E-Newsletter, June 2005

ARTICLES IN THIS ISSUE:

DISPARATE IMPACT CLAIMS ALLOWED UNDER THE AGE DISCRIMINATION IN EMPLOYMENT ACT

By:  Tina M. Maiolo, Esq. and Cedric D. Miller, Esq.

In this term, the U.S. Supreme Court considered the issue of whether the Age Discrimination in Employment Act (“ADEA”) supports a claim of discrimination based upon the theory of disparate impact.  In a heavily divided ruling, the high court held that it does.

The case decided was Smith v. City of Jackson.1  In Smith, a group of police officers (“Officers”) sued the City of Jackson (the “City”) under the ADEA for discrimination based upon their age.  Their complaint centered around a pay increase instituted by the City that effectively provided a greater salary increase to Officers under the age of forty, than to those over the age of forty.  The United States District Court for the Southern District of Mississippi granted summary judgment in favor of the City and the Officers appealed.2  The Fifth U.S. Circuit Court of Appeals affirmed the ruling of the lower court holding disparate impact claims categorically unavailable under the ADEA.3  However, the court of appeals assumed that the facts alleged by the Officers would entitle them to relief under Griggs v. Duke Power Co.,4 which announced a disparate impact theory of recovery for cases brought under Title VII of the Civil Rights Act of 1964 (“Title VII” or “Title VII of the Civil Rights Act of 1964”).

In affirming the decision of the court of appeals, the Supreme Court held that the ADEA does authorize recovery in disparate impact cases.5  However, the Court concluded that because the Officers had failed to identify any specific tests, practices, or requirements within the pay plan that had an adverse impact on older workers, they had not provided evidence sufficient to establish a claim of disparate-impact discrimination.6

In reaching its decision, the Court was cognizant of the fact that when Congress enacted the ADEA, it included the same language in it as it had in Title VII of the Civil Rights Act of 1964.7However, unlike the race provisions of Title VII, the Court noted that § 4(f)(1) of the ADEA contained language that substantially limited its coverage by permitting any “otherwise prohibited” action “where the differentiation was based on reasonable factors other than age.”8  In addition, the Court also noted that in 1991 Congress had expanded the scope of the protections of Title VII after the Court had narrowly construed its provisions in Wards Cove Packing Co. v. Atonio,9  acknowledging, however, that this same expansion in coverage was not extended to the ADEA.10  Consequently, the Court reasoned that the pre-1991 Wards Cove interpretation of Title VII’s identical language applied to the ADEA,11 and not the expansive interpretation afforded Title VII by the 1991 amendment to the Civil Rights Act.

In following the reasoning of Wards Cove, the Court found that the Officers had “done little more than point out that the pay plan at issue [wa]s relatively less generous to older workers than to younger workers.”12  The Court reaffirmed its Wards Cove holding that it was not enough to simply allege that there was a disparate impact on workers, or point to a generalized policy that leads to such an impact.13  Rather, the Court stated, the Officers are ‘“responsible for isolating and identifying thespecific employment practices that are allegedly responsible for any observed statistical disparities.”’14  The Court reasoned that the failure to identify the specific practice being challenged is the sort of omission that could result in employers being potentially liable for the myriad of innocent causes that may lead to statistical imbalances.15  Accordingly, the Court concluded that the Officers had failed to meet their burden in this regard.16  In addition, the Court also found that the City’s plan was based on reasonable factors other than age.17  Specifically, the Court found that the City’s decision to give raises based on seniority and position was unquestionably reasonable given the City’s ultimate goal of trying to raise employees’ salaries to competitive levels in relation to surrounding communities.18 The Court stated that while there may have been other reasonable ways for the City to achieve its goals, the one selected was not unreasonable.19  “Unlike the business necessity test, which asks whether there are other ways for the employer to achieve its goals that do not result in a disparate impact on a protected class, the reasonableness inquiry include[d] no such requirement.”20

As a result, although the Court disagreed with the court of appeals that the disparate impact theory of recovery was never available under the ADEA, the judgment of the court of appeals was, nonetheless, affirmed.21

 

1      125 S. Ct. 1536 (2005).

2      Id. at 1539.

3      Id.

4      401 U.S. 424, 91 S. Ct. 849, 28 L. Ed. 2d 158 (1971).

5      Id. at 1544.  It is important to note that the Court found that Griggs, which interpreted the identical text at issue, strongly suggested that a disparate-impact theory of recovery was available under the ADEA.  See Smith v. City of Jackson, 125 S. Ct. 1542, 1543 (2005).

6      Id. at 1545-46.

7      Smith, 125 S. Ct. at 1540.

8      Id. at 1540-41.

9      490 U.S. 642, 109 S. Ct. 2115, 104 L. Ed. 2d 733 (1989).

10      Id.

11   Id. at 1545.

12   Id.

13   Id.

14   Id. (No emphasis added).

15   Id.

16   Id.

17   Id.

18   Id. at 1546.

19   Id.

20   Id.

21   Id.

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SUPREME COURT REJECTS REDUCED STANDARD FOR LOSS CAUSATION IN SECURITIES ACTIONS

By:  Michael J. Sepanik, Esq.

In a decision issued on April 19, 2005, in the case of Dura Pharmaceuticals, Inc., et al. v. Broudo, (No. 03-932), the United States Supreme Court reversed the United States Court of Appeals for the Ninth Circuit, which had issued a decision allowing for a less rigid application of the loss causation requirement set forth in 15 U.S.C. § 78u-4(b)(4).

The unanimous decision of the Court was delivered by Justice Bryer, and held that an inflated purchase price does not, by itself, constitute or proximately cause the relevant economic loss needed to allege and prove “loss causation” under Section 10(b) of the Securities Exchange Act of 1934.  Specifically, the Court held that the Ninth Circuit erred in allowing plaintiffs in a securities fraud action to satisfy the loss causation requirement simply by alleging that a stock’s price at the time of purchase was inflated because of a misrepresentation.  The Court held that plaintiffs in securities fraud actions must show that the misrepresentation actually caused their loss, as opposed to the Ninth Circuit’s decision to allow a plaintiff to show a misrepresentation merely “touches upon” a later economic loss.  The Court noted that its decision is consistent with Congress’ intent in permitting private securities fraud actions only where plaintiffs adequately allege and prove to the traditional elements of causation and loss.

Respondents represented individuals who bought stock in Dura Pharmaceuticals, Inc. on the public securities market between April 15, 1997 and February 24, 1998, during (and after) which period the company allegedly made several false representations.  Respondent investors filed their securities fraud class action against Dura and its managers and directors alleging in the complaint only that “In reliance on the integrity of the market, the plaintiffs… paid artificially inflated prices for Dura Securities” and the plaintiffs, thereby, suffered “damages.”

In cases alleging fraud in the purchase or sale of stocks in the public securities markets, the following elements must be demonstrated:

1.       A material representation;

2.       Made with scienter, i.e., a wrongful state of mind;

3.       In connection with the purchase or sale of a security;

4.       Reliance;

5.       Economic loss; and,

6.       Loss causation, i.e., a causal connection between the material misrepresentation and the loss.

The Court held that Respondents’ Complaint failed to adequately plead the fifth and sixth elements required to establish a claim for violation of Section 10(b) of the Securities Exchange Act of 1934.  The Court agreed with Dura Pharmaceuticals that the clear intent of the Act is to permit private securities fraud actions for recovery where, but only where, plaintiffs adequately allege and prove the traditional elements of causational loss.  The Court noted that the Ninth Circuit’s approach was invalid as it would allow recovery where a misrepresentation leads to an inflated purchase price, but nonetheless did not proximately cause any economic loss.

While the Court’s decision offers some solace to corporations and investment firms facing the recent wave of investor suits, it will likely not have a resounding impact in most of the U.S., as every other U.S. Court of Appeals that considered the issue required the heightened (or traditional) standard of loss causation adopted in Dura Pharmaceuticals.

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RECOVERABLE DAMAGES IN AN ACTION TO ENFORCE A COVENANT NOT TO COMPETE

By:  Thomas L. McCally, Esq. and Susan E. Delaney, Esq.

It is not uncommon for disputes to arise over non-compete covenants found in employment contracts. Parties often seek a judicial determination as to whether such agreements are valid and enforceable.  It is important to recognize what damages may or may not be recovered by a former employer if a court finds that a non-compete covenant in an employment contract is enforceable.  Generally, the potential recoverable damages are those that are awarded in any breach of contract action.

First, in the context of an action to enforce an anticompetition covenant, a permanent injunction tends to be the favored remedy because the injury to the former employer’s confidential information, good will, or customer contact interest, which these covenants seek to protect, is not readily measurable or compensable in terms of monetary damages.  If the anticompetition covenant is clear, unambiguous, and reasonable and the plaintiff has an interest which is being threatened by injury for which there is no adequate legal remedy, a court will likely issue a permanent injunction.  The first question which arises in determining whether a permanent injunction should be granted is whether the anticompetition covenant can be enforced as written.  If it can, a permanent injunction can be issued accordingly, and the matter is essentially at an end.  A permanent injunction enforcing an anticompetition covenant will be reasonable if it serves to protect a legitimate employer interest while not infringing unreasonably on the rights of the former employee.

Next, the proper measure of damages for breach of the anticompetition covenant is typically the amount of lost profits sustained by the former employer during the period in which the covenant was violated.  While lost profits may not be computed with any exactness, courts have indicated that the nature of the breach of a covenant against competition would cause substantial damages; therefore, lost profits need not be susceptible of calculation with mathematical exactness provided there is sufficient foundation for a rational conclusion.  The lost profits should have been contemplated at the time to contract was formed and the recoverable damages should be for the loss which the plaintiff sustained as the natural direct and proximate result of the employers breach of the covenant i.e. the illegal competition.  For example, plaintiffs could recover the value of the probable amount of sales which they would have made if they had been allowed to perform their contract, and the best way to make an intelligent estimate of this value is to consider the past experience of plaintiffs in selling goods of similar character in that territory.  Another less rewarded damage, but one which may potentially be awarded, is any gain obtained by an employee from the use of information wrongfully obtained from their former employer.  Also, if it is too difficult to establish actual damages, a court may be give effect to a liquidated damages clause of an employment contract so long as the liquidated damages are reasonable in light of the breach.

Moreover, absent any applicable contractual or statutory provision, attorney’s fees and litigation expenses incurred by a plaintiff in litigation of its claim against a defendant, aside from usual taxed court costs, are not recoverable as an item of damages in contract actions.  However, attorney’s fees may be recovered if the party against whom the award is sought acted in bad faith.  Also, attorney’s fees and other expenses incurred in former litigation between the same parties are not recoverable in a subsequent action.  The exception to this general rule is that an award of attorney’s fees is proper when, as a result of defendant’s breach of contract, expenses of collateral litigation are incurred with a third party, provided that the employment of counsel is a direct and necessary consequence of defendant’s breach of contract.

Finally, for any claim for breach of duty arising under contract law, punitive damages are not available in the absence of an independent willful tort.  Thus, a plaintiff seeking punitive damages should allege a willful, independent tort in a count separate from that which alleges a breach of contract.  An independent tort is one that is factually bound to the contractual breach but whose legal elements are distinct from it.

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USING THE REGULATORY COMPLIANCE DEFENSE IN PRODUCT LIABILITY CASES IN VIRGINIA

By:  William E. Buchanan, Esq. and Dennis J. Quinn, Esq.

In products liability cases, manufacturers must follow government regulations or industry safety standards or judges will find manufactures negligent per se.  Yet it has long been the case that a manufacturers’ strict compliance with applicable product safety statutes or administrative regulationsonly acted as a shield to a negligence per se finding.  Compliance itself does not preclude as a matter of law a finding of product defect.

Recent Virginia case law suggests that a manufacturer may be able to use its strict compliance not only as a shield against a negligence per se finding, but also as a sword to establish its product is not unreasonably dangerous.  The regulatory compliance defense asserts that if manufacturers comply with the controlling government regulations or industry safety standards, then their product is not unreasonably dangerous.  If the product is not unreasonably dangerous, the plaintiff’s product liability claim should fail.

Federal courts in Virginia are slowly beginning to accept the logic of the above argument.  InAlevromagiros v. Hechinger, Co. the 4th Circuit held that while conformity with industry custom does not absolve a manufacturer or seller of a product from liability, such compliance may be conclusive when there is no evidence to show that the product was not reasonably safe.1  In Hechinger, a directed verdict was granted in favor of defendant after plaintiff had failed to establish the product violated any standard.  In Mears v. General Motors Co.,2 the Eastern District of Virginia granted defendant’s motion for summary judgment finding that an automatic breaking system complied with industry standards that existed at the time of manufacturer.

Regulatory compliance should no longer be viewed by defense counsel as simply a minimum requirement their client needs to satisfy to avoid a negligent per se finding against them.  As regulations continue to become more sophisticated, manufacturers’ compliance with them arguably should no longer be a starting point for the court to evaluate whether a product is unreasonable dangerous.  Rather, defense counsel should use his client’s compliance with the relevant government regulations or industry safety standards as a weapon against plaintiff’s product liability claim.  The crafting and use of that weapon should begin early in the discovery phase of litigation, through dispositve motions and certainly in jury instructions. While Virginia does not currently allow compliance alone to preclude as a matter of law a finding of product defect, there is some movement in Virginia in that direction.3  Defense counsel in product liability litigation should become aware of the relevant case law, the policy arguments behind them and use these arguments to their client’s advantage.

 

1      993 F.2d 417, 420-21 (4th Cir. 1993)

2      896 F. Supp. 548, 551-53 (E.D. Va. 1995),

3      In Lemons v. Ryder Truck Rental, Inc., 906 F. Supp. 328, (W.D. Va. 1995), the court held absent proof of a violation of a government, industry or safety standard, plaintiff is required to offer evidence as to “actual industry practices, knowledge at the time of other injuries, knowledge of dangers, published literature, and . . . direct evidence of what reasonable purchasers consider defective.”  In Wilder v. Toyota Motor Sales, 23 Fed. Appx. 155; 2001 U.S. App. LEXIS 26787 (2001) the court held without specific evidence of a defect, plaintiff can defeat a summary judgment motion ‘only if his evidence tends to eliminate all reasonable possibilities that some other party or cause is to blame for the accident, or if the facts are such that no other inference but the existence of a defect . . . is reasonable.’”  In McAlpin v. Electric Furnace Co., 1996 U.S. Dist. LEXIS 12618 (1996), the court held that in determining what constitutes an unreasonably dangerous defect, a court will consider safety standards promulgated by relevant industry, as well as the reasonable expectations of consumers.

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SUPREME COURT OF VIRGINIA FINDS INSURER ENTITLED TO REFUND OF SETTLEMENT AMOUNT WHERE POLICY DOES NOT PROVIDE COVERAGE

By:  William J. Carter, Esq. and James P. Steele, Esq.

On April 22, 2005, the Supreme Court of Virginia held that an insurer was entitled to be reimbursed by its insured for amounts advanced to settle a tort claim where the policy did not provide coverage.  The case, Asplundh Tree Expert Company v. Pacific Employers Insurance Company, 611 S.E.2d 531 (Va. 2005), involved an insured’s appeal of a trial court’s declaration that insurer was entitled to be reimbursed for such funds.

The insured, Asplundh, contracted with the Virginia Department of Transportation to clear brush from state highway property.  Asplundh permitted a member of the brush clearing crew to drive a company truck so that he could transport other crew members to and from worksites.  The driver was not permitted to use the company truck for personal business, but it was customary for him to stop somewhere before reaching worksites so that the crew could get breakfast.  On August 21, 2001, the driver lost control of the company truck and it ran off the highway, injuring the workers, two of them severely.

At the time of the accident, Asplundh insured its vehicles through a Pacific Employers business motor vehicle liability insurance policy.   The policy excluded from coverage, among other things, any bodily injury to an Asplundh employee “arising out of and in the course of: . . . [e]mployment by [Asplundh]; or [p]erforming the duties related to conduct of [Asplundh’s] business,” or any bodily injury for which Asplundh may be held liable under and workers’ compensation or similar law.

Shortly after Asplundh notified Pacific Employers of the accident, one of the severely injured employees sued Asplundh and the driver in West Virginia.  Asplundh then sought a determination from the Virginia Workers’ Compensation Commission that the severely injured employee’s claims were subject to Virginia’s Workers Compensation Act.  After the Commission rejected the injured workers’ argument that it lacked jurisdiction over the matter while the West Virginia law suit was pending, Asplundh moved for summary judgment in the civil action.

Asplundh was represented by its own counsel during the civil action and the workers’ compensation proceedings.  Although Asplundh intermittently communicated with Pacific Employers concerning the civil case, it did not demand that Pacific Employers provide Asplundh with a defense.

Eventually, Pacific Employers sued Asplundh in a Virginia court, seeking a declaratory judgment that its policy did not cover the severely injured workers’ claims in the West Virginia case.  Asplundh moved to dismiss the declaratory judgment action.

The West Virginia court denied Asplundh’s Motion for Summary Judgment and the parties began negotiating a settlement.  Pacific Employers participated in the settlement negotiations while reserving its rights, which had yet to be determined, in the Virginia declaratory judgment action.  Pacific Employers eventually funded a settlement of the West Virginia case without abandoning its right to contest coverage in the Virginia declaratory judgment action.

The parties turned their attention to the Virginia declaratory judgment action, where the chancellor found that the severely injured worker was an employee acting within the scope of his employment at the time of the accident for policy exclusion and workers’ compensation purposes.  Therefore, the chancellor ruled, Pacific Employers’ policy did not cover the injured workers’ claims as set forth in the West Virginia action.  The chancellor ordered Asplundh to reimburse Pacific Employers for the settlement amount, and Asplundh appealed.

On appeal, Asplundh argued that the severely injured worker was not acting within the scope of his employment under Virginia’s general rule that an employee going to and from his or her place of employment is not engaged in any service growing out of or incidental to the employment.  The Supreme Court rejected this argument, noting that one exception to this rule is where an employer provides the means of transportation for going to and from work.  The Court cited an earlier case,Bristow v. Cross, 210 Va. 718, 720-21, 173 S.E.2d 815, 817 (1970), in which it applied this exception to hold that an injury to an employee while going to work in an employer-owned vehicle arises out of and in the course of his employment where the transportation is furnished by custom to the extent that it is incidental to and part of the contract of employment, or when it is the result of a continued practice in the course of employer’s business that is beneficial to both the employer and employee. (Internal quotations omitted).

The Court found that the evidence was abundantly clear in this case that Asplundh’s practice was customary and conferred a benefit to both Asplundh and the injured worker.  Thus, the chancellor was correct in finding that the injuries arose out of the course of the injured worker’s employment.  The chancellor was also correct in finding that the injured worker’s claims were properly excluded from coverage under Pacific Employer’s policy, and Pacific Employer was entitled to have Asplundh refund amounts that Pacific Employers provided to settle the West Virginia claims brought by the injured worker.