Wednesday, November 19, 2008

Government Contractor Hit with $10 Million in Punitive Damages for Discriminatory Contract Termination

In a government contractor dispute between prime and subcontractor companies, a jury empanelled in the U.S. District Court for Eastern District of Virginia found that the prime contractor racially discriminated against the subcontractor, tortiously interfered with the subcontractor's employee contracts, breached the parties' contracts and breached the implied duty of good faith and fair dealing. The jury awarded over $5 million in compensatory damages and $10 million in punitive damages against the prime contractor.

The Court's September 22, 2008 opinion sets forth the evidence which the jury considered and ultimately believed in reaching the verdict. That evidence, the Court found, was sufficient to uphold the verdict. The opinion can be found here.

The plaintiffs were two related companies, World Wide Network Services, LLC and its subsidiary World Wide Network Services International (hereinafter "WWNS"). WWNS was certified as an "8(a)" small disadvantaged company. WWNS was awarded a subcontract with Defendant DynCorp International, LLC ("DynCorp") to assist DynCorp with its contracts with the U.S. Department of State in Iraq and Afghanistan.

According to the Court, "in the fall of 2005 the relationship between DynCorp and WWNS began to cool." Opinion at 7. "WWNS employees began to observe displays of racial animus towards WWNS in the form of derogatory comments . . . , as well as deliberate exclusion from planning meetings, failing to respond to e-mail requests for information and assistance . . . and failing to renew/provide WWNS employees with the proper security badges WWNS’s employees were required to have in order to perform their work and to access remote work sites. Additionally, DynCorp’s evaluations of WWNS's performance turned critical." Id.

In examining the discrimination claim filed pursuant to Section 1981, the Court maintained the burden-shifting analysis used in Title VII discrimination claims. It found that WWNS was required to show that it: "(1) is a member of a minority group; (2) was qualified to perform the obligations set forth in the subcontracts; (3) despite its qualifications and performance, it was terminated; and (4) after its termination, DynCorp retained another company from an unprotected class." Op. at 18. DynCorp would then have to "produce evidence that the plaintiff was rejected, or someone else was preferred, for a legitimate nondiscriminatory reason." Id. If those burdens were met, WWNS would have to show that DynCorp’s proffered reason was "mere pretext and that race based discrimination was the real reason" for DynCorp's actions. Id.

As to the tortuous interference with contract claim, the Court rejected DynCorp's argument that the jury's verdict was unsupported as a matter of law. DynCorp argued it did not tortiously interfere with WWNS's employment contracts because there was "no evidence that DynCorp intentionally induced any former WWNS employee to fail to provide 15 days notice of termination of their employment agreements with WWNS . . . ." Op. at 22-23. The Court found that the jury's finding was supported by the evidence of DynCorp's meeting with WWNS's employees to notify them that the subcontract "would be terminated August 11, 2006, and that as of July 26, 2006, all WWNS employees should report to DynCorp . . . ." Op. at 23. And, after receiving a letter from WWNS's counsel, DynCorp "convened another meeting . . . at which DynCorp recanted its statements . . . and notified WWNS personnel that they continued to be considered WWNS employees and would no longer work in support of the [subcontract] after August 11, 2006." "Thereafter, DynCorp began to make employment offers to select WWNS employees in Iraq in order to prevent a ‘disruption of service.'" Id.

The Court also found that there was enough evidence to support the punitive damages award and the finding that DynCorp acted with malice:

"DynCorp’s malicious intent towards WWNS is illustrated in DynCorp's conduct during the time period leading up to and after it decided to terminate its relationship with WWNS. For example, WWNS introduced evidence at trial that [DynCorp] reached out to EDO Corporation [which was a competitor to WWNS] well before DynCorp notified WWNS of its decisions to terminate their contractual relationship. [DynCorp] hired EDO Corporation to evaluate WWNS's workmanship with the Codan Radios. [DynCorp] terminated EDO Corporation’s contract because assessments of the Codan Radio system had already been completed by another firm. However, [DynCorp] indicated in an e-mail to EDO Corporation that [it] would look for ways to work with EDO Corporation in the future. Less than one month later, and before notifying WWNS of the impending contract termination, Mr. Walsh contacted EDO Corporation and requested that the company begin planning to take over the Codan Radio network. Shortly thereafter, [DynCorp] and a representative from EDO Corporation met with [a] WWNS employee . . . . At the meeting [the WWNS employee] provided [DynCorp] and EDO Corporation with a list of WWNS employees he recommended DynCorp and EDO hire. [the WWNS employee] also provided resumes and confidential salary information to DynCorp via e-mail to DynCorp [a] employee . . . ." Op. at 57.

That conduct, the Court held, "demonstrates DynCorp"s intent to not only cease working with WWNS, but to destroy WWNS’s ability to continue to operate in Iraq and Afghanistan." Op. at 58.

The jury returned a verdict in favor of DynCorp for the following counts: tortious interference with prospective economic advantage, common law civil conspiracy, Virginia statutory conspiracy and a breach of contract counterclaim.

It is clear from the number of issues raised that the case was hotly contested. It is likely that the case will be appealed and the Fourth Circuit will revisit many of the District Court’s findings.

Wednesday, November 5, 2008

Virginia Court Limits Intra-corporate Immunity Doctrine As Defense to Conspiracy Claim

A recent decision of the United States District Court for the Eastern District of Virginia in an unfair business case sharply limited the use of the intra-corporate immunity doctrine as a defense to a conspiracy claim and refused to enforce contractual language limiting claims against officers and directors for breach of fiduciary duty. The case, The Flexible Benefits Council v. Feltman, et al., Civil Action No. 1:08-cv-371, pitted the FBC, a trade association, against Feltman, its former Executive Director, a new trade association Feltman established to directly compete with FBC, and the new trade association’s Pennsylvania-based attorney who was also its President and COO. The case involved claims for business conspiracy, breach of fiduciary duty, and interference with business, among others.

The plaintiff alleged that, while Executive Director, Feltman: (1) allowed FBC’s corporate charter in Washington, DC to lapse; (2) chartered the new trade association using the same name; (3) with the assistance of the new association’s attorney, Anthony Hawks, filed an application to register the mark “Employer’s Council on Flexible Compensation” (the FBC’s name prior to the lapse of its corporate charter) with the Patent and Trademark Office; (4) registered domain names using the acronym, “ecfc”; and (5) leased office space on the same street as plaintiff’s Washington offices with the same suite number. The FBC sued in Virginia, rather than in the District of Columbia.

The defendants sought to dismiss the case, challenging personal jurisdiction over Hawks, who was not licensed to practice law in Virginia, venue, and whether the Complaint stated a claim for relief. Several aspects of the opinion, denying the motion to dismiss, are significant to businesses and their owners, directors, officers and management. For full opinion, click here.

First, the defendants argued that the intra-corporate immunity doctrine barred the business conspiracy claim against them as they were all agents of the new trade association. Under that doctrine, because a corporation can only act through its agents, by law, it cannot conspire with those agents. This doctrine is frequently used by defendants as a bar to conspiracy claims.

In FBC, the court rejected that argument and noted that the intra-corporate immunity doctrine has a recognized exception: an employee or agent can conspire with the corporation where he or she has an “independent personal stake” in the outcome of the conspiracy. In FBC, the court found that both Feltman and Hawks were alleged to have had a personal stake in the success of the new co-defendant association, thereby satisfying the exception and allowing the case to proceed.

Second, the court rejected Feltman’s challenge to the breach of fiduciary duty claim. Feltman argued that he was exempt, under the terms of several Management Services Agreements by which he was retained by the FBC, from being sued for breach of fiduciary duty. The MSAs provided that “under no circumstances shall either party seek to hold liable the officers, directors, members, servants or agents of the other party in their personal and individual capacities on any claim or theory whatever arising under the performance, non-performance, breach, cancellation or termination of this agreement.” According to the court, however, such clauses are unenforceable “to the extent they [] limit a party’s liability for gross negligence, recklessness or intentional torts.” Moore v. Waller, 930 A.2d 176, 179 (D.C. 2006). In the FBC case, the allegations that Feltman had attempted to steal the FBC’s identity were intentional in nature, thus rendering those restrictive clauses inapplicable.

Finally, Hawks challenged whether the court had personal jurisdiction over him given that he had not physically been present in Virginia with relation to the alleged acts. Significantly, the court held that Hawks had “transacted business in Virginia” by virtue of his filing a trademark application with the Patent and Trademark Office located in Alexandria. It rejected the argument that such a filing was exempt from challenge because petitioning the federal government can not be used as a basis for personal jurisdiction. In doing so, the court found that the “government contacts” principle had been modified to allow jurisdiction over a non-resident defendant if there were sufficient allegations to make out a prima facie case that the agency proceedings had been used to perpetrate a fraud. Because it was alleged that Hawks had sworn under oath that no other firm had the right to use the trademark, even though he knew it had been used by FBC for over 20 years, the filing fell within the exception to the “government contacts” rule and was a sufficient basis for personal jurisdiction. The court also found that these acts satisfied the Constitution’s due process requirements.

This case is a cautionary tale, not only as to the reach of Virginia’s long arm statute, but as to the significant limits on the intra-corporate immunity doctrine and the enforceability of contractual clauses that are designed to limit claims for breach of fiduciary duty.