The Virginia Business Litigation Blog

July 22, 2011

Virginia Business Owners Smacked For Paying Themselves Excessive Fees

Two owners of a Virginia restaurant breached their fiduciary duty to the corporation they managed by paying themselves exorbitant management fees and by making improper loans and distributions to themselves, a Fairfax County judge has found.

“Fiduciary duty” in this context generally refers to the duty of loyalty owed by officers, directors, and other employees to each other or to the corporation they work for. Fiduciary duties include things like acting at all times with the corporation’s best interests in mind, refraining from usurping business opportunities for yourself, and refraining from actively competing with the company. In general, the law in Virginia and elsewhere holds that people in a position of trust vis-à-vis a closely held corporation must perform their duties without self-dealing or conflict of interest.

According to the opinion, the basic facts were as follows. As of 1993, Michael Magill, Thomas Dinsmore, and Raymond Clatworthy each owned 33 percent of the shares of DPR, Inc., a Virginia corporation that operated a restaurant. The restaurant’s primary business was preparing buffet lunches for sightseeing school groups visiting the Washington, D.C., area. Magill, who lived in the D.C. area, set up Magill Enterprises, Ltd., which operated the restaurant as an independent contractor of DPR and charged it a management fee. The other two owners did not live in the D.C. area. DPR was organized as an S corporation.

July 13, 2011

Facebook Sued for Showing Us What Kids “Like”

by Lee E. Berlik

Is Facebook violating New York privacy laws when it permits children to press the “like” button on the site to endorse advertisements without first receiving approval from their parents? That’s the question posed by a lawsuit filed on May 3, 2011, in federal court in Brooklyn, N.Y., by the father of a teenager there who is a member of the hugely popular social networking site. The case was brought as a class action on behalf of “all minors in New York whose names or likenesses were used by Facebook, Inc., for commercial purposes without the consent of the parents or guardians of said minors.” Anyone over the age of 12 can sign up for a Facebook account.

When any Facebook user, including a teenager, “likes” an advertisement, that preference appears on the Facebook page for that ad, the lawsuit says. This in turn is considered a “click” on that ad and generates revenue for Facebook, since it receives revenue from advertisers based on the number of users that “like” the advertisement. Facebook’s privacy settings don’t permit any users to prevent their names and pictures from appearing on advertising pages that they have “liked.” They can at any time withdraw their “like,” but as long as it is in effect, it will be considered a “click” and thus a “commercial use,” according to the complaint.

In order to sign up for Facebook, users, including those under age, agree to the following statement: “You can use your privacy settings to limit how your name and profile picture may be associated with commercial, sponsored or related content (such as a brand you like) served or enhanced by us. You give us permission to use your name and profile picture in connection with that content, subject to the limits you place.” According to the complaint, however, “at no time does Facebook seek or obtain the consent of any parent or guardian of its minor users to use or sell the name and likeness of the child for commercial use by Facebook or third-party advertisers.”

July 6, 2011

Apple Asserts New Intellectual Property Claims Against Samsung

by Lee E. Berlik

In a 63-page amended complaint filed on June 16, 2011, in federal court in San Jose, Apple Inc. is continuing to strongly press its contentions that Samsung Electronics Co.’s Galaxy smartphones and tablet computers infringe upon Apple’s patents and trademarks for the iPhone and the iPad. In this new filing, Apple, which has long been known as a company that pursues its intellectual property claims vigorously, amplifies a complaint it filed a couple of months ago against Samsung.

“Instead of pursuing independent product development, Samsung has chosen to slavishly copy Apple’s innovative technology, distinctive user interfaces, and elegant and distinctive product and packaging design, in violation of Apple’s valuable intellectual property rights,” Apple’s attorneys wrote in the new complaint. An Apple spokeswoman has been quoted as saying, “It’s no coincidence that Samsung’s latest products look a lot like the iPhone and iPad, from the shape of the hardware to the user interface and even the packaging. This kind of blatant copying is wrong, and we need to protect Apple’s intellectual property when companies steal our ideas.”

A key focus of Apple’s concern is several design patents that it owns for various aspects of the iPhone and iPad. These design patents, Apple said in the complaint, “cover the unique and novel ornamental appearance of Apple’s devices, which include features such as the black face, bezel, the matrix of application icons, and a rim surrounding a flat screen.”

June 22, 2011

LogMeIn Wins Summary Judgment of Noninfringement

by Lee E. Berlik

On May 4, 2011, United States District Judge Claude M. Hilton of the Eastern District of Virginia issued an opinion rejecting a claim that LogMeIn Inc., a Boston-area computer-access company, had infringed a patent owned by Canadian competitor 01 Communique Laboratory Inc. Judge Hilton granted summary judgment of noninfringement for LogMeIn, finding that LogMeIn’s devices that permit a communication session between a personal computer and a remote computer cannot, as a matter of law, be construed to infringe 01’s patent, due to differences in the technology used by the competing devices.

In evaluating the patent claim, Judge Hilton reviewed the patent prosecution history and examined the way in which the Patent and Trademark Office and the inventor had previously described and understood the reach of the patent, including its limitations. The court found that LogMeIn’s product was dissimilar enough from 01’s intellectual property as to avoid any finding that infringement had occurred. Specifically, Judge Hilton found that 01’s patent, by its own admission, was to be limited to a system in which only a single device perform the multiple duties of the so-called “location facility,” including creating communication sessions, receiving a request for communication with the personal computer from the remote computer, locating the personal computer, and creating a communication channel between the remote computer and the personal computer. If several devices together performed those functions, the judge found, the patent’s claims were not implicated.

“The accused LogMeIn products do not have any ‘location facility’ that locates a personal computer and ‘itself’ creates a communication channel between a remote computer and the personal computer,” Judge Hilton wrote. “In briefing the Motion for Preliminary Injunction, 01 admitted that LogMeIn’s products function in precisely the manner that 01 told the PTO the ‘479 Patent does not cover – that is, by distributing the functions of the ‘location facility’ among different devices,” the judge added. No one component of the LogMeIn system itself performs all the needed functions of the “location facility” under the Court’s construction of the term, the judge noted.

June 13, 2011

Sidwell Friends Grad Says School Permitted Sexual Affair

by Lee E. Berlik

A highly sensational case filed recently against the prestigious Sidwell Friends School in Washington, D.C., may end up raising interesting legal questions about the responsibility of private schools to supervise the actions of their school psychologists. In the $10 million civil suit filed in D.C. Superior Court, Arthur Newmyer, father of a kindergarten student at Sidwell, alleges that Jack Huntington, while working as the school psychologist and counseling Newmyer’s daughter, carried on a sexual affair with Newmyer’s wife, Tara, a former associate attorney at Dickstein Shapiro LLP, a large Washington law firm. So far, at least three judges have recused themselves from the case, apparently due to their close ties to the prestigious institution.

Earlier this year, Huntington left the school. The lawsuit contends that he was fired after the school learned about sexually explicit e-mails that Huntington sent to Tara Newmyer from the school’s computer system. According to the complaint, Huntington and Tara Newmyer arranged “play dates” for the girl so that they could meet and carry on their clandestine affair. The counseling sessions, the complaint says, occurred off school property.

A spokesman for Sidwell has said that the school will “vigorously defend” itself against allegations that he said were “completely without merit.” The explosive allegations in the lawsuit filed by Arthur Newmyer, himself a Sidwell graduate who has been extremely active in supporting the school over the years, have become a major topic of discussion at the private school, whose students include President Obama’s daughters Malia and Sasha.

June 4, 2011

Virginia Noncompete, Formed After Termination of Employment, Upheld as Reasonable

by Lee E. Berlik

Not all noncompete agreements in Virginia are subject to the restrictive rules governing noncompete agreements formed between employers and employees. Noncompete agreements entered into between two sophisticated parties outside of the employment context may be governed by the less-restrictive standards that govern ordinary contracts. A federal court in Virginia recently denied a motion to dismiss a breach-of-contract claim on this basis, rejecting the argument that the noncompete agreement was unenforceable as a matter of law.

In McClain v. Carucci, a construction and engineering company sued a former employee for allegedly violating a noncompete agreement by forming a competitive company. The noncompete agreement was not entered into as part of the employment relationship, but was part of a larger settlement agreement the parties signed to resolve the company’s allegations that the former employee had embezzled nearly $286,000 of the company’s funds.

The court found that the justification for exercising heightened scrutiny of noncompete covenants in employment agreements does not apply where the noncompete covenant is part of a post-employment settlement contract. Virginia courts have already held that where a contract for the sale of a business between a vendor and buyer contains a covenant not to compete, greater latitude is allowed in determining the reasonableness of the noncompete than when the covenant arises out of an employment contract. A different standard applies because employees usually have comparatively little bargaining power, whereas the sale of a business usually involves sophisticated parties capable of negotiating at arm’s length for a fair deal.

May 16, 2011

Computer Fraud and Abuse Act Claim Supportable Without Cash Loss

by Lee E. Berlik

What kind of expense amounts to a “loss” under the Computer Fraud and Abuse Act (CFAA), and did a Virginia litigation-support company incur the required minimum of $5,000 in losses when it investigated an alleged breach of its computer systems, retaining the services of both an attorney and a computer forensics company to aid with the investigation? That was the issue recently before Judge T.S. Ellis III of the Eastern District of Virginia, who held that the investigative activities could support a CFAA claim, even if the expenses were not paid in cash.

The issue was particularly important to the plaintiff, Animators at Law, a graphics and technology litigation support company, because of the 13 claims it brought against two former employees and a competitor, all but the CFAA claim were based on state law, meaning that without it, there would be no basis for federal-court jurisdiction.

The CFAA provides for a civil action against anyone who intentionally gains access to a computer without authorization and obtains information from it. The CFAA has a minimum jurisdictional requirement of $5,000 in losses. Animators at Law claimed that its former employees conspired with a competitor to leave Animators’ employment and join the competitor, taking with them confidential and proprietary information about Animators’ services, projects, and clients.

May 7, 2011

ADA Plaintiff Perpetrates Fraud on Court, Sees Claim Stricken

by Lee E. Berlik

In a memorandum opinion dated April 27, 2011, United States District Judge T.S. Ellis, who sits in the Alexandria Division of the Eastern District of Virginia, taught plaintiff Stephanie Holmes that it was not a good idea to change her story multiple times during her deposition. Finding that she had “perpetrated a fraud on the court,” Judge Ellis affirmed the magistrate judge’s recommendation to strike Holmes’s claim for compensatory damages for pain and suffering.

Holmes, who had worked as a stocker at a Wal-mart in Alexandria, Virginia, for four years, filed a complaint with the Equal Employment Opportunity Commission (EEOC), alleging that Walmart had failed to make reasonable accommodations for her hearing impairment. She alleged that Walmart had refused to provide her with an interpreter and with comprehensive notes of meetings and instructions, all of which she needed to perform her job properly. She sought compensation for pecuniary losses, an injunction, punitive damages, and back pay.

The EEOC filed suit on Holmes’s behalf. During Holmes’s deposition in 2010, Walmart’s attorneys asked her about whether she had received any treatment from a mental health provider for emotional distress caused by her employment at Walmart. First, she said, “I don’t need therapy, and I don’t see doctors.” Then she said she saw a therapist just once in 2007. She later changed her story again and said she saw one doctor three times a week from March 2004 through February 2005. Finally, at the end of her deposition, she acknowledged that she had received therapy for anxiety and depression in a 13-year period from 1994 to 2007 and that some of the treatment related to her work at Walmart.

May 2, 2011

First Amendment Protects Right to Express Love of Boobies

by Lee E. Berlik

A Pennsylvania school district violated two female middle school students’ First Amendment rights when it punished them for attending school while wearing breast cancer awareness bracelets that bore the slogan “I (heart) Boobies! KEEP A BREAST.” That was the ruling of U.S. District Judge Mary McLaughlin of the Eastern District of Pennsylvania on April 12, 2011, in a high-profile case that pitted free-speech rights and public-health efforts against the need to enforce discipline and promote order in public schools. Judge McLaughlin granted a temporary injunction enjoining the school from enforcing its “no bracelet” policy.

The United States Supreme Court had previously held that students don’t shed their First Amendment protections at the schoolhouse door, but it had also ruled that educators have the right to ban lewdness and to preserve a learning environment. The school district’s lawyers argued that the “boobies” bracelets were lewd and vulgar, and that even if they weren’t, they should be banned because they substantially disrupted the work and discipline of the school. At the injunction hearing, school principals testified that they viewed the term “boobies” as “an impermissible double entendre about sexual attraction to breasts.” The court disagreed, reasoning that the statements needed to be examined in context.

The bracelets are distributed nationwide by the Keep A Breast Foundation, a nonprofit that promotes awareness of breast cancer by women under 30. The girls, Brianna Hawk and Kayla Martinez, testified that they did not intend to express a sexual message by wearing the bracelets to school. Both of their mothers gave them permission to wear the bracelets, and they did so on the school’s designated breast cancer awareness day.

April 25, 2011

Trademark Fight Ensues Over Lou’s Red Shoes

by Lee E. Berlik

A new line of women’s footwear now being sold by Yves Saint-Laurent has high-end French shoe designer Christian Louboutin seeing red. Louboutin’s companies, asserting that a new line of red Yves Saint-Laurent shoes violates their U.S. trademark, recently filed a trademark infringement suit in federal court in Manhattan against YSL. The lawsuit raises the interesting question: can a color be trademarked?

Louboutin’s trademark lawyers explain that the issue isn’t about ownership of a color so much as whether a shoe designer can have a proprietary interest in the use of distinctive red soles. According to the complaint, Louboutin first thought of the idea of painting the outer soles of his shoes red in 1992. Ever since then–for nearly two decades–every shoe in his collection has had that distinctive stylistic feature.

“Louboutin Footwear is instantly recognizable as a result of Plaintiffs’ trademark red outsole,” the complaint declares. “The location of the bright color on the outsole of a woman’s pump is said to provide an alluring ‘flash of red’ when a woman walks down the street, or on the red carpet of a special event.” The complaint provides a long list of celebrities who have worn the shoes and even includes two photos of the Carrie Bradshaw character on Sex and the City, played by Sarah Jessica Parker, wearing the shoes with the “alluring flash of red.”

The VirginiaBusiness Litigation Blog