Piliero Mazza &
Pargament, PLLC

Vol. IV, Issue 1
January 1999

An Update for Federal Contractors and Commercial Businesses


Supreme Court Holds
That Subcontractors
May Not Seek
Equitable Lien Against
Government When
Prime Contractor Defaults

Employers Should
Review Thier
E-Mail Policies

Supreme Court
Broadens Rights of

"At-Will" Employees



Supreme Court Holds That Subcontractors
May Not Seek Equitable Lien Against
Government When Prime Contractor Defaults

A common problem confronted by subcontractors is obtaining relief when a prime contractor defaults in its obligation to make payment. Prime contractors often claim that they simply do not have the money. Because of the lack of privity of contract, subcontractors have also been largely unable to seek relief directly against the government. Accordingly, in many cases, subcontractors have no alternative but to absorb the loss, which in certain circumstance can be substantial.

However, a recent Ninth Circuit Case, Department of the Army v. Blue Fox, Inc., suggested that subcontractors may be able to obtain an equitable lien on government funds allocated to a prime contract which have not yet been paid to the prime contractor. That case involved a contract awarded in 1993 to Verdan Technology, Inc. ("Verdan"). Verdan subcontracted a major portion of the work to Blue Fox, Inc. ("Blue Fox"). Verdan paid Blue Fox approximately $140,000 of the $186,000 subcontract price. Verdan then defaulted. Blue Fox filed suit against Verdan and its officers, but was unable to collect on the judgments it won.

Thereafter, Blue Fox sued the government in federal district court, seeking an equitable lien on funds from the prime contract that were not paid to Verdan and any funds that might later be made available to complete the project. The suit was not "contractual" in nature – it sought the imposition of a equitable lien on government money. Therefore, the lack of privity of contract between Blue Fox and the government did not bar the action. Rather, the central issue in the case was whether or not the government has waived its "sovereign immunity" to permit this type of suit to be brought. Blue Fox brought the suit under the Administrative Procedure Act ("APA"), which is commonly relied upon by private parties seeking to set aside government action as arbitrary, irrational or contrary to law. The APA operates as a waiver of the government’s sovereign immunity. The district court, however, dismissed Blue Fox’s case. It held that the APA permits suits against the government that seek "equitable" relief, but not money damages. The court found that Blue Fox’s suit was, in effect, an action for money damages.

On appeal, however, the U.S. Court of Appeals for the Ninth Circuit ("Ninth Circuit") reversed the district court’s decision. The Ninth Circuit held that Blue Fox’s suit seeking an equitable lien against contract funds in order to recover the balance owed by the contractor seeks specific performance (i.e., "equitable" relief), and is, therefore, permitted by the APA. The matter was thereafter appealed by the government to the U.S. Supreme Court.

Earlier this month, the Supreme Court heard arguments in the case, and on January 20, 1999, the Court issued its decision reversing the Ninth Circuit’s holding. Chief Justice William Rehnquist’s unanimous opinion made clear that the APA’s waiver of sovereign immunity for suits seeking relief "other than money damages," 5 U.S.C. 702, does not allow creditors (e.g., subcontractors) to enforce liens on government property. The crucial question, the Court said, is not whether a particular claim for relief is "equitable" (a term not found in the statute), but rather, what Congress meant by "other than money damages." The Court noted that even though the lien in the case was "equitable," it was ultimately a claim for money damages (i.e., payment for work performed). Accordingly, the Court found the case to be outside of the APA’s waiver of sovereign immunity.

The Supreme Court’s decision was a disappointment for subcontractors, which had hoped that this case would expand their ability to recover payment from the government for work performed. However, it appears that if such rights will ever be granted to subcontractors, an act of Congress will be required.


Employers Should Review Their E-Mail Policies

Electronic mail has become a fact of life in the workplace. While its use can have distinct benefits for a company, it can also create as many problems. It is important for employers to ensure that they have effective policies governing the dissemination of e-mail in the workplace. We discuss below some of the considerations that should go into the development of such policies.
One of the primary difficulties with e-mail is that most users view it as they would a telephone conversation, and do not fully appreciate the fact that, in effect, it involves the creation of a document. In fact, even after the "delete" key is pushed, e-mail is not necessarily destroyed. Rather, it is often moved to undisclosed locations on a hard drive, and subject to retrieval. In the context of a lawsuit involving the company, an e-mail database may reveal evidence that is not only damaging to the company’s legal position, but also extremely embarrassing.

To avoid such problems, employers should make clear to their employees that e-mail is to be used for business purposes only. By prohibiting personal e-mails, employers can help avoid the generation of electronic data that can prove to be extremely embarrassing to the company and its employees.

Along these same lines, employees should also be informed that their e-mail constitutes company property. Accordingly, e-mail can potentially be disclosed to third parties during the course of civil or criminal proceedings.

Additionally, statements made by an employee in an e-mail, like statements contained in a traditional inter-office memorandum can, in some circumstances, constitute an admission by the company. Thus, it is important that employees understand when they compose e-mail that a third party, or perhaps a jury, may one day read the message.

Similarly, employees should be cautioned against using e-mail to express frustration or anger towards third parties. In addition to causing embarrassment, such statements can be used by lawyers for such third parties to show that the company acted with "malice" toward them, which is typically a prerequisite for an award of punitive damages.

The transmission of data electronically increases the likelihood of inadvertent disclosure of confidential information. Thus, employees should be cautioned that receiving, downloading, sending or uploading confidential or proprietary information without authorization is prohibited. Such information should include, copyrighted materials, financial data, bids and proposals, etc.

It is also important that all employees understand that company policies prohibiting sexual harassment and discrimination are applicable to electronic mail systems. Thus, messages containing foul, inappropriate, or offensive language, or those containing racial or ethnic slurs, or sexual innuendo, should be prohibited.

These are just a few of the considerations that should go into the development of an e-mail policy. The wisest course of action is to seek the assistance of counsel in developing a comprehensive written policy. Once such a policy is developed, employers must be sure to disseminate and enforce it. Ideally, employees should acknowledge receipt and review of the policy. Additionally, those who violate the policy should be uniformly disciplined. By adopting and implementing such a policy, employers can help avoid the creation of documents that can later prove to be costly and embarrassing.


Supreme Court Broadens Rights of "At-Will" Employees

On December 14, 1998, the U.S. Supreme Court issued an opinion which broadens the rights of "at-will" employees. The Court held that an employer may not fire an "at-will" employee in retaliation for obeying a federal grand jury subpoena or to deter him/her from testifying at a federal criminal trial.

In the case in question, Haddle v. Garrison, U.S. Sup. Ct., No. 97-1472, Dec. 14, 1998, the plaintiff, Michael Haddle, had alleged in his complaint that his employer, Healthmaster, Inc., and its officers were indicted in March 1995 by a federal grand jury and charged with Medicare fraud. Mr. Haddle cooperated with the federal agents who conducted the investigation that preceded the indictment, and was prepared to testify before the grand jury. Mr. Haddle was also expected to appear at trial as a witness for the prosecution.

The complaint also alleged that Healthmaster’s officers conspired among themselves to terminate Haddle’s employment. Mr. Haddle alleged that the officers did this to intimidate him and to retaliate against him for his attendance at the federal court proceedings.

Mr. Haddle’s suit was brought under 42 U.S.C. 1985(2), a federal statute which prohibits conspiracies to "deter by force, intimidation, or threat, any party or witness in any court of the United States from attending such court, or from testifying to any matter pending therein, freely, fully and truthfully, or to injure such party or witness in his person or property on account of his having so attended or testified." Importantly, the statute provides that a plaintiff may recover damages if, in furtherance of the conspiracy, he is "injured in his person or property."

The central issue presented to the Court, therefore, was whether Mr. Haddle was "injured in his person or property" by the defendants’ termination of his "at-will" employment. The Court recognized previous court rulings that at-will employment does not constitute "property" for purposes of the Constitution’s Due Process Clause, and that at-will employees have no constitutionally protected interest in continued employment. However, the Court held that the type of harm allegedly sustained by Mr. Haddle – essentially third party interference with an at-will employment relationship – has long been a compensable injury under tort law and, therefore, states a claim for relief under Section 1985(2).


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