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)

Written by H. Scott Johnson, Jr.

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.

In a recent failure to pay overtime case under the Fair Labor Standards Act, Senior U.S. District Court Judge James C. Cacheris held that the defendant employer’s general, boilerplate affirmative defenses were sufficient under the federal rules as they provided the plaintiff employee with fair notice of the nature of the defense

Judge Cacheris’ ruling marks a striking departure from the rulings of a majority of the other federal district courts in the Fourth Circuit (comprised of federal courts in Maryland, North Carolina, South Carolina, Virginia, and West Virginia), which had each previously held that the ‘Twiqbal’ standard should apply equally to a plaintiff’s complaint and a defendant’s defenses. (Under the ‘Twiqbal’ standard, which was borne out of the cases of Bell Atlantic v. Twombly and Ashcroft v. Iqbal, the U.S. Supreme Court held that a plaintiff’s complaint must be based on more than just “threadbare recitals” to survive a motion to dismiss; instead, a plaintiff’s complaint must contain sufficient facts to give rise to a plausible entitlement to relief.)

While acknowledging that policy considerations such as “fairness, common sense, and litigation efficiency” are “compelling,” Judge Cacheris opined that, unlike the federal rules which govern the pleading requirements for a plaintiff’s claims for relief, the federal rules which govern a defendant’s affirmative defenses merely require a responding party to “state in short and plain terms its defenses to each claim asserted against it.”

Until the Fourth Circuit chimes in on this issue, plaintiffs and defendants alike will continue to litigate whether Twiqbal applies to affirmative defenses. Until then, defendants (especially those appearing in a Virginia federal court) can use Judge Cacheris’ opinion as authority in support of their position.

Written by H. Scott Johnson, Jr.

Employers should take notice that the Internal Revenue Service (IRS) has announced a standard business mileage reimbursement rate of 51 cents per mile for 2011. The business mileage reimbursement rate is used by many employers for computing the appropriate employee reimbursement amount in instances where an employee uses a personal vehicle for a work-related purpose. The new mileage reimbursement rate, which takes effect on January 1, 2011, represents a slight increase from the rate set by the IRS in 2010 of 50 cents per business mile driven.

Employers with an established personnel policy should update their employee handbooks by year-end to reflect this change. Those employers who do not have an established policy for reimbursing employees for business miles traveled in personal vehicles should consider instituting a mileage reimbursement policy for 2010 and adopting a good mileage log reimbursement form for employees.

Employers should consult the IRS website for more information on the mileage reimbursement guidelines.

Written by H. Scott Johnson, Jr.

Although employers with less than 15 employees are generally not subject to federal discrimination statutes such as Title VII and the Americans with Disabilities Act, Virginia small businesses may still find themselves subject to Virginia’s discrimination laws even if they have fewer than 15 employees.

The Virginia Human Rights Act, which applies to Virginia businesses with more than 5 but less than 15 employees, makes it unlawful for a Virginia employer to discharge an employee on the “basis of race, color, religion, national origin, sex, pregnancy, childbirth or related medical conditions,” or age (if the employee is over 40). An employee may file a lawsuit against an employer for an alleged violation of the Virginia Human Rights Act in either a general district court or a circuit court, provided the employee files the action within 300 days from the date of termination. (If the employee files a complaint with a human rights agency or commission within 300 days of the termination date, then the employee may bring a court action within 90 days from the date the commission or agency has rendered a final ruling on the complaint.) Employers who are found to have violated the Virginia Human Rights Act may be liable for the employee’s attorneys’ fees and up to 12 months of back pay with interest.

Under the Virginians with Disabilities Act, it is unlawful for employers of all sizes to “discriminate in employment or promotion practices against an otherwise qualified person with a disability solely because of such disability.” To comply with the Virginians with Disabilities Act, an employer must make a “reasonable accommodation to the known physical and mental impairments of an otherwise qualified person with a disability, if necessary to assist such person in performing a particular job, unless the employer can demonstrate that the accommodation would impose an undue burden on the employer.” Under Virginia disability law, whether an accommodation would impose an undue burden on an employer depends on a variety of factors such as potential hardship on the employer, the size of the facility where the employment occurs, the nature and cost of the accommodation, and safety and health considerations. (For Virginia employers with less than 50 employees, any accommodation that would exceed $500 is presumed to impose an undue burden.) Employers who are found to have violated the Virginians with Disabilities Act may be subject to an injunction (to enjoin the violation) or ordered to pay the employee compensatory damages and attorneys’ fees.

Virginia business owners should visit the Virginia Human Rights Council’s website for more information regarding the Virginia Human Rights Act and the Virginia Department of Rehabilitative Services' website for additional information pertaining to the Virginians with Disabilities Act.

Written by H. Scott Johnson, Jr.

As previously noted on the Virginia Business Law Update, theVirginia State Corporation Commission (SCC) is in the process of rolling out a new suite of electronic filing capabilities on its SCC eFile website. The latest enhancement is a welcome addition to all Virginia corporations -- the ability to file corporate annual reports and pay corporate annual registration fees online.

Over the coming months, the SCC plans to further expand the services available on its SCC eFile website. Specifically, Virginia corporations and limited liability companies will be able to submit organizational documents electronically and pay associated fees on the SCC eFile website. Additionally, Virginia businesses will be able to file Uniform Commercial Code (UCC) documents and pay UCC filing fees online.

Written by H. Scott Johnson, Jr.

In EEOC v. Fairbrook Medical Clinic, a Title VII sexual harassment case in which the Equal Employment Opportunity Commission (EEOC) brought a lawsuit on behalf of a woman doctor against her former employer, the Fourth Circuit Court of Appeals (4th Circuit) reversed the district court’s grant of summary judgment and remanded the case to the district court for trial. The 4th Circuit determined that the defendant employer’s alleged conduct, if proven true, was severe enough to alter the conditions of the plaintiff employee’s employment and create an abusive work environment.

According to the summary judgment record, the plaintiff employee was subjected to nearly four years of harassment by the owner of a family medical center. Throughout the duration of her tenure with the defendant employer, the owner of the medical center (who was also the plaintiff employee’s immediate supervisor) created a hostile work environment by: routinely making vulgar and sexually graphic comments to the plaintiff employee; repeatedly showing the plaintiff employee an x-ray of his torso, which included an image of what he called “Mr. Happy;” openly discussing with the plaintiff employee his sex life and bragging that his wife was “nice” and “tight” because she had a c-section instead of vaginal delivery; and, telling the plaintiff employee’s patients, in her absence, that they could follow up with the plaintiff “when she returns from screwing.” Additionally, during the plaintiff employee’s pregnancy and continuing after her return from maternity leave, the defendant employer commented on the size of the plaintiff employee’s breasts and offered to help her pump them. After assisting the plaintiff employee with a contract dispute with a vendor, the defendant employer told the plaintiff employee that she owed him and asked, “Are you going to let me help you pump [your breasts]?”

Although the plaintiff employee frequently told the defendant employer that his comments were inappropriate as well as discussed the harassment with the office manager and personnel manager, no investigation or corrective action was taken. Accordingly, the plaintiff employee resigned from the defendant employer and took a new position.

Shortly after resigning, the plaintiff employee filed a charge with the EEOC and the EEOC filed a lawsuit alleging that the plaintiff employee was subjected to a hostile work environment because of her sex in violation of Title VII of the Civil Rights Act of 1964. The district court granted the defendant employer’s motion for summary judgment. On appeal, the 4th Circuit reversed the district court finding that the EEOC had raised a triable issue of fact with respect to each element of its hostile work environment claim.

In reversing the district court, the 4th Circuit focused on whether the offending conduct was sufficiently severe or pervasive to alter the conditions of the plaintiff’s employment and create an abusive work environment. (To be actionable under Title VII, the sexual harassment must be objectively hostile or abusive, and the victim must subjectively perceive it as such. The severity must be judged from the perspective of a reasonable person in the plaintiff’s position and a court must consider all circumstances including the frequency of the conduct, its severity, and whether it unreasonably interferes with an employee’s work performance.)

In considering the defendant employer’s argument that the offensive comments were not made because of the plaintiff’s sex and, instead, were made to men and women alike, the 4th Circuit held that the defendant employer’s use of “sex-specific and derogatory terms” indicated that he intended to demean women and that a reasonable jury could infer that the comments “would not have been made to someone of the same sex.”

The Court also rejected the defendant employer’s argument that, the conduct at issue, when viewed in its social context, was not severe but constituted simple teasing, off-color jokes, and off-hand comments. Based on the record before it, the Court concluded that the conduct was more than general crudity and that the allegations, if proven, show that the defendant employer targeted the plaintiff with highly personalized comments designed to demean and humiliate her. Also, the Court noted that the severity of the defendant employer’s conduct was exacerbated by the fact that he was not only the plaintiff’s immediate supervisor, but also the sole owner of the medical center. As such, he had significant authority over the plaintiff on a daily basis and the ability to influence her career.

Furthermore, the 4th Circuit found unpersuasive the defendant employer’s argument that the conduct was neither frequent nor severe because it did not cause the plaintiff employee to miss work due to stress or otherwise adversely affect her job performance. With respect to the frequency, the Court held that a reasonable person could conclude that comments once or twice a week was a persistent feature of the plaintiff employee’s work environment. Regarding the severity, the Court held that the critical inquiry is not whether the plaintiff employee’s work was impaired, but whether her working conditions were discriminatorily altered. Given that the defendant employer “bombard[ed] her with graphic and highly personalized comments about intimate features of his and her anatomy,” a jury could find that the plaintiff employee’s working conditions were in fact discriminatorily altered. (The Court also noted that the plaintiff employee withstanding the harassment until a new job became available does not, “without more,” defeat the plaintiff employee’s Title VII claim.)

This case, as if further proof is needed, illustrates the advantage that employers have on sexual harassment and discrimination claims in the 4th Circuit (which includes Virginia, Maryland, and North Carolina). Although the 4th Circuit remanded the case to the district court for trial, it is important to note that the district court had initially ruled in the employer’s favor on summary judgment. While Virginia employers should take some comfort with how courts construe Title VII cases, they should also recognize that there are circumstances in which the conduct is so egregious that a court may side with an employee.As such, Virginia businesses must ensure that they have a process in place to address allegations of harassment or discrimination seriously and expeditiously. 

Written by H. Scott Johnson, Jr.

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.

Written by H. Scott Johnson, Jr.

Small businesses with Federal contracts have to be especially mindful of ensuring compliance with equal employment opportunity (EEO) requirements. The failure to comply with the EEO guidelines set forth in Executive Order 11246 (which prohibits employment discrimination by Federal contractors and subcontractors as well as federally-assisted construction contractors and subcontractors) may very well result in the cancellation of a contract, termination, suspension (in whole or in part), or the debarment of the contractor. As the Office of Federal Contract Compliance Programs (OFCCP)requires contractors to engage in their own internal EEO compliance analysis, small businesses often run afoul of satisfying their obligations under Executive Order 11246. 

To ensure compliance with the basic EEO requirements imposed by Executive Order 11246 -- and to avoid the wrath of the OFCCP – contractors should adhere to the following OFCCP guidelines:

Don’t Discriminate! Contractors must refrain from engaging in workplace employment discrimination on the basis of race, color, religion, sex, or national origin. Although most people think of intentional discriminatory acts, employment discrimination can also arise when a neutral policy or practice has an adverse impact on the members of any race, sex, or ethnic group.

Post an EEO Poster. Federal contractors must post OFCCP’s EEO poster in a location that is easily seen (e.g., a lunchroom, break room, or locker room).

Include an EEO Tag Line in Employment Advertising. Contractors should include a sentence in all solicitations and advertisements for employment stating that “all qualified applicants will receive consideration for employment without regard to race, color, religion, sex or national origin.”

Keep Records. Contractors must maintain their personnel records and employment records including job descriptions, job postings, job offers, applications and resumes, interview notes, tests and test results, written employment policies and procedures, personnel files, and time-keeping records.

Develop and Maintain an Affirmative Action Program. Contractors with 50 or more employees and a contract of $50,000 or more must develop and maintain a compliant affirmative action program (AAP).

Small businesses with Federal contracts should regularly review their EEO policies and procedures to ensure that they are compliant with Executive Order 11246. Certainly, given the potential penalties, it is better to be safe than sorry!

Written by H. Scott Johnson, Jr.

A recent decision from a Virginia Circuit Court serves as a worthwhile reminder to Virginia employers thatnot 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.

Written by H. Scott Johnson, Jr.

Entering into a corporate transaction without a careful review of the intellectual property (IP) involved can have negative consequences on your enterprise’s future IP strategy.  This is especially true when IP owners do not adequately supervise their corporate attorneys who may not appreciate or be aware of the unintended consequences of the language typically employed in merger, acquisition, joint venture, financing and other corporate transactional agreements.  A case decided a few months ago by the U.S. Court of Appeals for the Federal Circuit[1] illustrates the above concern.

The fact pattern of the case was as follows:

• Company A enters into a limited partnership with Company B
• As part of the transaction, Company A transfers tangible and intangible assets to Company B via a “Contribution Agreement”
• The Contribution Agreement defined the transferred assets as including patents, except “any and all patents and patent applications related to any pending litigations involving Company A.”
• Section 4.21 of the Contribution Agreement then stated that “there are no actions pending or threatened by or against, or involving Company A except as set forth in Schedule 4.21.”
• Five years later, Company B sought to enforce certain patents they assumed were obtained from Company A (purportedly via the Contribution Agreement) against Company C.

So, in the lawsuit, Company C used the defense that Company B did not own the patents-in-suit and thus cannot enforce them!  Thus, Company B had to prove the patents-in-suit they sought to enforce were indeed transferred by the Contribution Agreement, and were not part of the exception (i.e., the patents did not fall into the exception of “any and all patents and patent applications related to any pending litigations involving Company A”).   Seems easy, right?  Wrong!  Schedule 4.21 was never completed and there was no record of what actual litigations Company A was involved in five years earlier when the Contribution Agreement was signed!  Even if there was a record of what litigations were active five years earlier, the phrase “related to” was not defined in the Contribution Agreement!

Given these facts, the trial court was forced to dismiss the lawsuit and the appeals court affirmed that decision. Moral of the story: there are no routine IP provisions in corporate transactional documents to affect a transaction.  Care must be taken to make sure that the IP that is transferred (or licensed, exempted, etc.) is clearly identified and no unintended consequences result with respect to the involved parties’ future IP strategy.