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.
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.
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.
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.
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.
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.
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.
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.
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.
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