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

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

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

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.

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

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.

Written by Malik Cutlar

Federal employee Robert T. Perry (“Perry”) had a long-running legal battle with his federal employer, the Pension Benefit Guaranty Corporation (“PBGC”). After three lawsuits, two of which were settled, Perry’s claims of hostile work environment and retaliation have now been dismissed on summary judgment.

The case, Perry v. Gotbaum, was the third lawsuit brought by Perry against the PBGC and centered around Perry’s allegations that the PBGC discriminated and retaliated against him based upon a Settlement Agreement entered into by the parties to settle the first two lawsuits. As required under the Settlement Agreement, the PBGC provided Perry with a grade and step increase in salary, paid for $10,000 worth of training, paid Perry a lump sum of $60,000, and placed him on Leave Without Pay (“LWOP”) Status for a time-period not to exceed six months. In addition to proving Perry with a salary increase and training, it appears that the impetus behind the Settlement Agreement was to provide Perry with an opportunity to find employment outside of the PBGC and give him a lump sum payment during his job search. Per federal government regulations, the personnel actions required under the Settlement Agreement had to be documented using a federal government Standard Form 50 (“SF-50”). 

In his third lawsuit, Perry complained, inter alia, that the comments section of the SF-50 forms used to process the personnel actions included information referencing his prior lawsuits and the Settlement Agreement. According to Perry, such comments would have a chilling effect on his ability to seek employment outside of the PBGC because it would be clear that he had engaged in protected activity. Further, Perry complained that the PBGC had used a more generic code when processing SF-50 forms for other employees, and therefore he should have been afforded the same treatment. 

While the Court agreed with Perry that he engaged in protected activity regarding his prior lawsuits and the resulting Settlement Agreement, the Court ruled in favor of the PBGC finding that the Agency actually went back and corrected the SF-50 forms to respond to Perry’s concerns about the remarks placed on the forms. Further, since the Settlement Agreement was not confidential and had been filed with the Court, it was a public record and Perry could not base his claims of a retaliatory and/or discriminatory disclosure upon information that was generally available to the public. In addition, the Court found that there was no basis to find the PBGC’s “honest mistake” was an attempt to hamper Perry’s future job opportunities since it was in the Agency’s interest to have Perry find employment outside of the PBGC as soon as possible. As such, the Court dismissed Perry’s federal employment discrimination and retaliation claims.

It should be noted that the legal standard applied by the Court in this public sector case applies to private sector Virginia businesses as well.

Written by Malik Cutlar

For several years now, many practitioners that advise and/or draft non-competes for their business clients have stopped including language in non-compete provisions which prohibit a former employee from being an “owner” or “shareholder” in a competing business. Virginia Courts have routinely held that including language which prohibits a former employee from essentially owning stock in a competing business was overbroad and not necessary to protect an employer’s legitimate business interest. Therefore, such non-competes have regularly been invalidated.

Consistent with prior court opinions, a Virginia Beach Circuit Court recently invalidated a non-compete provision which prohibited a former employee from, inter alia, being an owner or shareholder in a competing business. The case, Patient First Richmond Medical Group, LLC v. Ameanthea Rica Blanco (Virginia Beach Circuit Court, Feb. 15, 2011), involved Defendant Blanco, a family nurse practitioner who was employed by Plaintiff Patient First. According to the allegations in the case, Blanco, while still working at Patient First, began formation of a competing healthcare practice which was to provide primary and urgent care treatment at reasonable or fixed fees during extended weekday and weekend hours without the need for an appointment.

Blanco also solicited two doctors from Patient First to come work with her at the new medical practice. After she resigned her position with Patient First, Blanco opened up the competing business within seven miles of her former place of employment. Patient First brought suit alleging that Blanco violated her employment agreement which contained non-competition and non-solicitation provisions.

The covenant not to compete prohibited Blanco from performing medical services of the type performed for Patient First (though the term “medical services” was not defined) for two years after her employment and within a seven-mile radius as an “agent, officer, director, member, partner, shareholder, independent contractor, owner, or employee” of the competing business. The Court found that the non-compete provision was overbroad because its provisions went beyond occupations and businesses that were in competition with Patient First. The Court reasoned that by barring Blanco from being a shareholder in a competing business, she would be barred from merely owning stock in a publically traded company, even if she were not providing medical services for the company and thus not competing with Patient First.

The Court also held that a number of the terms in the provision were not defined and left too much uncertainty as to which activities of the former employee would, or would not, be in violation of the covenant. Therefore, an employee would essentially have to guess at which conduct was prohibited. The Court held that in such cases, the non-compete was unenforceable as offending sound public policy, and sustained Blanco’s demurrer without leave for Patient First to amend.

Written by Malik Cutlar

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.

Written By Angela France