What You Need to Know About Relation Back of Amendments

Tuesday, December 15th, 2015

When we say that an amendment to a pleading “relates back” to the filing of the original pleading, we are simply saying that we are going to pretend that the new allegations appeared in the original document, even though they didn’t. The reason for this concept, and indeed the only reason that anyone would care whether an amendment relates back, is the statute of limitations. If a party, almost always a plaintiff, seeks to amend his or her pleading before the statute of limitations runs, he or she doesn’t need anything to relate back. It is only when the original pleading was filed before the statute ran, and later, after the statute has run, the party wishes that the original complaint had included other or different allegations that the concept of relation back saves the day. Of course, there may be other times when a litigant will wish that he or she had said something sooner, such as when a defendant wishes to amend an answer to include a defense. Defenses don’t have statutes of limitation, however, and so the issue becomes one of the timing of an amendment and prejudice to the opposing party. Relation back doesn’t come into play.

Federal Court

Amendments in federal cases are governed by Rule 15 of the Federal Rules of Civil Procedure, which provides in pertinent part as follows:

Rule 15. Amended and Supplemental Pleadings

(a)        Amendments Before Trial.

(1)        Amending as a Matter of Course. A party may amend its pleading once as a matter of course within:

(A)       21 days after serving it, or

(B)       if the pleading is one to which a responsive pleading is required, 21 days after service of a responsive pleading or 21 days after service of a motion under Rule 12(b), (e), or (f), whichever is earlier.

(2)        Other Amendments. In all other cases, a party may amend its pleading only with the opposing party’s written consent or the court’s leave. The court should freely give leave when justice so requires.

(3)        Time to Respond. Unless the court orders otherwise, any required response to an amended pleading must be made within the time remaining to respond to the original pleading or within 14 days after service of the amended pleading, whichever is later.

. . .

(c)        Relation Back of Amendments.

(1)        When an Amendment Relates Back. An amendment to a pleading relates back to the date of the original pleading when:

(A)       the law that provides the applicable statute of limitations allows relation back;

(B)       the amendment asserts a claim or defense that arose out of the conduct, transaction, or occurrence set out–or attempted to be set out–in the original pleading; or

(C)       the amendment changes the party or the naming of the party against whom a claim is asserted, if Rule 15(c)(1)(B) is satisfied and if, within the period provided by Rule 4(m) for serving the summons and complaint, the party to be brought in by amendment:

(i)         received such notice of the action that it will not be prejudiced in defending on the merits; and

(ii)        knew or should have known that the action would have been brought against it, but for a mistake concerning the proper party’s identity.

Amendments to add allegations of fact, claims, and theories of recovery are the least complex. Basically, if the new allegations or claims arise out of the same operative facts as did the claims in the original complaint, they relate back. If, for instance, an original complaint contains allegations of medical malpractice, and a plaintiff later wishes to sue for medical battery based on the same treatment, the new claims would relate back to the date of the filing of the old claims, notwithstanding the fact that the statute of limitations might have run in the interim. Similarly, a new claim of fraud would likely relate back to the date of an original claim for breach of contract, if the same actions on the part of the defendant gave rise to both. On the other hand, if the original complaint claims that the defendant breached a contract on August 1, 2015, allegations that the same defendant breached a different contract, or breached the same contract on October 1, 2015, probably would not relate back. If the statute for the second claim had run as of the time of the amendment, the second claim would likely be barred.

The issue becomes more complex and the rules become much more technical when a plaintiff wants to add a defendant, or substitute a new defendant for the old one. Concepts such as due process dictate that the statute of limitations can’t just be suspended indefinitely, and so the ability to add a defendant or switch defendants must have some limits, and those limits must be closely tied to the statute of limitations itself. The basic rule in federal court is set out in Rule 15(c) above, and can be summarized as follows: if the “new” defendant got notice of the lawsuit within the time established by the rules for serving a complaint, and knew or should have known that, but for a mistake, he, she, or it should have been sued, then a later amendment to either add the “new” defendant or substitute the “new” defendant for the old one will relate back, regardless of whether the statute of limitations has run. In other words, the statute of limitations is extended a bit, and can be tolled by notice, rather than by an actual claim. The actual claim can be made later. The question of how much later is governed by the usual Rule 15 analysis, which looks at things like prejudice, delay, fairness, etc.

There are all sorts of issues hidden here. First, the time for serving a complaint has recently been changed, from 120 days to 90 days, per Rule 4(m). Second, the party seeking to amend has to show that the “new” defendant had notice, which could be difficult in some circumstances. The easiest way to show notice is to simply have the potential defendant served with the complaint, but unless the plaintiff is very diligent and knows beforehand that the defendant he or she has sued might turn out to be the wrong one, it seems unlikely that this will happen very often. Further, the notice must be of the lawsuit, not just the claim or the events that give rise to the lawsuit. For instance, notice that there was a car accident would be insufficient; the amending party would have to show that the “new” defendant had notice of the fact that there was a lawsuit about the car accident.

Another issue arises from the use of the word “mistake” in the rule. It is fairly well‑settled that the requirement of a “mistake” means that relation back does not work when a plaintiff consciously decides not to sue a known defendant for strategic reasons. It is less clear whether the requirement of a “mistake” means that relation back can only be used to substitute the “right” defendant for the “wrong” one, or whether the rule allows the addition of another “right” defendant, while keeping the original defendant in the case. The case law seems to indicate that the rule can be used in either circumstance.

Finally, there seem to be some mysteries as to when the 90-day period starts to run. It is easy enough to figure this out in a case involving only one original complaint that is timely served, and a plaintiff attempting to make his or her first amendment. But what if the original defendant is not served within the 90-day period, but the court allows an additional period? The answer is that the “notice” period for the “new” defendant is also extended.

Similarly, what if the original complaint is filed on January 1 against Defendant A, a first amended complaint is filed on July 1 against Defendant B, and then plaintiff later wishes to take advantage of relation back to add Defendant C? Does the time period run from January 1 or July 1? Does it make a difference whether the mistake was made in January or July? Which complaint must Defendant C have had notice of? At least one treatise says that a new “notice” period starts to run with each amendment, meaning that each amendment carries with it an additional 90-day window in which to give notice to a potential new defendant. But, logically, this can’t be correct. If it were, then a plaintiff could file an amended complaint naming a new defendant, and simply serve that defendant within 90 days. It would then be easy to show that the “new” defendant had actual knowledge of the lawsuit within the required time. This would mean that the statute of limitations could theoretically be extended forever. It does not appear that any court has ever addressed this question, nor have the commentators to the rules.

Finally, what if a complaint is filed, voluntarily dismissed, and then re-filed? Does the notice period run from the original filing, or the new filing? One would guess that it runs from the new filing, but, again, it does not appear that any court has addressed this question.

In an effort to avoid the opportunity to lose these or similar issues before the United States Supreme Court, litigants should follow what we all know are the best practices: investigate claims thoroughly, file suit well in advance of the statute of limitations, and if any issue arises as to the correct identity of the defendant, make sure that all potential defendants are sued, or at least given actual notice of the lawsuit before the time period runs. Of course, this is easier said than done.

Virginia State Court

The basic rule on amendments in Virginia is:

Rule 1:8. Amendments: No amendments shall be made to any pleading after it is filed save by leave of court.

The rule on relation back of allegations against an existing defendant is roughly the same as in federal court. The rule itself is as follows:

Va. Code § 8.01-6.1. Amendment of pleading changing or adding a claim or defense; relation back
Subject to any other applicable provisions of law, an amendment of a pleading changing or adding a claim or defense against a party relates back to the date of the original pleadings for purposes of the statute of limitations if the court finds (i) the claim or defense asserted in the amended pleading arose out of the conduct, transaction or occurrence set forth in the original pleading, (ii) the amending party was reasonably diligent in asserting the amended claim or defenses, and (iii) parties opposing the amendment will not be substantially prejudiced in litigating on the merits as a result of the timing of the amendment. In connection with such an amendment, the trial court may grant a continuance or other relief to protect the parties. This section shall not apply to eminent domain or mechanics’ lien claims or defenses.

The latest guidance on this general concept from the Supreme Court of Virginia came in McKinney v. Va. Surgical Assoc., P.C., 284 Va. 455, 732 S.E.2d 27 (2012). The issue in McKinney was whether claims made a complaint filed after a nonsuit were the same as the claims made in the original suit, so as to take advantage of the 6-month savings period. The court held that all claims arising from the same “cause of action” are functionally the same for purposes of the nonsuit rules. It stated that a “cause of action” is the facts and circumstances which give rise to the various “rights of action.” Thus, a survival action for medical malpractice and a wrongful death claim, while separate “rights of action,” arose from the same facts, and thus were the same “cause of action.” There appears to be no reason why the court would not apply the same test with regard to relation back amendments.

When it comes to adding or substituting defendants, Virginia has two statutes. The first, Va. Code § 8.01-6, tracks the federal rule except in a few regards. The most important is that the “new” defendant had to have notice of the claim before the statute of limitations ran, as opposed to within the statute plus the time to serve the complaint. In theory, this could be about 89 days shorter than would be allowed in federal court. The statute reads as follows:

Va. Code § 8.01-6. Amending pleading; relation back to original pleading

A misnomer in any pleading may, on the motion of any party, and on affidavit of the right name, be amended by inserting the right name. An amendment changing the party against whom a claim is asserted, whether to correct a misnomer or otherwise, relates back to the date of the original pleading if (i) the claim asserted in the amended pleading arose out of the conduct, transaction, or occurrence set forth in the original pleading, (ii) within the limitations period prescribed for commencing the action against the party to be brought in by the amendment, that party or its agent received notice of the institution of the action, (iii) that party will not be prejudiced in maintaining a defense on the merits, and (iv) that party knew or should have known that but for a mistake concerning the identity of the proper party, the action would have been brought against that party.

The second Virginia statute on point is Va. Code § 8.01-6.2, which provides as follows:

Va. Code § 8.01-6.2. Amendment of pleading; relation back to original pleading; confusion in trade name

(A) A pleading which states a claim against a party whose trade name or corporate name is substantially similar to the trade name or corporate name of another entity may be amended at any time by inserting the correct party’s name, if such party or its agent had actual notice of the claim prior to the expiration of the statute of limitations for filing the claim.

(B) In the event that suit is filed against the estate of a decedent, and filed within the applicable statute of limitations, naming the proper name of estate of the deceased and service is effected or attempted on an individual or individuals as executor, administrator or other officers of the estate, such filing tolls the statute of limitations for said claim in the event the executor, administrator or other officers of the estate are unable to legally receive service at the time service was attempted, or defend suit because their authority as executor, administrator or other officer of the estate excludes defending said actions, or their duties as executor, administrator or other officer of the estate had expired at the time of service or during the time of defending said action.

The concept here is the same, except that there is no examination of prejudice to the defendant. There appears to be a trade-off here, in that a defendant with a confusing trade name is not entitled to quite as much protection.

There are very few Virginia state cases interpreting any of these statutes. It is likely that the Virginia state courts would look to the federal courts for guidance. Given that there are still uncharted waters in the federal system, however, litigants are well advised to be careful and diligent.

Scientific Misconduct Red Flags – Warning Signs that Scandal Might be Brewing in Your Lab

Wednesday, December 2nd, 2015

This article by Gentry Locke Qui Tam Relator attorney John Thomas was published on December 1, 2015 by The Scientist Magazine on its website, www.the-scientist.com.

Recent years have seen a spate of scientific scandals. Whether this is due to an increase in dishonesty or foul play in the lab or simply closer attention to the issue, research misconduct is now squarely in the public eye.

Scientific scandals come in all shapes and sizes and can result from the actions of lab members at any level. While misconduct cases involving principal investigators garner the most attention, lab heads are not the only ones engaging in wrongdoing; sometimes it is technicians, research assistants, postdocs, or even students in their laboratory. Despite the variety of research misconduct cases, similarities exist across these scandals, and upon closer examination we can identify clear patterns that may provide clues for how to recognize and prevent misconduct in the future.

Lack of data transparency. Often times, there is a significant lack of transparency in data sharing and storage. Scientific data is highly proprietary, and some measure of safekeeping is understandable. But in many cases of scientific fraud, no one—not even the wrongdoers’ colleagues—had access to the raw data. Transparency is not only essential for combating fraud; it can be an important safeguard for catching mistakes in data analysis and interpretation. Lack of transparency, while not a guarantee that fraud is taking place, is one red flag that something may be amiss.

“Revolutionary” findings. Another sign that may be cause for concern is the claim of a “revolutionary” or “groundbreaking” discovery. While such breakthroughs certainly happen, and are important for scientific progress, data that are “too good to be true” often are. Fraudsters rarely falsify research results in order to make mundane observations; it is their pursuit of international recognition, grant funding, and career advancement that leads them to commit fraud. Thus, breakthrough findings should be met with skepticism and, at a minimum, should motivate fellow scientists to attempt to replicate the work independently.

Misleading statistics. Mark Twain once said, “There are three kinds of lies: lies, damned lies, and statistics .” This certainly exaggerates the case, as sound statistical analysis is one of the foundations of modern science. But Twain had a point about the misleading way that statistics can be used. Scientific fraud often involves researchers using statistical techniques to obscure the true results of an experiment or to tell a story where one does not exist. Researchers should be suspicious when they see examples of “lying with statistics” such as flipping the axes of graphs, using nonstandard values, or switching methods of measurement between figures in a confusing manner.

Suspicious lab practices. Another common pattern in scientific misconduct cases is that certain individuals stood out as being “exceptional” for some time before wrongdoing was identified. Whether such a person appears able to complete experiments at a much higher volume than anyone else, seems to possess a “magical” ability to make experiments or equipment work when others cannot, or has simply taken complete control over the research, those who uncover scientific fraud often realize that the warning signs had been apparent for some time.

Small lies, big lies. As American physician, writer, and oculist   Austin O’Malley once said, “Those who think it is permissible to tell white lies will soon become color-blind.” Scientists in all fields and at all seniority levels should be extremely concerned when they discover that a colleague is being untruthful about anything, even if it appears to be a small matter. In many scientific fraud cases, the wrongdoer’s colleagues did not immediately uncover the fraud itself, but discovered falsity in a peripheral issue, such as a small lie in credentials.

What to do if you see red flags

If you notice potential problems in your lab, the first thing to do is learn as much as possible about the situation. If you have concerns about a data set, find out when it was generated, who created it, what versions of the data exist, and what potential explanations could account for the discrepancies. At that point, it can be appropriate to give your colleague an opportunity to explain the problem.

Even if this does not occur, a potential whistleblower should not take the colleague’s word at face value; follow-up will be necessary to verify. And be sure there is a clear written record of your observations before approaching your colleague.

If you continue to believe that scientific misconduct is occurring after speaking with your colleague and conducting a brief investigation, escalate the issue pursuant to your institution’s policy. Usually internal procedures require notification of the research integrity officer and/or department chair. Consider reporting the allegation externally as well, such as to the Office of Research Integrity of the U.S. Department of Health and Human Services, or by filing an action as a private whistleblower under the False Claims Act.

Whatever the course of action, it is important to do something. As previous cases of misconduct clearly illustrate, the damage that can be done through scientific fraud can be devastating not only to the scientific record, but also to human lives.

John R. Thomas Jr., an attorney with Gentry Locke, represents scientific whistleblowers in a variety of matters, including False Claims Act cases. He is also chair of the Federal Bar Association Qui Tam Section, a Marine Corps Major, and a practicing judge advocate.

“Ban the Box” May Soon Be the Law for Government Contractors

Tuesday, November 24th, 2015

This article by Gentry Locke attorney Brad Tobias was published in Gentry Locke’s “Virginia Construction Law Update” blog.

What is the “ban the box?”

Many employers are starting to see the term “ban the box” creep into the lexicology of phrases and buzzwords which permeate the regulatory framework imposed on government agencies and government contractors. Across the country, 19 states and more than 100 cities and counties have enacted various versions of “ban the box” legislation and rules.

So what does this term mean? Put simply, the term refers to a requirement to remove any questions regarding a person’s criminal history from job applications. Employers may recoil at the idea that that they cannot ask their job applicants about their criminal history. What is important to note, however, is that the “ban the box” rules currently in force around the county, including here in Virginia, generally do not prevent employers from ever conducting a criminal background check on job candidates or inquiring into their criminal history. Instead, the rules delay the time when these background checks and inquiries can occur. Any inquiry about criminal history and all background checks must be delayed until after the employer has made a determination that the applicant is otherwise qualified for the position.

On November 2, 2015, President Obama announced that he would be issuing an executive order requiring federal agencies to “ban the box” and to “delay inquiries into criminal history until later in the hiring process.” This directive will apply exclusively to those who seek employment with a federal agency. Private employers, even those who are federal government contractors, will remain unaffected by the new order, which has not yet been formally issued.

“Ban the box” in Virginia

Here in Virginia, state government agencies are also subject to this “ban the box” rule. In April 2015, after the General Assembly failed to pass more comprehensive legislation, Virginia Governor Terry McAuliffe issued an executive order that requires all state government agencies to discontinue using job applications that asked the candidate to disclose whether he or she had been previously convicted of crime. Several other localities have followed suit. With the issuance of this state executive order, Virginia became the 15th state out of what is now 19 states which have adopted orders and/or legislation mandating that employers “ban the box” on initial job applications.

As of late 2015, the “ban the box” rules do not apply to private employers in Virginia. As such, there is currently no rule or order that prohibits federal or state government contractors or their subcontractors from including questions about criminal history on their job applications or inquiring into this area before a job offer is extended.

Legislation “banning the box” is moving ahead in Congress

Despite genuine concerns about implementing this new rule, the “ban the box” movement which is designed to create a more open hiring process appears to be gaining bi-partisan support in Congress. In September 2015, legislators from both parties introduced a bill in both the Senate and the House which would prohibit federal contractors and agencies from inquiring into an applicant’s criminal history prior to a conditional offer of employment.

The Senate version of the bill was approved with unanimous support by the Senate Homeland Security & Governmental Affairs Committee, and some predict that the bill may be fast-tracked through the Senate and combined with the House version. The Senate version of the bill, S.2021, states that contractors may not verbally or through written form request the disclosure of criminal history record information regarding an applicant before the contractor extends a conditional offer to the applicant. The bill as it is currently drafted includes several exceptions for certain positions, including those which relate to law enforcement and national security, require access to classified information, or involve interaction with minors.

What could “ban the box” mean for government contractors?

From a legal perspective, if the “ban the box” rule becomes the law, and questions about past criminal convictions are prohibited on initial job applications, employers will need to think through their hiring procedures. Under these rules, the employer is first required to make a determination that the candidate is qualified for the job before requesting the background check. This rule is very similar to the protections put in place under the Americans with Disabilities Act, which now prohibits employers from asking applicants about their past workers compensation claims and medical problems before first determining the candidate was otherwise qualified for the job.

If this proposed rule becomes the law, it is certain that the change in timing will increase the likelihood that a rejected candidate will challenge the decision to “withdraw” the job offer. There are several ways these claims may arise based on laws and rules that predate the “ban the box” movement. First, employers must comply with the Fair Credit Reporting Act (FCRA) disclosure and consultation requirements before taking any adverse action based on background searches. In recent years, there has been a rash of FCRA claims against employers and credit agencies for errors in background reports and for failing to ensure full compliance with FCRA. This new law is likely to make those types of claim more likely.

The second area of legal challenge will come from a rejected applicant based on a claim that the decision to withdraw the job offer is discriminatory and based on his/her status as a minority. Title VII prohibits employers from wholesale rejection of applicants with criminal history without a justification that is job-related and consistent with business necessity. The Equal Employment Opportunity Commission (EEOC) has argued, and courts have held, that adopting this type of rule (exclude all those with a criminal history – arrest or conviction) has a disparate impact on minority candidates.

The EEOC’s Guidance advises employers against making an employment decision based on conviction records without first considering the following three factors in determining whether the decision is job-related: (i) the nature and gravity of the offense; (ii) the time that has passed since the conviction and/or the completion of the sentence; and (iii) the nature of the job held or sought.

The EEOC Guidance also suggests that employers should give applicants with a criminal record an opportunity to explain the circumstances and provide mitigating information showing that the employee should not be excluded based on the offense. While this Guidance does not carry the force of law, it may be considered favorably by a court and will certainly be the framework the EEOC uses when judging complaints received from rejected job candidates, so it is worth including in the process used to evaluate whether to withdraw a job offer.

Conclusion

Government contractors should pay close attention to the legislation currently pending in Congress. Although the “ban the box” rules currently only apply to government agencies and their employees, this effort will not go away soon. Even without this new rule, employers must make sure they are making thoughtful decisions about when to ask about past criminal records and how to respond to that information when it is discovered. It is especially important that employers are vigilant in their efforts to document compliance with FCRA, and maintain their hiring records for the required time periods mandated by federal law. If you have questions about these issues, contact any of the attorneys who are part of our Employment team.

Judicial Decision Making in Local Government Cases

Wednesday, November 4th, 2015

This outline was presented at the Local Government Attorneys Association 2015 Fall Conference at the Hotel Roanoke Conference Center on Saturday, October 17, 2015.

For the full article, click here.

Speakers:

Cynthia D. Kinser, Retired, Supreme Court of Virginia

Honorable Elizabeth K. Dillon, United States District Court, Western District of Virginia

Honorable David B. Carson, 23^rd Judicial Circuit of Virginia

Moderators:

Timothy R. Spencer, Chief Deputy, City of Roanoke, City Attorney’s Office

Gregory J. Haley, Gentry Locke

Outline Authors:

Timothy R. Spencer, Gregory J. Haley, and Jonathan D. Puvak

We have prepared this outline based on discussions with and comments by the judges participating in the program and others. We have also contributed our own observations prompted by the discussions with the judges. Any insights must be credited to the judges. Any mistakes must be attributed to the outline authors.

We emphasize that this outline has been prepared by the outline authors. The content is based on our interpretation of the comments of the judges, on our personal experience, and the input of other judges and lawyers. No statements in this outline can be attributed to any judge participating in the program.

This outline has three basic interrelated themes:

1. What are the best practices to persuade judges in local government cases?
2. How are local government cases different from (or the same as) other cases?
3. How do judges make difficult decisions in local government cases?

In a nutshell, your job from beginning to end is to present the judge with enough clear and concise factual and legal information to make the court’s job easier and to persuade the court to rule in your favor.

Round 2.5 – New Home Healthcare Wage Rules to be Effective October 2015

Friday, September 25th, 2015

In August, the U.S. Court of Appeals for the District of Columbia approved the new Department of Labor (DOL) rule that will extend minimum wage and overtime coverage to about 2 million workers employed by home healthcare agencies. In doing so, the Court of Appeals overturned a lower court’s decision that held DOL had overstepped its authority when it adopted the rule.

The Home Care Association of America which brought this lawsuit asked the Court of Appeals to delay implementation of its decision while the Association filed an appeal to the U.S. Supreme Court. On September 18, 2015, the Court of Appeals denied this motion to stay the effectiveness of its ruling. As a result, the new DOL rules for home healthcare agencies will go into effect on October 13, 2015. The DOL has said that it will refrain from bringing any enforcement action under the new rules for 30 days after the rules become effective.

Given this turn of events, businesses who send workers to provide companionship and other in-home domestic services must take immediate steps to come into compliance with the new DOL rules which require that these employees be paid both minimum wage and overtime. For assistance with regard to these issues or other wage and hour/overtime issues, please contact any member of Gentry Locke’s Employment practice group.

The DOJ Wants Heads on Sticks (Officially): What You Need to Know About the Yates Memo

Thursday, September 24th, 2015

Recently, several Gentry Locke lawyers attended the second Annual ABA Southeastern White Collar Crime Conference outside of Atlanta, Georgia. The timing of this year’s conference proved to be fortuitous as Deputy Attorney General Sally Yates issued a new Department of Justice (DOJ) memo on September 9, 2015 regarding individual accountability for corporate wrongdoing. Members of the Bench and Bar alike offered different views of how the Yates memo will impact corporate government investigations.

For any company that engages in any sort of regulated activity, from ensuring fair wages to government contracts, the Yates memo cannot be ignored. Below is the summary of the key points and some observations about the memo:

1. For a corporation to be eligible for any cooperation credit (e.g., brownie points) in civil or criminal proceedings, corporations must provide to the DOJ all relevant facts about the individuals involved in the corporate misconduct.
   • While not entirely new, this declaration of cooperation credit focuses on a holistic approach. Corporations cannot receive any cooperation credit if they fail to give up the goods on individual actors, whether they be low level employees or top executives. This principle is aimed specifically at ensuring that corporate decision makers reveal information on employees regardless of an employee’s position; namely, executives. These principles also apply in the context of civil cases, particularly False Claims Act cases.
2. Both criminal and civil corporate investigations should focus on individuals from the inception of the investigation.
   • While this principle is not new, the DOJ’s pronouncement is a clear statement that individuals are always the key focus of investigations and will be from the very beginning of any sort of civil or criminal investigation.
3. Criminal and civil attorneys handling corporate investigations should be in routine communication with one another.
   • While coordination is not uncommon both on the civil and criminal front by the DOJ and its related agencies, this overt statement in the Yates memo begs the question of whether or not there will be more opportunities for defense counsel to attack civil or criminal investigations for sharing information or coordinating to a degree that impinges upon notions of keeping parallel investigations separate. It is yet to be seen how courts will apply this principle given the fact that there are wide-ranging court opinions about when investigations are unlawfully commingled versus where the line is for proper sharing of information between civil and criminal attorneys within the DOJ and its related agencies.
4. Absent extraordinary circumstances, no corporate resolution will provide protection from criminal or civil liability for any individuals.
   • Achtung! Attention! Atención! Aandacht! Attenzione!: Any release of criminal or civil liability due to extraordinary circumstances must be personally approved in writing by the Assistant Attorney General or the US Attorney supervising the case. This may be a game changer. While the concept is not new, the DOJ has formally introduced a policy requiring line assistants to seek written authorization to make a decision about releasing individuals in the context of a civil or criminal case. This could have a profound impact on pre-indictment negotiations and pretrial negotiations in both civil and criminal cases. While it is unclear how the DOJ will apply this principle, it is imperative to seek early advice whenever your company is facing civil or criminal allegations by a government agency.
5. Corporate cases should not be resolved without a clear plan to resolve related individual cases before the statute of limitations expires and declinations as to individuals in such cases must be memorialized.
   • Related to the 4^th principle noted above, the DOJ now requires a written memorandum explaining why a decision has been made to not bring a civil or criminal charge against an individual who committed misconduct and this memo must be approved by the US Attorney or Assistant Attorney General whose office handled the investigation. This provision also provides that tolling agreements for corporations should be the rare exception and not the norm.
6. Civil attorneys should consistently focus on individuals as well as the company and evaluate whether to bring suit against an individual based on considerations beyond that individual’s ability to pay.
   • This provision has the most impact in the area of False Claims Act cases. In civil cases, many decisions about what parties to include take into consideration whether a party has the ability to pay. In the context of False Claims Act cases and other civil cases before the DOJ, civil attorneys should consider factors such as whether the person’s misconduct was serious, whether it is actionable, whether the admissible evidence will probably be sufficient to obtain and sustain a judgment and whether pursuing the action reflects an important federal interest. Including individuals that have no ability to pay, based on other considerations, can certainly have a significant impact in settlement negotiations in civil cases and indeed could impact preparations for trial.

Many principles in the Yates memo are not new. But, as with any written policy that is disseminated to all attorneys at the world’s largest law firm (the DOJ), people are sure to take notice. In the near term, we can expect immediate uncertainty to infiltrate into current civil and criminal investigations and cases. Over the long term, however, it is unclear whether or not the Yates memo will have any profound, lasting impact. While most lawyers are well aware that individuals are always prized over corporate entities, the Yates memo is the new Attorney General’s first bite at addressing criticisms directed at the DOJ for failure to adequately address individual and corporate wrongdoing, both civilly and criminally, in the wake of the financial crisis of 2008.

So what are the final parting words?

1. If you’re a corporation, be ready to devote the time and resources to an internal investigation and be ready to throw employees under the bus if it serves the corporation’s interest; and
2. If you’re an employee in a corporation that is being investigated civilly or criminally, lawyer up and walk the fine line between placating the government and your employer.

Labor Board’s New “Joint Employer” Decision: More Bad News for Virginia Employers

Thursday, September 10th, 2015

The pro-union NLRB has struck again! In a high-profile case that had been pending before the Board for over two years, the Board, in a 3-2 decision, overruled 30 years of settled precedent and announced a new test to determine whether two entities could be considered “joint employers” under the National Labor Relations Act. Browning-Ferris Industries of California, Inc., 362 NLRB No. 186 (Aug. 27, 2015). As will be explained below, the Board concluded that a user employer did not have to exercise “direct and significant” control over the contractor’s employees to be considered a “joint employer.” Instead, it ruled that “indirect” control (e.g., through an intermediary) is sufficient. Moreover, the user employer can also be a “joint employer” merely by retaining the contractual right to control essential terms and conditions of employment, even if it has never exercised such control.

Procedural Posture of the Case.

Browning-Ferris (BFI) operates a recycling facility in California. BFI employed about 60 employees, most of whom worked on the exterior portion of the facility. There were four conveyor belts inside the facility that carried distinct materials. In 2009, BFI entered into a temporary labor services agreement with Leadpoint. Under the agreement, Leadpoint provided employees to do the work of sorting the materials and general housekeeping inside the facility.

In July 2013, a local Teamsters union filed a petition for an election seeking to represent a unit comprised of sorters, housekeepers and screen cleaners. The union contended that BFI and Leadpoint should be considered joint employers of these employees. In August 2013, the parties presented evidence at a NLRB hearing, and then submitted post-hearing briefs. On August 16, 2013, the Acting Regional Director for Regional 32 of the NLRB concluded, based on the evidence and settled legal authority, BFI could not be considered the joint employer of the Leadpoint employees. The union appealed to the Labor Board in Washington, DC.

The Board’s New “Joint Employer” Test.

More than two years later, on August 27, 2015, the Board concluded that BFI and Leadpoint were joint employers. The Board stated the test moving forward to be as follows:

The Board may find that two or more entities are joint employers of a single workforce if they . . . share or co-determine those matters governing the essential terms and conditions of employment. In evaluating the allocation and exercise of control in the workplace, we will consider the various ways in which joint employers may ‘share’ control over terms and conditions of employment or co-determine them.

In other words, the Board will now evaluate the evidence to determine whether an employer that uses a staffing company’s employees affects the means or manner of those employees’ work and employment terms, either directly or indirectly through an intermediary.

The Board opined that “essential terms and conditions” includes matters such as “hiring, firing, discipline, supervision and direction,” as well as the employees’ wages and hours. Other examples of control include “dictating the number of workers to be supplied, controlling scheduling, seniority, and overtime and assigning work and determining the manner and method of work performance.”

The evidence in the case.

To understand the breathtaking overreach of the NLRB, it is useful to outline the arrangement between BFI and Leadpoint in this case. As a general statement, there was nothing out of the ordinary — it is an arrangement that is fairly typical in today’s business environment. The evidence established at the hearing as to the relationship between BFI and Leadpoint was as follows:

• Leadpoint had its own supervisors at the plant.
• Leadpoint supervisors reported to Leadpoint corporate in Arizona.
• Leadpoint supervisors created its employees’ work schedules.
• Leadpoint had its own human resources department and had a HR representative located in a trailer on the premises of the facility.
• Leadpoint had the sole authority to set the wage rates for its employees. [However, Leadpoint could not raise its employees’ wages in excess of those paid by BFI to its full-time employees who performed the same work.]
• Leadpoint independently paid all of its employees and provided them with options to participate in benefit plans offered by Leadpoint.
• Leadpoint has the sole responsibility to discipline, evaluate and terminate employees assigned to BFI.
• Leadpoint was solely responsible for recruiting and hiring its own employees.
• BFI maintained productivity standards for the lines. However, BFI did not control or enforce the speed at which the individual Leadpoint employees had to work.
• BFI set the facility’s hours of operation. However, Leadpoint created the individuals’ work schedules and assigned its employees to work the required shifts.

The Board applied the evidence to the new test.

1. BFI retained the right to “discontinue the use of any personnel” that Leadpoint assigned to the facility. The evidence showed that on one occasion a BFI manager observed two Leadpoint employees in possession of a bottle of whiskey while on duty. The BFI manager sent an email to a Leadpoint manager and “requested” their dismissal. Leadpoint thereafter sent the employees for alcohol testing and dismissed one employee and removed the second from the job site. On a second occasion, a BFI manager asked that a Leadpoint employee be dismissed after viewing security video in which the employee punched a mounted box and destroyed other property. The Leadpoint manager conducted his own investigation, consulted Leadpoint corporate management, and then terminated the employee.
2. BFI required that all persons who work on the premises pass a drug test.
3. BFI had the right to control its conveyor belts including the speed in which they operated, and BFI managers directly and indirectly implored Leadpoint employees to work faster and smarter.  BFI managers sometimes spoke directly with Leadpoint employees to communicate work instructions and preferred work practices.
4. BFI set the shift times and determined the number of employees that were necessary to staff the plant.
5. Although Leadpoint determined employees’ pay rates and benefits, BFI prevented Leadpoint from paying employees more than BFI employees who were performing comparable work.

In sum, the Board concluded that BFI’s role in sharing and codetermining the essential terms and conditions of employment established that it is a joint employer with Leadpoint.

The two Republican members of the Board issued a lengthy, passionate and compelling dissent. (The employer community can only hope such reasoning is persuasive to future courts who analyze these types of cases.)

Concluding Thoughts

This decision is a game changer. There is no doubt that this new standard will result in intense and/or protracted litigation in a variety of settings for years to come. In the short term, this decision will embolden Unions and NLRB Regional Directors to inject themselves into a wide variety of business relationships and contend that the user employer is the joint employer of the contractor’s employees. No business relationship is spared of NLRB scrutiny—this is especially true as to franchisor-franchisee relationships, user employer contracts with staffing or temporary agencies, and any agreement in which an employer uses a vendor or contractor to outsource services.

Businesses will need to evaluate their arrangements with outside entities to assess whether they may be found to be a joint employer under the relaxed standard. Business executives should also keep an eye on the development of the law in this area; there will be a multitude of subsequent decisions from the courts and the NLRB as to the countless issues left unanswered. Please contact us at Gentry Locke if we can assist your business in working through the issues unique to your company and industry.

Round 2: DOL Wins Right to Change Home Health Care Exemption

Thursday, August 27th, 2015

Until recently, the Department of Labor (DOL) interpreted the Fair Labor Standards Act (FLSA) to exempt from minimum wage and overtime pay those persons who provided “companionship services” (to the aged or infirm) [1] or were “live-in” domestic workers, [2] regardless who paid the domestic services worker. In 1975, the DOL issued regulations that applied these statutory exemptions to workers who were hired directly by families to work in their home and to employees placed in the home by third-party agencies.

In 2014, the DOL sought to reverse course and issued new regulations that withdrew the exemption from those workers providing the home health services if they were employed by a third party agency, and not the family.[3] Not surprisingly, home health care agencies challenged the new DOL regulations. As reported previously, the U.S. District Court for the District of Columbia struck down these new regulations in December 2014, concluding that the DOL had overstepped its bounds by trying to change this exemption after 40 years – see article.[4]  So, the home health care providers won “Round One.”

DOL appealed this ruling, and on August 21, 2015, the Court of Appeals reversed, finding that DOL had been granted very broad discretion to interpret and re-interpret these statutory exemptions.[5] The court found that DOL’s decision in 2014 to change its position and remove the exemption from the minimum wage and overtime protections to those employees hired by third parties was a reasonable interpretation of the FLSA. In doing so, the court noted that the administrative record developed by DOL showed that the home care industry had radically changed over the past 40 years such that most workers are now professional caregivers (not family members or friends). It also noted that caregivers employed by third party agencies are required to be trained and/or certified and these agencies typically make a profit from their employees’ services. In short, DOL won “Round Two.”

The Court of Appeals sent a clear signal that it intends to grant DOL wide latitude when it redefines how FLSA exemptions as long as when it does so, it is not acting arbitrarily. The court did not seem bothered by the complete reversal of position by the DOL on the caregiver exemptions because the agency had gone through the required administrative process, including a detailed fact-finding process and comment period. It found based on this record that the DOL was able to articulate a “reasonable” basis for its substantial change of position. The DOL is currently going through this same type of process in connection with its announced intention to revise and narrow the “white collar” exemptions; those new “white collar” rules are expected later this year.

The ultimate outcome on whether these new rules on home health care exemptions become law may require a “Round Three” before the Supreme Court, but only if the plaintiffs decide to continue their fight with the DOL and court agrees to take the case. If no appeal occurs, then the Court of Appeals will remand the case to the District Court. At that point, the new home health exemption regulations will become effective upon the entry of the District Court’s Order.[6]

If your business operates in the home health care industry and you have questions about these new regulations, or if you have other questions about the DOL’s proposed new rules for white collar exemptions, the members of Gentry Locke’s Labor & Employment team will be glad to assist you.

[1] 29 U.S.C. § 213(a)(15).

[2] 29 U.S.C. § 213(b)(21).

[3] 29 C.F.R. § 552.109(a), (c) (2015), 29 C.F.R. § 552.6(b) (2015).

[4] Home Care Ass’n of Am. v. Weil, 76 F. Supp. 3d 138 (D.D.C. 2014).

[5] Home Care Ass’n of Am. v. Weil, No. 15-5018, 2015 U.S. App. LEXIS 14730 (D.C. Cir. Aug. 21, 2015).

[6] The original regulations were set to go into effect on January 1, 2015.

Seeing Double: Temp Agency Employees & the Joint Employer Doctrine

Friday, August 21st, 2015

We recently reported on new Guidance from the Department of Labor regarding its effort to combat what it views as the misclassification of workers as independent contractors, instead of employees. A new court decision makes it clear that even if a worker is correctly designated as an “independent contractor,” the business where s/he is assigned to work may nevertheless have liability under federal anti-discrimination laws under the “joint employer” doctrine.

In a recent opinion,[1] the Fourth Circuit ruled that an employee assigned by a temporary employment agency to work at an automotive manufacturing plant could sue both the agency and the manufacturer. The employee alleged that she was sexually harassed by her supervisor at the plant, and had reported the harassing behavior to both the agency and the manufacturer, but neither took action. When she made a subsequent complaint to her supervisor’s manager at the plant, she alleged the plant manager requested that the agency remove her. A few days later, the agency terminated her employment.

The district court dismissed the claim, concluding the manufacturer was not the plaintiff’s “employer.” On appeal, the Fourth Circuit reversed, holding for the first time that the “joint employer” doctrine applied to this type of anti-discrimination claim. The Court announced it would use a “hybrid test” to determine whether a company using temporary workers would be deemed a “joint employer.” In doing so, the Court noted that the amount of control over the workers remains the principal guidepost, and the ability to hire and fire will be the most important factor in determining ultimate control. However, this “hybrid test” considers a number of factors, such as, who provides day-to-day supervision, who furnishes the equipment and place of employment, how long the worker has worked at this same location, whether the worker has been assigned by the agency only for this employer, who provided the training for the job, and whether the individual’s duties are substantially similar to regular employees doing the same type of work. In a footnote, the Court emphasized that the use of a form agreement that specifies that the worker is not an “employee” but is an “independent contractor” will not defeat a finding of a joint employer relationship.

Turning to the facts, the Court found as a matter of law that this manufacturer was the joint employer of this worker because the manufacturer exhibited a high degree of control over the terms of the worker’s employment. It pointed out that she worked side by side with regular plant employees, performed the same basic tasks with the same equipment as regular employees, and was supervised by the same managers as the other regular employees. It also noted the work performed was part of the company’s core business.

Each case will still have to be evaluated on its own facts, but the adoption of this new “hybrid test,” which gives courts a degree of flexibility in deciding the issue, means it will be easier for contract and temporary agency workers to successfully argue they are also “employees” of the business where they are assigned to work.

This decision is yet another reminder for businesses who utilize employees provided by temporary placement agencies to manage and monitor those third party relationships carefully. Front-line managers must be trained that they cannot act with impunity toward “temporary workers,” and HR personnel must be alert to workplace issues involving contract workers. If you have questions regarding your workforce or the laws that govern it, Gentry Locke’s Labor & Employment team is available for advice or to represent you when claims are made.

[1] Butler v. Drive Automotive Industries of America, Inc., No. 14-1348, 2015 U.S. App. LEXIS 12188 (4th Cir. 2015). Decisions from the Fourth Circuit Court of Appeals are binding on cases that  are decided in Virginia, West Virginia, North Carolina, South Carolina and Maryland federal courts.

Enforcement of Restrictive Covenants in Business Sales

Thursday, August 20th, 2015

When you challenge the enforceability of a restrictive covenants in Virginia, the court is going to apply one of two standards. Either the court will closely scrutinize the restrictive covenant, if it is between an employer and employee, or the court is going to apply a more relaxed standard, if it was signed during the sale of a business.

How does a Virginia court know which standard to apply? What happens if you sell a business but keep working as an executive? Will the court apply the sale of business standard because you sold the company, or will the court apply the employer and employee standard because you kept working there?

Under Virginia law, the Court will apply the less restrictive sale of business framework when there is some form of corporate transaction separate from the parties’ employment relationship. See, e.g., W. Insulation L.P. v. Moore, 2006 WL 208590, at *6 (E.D. Va. Jan. 25, 2006) (applying the sale of business framework because the case “involves a sale of a business”); McClain & Co. v. Carucci, No. 3:10cv65, 2011 WL 1706810, at *6 (W.D. Va. May 4, 2011) (applying the sale of business standard when the parties agreed to a covenant not to compete in concert with a settlement of claims).

First, the sale of business context applies when the non-compete was drafted to permit “the owner of a business to convey its full value on its sale, by contracting not to destroy of that business by immediate competition.” 6 Williston on Contracts § 13:9 (4th ed.). In other words, the sale of business standard applies if the agreement is “attributed more to the sale of goodwill than to the employment contract.” Restatement (Second) of Contracts § 188 Rptr’s Note b; see Carucci, 2011 WL 1706810, at *6 (applying the sale of business framework because the “primary purpose” of the non-compete was unrelated to employment).

Second, the sale of business standard governs if the non-compete is the result of an arms-length negotiation between sophisticated parties of comparable bargaining power and for substantial consideration. See Roto-Die Co., Inc. v. Lesser, 899 F. Supp. 1515, 1519 (W.D. Va. 1995) (refusing to apply the sale of business standard because the employee lacked bargaining power and was a minority shareholder in the company).

These are the principles that guide whether to apply the more lenient, less restrictive sale of business standard:

• The non-compete arose in a context separate from employment
• The non-compete resulted from arms-length negotiations
• The parties were sophisticated
• The parties received substantial consideration

If the sale of business standard does not apply, then a Virginia court will apply the employer-employee standard. A non-compete in the context of an employer-employee is scrutinized more closely than a non-compete ancillary to a sale of a business. Alston Studios, Inc. v. Lloyd V. Gress and Assocs., 492 F.2d 279, 284 (4th Cir. 1974). The restrictive covenant must be narrowly drawn to protect the employer’s legitimate business interest, not unduly burdensome on the employee’s ability to earn a living, and otherwise consistent with public policy, based on its functional limitation, duration, and geographic scope. Modern Env’ts v. Stinnett, 263 Va. 491 (2002).

Since Virginia courts are increasingly reluctant to enforce non-competes in employment relationships, as opposed to sales of business, companies will often fight to apply the sale of business standard in any non-compete dispute.

In a recent case, Capital One Financial Corporation v. John Kanas and John Bohlsen, Case No. 1:11-cv-750 (E.D. Va. 2012), a Richmond federal court reviewed whether the sale of business standard applied to two executives who sold their company, stayed on as employees, then left to compete.

Here is a summary of what happened. Kanas and Bohlsen sold their regional bank to Capital One and received a nearly $42 million in stock as consideration. The business sale agreement included a non-compete. However, rather than leave, they continued working as executives at Capital One. Within a couple years, they left, and on their way out, they signed new non-competes under a employee separation agreement.

Capital One moved to enforce a five-year non-compete against the executives. They argued that the less restrictive sale of business standard applied because the executives had sold their bank, thus giving rise to the restrictive covenant.

The federal court disagreed. Although the executives had sold the company, they kept working at the new venture as employees. Therefore, the applicable standard was not the less restrictive, sale of business standard, but the more restrictive, employer-employee standard. After all, the executives had signed employee separation agreements.

Even though the Court denied the company’s request for the sale of business standard, the Court nonetheless upheld the non-compete under the employer-employee test. After all, the executives had received sufficient consideration for their stock and would not have much difficulty earning a livelihood.

The key takeaway for Virginia businesses is that restrictive covenants can and will be enforced in sale of business agreements. However, if the newly acquired company’s executives will continue on as employees, the court will apply a higher standard to any non-compete agreements with the executives. Therefore, it is imperative to keep contracts updated with the latest changes in Virginia law.