Month: June 2018

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Another Blow To Construction Indemnity Agreements In Virginia

In Travelers Indemnity Company of Connecticut v. Lessard Design, Inc. (decided June 12, 2018), the Eastern District of Virginia invalidated an indemnity clause in a contract between an architect and a contractor on the basis it violated Va. Code § 11-4.1, which prohibits certain types of indemnity agreements in construction contracts. Lessard Design, Inc. (Lessard) contracted with PDT Builders LLC (PDT Builders), a subdivision of Penrose Group (Penrose), to prepare design plans and provide construction supervision and consulting services on a condominium project. Travelers was PDT Builders’ and Penrose’s commercial general liability insurance carrier.

Lessard, PDT Builders, Penrose, and Travelers were defendants in a prior lawsuit brought by a third party for copyright infringement related to Lessard’s design. After that lawsuit concluded, Travelers sued Lessard to recover the attorneys’ fees and costs it spent defending itself, PDT Builders, and Penrose against the copyright infringement claim. Travelers relied upon a provision in the contract between Lessard and PDT Builders, in which Lessard agreed to:

[i]ndemnify, defend and hold [PDT Builders and its affiliates, agents, employees, and officers] harmless from and against any and all losses, liabilities, expenses, claims, fines and penalties, costs and expenses, including, but not limited to reasonable attorneys’ fees and court costs relating to the services performed by [Lessard].

When Lessard refused to indemnify Travelers, Travelers sued. At issue in the case was whether Lessard could be required to indemnify Travelers in light of Virginia Code § 11-4.1, which prohibits:

[a]ny provision in any contract relating to the construction, alteration, repair or maintenance of a building [or other project] by which the contractor performing such work [agrees] to indemnify or hold harmless another party to the contract against liability for damage arising out of bodily injury to persons or damage to property . . . caused by or resulting solely from the negligence of [the] other party . . .

The Court considered whether § 11-4.1 applied to Lessard, in its role as architect. It found that in addition to Lessard’s design obligations, it also “ha[d] duties and responsibilities related to the ‘Construction Phase’ of the Builders, regularly visit the project site, guard against defects and deficiencies, and reject non-conforming work. Therefore, its contract was one “relating to construction” within the scope of § 11-4.1.

Next, the court found that because Lessard was “the party performing the contract” with PDT Builders, it was a “contractor” under § 11-4.1. The court refused to define the term “contractor” in § 11-4.1 so narrowly as to apply only to entities that actually perform construction. Instead, it found that “contractor” extends to anyone “including architects, who do other work relating to a contract for construction, repair, or other building-related services.” The court suggested, however, that if Lessard had simply sold a set of plans to PDT Builders without participating in the construction phase of the project, § 11-4.1 might not have applied. Had it found that § 11-4.1 did not apply, the court presumably could have reached the same result under Va. Code § 11-4.4, which is nearly identical to § 11-4.1, except that it pertains specifically to contracts with architects and professional engineers.

Lastly, the court found that the indemnity clause failed to exclude situations where Lessard might be forced to indemnify PDT Builders for damages caused solely by PDT Builders’ own negligence. Requiring Lessard to indemnify PDT Builders in these circumstances was “precisely the situation forbidden by § 11-4.1.” Relying on the Supreme Court of Virginia’s prior decision in Uniwest Construction, Inc. v. Amtech Elevator Services, Inc., the court refused to revise the indemnity clause to make it compliant with § 11-4.1. Instead, it struck the entire thing—leaving Travelers without any right to indemnity from Lessard.

Significantly, the court threw out the contract’s indemnity clause simply because, it could have, under different facts, required Lessard to indemnify Travelers for personal injury or property damages. However, in this case, Travelers was just trying to recover attorneys’ fees it spent in the prior litigation, which were not themselves, nor were they related to, personal injury or property damages. Furthermore, it was presumably Lessard’s design services (i.e., its design of the condominium), not its construction phase services, that gave rise to the prior copyright infringement suit and therefore the damages for which Travelers was seeking indemnity. Yet, the court relied upon Lessard’s construction phase services as justification for why § 11-4.1 applied. The court’s reliance upon nonexistent personal injury/property damages and Lessard’s unrelated construction phase services to invalidate the indemnity agreement in the parties’ contract demonstrates just how far courts will go to avoid imposing indemnity obligations in Virginia construction contracts. For more information, please contact the authoring attorney.

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US Supreme Court Overturns Quill

In South Dakota v. Wayfair, Inc., No. 17-494, 2018 WL 3058015 (June 21, 2018), the United States Supreme Court upheld a law allowing the State of South Dakota to collect sales and use tax from out-of-state sellers, even if those sellers do not maintain a physical presence in South Dakota.  In its decision, the Supreme Court overturned its prior decisions in Quill Corp. v. North Dakota, 504 U.S. 298 (May 26, 1992), and National Bellas Hess, Inc. v. Dept. of Revenue of State of Illinois, 386 U.S. 753 (May 8, 1967), which had required the out-of-state seller’s physical presence (such as an office or retail store) in the state in order for the state to collect a sales and use tax. The decision has now made it possible for states to impose sales and use tax on online purchases from out-of-state sellers (such as online retailers).

In Sky Cable LLC v. DIRECTTV Inc., 886 F.3d 375 (4th Circuit, March 28, 2018), the 4th Circuit Court of Appeals affirmed a district court decision ruling that Delaware law permits a court to reverse pierce the corporate veil in order to hold an entity liable for the debts of its alter ego member.  The district court entered judgment for DirectTV for $2.3 million against an individual who fraudulently provided DirectTV services to over 2,300 rental units without a license. When the individual was unable to satisfy the judgment out of his personal assets, DirectTV sought to hold the individual’s limited liability company liable, of which the individual was the sole member. Basing its decision on existing Delaware law and the abundance of evidence that the limited liability company was merely the alter ego of the individual, the 4th Circuit affirmed the district court decision holding that the limited liability company was the alter ego of the individual, and therefore liable for the individual’s debts. This case serves as a good reminder of the importance of observing the corporate formalities.

In Burkhart v. Grigsby, 886 F.3d 434 (4th Circuit, March 29, 2018), the 4th Circuit Court of Appeals held that an unsecured claim can be stripped from a debtor’s principal residence in a Chapter 13 bankruptcy case, regardless of whether the claimant filed a proof of claim.

In Total Tech Solutions, LLC v. ActioNet, Inc., CL-2017-10745 (Fairfax Cir. Ct., March 29, 2018), the Fairfax Circuit Court held that a subcontractor failed to sufficiently plead a cause of action for quantum meruit or unjust enrichment when the disputed matters were clearly contemplated in and addressed by the parties’ written agreement.

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Federal Jury Enters $50,000 Judgment Against Construction Company For FMLA Retaliation

On April 27, 2018, after a two-day trial, a federal jury found a construction company liable for retaliating against an employee who took Family Medical Leave Act (FMLA) leave.  The jury awarded the employee $50,555 in damages.  The outcome is a reminder to employers to never entangle employee performance and discipline issues with an employee’s request for federally protected leave.

The case, Fry v. Rand Construction, involved Rand Construction Company and its employee, Arlene Fry. Although Fry had multiple sclerosis (MS), she performed her duties without incident until November 2016, when she had a series of heated encounters with Rand’s CEO that greatly increased her stress level.  The increased stress aggravated Fry’s MS, causing her to experience numbness in her leg, floaters in her eye, and other MS-related problems.

Fry’s doctor recommended two weeks off work to alleviate the stress.  Rand granted Fry the requested leave but required her to complete all pending projects beforehand.  Fry took three days to complete the projects, which delayed the start of her FMLA leave.

Upon returning, Fry continued to have altercations with Rand management.  This included rumors that Fry had fabricated her MS diagnosis and was vacationing on a cruise during her FMLA leave.  However, Fry also began to have noticeable performance issues.  She was making errors in placing orders and in scheduling deliveries and other events.  Eventually, Rand asked Fry to train her replacement and then voluntarily resign.  Fry refused the arrangement.  Shortly afterward, Rand terminated Fry, citing her declining performance and waning relationship with management.

Fry filed suit against Rand claiming disability discrimination and retaliation under the FMLA and Americans with Disabilities Act (ADA). The jury’s verdict in Fry’s favor of $50,555 could have been much worse; Rand managed to avoid a six-figure judgment, with evidence that after terminating Fry it discovered that she had taken several confidential company emails.  For the jury, these policy violations justified Fry’s termination and preempted the imposition of additional damages.

This case provides two vital lessons for employers.  First, employers must have a clear FMLA leave policy that is applied fairly and consistently to all employees, even if the employer suspects that an employee has ulterior motives in requesting the FMLA leave. Employers should require in their policies that employees provide documentation for FMLA leave requests, particularly for medical leave.

Second, employers should refrain from making any changes to an employee’s working conditions soon after his or her return from FMLA leave.  Most courts frown on an employer taking any action that significantly alters the employee’s working conditions in close proximity to the employee’s return from FMLA leave.  While Rand may have had valid grounds to terminate Fry, had Rand waited a few more months to terminate her employment and documented her performance issues, it may have avoided liability altogether.

Whenever questions arise regarding an employee’s request for federally-protected leave, like FMLA leave, it is best to consult an employment attorney prior to taking action.

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A Few Do’s and Don’ts of Purchasing Small Business Insurance

Insurance is essential for all businesses, large and small.  Indeed, some types of insurance are required by law, such as workers’ compensation insurance for businesses who have more than two workers.  This article will address selected do’s and don’ts for small businesses purchasing property/casualty insurance.  Please note that it is not a comprehensive list and does not address health insurance issues.

DO consider the landscape of the insurance market when selecting an agent.  For example, broadly speaking, the property/casualty market has two types of insurance companies: so-called “direct writers” and independent agents.  Direct writers, such as State Farm, offer through their agents only State Farm products.  Independent agents, on the other hand, have “appointments” with multiple insurance companies and may offer insurance policies written by those companies.  The number and identity of these insurance companies vary widely from independent agent to independent agent.  Accordingly, it is prudent to discuss in detail with your agent what types of insurance products the agent may be able to offer to you.

DO explain in great detail the nature and operations of your business.  Unless your agent has complete information, your agent cannot procure an appropriate set of insurance policies.

DO update your agent on any and all changes that take place during the term of the insurance policies.

DO read your insurance policies as soon as they arrive and ask your agent any questions that you may have.

DO provide only truthful information to your agent when applying for insurance and when making a claim.  Failure to do so may void your policy and may even subject you to a charge of insurance fraud, which is a crime in Virginia.

DO NOT THROW YOUR POLICIES IN A DRAWER INSTEAD OF READING THEM! Virginia law imposes a duty on policyholders to read their policies and to contact their agents if the policies do not appear to be correct.  In a significant decision, the Supreme Court of Virginia reversed a judgment for a small business owner who alleged that his agent negligently failed to procure the increased policy limits that the business owner had requested. The agent had indeed failed to make the requested changes to the policy, but the policyholder — who left school in seventh grade because he could not read – testified that he never looked at the new policy and literally threw it in a drawer.  Despite these circumstances, the Supreme Court of Virginia stated that the policyholder should have had his wife or someone else read the policy for him.  General Ins. of Roanoke v. Page, 250 Va. 409 (1995). While this decision is harsh, it has not been overruled and thus remains the law in Virginia.

DO NOT expect your insurance agent to advise you on all aspects of your business.  Your insurance agent is not your financial consultant, your management consultant or your CPA.

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U.S. Supreme Court Rules In Favor Of Employment Agreements Requiring Arbitration On An Individual Rather Than Class Or Collective Basis.

The U.S. Supreme Court issued its opinion in Epic Systems Corp. v. Lewis on May 21, 2018, holding that employers and employees can agree in arbitration agreements that claims must be brought on an individual, rather than class or collective, basis. This decision reaffirms the federal policy favoring arbitration and a long line of cases requiring courts to enforce arbitration agreements as written.

The Court in Epic Systems decided three consolidated cases in which employers had agreements with employees that included an arbitration clause requiring that the parties submit any dispute to arbitration and that the arbitration be on an individual basis, meaning that the employees could not bring a collective or class action against the employer. In each of the three cases, the employees ignored their arbitration agreements and filed in court collective actions on behalf of themselves and other employees claiming their employers committed violations of the Fair Labor Standards Act (FLSA). The employees and the National Labor Relations Board (NLRB) argued that by precluding collective actions, the arbitration agreements violated Section 7 of the National Labor Relations Act (NLRA), which protects employees’ right to “concerted activity.”

The Supreme Court’s decision in Epic Systems rejected the NLRB’s and the employees’ position. Section 7 of the NLRA secures employees’ “rights to organize unions and bargain collectively,” but does not guarantee a right to bring class or collective actions. The Court pointed out that the NLRB’s opposition to individual arbitration is new; up until 2012, the NLRB had recognized that employees and employers both “benefit from the relative simplicity and informality of resolving claims before arbitrators” and that the validity of employment arbitration agreements does not involve the NLRA. In 2012, however, the NLRB reversed its position, announcing in D.R. Horton, Inc. that the NLRA nullifies arbitration agreements that disallow collective or class actions.

The Supreme Court’s opinion in Epic Systems harkens back to the original basis for Congress’s endorsement of arbitration in the Federal Arbitration Act (FAA): arbitration benefits all parties to a dispute by offering “quicker, more informal, and often cheaper resolutions for everyone involved.” The FAA embodies a federal policy strongly favoring arbitration agreements and requires courts to “rigorously” enforce them according to their terms, including terms about which procedures or rules apply to the arbitration. The Supreme Court recognized the “traditionally individualized and informal nature of arbitration.” If a party could demand a collective or class action in arbitration, the advantages of arbitration—speed, simplicity, and inexpensiveness—“would be shorn away and arbitration would wind up looking like the litigation it was meant to displace.” The Supreme Court warned against “reshap[ing] traditional individualized arbitration by mandating classwide arbitration procedures without the parties’ consent.”

The Supreme Court’s decision is strong support for arbitration agreements in the employment context. If you are interested in implementing such agreements in your workplace, you should consult with an experienced employment law attorney. The employment law attorneys at Vandeventer Black are available to assist you.

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