Fourth Circuit Substantially Reduces Jurys Emotional Damages Award

Please see, Angela France's article featured within Virginia Business Law Update.

Government Contractor Teaming Agreement Ruled Unenforceable

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.

Written By Malik K. Cutlar

Trademark Licensing Agreement Foreclosed Naked Licensing Defense

Limiting Liability vs. Litigation

Almost every modern business is organized under some sort of limited liability platform. Perhaps this is in response to what the press has dubbed a “frivolous lawsuit problem.” Nevertheless, these platforms are a great starting point for any business, especially when it comes to insulating the owners from external liabilities like suits from customers.  Significantly less press attention is focused on the fact that most business litigation is actually a result of internal conflicts, such as suits between and among owners, shareholders, directors, partners, members, and officers. A problem I often come across is that most people do not understand that, in the future, serious complications among owners and partners can arise due to merely electronically filing the bare minimum to get your limited liability status.

When I am retained by entrepreneurs to help start a business, the last topic anyone wants to discuss is circumstances that would trigger the dissolution of their newly formed organization. I usually get the same response, “we are all good friends and we will work that out.”  The fact is, entire books of case law exist that are filled with cases beginning with a phrase similar to, “they were all friends, and then…”

In Florida, whether you choose to be a Florida Corporation, a Florida Limited Liability Company, or a Limited Partnership, the respective business organization statute calls for an additional internal governance document to be drafted.  These are bylaws for Corporations, operating agreements for Limited Liability Companies, and partnership agreements for Limited Partnerships.  In my opinion, the internal governance document is the single most important document an organization may have.  It is a binding agreement between the business owners and managers, outlining internal relationships, as well as duties to the business and each other.  It explains your rights as an owner, the procedures for voting and resolving disputes, as well as, the un-mentionable: dissolution.  Most importantly, this document is, after all, an agreement and, in most cases, your agreement overrides any statutory rules that contradict it.

So that fact that all the owners of the business are currently great friends, is actually the best reason to resolve all of the issues before an event occurs that can only be resolved through litigation because there was no agreement.

As I explain to anyone that I assist with business formation, there are lots of free and cheap resources online that can aid in the legal end of starting a business.  In fact, most of the initial electronic filing, registering of a tax ID number, and a state sales tax number, can easily be done without attorney supervision or paying one of these incorporation services that we hear advertised on the radio. The internal governance documents, however, can get rather complicated.  The owners of a newly formed business can receive a great benefit from having their legal duties to each other, as well as their organization, thoroughly explained to them.  If I could recommend having an attorney for any one part of the business formation, it would be to assist in drafting the internal governance documents.

That being said, I know that not every business, or start-up, is in a position to afford an attorney and, in the business world, one will not be assigned to you.  I think that people would be surprised how many business attorneys, such as myself, would be willing to provide their assistance solely to form that initial relationship, and to help your business get to a position where you can not only afford to, but are glad to retain us to assists with all your legal needs.

Written by Vladimir DuBovis

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.

Written by Malik Cutlar

Employee Allowed to Go Forward with Sexual Harassment & Retaliation Claims

The Fourth Circuit Court of Appeals allowed a former city employee’s sexual harassment and retaliation claims to proceed to trial by reversing a lower court ruling which granted summary judgment in favor of the employer. Plaintiff Katrina Okoli, formerly an executive assistant for John P. Stewart, the director of Baltimore’s Commission on Aging and Retirement, filed a lawsuit alleging sexual harassment hostile work environment, quid pro quo sexual harassment, and retaliation. In the case of Okoli v. City of Baltimore, et al., Plaintiff Okoli alleged that over a four month span, Defendant Stewart repeatedly sexually propositioned her; told her of his alleged sexual exploits; asked her about her underwear; fondled her leg underneath a table on several occasions; and forcibly tried to kiss her when they were alone in a conference room. Okoli alleged that she rejected such advances by Stewart and also twice complained about the harassment to officials within the City government, as well as wrote a letter to Baltimore’s then-mayor Martin O’Malley concerning the harassment. Okoli was fired by Stewart just hours after her letter was received by the mayor’s office.

For its part, the City contended (and apparently the lower court agreed) that Stewart’s conduct was sporadic and infrequent and did not rise to the level of a hostile work environment. Further, the City argued that Okoli’s work had deficiencies, and that she was going to be fired even before she wrote the letter complaining of Stewart’s behavior. Additionally, the City argued, Okoli’s letter was non-specific and did not state that she was being “sexually” harassed by Stewart, only “harassed.” Therefore, they argued, Okoli did not engage in protected activity under Title VII to warrant a retaliation claim against the City.

The Appellate Court disagreed and held that the statements attributed to Stewart were both severe and pervasive. In addition, the Court held that a plaintiff need not mention the “magic words” of “sex” or “sexual” to effectively advance a sexual harassment complaint. Citing decisions from other circuit courts, the Court held that the complainant only need put the employer on notice that unlawful behavior is afoot. Okoli’s use of the words “unethical,” “degrading and dehumanizing” in her letter complaining about Stewart’s behavior were enough to raise a sexual harassment complaint. Finally, the Court determined that the district court erred in concluding that simply because Stewart had a document on his computer that pre-dated Okoli’s letter, such document was a termination letter. Stewart modified the computer document three times before delivering it to Okoli as a termination letter just hours after her sexual harassment complaint reached the mayor’s office. Under those facts, the Court concluded that there was sufficient evidence to infer that Stewart did not intend to fire Okoli prior to receiving word that she complained about his behavior to the mayor and his staff.

The Fourth Circuit Court of Appeals hears appeals involving Virginia employment cases.

Written by Malik Cutlar

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)

Written by H. Scott Johnson, Jr.

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.

Written by Angela France

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." 

By Angela France