Fourth Circuit Substantially Reduces Jury's Emotional Damages Award in False Claims Act Case
In the Fourth Circuit (the federal court with appellate jurisdiction over the district courts in Virginia, Maryland, West Virginia, South Carolina and North Carolina), six-figure compensatory damage awards are frequently viewed as excessive. This Court has repeatedly emphasized that while a plaintiff’s testimony can theoretically support a large emotional damage award, such evidence alone usually does not pass muster. The recent Virginia Federal Court decision of Huang v. The Rector and Visitors of the University of Virginia, et al., which involved a False Claims Act retaliation claim, followed the same line of reasoning and reduced the jury’s award by hundreds of thousands of dollars.
After a four-day trial, a jury found in favor of Plaintiff Huang on his False Claims Act retaliation claim and awarded $159,915 in lost wages and $500,000 in compensatory damages. The only evidence introduced by Plaintiff in support of compensatory damages was his own testimony of the effects of the retaliation by Defendants. Plaintiff testified that the retaliation ended his academic career at the University, caused the loss of his research grant, limited his ability to obtain subsequent employment, caused a significant fifty pound weight loss and sleep issues, and put a strain on his marriage. But, he did not present any evidence of medical treatment, counseling, medications, physical injuries, etc.
In reducing the jury award in Huang, the Fourth Circuit considered the succession of case decisions involving emotional damage awards. The Court rejected the implication that there is a bright-line rule in the Fourth Circuit that six-figure awards are excessive in the absence of medical evidence. But, the case awards examined all had been significantly reduced by the Court. Three cases ultimately resulted in awards no greater than $15,000 and another jury award was reduced to $50,000. In another case, the Fourth Circuit found that the plaintiff had presented “considerable objective verification of her emotional distress,” but the award was still reduced from $245,000 to $150,000.
The Fourth Circuit noted that certain factors were helpful in determining what evidence of emotional distress had been offered, such as whether the plaintiff had received medical attention or psychological treatment, or had physical injuries or loss of income. In addition, the Court noted that corroborating testimony of plaintiff’s distress was a factor to consider when deciding whether to reduce an award. Given the specific description of the emotional distress offered by the Plaintiff in Huang, the Court determined he had provided a solid basis for a significant award of compensatory damages. But given the lack of objective verification evidence, the award was reduced from $500,000 to $100,000.
In assessing the potential damages in a case, the above decision provides further assistance in placing a dollar value on emotional injuries. For injuries that defy a fixed rule of quantification, this legal authority is a helpful guide for the assessment of the degree of harm allegedly suffered.
© Copyright, PCT Law Group 2013, all rights reserved.
Government Contractor Teaming Agreement Ruled Unenforceable
In the world of government contracts, companies frequently team together to put forward the most persuasive bid in response to a Request for Proposal (“RFP”). Such teaming arrangements often result in a teaming agreement between government contractors. A teaming agreement typically sets forth the relationship of the companies, the purposes for which they are teaming together, the rights of the companies and general terms, as well as a provision which sets forth that for a specific project a second document (i.e., a subcontract or work order) will be executed by the parties. Well, what happens if the prime contractor is awarded the contract, but ultimately refuses to sign a subcontract with its teaming partner, the sub? Can the sub successfully sue the prime contractor by relying on the teaming agreement?
In the case of Cyberlock Consulting, Inc. v. Information Experts, Inc. (2013), the United States District Court for the Eastern District of Virginia said “No” to Plaintiff subcontractor’s breach of contract claim and held that the Teaming Agreement in that case was an agreement to agree and thus unenforceable under Virginia law. Cyberlock Consulting, Inc. (“Cyberlock” or “Plaintiff”) entered into two Teaming Agreements with Information Experts, Inc. (“IE” or “Defendant”) for the purpose of assisting IE with work it hoped to get in response to RFPs from the U.S. Office of Personnel Management (“OPM”). The first Teaming Agreement had attached to it a Statement of Work setting forth in detail the work that Cyberlock would perform for IE, the period of performance, place of performance, and project management requirements for the work. The first Teaming Agreement also had attached to it as an exhibit the actual subcontract that the parties agreed they would enter into upon award of the prime contract to IE. IE was in fact awarded the prime contract by OPM and obligations under the first Teaming Agreement were satisfied.
Subsequently, OPM revealed that it would seek bids for a new project and the parties negotiated and entered into a second Teaming Agreement. While the second Teaming Agreement set forth general provisions of the parties’ responsibilities if IE was awarded the prime contract, and even included a Scope of Work document as an exhibit which stated that Cyberlock would perform 49% of the work awarded to IE under a prime contract, [according to the Court] the second Agreement did not specifically set out in detail what work Cyberlock would perform. In addition, unlike the first Teaming Agreement, there was no subcontract attached to the second Teaming Agreement that the parties agreed to sign in the event that IE was awarded the prime contract. As it turns out, IE was awarded the second prime contract. However, after a month of negotiations and several drafts of a proposed subcontract exchanged between the parties, IE terminated the negotiations. Cyberlock sued to enforce the second Teaming Agreement and claimed that it was entitled to 49% of the work awarded to IE in the prime contract.
The Court disagreed, and stated that although there was language in the second Teaming Agreement which indicated the parties’ intent to enter into a subcontract if IE was awarded the work by OPM, there was no specific subcontract that had been negotiated and to whose terms the parties’ had agreed. The Court held that the post-award obligations in the second Teaming Agreement were, at most, an agreement to agree to enter into a yet agreed upon (future) subcontract agreement, and therefore the second Teaming Agreement was unenforceable as a matter of law since agreement to agree contracts are unenforceable under Virginia law.
© Copyright, PCT Law Group 2013, all rights reserved.
Trademark Licensing Agreement Foreclosed Naked Licensing Defense
A former business partner’s “naked licensing” defense was foreclosed by entering into a trademark licensing agreement with the trademark owner, ruled the Eleventh Circuit (the federal court with appellate jurisdiction over the district courts in Florida, Georgia and Alabama). This defense to a trademark violation claim is made when the owner/licensor fails to properly supervise the licensee’s use of the mark, which can constitute abandonment of any rights to the trademark by the licensor.
In Nguyen v. Biondo, the plaintiffs own and operate an upscale hair and nail salon that serves specialty cocktails and wine to customers. The plaintiff created a mark with the word “tipsy” in it to advertise this unique service, and registered the trademark with the United States Patent and Trademark Office. While the application for the mark was pending, the plaintiffs agreed to sell part of the spa business to defendant. However, after acquiring the mark, the business relationship between the plaintiffs and defendant fell out and the plaintiffs sold all ownership rights in the spa to defendant.
The sales agreement was central to this case decision. As part of the sales agreement, defendant was allowed to continue operating the spa business using the name “tipsy” until a certain date. The agreement specifically provided that defendant was not acquiring the rights to the mark “tipsy.” Despite the agreement provisions, defendant continued to use “tipsy” as part of the spa’s name after the date had passed and violated his payment obligations to plaintiffs.
Plaintiffs sued defendant for, among other things, breach of contract and trademark infringement under the Lanham Act. Defendant responded by asserting that plaintiffs’ conduct preceding the sales agreement demonstrated a lack of supervision and control over the mark “tipsy,” and thus defended that the mark had been abandoned. The Eleventh Circuit refused to consider the defendant’s “naked licensing” defense because the facts underlying it occurred before the sale and licensing agreement was signed by the parties. By signing the agreement, the Court held that defendant “expressly recognized that [plaintiff] owned the mark.”
Although the “naked licensing” defense was unsuccessful in this action, companies should ensure that written agreements to license marks contain robust quality control provisions to prevent consumer confusion as to the source of the goods and services sold under the mark. Moreover, businesses must monitor quality through inspections and other activities to avoid this harsh litigation trap.
Faulty EEOC Charge Leads to Dismissal of Sex Discrimination and Retaliation Claims
An employee who alleged she was subjected to a sexually harassing work environment, gender discrimination, and retaliation under Title VII of the Civil Rights Act of 1964 (“Title VII”) filed a Charge with the Equal Employment Opportunity Commission (“EEOC”). However, almost all of the facts supporting the employee’s Charge were put in the EEOC intake questionnaire and letters to the EEOC, rather than in the EEOC Charge Form. As such, only the claims and facts set forth in the Charge were considered by the Court and they were insufficient to state the discrimination and retaliation claims raised by the employee.
In the case of Balas v. Huntington Ingalls Industries, Inc. (2013), the United States Fourth Circuit Court of Appeals affirmed a ruling from the Eastern District of Virginia that the Plaintiff, Karen Balas, could not maintain claims which were solely asserted in her EEOC questionnaire and in letters to the EEOC. The Court ruled that an administrative charge serves a vital function in the process of [potentially] remedying unlawful employment practices because it serves to alert the employer of the alleged wrongs committed; allows for an investigation into the alleged wrongful activity by the employer and the EEOC; and allows for the EEOC to seek conciliation between the parties if it finds merit to the charges. The Court reasoned that since a plaintiff’s employer is not put on notice as to the claims and facts alleged in the EEOC questionnaire or in letters privately written by a plaintiff to the EEOC, only those claims formally made part of the EEOC Charge were allowed to move forward in a lawsuit against an employer.
The Fourth Circuit concluded that the district court was correct in its refusal to consider any of Ms. Balas’ Title VII claims that were not included in her EEOC Charge; and that the Court had no jurisdiction to hear such claims because the Plaintiff had failed to administratively exhaust her remedies before filing such claims in federal court.
© Copyright, PCT Law Group 2013, all rights reserved.
Plaintiff Denied Promotion Based Upon Job Interview Survives Summary Judgment
When interviewing employees for a job promotion, it is probably best for the employer to have selection criteria that go beyond an employee’s performance during the job interview.
In the case of Hill v. Commonwealth of Virginia Department of Transportation (“VDOT”) (2013), a Virginia Federal District Court held that the employer’s stated reason for passing over the Plaintiff was not enough to grant summary judgment in favor of the employer. Plaintiff, Pamela Hill, applied for the position of assistant district administrator for construction and preliminary engineering. She, along with eight other candidates, interviewed for the position. Ultimately, a male colleague, Christopher Blevins, was chosen for the promotion. Hill alleged gender discrimination under Title VII of the Civil Rights Act of 1964 for being passed over for the position. Hill alleged that she was more qualified than Blevins and cited to her seventeen years of experience working for VDOT, prior promotions, supervisory experience, and her Bachelor’s Degree in Mining Engineering (Blevins did not have a college degree). At summary judgment, VDOT apparently did not argue that Blevins was more qualified than Hill. Instead, VDOT relied solely on its assertion that Blevins provided better answers to the interview questions than Hill.
In denying VDOT’s summary judgment motion, the Court held that Defendant’s nondiscriminatory reason for denying Hill the job promotion – a few lines of interview notes from the candidate interviews – was “entirely subjective and meagerly explained.” While the Court readily acknowledged that prior cases within the Fourth Circuit have upheld subjective employment decisions based (at least in part) upon interviews, it noted that those cases also included some objective criteria upon which the employer based its employment decision. Ultimately, the court held that VDOT’s reliance solely upon a few lines of interview notes was not enough to meet its burden at the summary judgment stage, and the case was allowed to proceed to a jury trial on the merits.
While it is fine to make a promotion based upon performance during an interview, this court decision is a reminder to employers that additional and objective promotion criteria should be utilized and documented in order to provide a clear non-discriminatory reason for the promotion decision.
© Copyright, PCT Law Group 2013, all rights reserved.
Use of Misappropriated Trade Secret Not Required For a Trade Secrets Act Violation
If an employee misappropriates their current or former employer’s proprietary information, and discloses such information to its new employer and/or any other unauthorized person(s), that is enough to establish a violation under the Virginia Uniform Trade Secrets Act (“VUTSA”) so says the Virginia Supreme Court. There is no requirement under the Act that the employee or new employer actually use the misappropriated information to compete with the former employer.
In the case of Geographic Services, Inc. v. Collelo, et al. (2012), the Virginia Supreme Court held that once an employer establishes the existence of a trade secret, all that they are then required to show is that the trade secret was misappropriated as that term is defined under the Trade Secrets Act. The entity from which the trade secret was misappropriated does not have to show that defendants used the trade secret in order to establish a claim under the VUTSA and recover damages. Disclosure of the trade secret is sufficient where it can be shown that the new employer and/or person to whom the trade secret was disclosed knew, or had reason to know, that the trade secret was acquired by improper means. In such cases, where the plaintiff cannot readily prove measurable damages, then the VUTSA provides that the court can impose a reasonable royalty upon the wrongdoers for the unauthorized disclosure of the trade secret.
This decision by Virginia’s highest court provides a cautionary note for Virginia employers: if you know, or should have known, that an employee has obtained proprietary information from its prior employer without its knowledge, you could be on the hook for damages if the employee discloses the information to your company – even if your company never uses the information. The disclosure, in and of itself, will be enough to expose companies to monetary damages. Conversely, companies in which an employee has taken proprietary information can seek legal redress and possibly obtain damages even if the employee and its new company did not use the information.
© Copyright, PCT Law Group 2013, all rights reserved.
Virginia State Court: Contractor Can Pursue Assets of Subcontractor's Owner
After a less-than-satisfactory boiler improvement job done by a subcontractor, a Henrico County Circuit Court judge allowed the prime contractor to pierce the corporate veil and reach the personal assets of the subcontractor’s owner for damages related to this job. In this case, the Court found evidence that the sole shareholder of the subcontractor failed to uphold corporate formalities such as annual meetings and the maintenance of separate financial books for the company. Moreover, the subcontractor arranged for the corporation to enter into a contract while grossly undercapitalized. The finding resulted in a judgment worth $137,454 against the shareholder personally.
In Virginia, courts regard veil-piercing as an extraordinary remedy. Generally, each corporation is a separate legal entity with its own debts/liabilities and assets. However, under Virginia law, a court may pierce the corporate veil to find that an individual owner is the alter ego of a corporation where it finds (1) a unity of interest and ownership between the individual and the corporation, and (2) that the individual used the corporation to evade a personal obligation, to perpetrate fraud or a crime, to commit an injustice, or to gain an unfair advantage.
When deciding whether to pierce the corporate veil, courts consider a variety of factors, including the intermingling of assets of the corporation and of the shareholder; the absence or inaccuracy of company records; and significant undercapitalization of the business entity. Virginia businesses must be cognizant of such corporate formalities and protocols in order to protect the personal assets of owners from potential liability.
Fairfax County Circuit Court Awards Damages To IT Government Contractor In Non-Compete Case Against Subcontractor
A Fairfax County Circuit Court judge awarded a Virginia information technology government contractor $172,395 in damages in a non-compete case against a former subcontractor. The court determined that the defendant subcontractor breached the covenant not-to-compete provision in its consulting agreement with the plaintiff government contractor.
A Virginia court will enforce a non-compete clause between an employer and an employee if it is: sufficiently narrowly drawn to protect the employer’s legitimate business interest; not unduly burdensome on the employee’s ability to earn a living; and, not against public policy. As restrictive covenants are generally disfavored in Virginia (as they restrain free trade), the employer bears the burden of proof and any ambiguities in the contract are construed in favor of the employee.
In this case, the court concluded that the covenant not-to-compete at issue was enforceable because it only prevented the subcontractor from working for two companies; it proscribed competition for only a year; and, it was specific as to the type of work that was prohibited under the agreement between the parties.
The damages awarded by the court to the plaintiff government contractor were based on the lost profits that the non-compete clause was supposed to prevent. As the court noted, “[a]warding damages on the breach of the agreement protects plaintiff’s legitimate business interest by compensating it for the breach.”
Preferred Systems Solutions, Inc. v. GP Consulting LLC, Circuit Court for Fairfax County, Virginia (July 28, 2011)
Eastern District of Virginia Court Permanently Enjoins Verizon's VOD Service
An Eastern District of Virginia Court has permanently enjoined Verizon from infringing upon patents of a California-based Company, ActiveVideo Networks, Inc. (“ActiveVideo”), including two patents which will have a direct impact upon Verizon’s ability to offer its popular Video on Demand (“VOD”) services. In the case, ActiveVideo Networks, Inc. v. Verizon Communications, Inc., et al., ActiveVideo sued Verizon for allegedly infringing upon several of its patents. After a three-week jury trial, the jury found in favor of ActiveVideo and awarded it $115,000,000 in damages for Verizon’s infringement. ActiveVideo then sought a permanent injunction from the Court enjoining Verizon from continuing to infringe upon the patents.
In analyzing the injunction standard under the Patent Act, Judge Raymond A. Jackson of the Eastern District of Virginia relied heavily upon the four-part test set forth by the United States Supreme Court in the case of ebay, Inc. v. MercExchange, L.L.C. The District Court found in favor of ActiveVideo regarding all four prongs finding that: 1) ActiveVideo had been, and would continue to be, irreparably harmed by Verizon’s unauthorized use of its technology; 2) ActiveVideo did not have an adequate monetary remedy at law because the continuing harm associated with loss of market share and brand recognition of the VOD service were difficult to quantify; 3) the balance of hardships favored ActiveVideo because, as a small company, it relied heavily upon the patents infringed upon by Verizon, while Verizon offered numerous services and would be less affected by having to cease use and/or find alternatives to offering the VOD service; and 4) public interests and public policy were served by protecting patent rights. Regarding this last prong, the Court specifically noted that, “[t]hough Verizon does add other components to be able to offer the completed product, Verizon’s FiOS system, and more specifically the VOD aspect of the FiOS system, could not function without the use of ActiveVideo’s technology.” Mem. Op. at 17.
Nevertheless, have no fear Verizon VOD users. The Court granted Verizon a six-month “sunset” window of time to come up with a non-infringing alternative to its current VOD system, and Verizon claims it has already been diligently working to come up with an alternative system. Therefore, before the time is up, it is likely Verizon will have embarked upon an alternative method to provide the popular VOD service to its customers – thus, enabling it to keep sending out those monthly Verizon bills to its subscribers at a brisk and healthy pace.
© Copyright, PCT Law Group 2011. All rights reserved.
Employee Allowed to go Forward with Sexual Harassment & Retaliation Claims
The Fourth Circuit Court of Appeals allowed a former city employee’s sexual harassment and retaliation claims to proceed to trial by reversing a lower court ruling which granted summary judgment in favor of the employer. Plaintiff Katrina Okoli, formerly an executive assistant for John P. Stewart, the director of Baltimore’s Commission on Aging and Retirement, filed a lawsuit alleging sexual harassment hostile work environment, quid pro quo sexual harassment, and retaliation. In the case of Okoli v. City of Baltimore, et al., Plaintiff Okoli alleged that over a four month span, Defendant Stewart repeatedly sexually propositioned her; told her of his alleged sexual exploits; asked her about her underwear; fondled her leg underneath a table on several occasions; and forcibly tried to kiss her when they were alone in a conference room. Okoli alleged that she rejected such advances by Stewart and also twice complained about the harassment to officials within the City government, as well as wrote a letter to Baltimore’s then-mayor Martin O’Malley concerning the harassment. Okoli was fired by Stewart just hours after her letter was received by the mayor’s office.
For its part, the City contended (and apparently the lower court agreed) that Stewart’s conduct was sporadic and infrequent and did not rise to the level of a hostile work environment. Further, the City argued that Okoli’s work had deficiencies, and that she was going to be fired even before she wrote the letter complaining of Stewart’s behavior. Additionally, the City argued, Okoli’s letter was non-specific and did not state that she was being “sexually” harassed by Stewart, only “harassed.” Therefore, they argued, Okoli did not engage in protected activity under Title VII to warrant a retaliation claim against the City.
The Appellate Court disagreed and held that the statements attributed to Stewart were both severe and pervasive. In addition, the Court held that a plaintiff need not mention the “magic words” of “sex” or “sexual” to effectively advance a sexual harassment complaint. Citing decisions from other circuit courts, the Court held that the complainant only need put the employer on notice that unlawful behavior is afoot. Okoli’s use of the words “unethical,” “degrading and dehumanizing” in her letter complaining about Stewart’s behavior were enough to raise a sexual harassment complaint. Finally, the Court determined that the district court erred in concluding that simply because Stewart had a document on his computer that pre-dated Okoli’s letter, such document was a termination letter. Stewart modified the computer document three times before delivering it to Okoli as a termination letter just hours after her sexual harassment complaint reached the mayor’s office. Under those facts, the Court concluded that there was sufficient evidence to infer that Stewart did not intend to fire Okoli prior to receiving word that she complained about his behavior to the mayor and his staff.
The Fourth Circuit Court of Appeals hears appeals involving Virginia employment cases.
© Copyright, PCT Law Group 2011. All rights reserved.
U.S. District Court (Alexandria): No Personal Jurisdiction Over Defendant In Website Defamation Case
The U.S. District Court in Alexandria, Virginia (often referred to as the "rocket docket") recently held that a Canadian businessman who does business in Loudoun County, Virginia cannot sue an out-of-state resident who purportedly defamed the businessman on her website. The court concluded that it could not exercise personal jurisdiction over the defendant because there was no evidence that the defendant intended to target a Virginia audience with its website.
Under Virginia law, in order for a court to exercise personal jurisdiction over a defendant, a plaintiff must demonstrate that its lawsuit arises from activities that occurred in Virginia (“specific jurisdiction”). Alternatively, a plaintiff can establish a basis for personal jurisdiction over a defendant by showing that the defendant has such “continuous and systematic contacts” with Virginia that the defendant, for all intents and purposes, is domiciled in Virginia (“general jurisdiction”).
In this action, as the website did not target Virginia and the plaintiff could not put forth any evidence to show that the out-of-state defendant had a “continuous and systematic” presence in Virginia, the court held that it could not subject the defendant to jurisdiction in a Virginia court.
Knight v. Grayson and John Doe # 1, United States District Court for the Eastern District of Virginia (Alexandria Division)
Eastern District of Virginia Court Allows FMLA Suit Against Individual County Official
Individual May Be Deemed an "Employer" Under the FMLA
Plaintiff Patricia Weth, formerly a deputy treasurer for litigation in the Arlington County Treasurer’s Office, took leave under the Family and Medical Leave Act (“FMLA”) for several weeks during December of 2009 until mid-February of 2010 to have medically necessary surgery performed. On the same day that she returned to work from her medical leave, Weth was told by her boss, Arlington County Treasurer Francis O’Leary, that he wanted her to find a new job and that her main focus should be finding a new job. O’Leary promptly stripped Weth of almost all of her job duties, and told her she was no longer to perform other job duties with the exception of one project and the duty of finding a new job. Predictably, under such facts, Weth filed claims of FMLA interference for the County’s failure to place her in the same or similar position after her FMLA leave as she had prior to the leave; and a claim of FMLA retaliation for her demotion and discharge after returning from FMLA leave. However, Weth’s lawsuit ran into a stumbling block concerning the appropriate defendant(s) to sue.
In the case of Weth v. Francis X. O’Leary, Plaintiff initially filed suit against Arlington County, the County Treasurer’s Office, and Defendant O’Leary. However, since County Treasurers such as O’Leary are deemed independent constitutional officers under the Virginia Constitution, the Court dismissed the case against the County and the Treasurer’s office as they were improper Defendants. Weth then filed an Amended Complaint against O’Leary in his official and individual capacity. On summary judgment, after dismissing the case against O’Leary in his official capacity based upon sovereign immunity, one of the main issues revolved around whether O’Leary, as a County official, could be sued under the FMLA in his individual capacity as an “employer”. Acknowledging that the issue remains an open question in the Fourth Circuit, and that there is a split on the issue within the federal courts, the Court looked to the text of the FMLA and the holding of a majority of the district courts that have ruled on the issue. In particular, the Court looked to the Fifth and Eight Circuits, which (relying upon the text of the FMLA) have held that public agency officials, including state officials, can be sued in their individual capacities if they act directly or indirectly on behalf of the employer. A prominent example of such authority being the hiring and firing of employees.
In this case, since O’Leary clearly had the authority to hire and fire employees such as Plaintiff Weth, the Court held that he could be sued in his individual capacity under the FMLA. The Court concluded that to rule otherwise would run contrary to the very text of the FMLA, which, in addition to including those with such authority as O’Leary in the definition of an employer, also states that “public agencies” are included within the definition of employer. Therefore, the Court ruled that Plaintiff Weth will be allowed to pursue her claims against Defendant O’Leary in his individual capacity at trial.
© Copyright, PCT Law Group 2011. All rights reserved.
Virginia Federal Jury Rules on Virginia Tech Equal Pay Case
A Virginia Federal Court jury recently determined that Virginia Tech violated the Equal Pay Act, and awarded back pay to two women employees of its fundraising office. The Equal Pay Act is a federal law amending the Fair Labor Standards Act, which prohibits employers from paying unequal wages to women and men for doing the same or substantially similar work.
To establish a case under the Equal Pay Act, an employee must establish that:
- different wages are paid to employees of the opposite sex;
- the employees perform substantially equal work on jobs requiring equal skill, effort and responsibility; and
- the jobs are performed under similar working conditions.
However, an employee who proves all the above elements may still not prevail. A business may avoid liability if it establishes that such payment was made pursuant to a seniority system, a merit system, a system which measures earnings by quantity or quality of production, or a differential based on any other factor other than gender.
In the Virginia Tech cases, the two women claimed their starting salaries were lower than the men who did the same work. In its defense, Virginia Tech countered that the men had more experience when hired.
Both sides presented extensive statistical evidence. According to the plaintiff’s economist, men’s salaries involved with Virginia Tech’s fundraising were an average of 15% higher. Virginia Tech’s expert analyzed the experience and duties of the employees, and determined there was only an 8% difference. Tech's expert concluded that this difference could be linked to gender, but opined that there was a chance it occurred randomly since the disparity was not statistically significant.
Notably, one of the women testified that when she inquired about the pay differential between her and her male predecessor, the senior regional director of major gifts replied that her predecessor had a family to support. In addition, the Judge identified other statements that tend to show Virginia Tech's animus toward the women when he previously denied Virginia Tech's motion for summary judgment.
How does your company prevent potential liability under the Equal Pay Act? Businesses should evaluate its pay structure, including policies regarding seniority systems, merit systems and incentive systems in light of the prohibition of gender pay disparity. An effective way to prevent managers and supervisors from making compensation decisions based on a protected category under the discrimination laws is to establish and implement a comprehensive job evaluation system. As the lawyers for the women argued during the trial in this matter - if Virginia Tech "had good policies, we wouldn't be here."
$3 Million Personal Injury Claim Against Virginia Business Dismissed
We have all been there. Walking through the aisle of a store and some store personnel who was stocking a shelf has left a ladder or some supplies right in the middle of the aisle, obstructing the path. Well, the Plaintiff in this case did what most of us would do. She attempted to walk around the ladder, but when she did -- bam! – she hit her head on a metal shelf that was on the other side of ladder, and she (sadly) suffered significant, and likely permanent, brain injury.
In this diversity jurisdiction personal injury case, Zankow v. Sears Holding Corp., et al., Plaintiff claimed that Sears was negligent because the placement of the ladder combined with the shelves in the narrow aisle created an unreasonably dangerous condition that caused her serious and permanent injuries. The shelves were 1 to 1.5 inches thick and were connected to the back of a shelving unit with no side walls. While trying to get around the ladder, Plaintiff apparently did not notice the shelves as she was focused on the ladder – the original obstruction.
For its part, Defendant claimed that it should not be held liable as the ladder and the shelves were in plain sight; and, in any event, because Plaintiff failed to use ordinary and reasonable care in walking around the ladder, she was contributorily negligent and barred from recovery.
On summary judgment, the Court dismissed Plaintiff’s claims. The Court ruled that from the pictures submitted by the Plaintiff of the scene (which were attached to the Opinion) and the description provided, the shelf and the ladder were “open and obvious” conditions from which Plaintiff had a duty to use reasonable care to avoid. The court rejected Plaintiff’s argument that the shelf she hit her head on was protruding, because the evidence showed that no one shelf stuck out further than the others. Further, the Court did not find that the combination of the ladder and the shelves rendered either of the hazards “latent” such that Plaintiff would not have been expected to notice and avoid the open and obvious hazards. Citing Virginia Supreme Court precedent, the Court ruled that once a hazard is deemed to be open and obvious, an injured plaintiff’s claim must fail as a matter of law since she will be deemed to have failed to exercise reasonable care, and will thus be found contributorily negligent.
Fourth Circuit Court of Appeals: Employer May be Liable for Harassment by Customer
In an unpublished decision, the Fourth Circuit Court Appeals recently held that an employer may be liable for third-party harassment by a customer if the employer knew or should have known of the harassment and failed to take appropriate actions to halt it. The evidence of repeated complaints to supervisors and managers by the employee created a triable issue as to whether the employer had notice of the harassment, and thus, the Appeals Court allowed this claim to go forward to trial.
In EEOC v. Cromer Food Services, Incorporated, a route driver for a southeastern vending machine company alleged he suffered daily sexual harassment at the hands of two housekeeper employees of one of the company’s largest customers – a hospital. According to the driver, the harassment began after a co-worker left a note in the hospital cafeteria calling him gay. Following this incident, the two male hospital employees allegedly began harassing him with unwanted sexual comments.
The driver claims he complained to numerous people at CFS, including his supervisor, his direct supervisor, another supervisor, a manager of the company, and the chairman of the Board. As the harassment continued, he took more drastic measures by reporting the harassment directly to a human resources professional at the hospital and to the supervisor of the two hospital employees. But, the hospital employees were unrelenting.
In response to this lawsuit, the company asserted that it did not have actual or constructive knowledge of the harassment because the complaints by the driver were vague and insufficiently detailed for action to be taken. In addition, the company pointed out that the employee failed to report the harassment to its President in accordance with the company’s written sexual harassment protocol.
The Fourth Circuit reversed the trial court’s dismissal of the claim. In doing so, it noted that the District Court focused on only one snippet of the driver’s deposition testimony which stated that he did not provide details of the harassment to the company. The Appeals Court acknowledged that although anti-harassment law requires notice to the employer – it should not require it to be pellucid.
The Fourth Circuit also pointed out the flaws in the employer’s approach in this matter. The Court stated that harassment claims could not be avoided by utilizing a “see no evil, hear no evil” strategy, and it criticized the protocol requiring reports to be made to the President by recognizing that such requirement may likely intimate an employee. Moreover, the Court drew attention to the fact that management failed to report the harassment up the chain of command as required by company policy.
This case illustrates to employers within the Fourth Circuit (which includes Virginia, Maryland, North Carolina, West Virginia and South Carolina) that a company’s written policy for reporting harassment may not provide insulation from liability under Title VII. Virginia businesses must ensure that they have a reasonable process in place to address allegations of harassment by its employees and third parties.
Alexandria Federal Court Transfers Venue to California in Patent Infringement Suit
Plaintiff’s attempt to litigate in the Rocket Docket because it desired a "quick, efficient and consistent resolution of its claims" was recently thwarted. In an opinion from late January, the United States District Court for the Eastern District of Virginia Federal Court (commonly referred to as the “Rocket Docket”) transferred venue in a patent infringement case to California because it found the plaintiff patent holding company’s connection to this district was tenuous.
Pursuant to the patent venue statute, patent infringement lawsuits may be brought against a defendant anywhere that the company is subject to personal jurisdiction. The purpose of venue statutes is to provide a logical and efficient forum for the resolution of disputes, but the patent venue statute provides plaintiffs with a great deal flexibility in choosing where to litigate.
The case of Pragmatus AV, LLC v. Facebook, Inc., YouTube LLC, LinkedIn Corporation, and Photobucket.com Inc. involves three patents related to the storage, distribution, and playback of media files. The plaintiff company, Pragmatus, is a patent holding company that was incorporated in Virginia a week after it acquired the patent portfolio at issue. A few days after the last patent was issued by the United States Patent and Trademark Office, Pragmatus filed suit alleging the video uploading and linking technology on the defendant companies’ websites infringed on its patents.
The Alexandria Federal Court considered the convenience of the parties, and the witness convenience and access in determining to transfer venue to California. In analyzing this issue, the Court noted that the inventors of the patents and attorney who prosecuted the applications are located in California; and three of the four defendants are headquartered in California, and the other defendant has offices in Denver and San Francisco. The Court determined that these factors weighed in favor of transferring venue to California.
The Rocket Docket is an attractive forum for business litigation due to its efficiency – continuances are rare; weekly motions; relatively short discovery period; and trials within eight months from filing. However, a party must be able to prove a legitimate connection to the forum in order to maintain suit in this Court. As this case illustrates, patent holding companies raise a particular concern in this regard since their business is most often limited to enforcement of IP rights – not invention or development of the technology at issue.
US Supreme Court: Title VII's Antiretaliation Provision Covers Third Parties
In a unanimous recent opinion, the United States Supreme Court broadly construed the term “person aggrieved” in Title VII's antiretaliation provision to include a co-worker who is a relative or close associate of a targeted employee.
In the case of Thompson v. North American Stainless, LP, Plaintiff Thompson worked as a metallurgic engineer for North American Stainless (“NAS”), the owner and operator of a stainless steel manufacturing facility in Kentucky. Thompson began dating a coworker, and thereafter they became engaged to be married. According to the lawsuit, the couple’s engagement was common knowledge at the facility. Three weeks after the Equal Employment Opportunity Commission notified NAS that Thompson’s fiancée had filed a discrimination charge, NAS fired Thompson. Thompson pursued a retaliation claim against NAS for his discharge.
NAS moved for dismissal of the case before trial, contending that Thompson’s claim of third-party retaliation under Title VII was insufficient as a matter of law. The trial court granted NAS’s motion for summary judgment, which decision was affirmed by the Sixth Circuit Court of Appeals. In denying Thompson a trial, the Sixth Circuit joined several other appeals courts in holding that the authorized class of claimants under Title VII’s antiretaliation provision is limited to persons who have personally engaged in protected activity.
The Supreme Court disagreed, and rejected this narrow interpretation of aggrieved persons under the law. However, it declined to expand the provision into the outer boundaries of the standing standard set forth in Article III of the Constitution – which would allow anyone who claimed an injury by a Title VII violation to sue. The Court noted that such expansive interpretation would allow a shareholder to sue a company for firing a valuable employee for racial discriminatory reasons if he showed a decrease in his stock value as a consequence.
In settling on the middle ground, the Supreme Court stated that “Title VII’s antiretaliation provision must be construed to cover a broad range of employer conduct.” The Court’s concern was to prohibit employer action that would dissuade a reasonable employee from asserting or supporting a discrimination claim. Thompson fell within the zone of interests protected by the law.
Employment Pointer: This decision clears up the ambiguity over whether third parties have standing to sue for retaliation under Title VII. Although, the Court noted that there is no bright line test for who is protected. Given the broader scope of persons to be protected under this law, companies must be aware of its management’s underlying reasons for adverse employment actions and ensure that indirect revenge against an employee for filing a discrimination charge has not been a contributing factor.
Virginia Federal Court: 'Twiqbal' Standard Doesn't Apply To Affirmative Defenses
An Alexandria, Virginia federal court judge has held that the heightened pleading requirements under the so-called ‘Twiqbal’ cases do not apply to affirmative defenses.
Virginia Supreme Court Grants Appeal in Noncompete Case
The Virginia Supreme Court recently granted a writ of appeal in a noncompete case from the Fairfax County Circuit Court. In Home Paramount Pest Control Companies, Inc. v. Justin Shaffer, the issues before the Court include whether the lower court erred in finding the noncompete overly broad. In finding the noncompetition agreement unenforceable, the Fairfax Circuit Court considered the scope of the restricted activities, but did not consider the portion of the agreement in light of the narrow geographic scope of the restriction which applied only to certain limited geographic boundaries within Fairfax County.
Noncompetition agreements in Virginia are strictly construed against the employer, but a court will enforce the parties’ agreement if it is reasonable and narrowly tailored to protect the legitimate business interests of the company. In assessing the enforceability these types of restrictive covenants, Virginia courts scrutinize three aspects for reasonableness: (1) duration of the restriction; (2) geographic scope of the restriction; and (3) breadth of the restricted activities.
In Virginia, the enforceability of noncompetes is governed by common law principles (i.e., case law and precedent). Thus, the body of law on this subject is constantly evolving with each new court decision. The Virginia Supreme Court’s decision in this matter will shed further light on employer's ability to restrict post-employment activities of its workers.
As we have discussed previously, 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 drafted in accordance with Virginia court case precedent.
Business Disputes Cases Amongst Leaders on List of Largest Virginia Jury Verdicts in 2010
According to a Virginia Lawyers Weekly survey on the largest Virginia jury verdicts in 2010, verdicts in business disputes lawsuits claimed three of the top four positions.
The top Virginia jury verdict in 2010 was awarded by an Alexandria federal court jury for $26 million in the case of In Re: Outsidewall Tire Litigation. In this case, a tire-mining inventor prevailed in a lawsuit in which he alleged that a Chinese tire manufacturer and a Dubai tire distributor conspired to steal trade secrets and infringe on the inventor’s copyrights and trademarks.
In third place on the survey was the case of Humanscale Corp. v. CompX International, Inc., in which two leading companies in the field of ergonomic office products accused each other of patent infringement with respect to keyboard support systems. A Richmond federal court jury awarded the defendant $19 million in past damages and a royalty of 6% of future sales on the defendant’s counterclaims.
Coming in fourth place on the list of the top Virginia jury verdicts of 2010 was the matter of Perot Systems Government Services Inc. v. 21st Century Systems Inc. In this business case, which was tried in state court, the plaintiff alleged that two of its former employees copied confidential information when they joined the defendant company’s new government contracting division. A Fairfax County jury awarded the plaintiff $14.12 million for the defendants’ breach of fiduciary duty, breach of a non-disclosure agreement, breach of a non-solicitation agreement, tortious interference with a contract, violation of the Virginia Computer Crimes Act, violation of the Virginia Business Conspiracy Act, common law conspiracy, violation of the Virginia Uniform Trade Secrets Act, and conversion.
To participate in the Virginia Lawyers Weekly survey, the verdict must have been: for at least $1 million; returned by a jury in Virginia (not a judge); and during the calendar year 2010. In total, there were 22 Virginia court cases included on the survey, of which 16 of the verdicts were personal injury actions.
Employee Must Pay Employer's Attorney's Fees in Retaliation Suit
In a case with some odd facts, and an even stranger theory of liability, an Eastern District of Virginia Court found that an employee’s claims were “frivolous, groundless, and unreasonable,” and assessed the costs of the litigation, including the employer’s attorney’s fees, against the employee.
The case, Basinger v. Hancock, Daniel, Johnson & Nagle, P.C., involved plaintiff Judith Basinger’s claim that she was retaliated against and fired from her job as a legal secretary based upon her involvement in a sexual harassment complaint at the law firm where she worked. The defendant law firm (“Hancock”) employed an associate named Paul Walkinshaw (“Walkinshaw”). Apparently, over the course of a several months, Basinger made several advances toward Walkinshaw, including inviting him on a number of occasions to meet her after work and to go for a drink with her after normal work hours. She told him, via e-mail, that she hoped there would be a right time and place when they could “get together.” Walkinshaw, who was some twenty years younger than Basinger, complained to his supervisor and Hancock’s human resource department regarding Basinger’s behavior and her harassing e-mails. After investigation, and complaints about Basinger continuing to work in Hancock’s Fairfax office, the firm offered her a job transfer to its Richmond office. When she declined the transfer, Hancock terminated Basinger’s employment.
For some unknown reason, based upon these facts, Basinger actually filed a lawsuit against Hancock claiming she was retaliated against under Title VII of the Civil Rights Act of 1964 for opposing unlawful conduct in the workplace and for participating in the investigation of such unlawful conduct. The Court granted Hancock summary judgment as Basinger never complained to her employer that she was being sexually harassed, and her only “participation” regarding sexually harassing conduct was when she was interviewed by Hancock’s HR department for her alleged sexually harassing behavior.
Hancock also sought payment of its attorney’s fees and costs for defending the lawsuit. After reviewing the legal standard set out by the applicable caselaw, the Court found that the defendant law firm was entitled to recover its attorney’s fees and costs for defending the case because Basinger’s lawsuit “was based on a blatant misrepresentation of events, and totally lacking in evidentiary support.” Op. at 4-5. As such, the defendant was awarded $25,650 in attorney’s fees and $2,586.84 in costs.
Plaintiff Denied Relief After Court Applies New Preliminary Injunction Standard
An associate professor at the University of Virginia College at Wise was informed that his employment as a faculty member was going to be terminated. Professor James Holbrook had served as an assistant professor for three years at the time he was told his employment was being terminated. Feeling that his imminent job termination was unjust, Professor Holbrook filed suit against the College alleging statutory and constitutional violations and seeking a preliminary injunction barring his termination during the pendency of the lawsuit.Holbrook v. the University of Virginia.
However, Chief Judge James P. Jones of the Western District of Virginia denied the injunction citing the relatively new injunction standard set forth by the Supreme Court in 2008. The Court cited Winter v. Natural Resources Defense Council, Inc., and stated that the Supreme Court had “narrowed the grounds” upon which a party may obtain a preliminary injunction. In Winter, the Supreme Court held that in order to obtain a preliminary injunction, a plaintiff had to establish,
- that he is likely to succeed on the merits,
- that he is likely to suffer irreparable harm in the absence of preliminary relief,
- that the balance of equities tips in his favor, and
- that an injunction is in the public interest.
Chief Judge Jones noted that in light of this new standard, the Fourth Circuit in The Real Truth About Obama, Inc. v. FEC, had essentially “repudiated” the traditional balancing of the hardships test found in Blackwelder Furniture Co. of Statesville v. Seilig Manufacturing Co., 550 F.2d 189 (4th Cir. 1977), and required courts in this Circuit to now apply all four prongs of the preliminary injunction standard as set forth in Winter. Finding that the new standard was more rigid and lacked the flexibility of the prior Blackwelder standard, the Court held that it could only find in favor of the plaintiff if he clearly met all four prongs of the Winter test. As such, the Court held that Professor Holbrook did not make an adequate showing of irreparable harm since he could obtain monetary damages as a form of relief during the underlying case without the necessity of imposing an injunction at the outset of the litigation. Therefore, Professor Holbrook’s Motion for a Preliminary Injunction was denied.
© Copyright, PCT Law Group 2010, all rights reserved.
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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