Do you have an Enforceable Forum Selection Clause?

For companies that do business in multiple states, a forum selection clause can minimize the risks and expenses associated with being hailed into a distant and unfamiliar court. A forum selection clause in a contract allows the parties to agree that any litigation resulting from that contract will be initiated in a particular court in a certain state. Generally speaking, state and federal courts will consider a forum selection clause to be reasonable as long as any party to the contract has maintained offices or conducted activities in the chosen state, or the contract was executed or performed in that state. But what happens when a party to the contract then files suit in a court other than the one agreed to in a forum selection clause? This issue has created a circuit split among the United States courts of appeals as to the proper standard for enforcing such clauses.

The majority of federal courts, including the Fourth Circuit, which has appellate jurisdiction over the district courts in Virginia and Maryland, strictly enforce forum selection clauses without questioning convenience of the parties and witnesses. When a plaintiff files suit in a forum other than the one chosen by the forum selection clause, the forum is automatically improper and dismissal is appropriate under FRCP 12(b)(3). On the other hand, a minority of federal courts use the multi-factor balancing test under 28 U.S.C. § 1404(a), the federal venue transfer standard, that involves several private and public interest convenience factors, making the enforcement of a forum selection clause discretionary to the district court judge, and as a consequence, unpredictable. Under this approach, the existence of a forum selection clause is only one factor to consider in whether to transfer the case to the contractually selected forum, provided that the current venue is otherwise proper.

The U.S. Supreme Court granted review of In re Atlantic Marine Construction Co., 701 F.3d 736 (5th Cir. 2012), to resolve this circuit split. The Fifth Circuit Court of Appeals’ opinion involved a Texas construction project with a subcontract that required litigation to be brought in Virginia. Despite the fact that the subcontract’s forum selection clause was clear and otherwise enforceable, the Fifth Circuit affirmed the district court judge’s decision not to enforce it on convenience grounds, joining the minority of federal courts on how such clauses should be enforced.

The Supreme Court’s decision is expected to be issued sometime in 2014, and will hopefully provide guidance on how heavily businesses can rely on such clauses.  If the Court adopts the majority approach, businesses can be more confident that the forum selection clauses they insert in their contracts will be enforced and will help provide certainty to companies as they move their business forward.

Using Phantom Stock Plans to Retain Top Talent

Every successful business prioritizes the retention of its most valuable employees.  Many such businesses show their willingness to retain top talent through the use of one or another of a variety of employee incentive plans.  Whether it’s the stock option plan typically offered to corporate executives, or the annual cash bonus linked to individual performance that is commonly found in sales-oriented industries, many of these plans involve ceding equity interests or relying on complicated performance metrics that make them cumbersome, expensive, or impracticable.

One type of incentive plan that alleviates these concerns is the Phantom Stock Plan (or, in the case of an LLC or other non-corporate entity, the Phantom Unit Plan).  Under such a plan, an employee becomes incentivized to contribute to the growth and long-term profitability of the company in hopes of increasing the value of his or her shares.  Phantom Stock Plans are customizable to the needs of the company, require minimal paperwork, are not subject to the same reporting and disclosure requirements as plans involving a transfer of equity, and, if implemented correctly, may not result in tax consequences to either the employee or employer until payout later occurs.

A so-called “triggering event” under these plans is typically either the sale of the company, in which case phantom shares are bought out using proceeds from the sale, or an employee’s retirement from the company following a designated number of years of service.  By limiting the triggering event to those scenarios, a plan stays within the requirements of § 409A of the Internal Revenue Code and avoids incurring the additional 20% income tax on nonqualified deferred compensation plans.

Compared to alternative incentive schemes, Phantom Stock Plans are low-cost and low-hassle.  If a corporation already has regular valuation metrics in place to price its actual shares, its phantom shares can simply mirror that price without incurring any additional expenses or accruing capital gains along the way.  Flexibility, ease, and cost effectiveness continue to make Phantom Stock Plans exceedingly viable employee incentive plans that companies and executives may want to consider.

Frank Gulino joined Berenzweig Leonard in September 2013.  He can be reached at fgulino@berenzweiglaw.com.

How Can Employers Protect Their Intellectual Property?

In this technological age, intellectual property issues often arise in employment, including questions regarding the ownership of intellectual property developed or created by an employee and disputes with departing employees over trade secrets and other confidential business information. As a matter of general practice, and especially when the intellectual property created is essential to the long-term growth potential of the business, well-drafted employment agreements which fully address an employee’s rights and duties with respect to an employer’s intellectual property should be in place.

 Employers often mistakenly assume that because they pay their employees a salary, any intellectual property developed or created by their employees belongs to them and as a consequence, forgo written agreements that assign copyrights to the business. The Copyright Act’s “work for hire” provision does offer some protection. However, it is limited in its application and applies only to employees and not independent contractors who work for a business, unless a written agreement exists. According to the Act, an employer owns the copyrights in work created by employees in the course and scope of their employment. Disputes often arise as to the scope of employment, and even whether the relationship is one of employment and not of independent contract.

Employers must have certain policies in place if they want to make sure to retain ownership of this valuable property, including drafting employment manuals and policies that address this issue, and obtaining clear, timely, and written agreements that spell out the ownership of all copyrights, inventions, trade secrets, and ideas that an employee conceives of or develops during his or her employment. In most cases, a properly drafted agreement will control the parties’ rights and will be enforceable in federal and state court. Otherwise, without such an agreement, the parties’ rights will often be decided under the law of the state in which the employment relationship exists, which may or may not be favorable to the employer.

These agreements can take many forms, from an all-encompassing employment agreement to a series of agreements that are specific to intellectual property. Employers might be tempted to claim ownership of all inventions or ideas that an employee conceives of during his or her employment, whether it is related to his or her work for the employer, but a judge may be unwilling to enforce an agreement if it overreaches and is unreasonable. Thus, the scope of such invention assignment agreement should be limited to processes, inventions, works, and ideas that are related to the course and scope of employment.

In addition, businesses should ensure that employees do not misappropriate their intellectual property and include a discussion of their rights and duties concerning an employer's intellectual property in employment policies and manuals. Taking these steps can help secure a company's Intellectual Property.

Sara Dajani is an associate attorney with Washington, DC law firm Berenzweig Law. Sara can be reached at sdajani@berenzweiglaw.com.

Virginia Creates a New Type of Corporation

On July 1, 2011, Virginia began allowing the creation of benefit corporations. This benefit corporation classification allows companies to focus their efforts toward non-financial benefits, such as community and societal considerations and the corporation’s impact on the environment. Within the past three years, approximately 20 states have passed benefit corporation legislation. Maryland was the first state to approve the benefit corporation classification. Eight other states, including West Virginia and North Carolina, are considering benefit corporation legislation.

Virginia’s approval of this so-called “B-Corp” status allows company officers, directors and board members the opportunity to impact more than just shareholders’ bottom lines and to have a wider impact on society. Shareholders are also empowered to further the B-Corporation’s cause by bringing proceedings against the company’s leadership for failing to further the company’s focus on the identified benefit. Registered Virginia corporations even have the option to convert to a B-Corporation from a traditional corporation. Virginia is making efforts to highlight this new business classification to draw companies to the Commonwealth.

Katie Lipp is an attorney at the Washington, DC regional business law firm Berenzweig Leonard, LLP. She can be reached at KLipp@BerenzweigLaw.com.

Is an Unsigned Contract Still Enforceable?

Actions must speak louder than unsigned contract, says Virginia Federal Court.

The failure to obtain a fully signed agreement is not always fatal to a breach of contract claim. However, a recent Virginia federal court case reminds us of the need to ensure signed written agreements are in place as early as possible in a business relationship. At the same time, businesses should be aware that their conduct may demonstrate that they have waived the need to execute a written contract.

Musical artist Cameron Jibril Thomaz, who performs under the name "Wiz Khalifa" (“Mr. Thomaz”), sued concert promoter It’s My Party, Inc. (“IMP”) for breach of a contract that was never signed. Mr. Thomaz engaged The Agency Group to serve as his booking agent for a new tour which would have included a concert at The Patriot Center at George Mason University (“GMU”). The Agency Group then asked IMP to promote the concert, and represented to IMP that Mr. Thomaz would be releasing a new album soon. The Agency Group emailed a contract to IMP and requested that IMP sign and return it to The Agency Group for Mr. Thomaz’s approval and signature, which IMP never did. The contract stated that it would not be binding unless signed by all parties.

George Mason University Patriot Center

Mr. Thomaz argued that the parties entered into a contract for him to perform at GMU and that he turned down an opportunity to perform at a different venue in reliance on IMP’s representations. Moreover, he argued that despite the fact that IMP partially performed the contract by advertising the concert, and that he partially performed by preparing for the concert, IMP refused to pay him and canceled the concert after fans already had purchased tickets. On the other hand, IMP asserted that its interest in promoting Mr. Thomaz’s concert was dependent upon the release of his new album because it did not believe he could otherwise attract a sufficient number of fans to warrant his appearance at the venue. The parties had agreed to sell concert tickets before finalizing the agreement, but as IMP had predicted, advance tickets had sold poorly in the absence of the album release. While IMP agreed to reschedule the concert, the parties were unable to come to mutually agreeable terms and IMP ultimately canceled the concert and withdrew its offer to promote it.

Under Virginia law, a contract can exist despite the absence of a signature if the parties' actions evidence an intention to enter into an agreement. However, if the parties intended to sign a formal agreement but did not, this creates a presumption that no contract exists, which can only be overcome with strong evidence. Since the terms of the alleged contract were unambiguous in that the parties did not intend the agreement to be binding unless signed by all parties, the court presumed that no contract existed. As such, Mr. Thomaz was required to demonstrate strong evidence that the actions of the parties showed otherwise.

However, the court dismissed the complaint after Mr. Thomaz presented little evidence of the parties' conduct during negotiations and almost wholly relied on the unsigned contract itself. The fact that tickets were sold was not enough to prove that IMP intended to enter into a contract given the countervailing evidence, including IMP’s failure to pay the deposit required by the contract and Mr. Thomaz’s failure to contemporaneously object. Finally, the court noted that the contact had an arbitration clause requiring the parties to submit any dispute to arbitration and that if Mr. Thomaz considered the contract to be binding, he would have submitted the matter to arbitration.

Sara Dajani is an associate attorney at the Washington, DC business law firm, Berenzweig Leonard, LLP.   She can be reached at sdajani@berenzweiglaw.com.

Maryland’s New “Rain Tax” – Believe It Or Not, Here It Comes

On July 1st, ten of Maryland’s largest counties will impose a new “rain tax.”  Dubbed a “storm management fee,” residents and businesses will be forced to pay a new tax based on the amount of property surface area that does not absorb water, multiplied by the amount of rainfall causing “runoff” into the Chesapeake Bay.  The source of this controversial fee began when the Obama Administration’s EPA ordered Maryland to reduce levels of nitrogen and phosphorus in the Bay.  Maryland Governor O’Malley signed into law the directive that these costs are pushed down to counties, with a tax on so-called “impervious surfaces” causing water run-off.  In short, the EPA issued an unfunded $14.8 billion directive, and now Maryland’s ten largest counties are forced to foot the bill when it rains.

The method for calculating the rain tax has several flaws.  First, only the largest county residents and businesses get hit with this tax, which appears arbitrary.  Second, “impervious surfaces” will be measured by satellite, which will not be precise and cannot measure all differences between shared spaces.  Third, there is no method for exactly measuring differences in actual rainfall amounts between counties.  Fourth, there is no accounting for the fact that Counties closer to the Chesapeake Bay may contribute more runoff than other regions.  Fifth, the tax levies will not take into account harm to the economy – for example, shopping malls with large parking lots will be hit with larger tax increases, which will be passed on to tenants, who will be forced to raise prices on consumers.

The legislation does not even demonstrate how these new revenues will actually cause differences in nitrogen and phosphorus levels.  In fact, much of the money will go to paying for additional government employees, who will engage in new activities such as “mapping, assessment, monitoring, inspection, and enforcement.”  According to the Maryland government website, the funds “may be used for public education and outreach relating to stormwater management and stream restoration.”  In these difficult times, Maryland residents will not be pleased to shoulder a heavier tax burden to fund new ‘education.’

Aside from the absurdity of taxing rain (what is next, taxing air because exhaling carbon dioxide has a bad environmental impact?), the law poses several legal problems.  Opponents of this law could argue that it exceeds the state's taxing authority, and is applied in a manner that is arbitrary and capricious.  There could also be a Constitutional challenge, as well as claims that it violates Maryland’s Administrative Procedure Act.  While it is unclear if anyone will challenge this new law, the rest of the nation will watch with curiosity while Maryland residents ask themselves – “Is this really happening?”

Seth Berenzweig is a managing partner at the Washington, DC business law firm, Berenzweig Leonard, LLP.   He can be reached at sberenzweig@berenzweiglaw.com.

Can a nurse refuse CPR to follow "company policy" while a woman dies?

The nation is abuzz about an incredible situation at a California assisted living facility.  A video clip with the discussion of this breaking news is attached below.





A nurse at the facility called 911 for medical assistance when a female resident had difficulty breathing.  The dispatcher on the 911 tape pleaded with the nurse to administer CPR, but the nurse refused saying it was against company policy.  In a tragic twist of irony, the facility’s policy required medical personnel to arrive at the scene to provide medical assistance.  It is unclear why the nurse did not fall under the description of “medical personnel.”  The female resident’s medical condition worsened while waiting for medical personnel to arrive and she died.  The facility issued a statement following her death that supported the nurse’s actions.

This tragedy raises troubling issues which have legal and ethical implications.  Employers have broad latitude to create and implement company policies, but cannot abandon common sense and place customers in danger.  In this case, both the assisted living facility and nurse face possible legal action.  A jury could have a hard time supporting the facility’s decision to hide behind a procedural policy to meet their required standard of care.  Company policies need to factor in real-life situations that take into account foreseen circumstances, and apply procedures that protect their customers rather than standing on ceremony if tragedy strikes.  This may be a wake-up call to employers to update their policies and train employees to act in a safe and reasonable manner.

Seth Berenzweig is the Managing Partner at the Washington, DC business law firm, Berenzweig Leonard. Seth can be reached at sberenzweig@berenzweiglaw.com.

Can’t Always Pick Employees Based On The Interview

Can a company give a job to a less qualified male candidate just because he did better in the job interview than the female candidate?  That was the issue facing a federal judge in Virginia recently.

On paper, the female candidate was far superior to the male candidate.  The posting stated a preference for a college degree, which the female candidate had but the male candidate did not.  The female candidate had nearly twenty years of relevant management experience, compared to the male candidate’s four years.  But when the two candidates were brought in for in-person interviews, the company found that the male candidate’s responses were much better than those given by the female candidate.  A panel of eight people from the company conducted the interviews, and their decision to give the job to the male candidate was unanimous.

The female applicant sued the company for gender discrimination.  The company moved to dismiss the case by arguing that performance in a job interview was a big component of the selection process, and it should be free to rely on the interviews in deciding whom to hire for the job even if another applicant looks better on paper.

The judge ruled against the company and refused to dismiss the female applicant’s gender discrimination case.  The judge called the company’s justification for hiring the male candidate over the female “meager” given the disparity in qualifications, and he was not persuaded by the company’s “subjective explanation” that the male did better in the interview.  The judge warned that allowing company’s to ignore qualifications in favor of the subjective interview process would “allow employers unchallengeable authority to explain away employment decisions.”  The judge noted that it is almost impossible to evaluate the “truthfulness” of how a company rates candidates during the interview process.

This case is a wake-up call for employers who think they are free to do whatever they want in making hiring decisions.  Companies should pay particular attention to what they include in job postings, to make sure that the qualifications listed are those that will actually be determinant in the job selection.  And from this case, companies may want to include a statement in the job posting stressing the importance of the interview process.

Declan Leonard is managing partner of the Washington, DC regional business law firm Berenzweig Leonard, LLP. He can be reached at DLeonard@BerenzweigLaw.com.

The Implied Duty of Good Faith and Fair Dealing: What Does it Mean for Virginia’s Businesses?

The duty of good faith and fair dealing has its roots in the Uniform Commercial Code (“UCC”), which applies to sales and other commercial transactions, and is now recognized at common law in some form in most jurisdictions. Numerous Virginia state and federal courts have held that the implied duty governs all contracts at common law. However, as the common law continues to evolve, it appears that Virginia courts have described and applied the implied duty in a seemingly contradictory fashion. As a result, what protection the implied duty offers in a contract remains unclear. Nevertheless, the implied duty continues to impact business litigation in Virginia and has altered the outcome of several cases. See Sun Trust Mortg., Inc. v. United Guar. Residential Ins. Co. of North Carolina, 806 F. Supp. 2d 872 (E.D. Va. 2011); Wachovia Bank NA v. Ranson Tyler Chevrolet, LLC, 73 Va. Cir. 143 (Roanoke 2007).

Some Virginia courts have held that breach of the implied duty is an independent cause of action, while others have held that it is merely a factor to be considered as to whether a breach of an express contract term should be further considered a material breach. Historic Green Springs, Inc. v. Brandy Farm, Ltd., 32 Va. Cir. 98 (Louisa County 1993) and Virginia Vermiculite, Ltd. v. W.R. Grace & Co. Connecticut, 156 F.3d 535 (4th Cir. 1998); but see RW Power Partners, L.P. v. Virginia Elec. & Power Co., 899 F. Supp. 1490 (E.D. Va. 1995). Moreover, some courts have held that a party may not exercise contractual discretion in bad faith, even when such discretion is vested solely in that party. Historic Green Springs Inc., 32 Va. Cir. 98; Virginia Vermiculite Ltd., 156 F.3d 535.

Often the express contract either does not address the particular dispute at hand, or applying the contract’s express language seems to give rise to an unfair result, which, the affected party will argue, was not anticipated when the contract was made and that the party seeking to take advantage of the omission or unanticipated application of the contract terms is not acting in good faith. Without such an implied duty, parties may defeat the purpose of a contract without breaching the express terms and suffer no consequences. However, the Virginia Supreme Court has cautioned that the implied duty cannot be the vehicle for rewriting an unambiguous contract in order to create duties that do not otherwise exist. Ward’s Equipment v. New Holland North America, 254 Va. 379 (1997). That is, an implied duty of good faith must yield to the express terms of the contract if the two are inconsistent.  

Virginia courts will likely continue to clarify the role of the implied duty of good faith and fair dealing in contract disputes. In the meantime, businesses should continue to be on their best behavior, and litigants and lawyers can look to the implied duty to help protect the legitimate expectations of the parties to a contract and mitigate the often harsh results of classic contract interpretation.

The author, Sara Dajani is an associate attorney at DC region business law firm, Berenzweig Leonard.  Sara can be reached at sdajani@BerenzweigLaw.com.