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

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

As summer quickly approaches, businesses begin receiving an increasing number of offers for unpaid internships. As many businesses already know, there are many advantages to using an intern – unpaid internships may help fuel growth for your company and also provide an opportunity to mentor young professionals. However, unpaid interns can create legal troubles for the unwary business owner. Federal labor laws governing internships provide that the relationship has to benefit the intern more than the company. If it doesn’t, then the business must comply with the Fair Labor Standards Act (“FLSA”) by paying minimum wages and possibly overtime.

The U.S. Department of Labor’s Wage and Hour Division outlined a list of criteria to determine whether a trainee or intern is an “employee” under the FLSA, and thus, must comply with Federal wage laws.

The following criteria provide guidance in evaluating internship programs for for-profit organizations, but it is important to note that each program is unique and must be carefully examined:

• the training, even though it includes actual operation of the facilities of the employer, is similar to that which would be given in a vocational school;
• the training is for the benefit of the trainee;
• the trainees do not displace regular employees, but work under close observation;
• that the employer that provides the training derives no immediate advantage from the activities of the trainees and on occasion the employer’s operations may actually be impeded;
• the trainees are not necessarily entitled to a job at the completion of the training period; and
• the employer and the trainee understand that the trainees are not entitled to wages for the time spent in training.

If your company’s internship program does not satisfy all of the above criteria, your interns may be considered “employees” under the FLSA. Hiring an intern, which qualifies as an “employee” may cost your company thousands in unpaid wages and legal fines!

So, how do you ensure compliance? Establish a written internship program outlining the terms and structure of the relationship in a way that the intern is receiving the full benefit of the learning experience, and ensure that your managers and other employees properly implement it.

By Angela France

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.

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.

In a unanimous recent opinion, the United States Supreme Court broadly construed the term “person aggrieved” in Title VII's antiretaliation provision to include a co-worker who is a relative or close associate of a targeted employee.

In the case of Thompson v. North American Stainless, LP, Plaintiff Thompson worked as a metallurgic engineer for North American Stainless (“NAS”), the owner and operator of a stainless steel manufacturing facility in Kentucky. Thompson began dating a coworker, and thereafter they became engaged to be married. According to the lawsuit, the couple’s engagement was common knowledge at the facility. Three weeks after the Equal Employment Opportunity Commission notified NAS that Thompson’s fiancée had filed a discrimination charge, NAS fired Thompson.  Thompson pursued a retaliation claim against NAS for his discharge.

NAS moved for dismissal of the case before trial, contending that Thompson’s claim of third-party retaliation under Title VII was insufficient as a matter of law. The trial court granted NAS’s motion for summary judgment, which decision was affirmed by the Sixth Circuit Court of Appeals. In denying Thompson a trial, the Sixth Circuit joined several other appeals courts in holding that the authorized class of claimants under Title VII’s antiretaliation provision is limited to persons who have personally engaged in protected activity.

The Supreme Court disagreed, and rejected this narrow interpretation of aggrieved persons under the law. However, it declined to expand the provision into the outer boundaries of the standing standard set forth in Article III of the Constitution – which would allow anyone who claimed an injury by a Title VII violation to sue. The Court noted that such expansive interpretation would allow a shareholder to sue a company for firing a valuable employee for racial discriminatory reasons if he showed a decrease in his stock value as a consequence.

In settling on the middle ground, the Supreme Court stated that “Title VII’s antiretaliation provision must be construed to cover a broad range of employer conduct.” The Court’s concern was to prohibit employer action that would dissuade a reasonable employee from asserting or supporting a discrimination claim. Thompson fell within the zone of interests protected by the law.

Employment Pointer: This decision clears up the ambiguity over whether third parties have standing to sue for retaliation under Title VII. Although, the Court noted that there is no bright line test for who is protected. Given the broader scope of persons to be protected under this law, companies must be aware of its management’s underlying reasons for adverse employment actions and ensure that indirect revenge against an employee for filing a discrimination charge has not been a contributing factor.

Written by Angela France

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