, I have had many clients request an arbitration clause in a business contract because they believe that it is a quicker and cheaper alternative to court litigation. While arbitration does have some advantages over litigation, those advantages come at a heavy price: the substantial risk of having no recourse for a bad or incorrect arbitration award.
In Virginia, where courts are renowned for their “rocket dockets”, business owners may want to think twice before inserting an arbitration clause into a contract. Without the advantage of a quicker resolution, it may be best to forego an arbitration clause in favor of permitting court litigation. Although courts and juries aren’t always perfect, at least you will have the option to appeal an erroneous decision.
Business Law News Bites
Here is a quick summary of some interesting blogs I have read this week on a variety of business law topics that may be of interest to Virginia businesses:
Brian Hill, of the Employer Lawyer Report, analyzes how Facebook’s new privacy controls will impact the employer-employee relationship. According to Hill, these new privacy control measures could make it more difficult for employers who use Facebook to monitor their employees.
Robin Roberts, of the Startup Lawyer Blog, provides some guidance on how equity should be divided amongst co-founders of a startup company. The primary method described by Roberts is to base the equity split on an assessment of the past, current, and future contributions of each co-founder. Regardless of the method used, Roberts advises that co-founders make the equity-split determination quickly and that they consider vesting founders’ stock over a period of time.
Joshua Heslinga, of the Virginia IP Law Blog, writes that it makes good business sense to enforce your patents before they are reexamined by the United States Patent and Trademark Office (USPTO). As Heslinga notes, the timing of a reexamination decision (where a patent is reexamined by a patent examiner to verify a patent’s validity) can be a crucial determining factor in the outcome of a patent litigation case. If a reexamined patent is determined to be invalid, then that will almost certainly result in the dismissal of a pending patent infringement litigation action.
Joel Greenwald, of the Overtime Advisor Blog, details potential issues an employer may face for having employees work through lunch. According to Greenwald, employers that require "non-exempt" staff (e.g., receptionists, data entry clerks, administrative assistants, secretaries, billing clerks, customer service representatives, etc.) to work during their unpaid break time could face substantial liability under the Fair Labor Standards Act (FLSA). Under the FLSA, non-exempt employees must: (1) be paid for every hour they work; and (2) have all hours worked count towards their potential overtime pay. The website for the Virginia Department of Labor and Industry has a good FAQ section on wage payment issues in Virginia.
Michael Stocker, of the Eyes On Wall Street Blog, discusses a proposed bill by Senator Christopher J. Dodd (D-Conn.), Chairman of the Senate Banking Committee, that would overhaul the U.S. financial system. Senator Dodd’s financial reform plan bill would, among other things, consolidate bank regulators, create a consumer financial protection agency, and impose new restraints on exotic financial instruments and credit rating agencies.
DC Human Rights Act May Apply to Virginia Employers
You manage the Virginia office of a company headquartered in the District of Columbia, and place an ad for a job opening in a Virginia newspaper. Thereafter, you conduct interviews for that position at your Virginia office, and hire a new employee who proceeds to work full-time in Virginia.
And a couple of years later, you terminate the employee for poor performance and the employee files a lawsuit against your company for discrimination. Clearly, the employee’s lawsuit must be brought in Virginia under Virginia law, right? If your answer is “yes,” you are not alone, as I would have answered “yes” as well. However, in light of a new D.C. Court of Appeals case, we would both be wrong!
In Monteilh v. AFSCME, AFL-CIO (PDF), the D.C. Court of Appeals held that an employee could maintain a lawsuit in the D.C. Courts under the D.C. Human Rights Act (D.C.’s anti-discrimination statute) even though the employee never worked one day for the company in D.C. According to the Court, the determinative factor was where the alleged discriminatory decisions took place, not where the employee may have worked during the course of his employment.
The Court reasoned that although the effects may have been felt outside of D.C., “recognizing jurisdiction under the DCHRA where actual discriminatory (and/or retaliatory) decisions by an employer are alleged to have taken place in the District is most faithful to the statutory language and purpose.”
The ramifications of this decision are quite significant for those businesses that are headquartered in the District of Columbia but maintain an office in Virginia. For one, the D.C. Human Rights Act (DCHRA) is much broader than the applicable anti-discrimination statutes in Virginia (namely Title VII) as the DCHRA prohibits discrimination based on race, color, religion, national origin, sex, age, marital status, personal appearance, sexual orientation, familial status, family responsibilities, matriculation, political affiliation, disability, source of income, and place of residence or business.
By contrast, Title VII only prohibits discrimination based on race, color, religion, sex, and national origin.
As this is a new ruling, it remains to be seen as to whether there will be a flood of similar cases filed. My guess is that we will see quite a few of these cases over the next couple of years. Certainly, given the potential impact to Virginia businesses, this head-scratcher of a case is something we will have to keep our eye on down the road.
Wrongful Termination: Business Owner Hit for $1.5 Million in Damages
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xandria federal court judge has awarded a plaintiff employee more than $1.5 Million in damages against her former employer stemming from allegations, which included sexual harassment, breach of contract, and constructive discharge. In the case of Wynne v. Birach, the employee, Elizabeth Wynne, sued her former boss and his company, Twin Star Holdings, alleging the owner of the company, Sima Birach, Jr., sexually harassed her, cheated her out of money owed under her employment agreement, and forced her to submit fraudulent financial documents.
You might ask, what was Mr. Birach’s response to these serious allegations? The answer: Nothing!
Mr. Birach and his company never put in a response to the allegations and basically ignored the proceedings. This resulted in Ms. Wynne obtaining a victory by default. In and of itself, it is somewhat remarkable that a company would fail to defend itself against such allegations. However, more significant than that, the court’s opinion sets forth at least two very important findings for employment law cases.
First, the court took judicial notice of the fact that Mr. Birach was the sole director of Twin Star Holdings, and based upon the uncontested allegations in the Complaint, Mr. Birach regularly used corporate funds to pay for his personal expenses. This finding allowed the court to pierce the corporate veil and hold Mr. Birach personally liable for the damages in the case. It is rare that a company’s owner is personally tagged for damages in a wrongful termination case. The Wynne case emphasizes, once again, the need for companies to observe corporate formalities to avoid the possibility of personal liability against corporate owners.
Second, Ms. Wynne was not terminated, but actually resigned from her position. Nevertheless, the court found that she was “constructively discharged” from her job because her boss subjected her to “repeated and blatant” sexual harassment, and she was repeatedly asked to violate Virginia law by submitting fraudulent financial documents. This is significant because courts in Virginia rarely find that an employee has been subjected to working conditions so intolerable that they have no other choice but to resign.
These two important findings from the Wynne case should not be diminished just because the employer did not show up to fight. The court ruled against Ms. Wynne on several of her other claims made under the Virginia Human Rights Act and against her on her assault claim; so she did not automatically win her constructive discharge and piercing the corporate veil claims because the employer defaulted. Rather, the court looked at the facts asserted and found they were sufficient to establish these claims.
Based upon prior rulings from the federal and state courts in Virginia, some employment law practitioners thought that obtaining a constructive discharge finding was virtually impossible in Virginia. The Wynne case assures us that is not the case.
New TRO Standard for Business Non-Competes
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epresenting a corporate client have gotten the late afternoon call that a former employee is now working for a competitor in violation of the employee’s non-compete, and likely using confidential corporate information. A double-whammy which your client wants stopped immediately!
Well, for years us lawyers practicing in the Eastern District of Virginia would get out our tried and true Complaint asking for a PI, along with the papers requesting a Temporary Restraining Order (TRO) to immediately stop the wayward former employee from wrecking our client’s business one second longer (assuming diversity of citizenship for access to federal court).
We used what had become well-known as the Blackwelder standard, named after the case of Blackwelder Furniture Co. of Statesville v. Selig Manufacturing Co., 550 F.2d 189 (4th Cir. 1977), which was later reaffirmed in Rum Creek Coal Sales, Inc. v. Caperton. The injunction standard adopted by these cases used “the balance-of-hardship test”.
However, a few months ago, the Fourth Circuit changed the tried and true tune of the Blackwelder standard. Citing a Supreme Court case from 2008, the Fourth Circuit ruled in The Real Truth About Obama, Inc. v. FEC (PDF), that it had been misapplying the preliminary injunction standard. Last year, in Winter v. Natural Resources Defense Council, Inc. (PDF), the Supreme Court held that in order to obtain a preliminary injunction, a plaintiff has to establish that:
- he is likely to succeed on the merits
- he is likely to suffer irreparable harm in the absence of preliminary relief
- the balance of equities tips in his favor
- an injunction is in the public interest
For some reason, the prior cases form the Fourth Circuit heavily emphasized prongs two and three. The practical effect of the Real Truth decision (apart from a new catchy sounding injunction standard) is yet to be determined, because despite its proclamations in Real Truth, the Fourth Circuit and the district courts in this Circuit will likely find it difficult to move from a legal standard that had been adopted by jurists and practitioners alike for more than thirty years. However, it may be the case that employers and their counsel will have to really go the extra mile to get a TRO, and actually meet all four prongs of the injunction standard. We will have to wait and see.
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