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.

Written by Angela France
 

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.

Written by Angela France

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. 

Written by Angela France

On Friday, the Virginia Supreme Court adopted new rules of appellate procedure for both the Court and theVirginia 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.

Written by Angela France

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.   

Written by Angela France

Governor McDonnell announced today that he will propose reinstating a tax deduction for Virginia employers in the biennial budget in hopes of spurring economic development. Since 2004, Virginia law has allowed companies to claim the federal Internal Revenue Code Section 199 Domestic Production Activity Deduction, which encouraged U.S. manufacturing. The tax break initially allowed a 3 percent deduction, and was increased to 6 percent then 9 percent. However, this deduction is set to gradually phase out by 2014. Governor McDonnell asserts that the elimination of the deduction would result in an estimated $30 million tax increase for Virginia employers, and is proposing an amendment to prevent this result.

McDonnell said in a statement that “[t]his is a pro-job creation amendment that will help keep employers in the commonwealth, encourage businesses to locate in Virginia and give us a further advantage over other states.” Major employer, Northrop Grumman, which is weighing whether to locate its headquarters in Virginia or Maryland, would qualify for the tax break.

The amendment will have no fiscal impact in FY 2011, according to the Governor, and an estimated $10 million in FY 2012. The Governor has until midnight Tuesday to send any further amendments to the budget to the legislature, which will be considered on April 21. 

Written by Angela France

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 Blackwelderstandard 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.

Written by Angela France

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.

Written by Angela France

A proposed rule introduced by the Equal Employment Opportunity Commission (EEOC) on February 18, 2010, if adopted, will provide guidance and meaning to the “reasonable factors other than age” defense in the federal Age Discrimination in Employment Act (ADEA).

The ADEA, unlike Title VII, states that it is not unlawful for an employer to take an action “otherwise prohibited” by the statute against an employee where “the differentiation is based on reasonable factors other than age” (RFOA). The Supreme Court interpreted this provision in Smith v. City of Jacksonand Meacham v. Knolls Atomic Power Laboratory, which involved disparate impact discrimination claims.

The Supreme Court in Smith held that employees bringing claims under the ADEA can rely on the disparate impact theory, and thus, proof of age-motivation is not required. The Smith decision also stated that employers can defend such a case based on a reasonable factor other than age; however, the Court did not provide which party had the burden of persuasion on this issue.  Subsequently, inMeacham, the Supreme Court held that the employer - not the employee - has the burden of proving the RFOA defense.

The EEOC’s proposed rule seeks to provide guidance on what constitutes “reasonable factors other than age” consistent with the decisions in Smith and Meacham. It’s non-exhaustive list of relevant factors to be considered in determining whether an employment practice is reasonable are as follows:

--  Whether the employment practice and the manner of its implementation are common business practices; 
--  The extent to which the factor is related to the employer’s stated business goal; 
--  The extent to which the employer took steps to define the factor accurately and to apply the factor fairly and accurately (e.g., training, guidance, instruction of managers);
--  The extent to which the employer took steps to assess the adverse impact of its employment practice on older workers; 
--  The severity of the harm to individuals within the protected age group, in terms of both the degree of injury and the numbers of persons adversely affected, and the extent to which the employer took preventive or corrective steps to minimize the severity of the harm, in light of the burden of undertaking such steps; and 
--  Whether other options were available and the reasons the employer selected the option it did.

It is important to note that this standard is lower than Title VII’s business-necessity test but higher than the Equal Pay Act’s “any other factor” test.

The EEOC is accepting public comment on the proposed rule until April 19, 2010.

Written by Angela France

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.

Written by Angela France