Business and Corporate Category Archives — The Virginia Business Litigation Blog Published by Virginia and Washington, D.C. Litigation & Appeals Attorney

April 21, 2023

Shareholders Don’t Need Stock Certificates

In business litigation, it’s often necessary to determine whether the litigants are shareholders in a corporation. To bring a lawsuit against an officer or director of a corporation for breaching a fiduciary duty owed to the corporation, for example, the plaintiff must be a shareholder and bring the suit derivatively on behalf of the corporation. (See Va. Code. § 13.1-672.1). In small, closely held corporations, it can be unclear who the shareholders actually are. If an entire corporation is owned and managed by only two or three people, those people may not run the corporation with the same level of formality as a larger company. Board “meetings” may happen in line at Starbucks or not at all. Stock ledgers acquired during the formation of the business may not actually get used. Small corporations often aren’t good about documentation and record-keeping, so when the time comes to issue shares to their stockholders, they may not get around to actually issuing formal stock certificates. Sometimes the only evidence of stock ownership is in the form of a text message or email. This can be a problem when litigation arises because the parties may not agree on how many shares each shareholder owns or who the shareholders even are.

What’s important to note here is that while it’s always preferable to follow corporate formalities and maintain accurate records, shareholders don’t actually need to produce paper stock certificates to prove their status as the owner of corporate stock. Stock is intangible property: it represents ownership in a corporation but does not have a physical form. Stock certificates have physical form but stock certificates are not stock; they are merely evidence of stock ownership. In many cases, stock ownership can be proven without the existence of a stock certificate. Courts look to the totality of the circumstances.

January 11, 2023

Mass Resignation to Form Competing Business Leads to Litigation

by Lee E. Berlik

No employer likes to see a large number of its employees band together and leave en masse to form a competing business. A large number of employees leaving at once can lead to a loss of institutional knowledge and experience, not to mention customers and revenues. Mass departures hurt morale and can lead to increased costs for recruitment and training. A company’s reputation can be irreparably damaged once word gets out that a mass resignation has taken place, making it more difficult for the business to attract new talent. Depending on the circumstances, litigation against the former employees, as well as against the company that hired them, may or may not be warranted.

Possible legal claims include breach of fiduciary duty, breach of non-compete and/or non-solicitation agreement, tortious interference, business conspiracy, misappropriation of trade secrets, and more. Let’s take a quick look at how a Hampton Roads body-piercing business dealt with the sudden resignation of seven employees who went on to form their own body-piercing business in the same region. In the case of Chanah, Inc. v. Summers, currently pending in the Chesapeake Circuit Court, the plaintiff pursued a number of business torts against the departing employees. Most of the counts survived demurrer.

September 10, 2021

Bare Legal Conclusions Insufficient to Satisfy Notice Pleading Requirements

by Lee E. Berlik

Virginia is considered a “notice pleading” jurisdiction, which means that a complaint need only contain allegations of material facts sufficient to inform a defendant (i.e., put the defendant on notice) of the true nature and character of the plaintiff’s claim. To meet this standard, though, a plaintiff must allege actual facts rather than conclusory assertions. When ruling on a motion to dismiss for failure to state a claim, courts generally must accept the plaintiff’s allegations as true for purposes of ruling on the motion, as well as all reasonable inferences arising from those facts, but courts are not required to accept “allegations that are merely conclusory, unwarranted deductions of fact,…unreasonable inferences” or “allegations that contradict matters properly subject to judicial notice or by exhibit.” (See Veney v. Wyche, 293 F.3d 726, 730 (4th Cir. 2002)). When a plaintiff’s cause of action “is asserted in mere conclusory language” and supported only by “inferences that are not fairly and justly drawn from the facts alleged,” it is proper to sustain a defendant’s demurrer. (See Bowman v. Bank of Keysville, 229 Va. 534, 541 (1985)).

This basically means that whatever conclusion the plaintiff wants the court to draw from the alleged facts, the plaintiff must allege not just the actual desired conclusion, but specific facts that, if true, would support the accuracy of that conclusion. For example, a court wouldn’t have to accept a plaintiff’s allegation that she suffered “severe emotional distress” or “extreme emotional distress” without accompanying factual allegations demonstrating the specific forms of emotional distress experienced. (See Russo v. White, 241 Va. 23, 28 (1991)). In a defamation case, where a plaintiff must allege that a defamatory statement is “of and concerning” him, it’s not enough to just allege that a statement was indeed “of and concerning” him; he needs to include in his complaint the specific facts that would enable the trial judge to determine that the “of and concerning” characterization is indeed accurate. (See Dean v. Dearing, 263 Va. 485, 490 (2002)). In a conspiracy case, the plaintiff must allege facts showing the defendants acted with a common purpose to injure the plaintiff; it’s not enough to just say, “the defendants conspired against me.” (See Brown v. Angelone, 938 F. Supp. 340, 346 (W.D. Va. 1996)). And in a trade secrets case, the plaintiff can’t survive dismissal simply by alleging that the defendant used “improper means” to acquire its trade secrets; the plaintiff must identify the supposed trade secrets and describe the means used to acquire them that were supposedly improper. (See Preferred Systems Solutions, Inc. v. GP Consulting, LLC, 284 Va. 382 (2012)).

December 4, 2020

Participants in Business Expectancy Can’t Tortiously Interfere

by Lee E. Berlik

Virginia recognizes a cause of action against those who tortiously interfere with the contractual expectancies of another. To prove tortious interference with business expectancy under Virginia law, a plaintiff must show (1) the existence of a valid business expectancy; (2) knowledge of the expectancy on the part of the interferor; (3) intentional interference inducing or causing a breach or termination of the expectancy; (4) that the defendant employed improper methods when engaging in the intentional interference; and (5) resulting damage to the party whose expectancy has been disrupted. (See Dunlap v. Cottman Transmission Sys., LLC, 287 Va. 207 (2014)). Not long ago, the Virginia Supreme Court clarified that “[a]n action for tortious interference with a contract or business expectancy…does not lie against parties to the contract, but only lies against those outside the contractual relationship, i.e., strangers to the contract or business expectancy.” (See Francis Hosp., Inc. v. Read Props., LLC, 296 Va. 358 (2018)). This means that parties directly involved in the business expectancy may not be held liable for tortious interference with that expectancy.

Last month, the Eastern District of Virginia dismissed a count of tortious interference against a staffing company after it found that the staffing company was not really a stranger to the expectancy. Here’s what happened, according to the opinion issued in ITility, LLC v. The Staffing Resource Group, Inc.

October 21, 2020

Project Manager Sabotages Employer, Ordered to Pay Triple Damages

by Lee E. Berlik

About a year ago, a disgruntled systems engineer for government contractor Federated IT was sentenced to two years in prison for illegally accessing his former employer’s network systems, stealing critical servers and information, and causing a loss valued at over $1.1 million. In a civil lawsuit against his girlfriend and arising out of much of the same conduct, a former project manager at the same company has been held in default and ordered to pay over $150,000 in damages for breach of fiduciary duty, conversion, and conspiracy.

The facts of the case, which are assumed to be true by virtue of the fact the defendant was held in default for violating a court order, are as follows. Federated IT provides cyber security, information technology, and analytic and operations support services, and managed a contract with the U.S. Army Office of the Chief of Chaplains. Ashley Arrington was a project manager for the Army contract and a direct supervisor of Barrence Anthony, the engineer currently serving a two-year prison sentence. Arrington and Anthony were romantically involved but did not notify Federated IT about the relationship. At some point during Anthony’s tenure, he began to behave insubordinately and failed to show up for work, eventually leading to his termination. He decided to go out with a bang. Among other spiteful acts he was accused of before and after he left, Federated IT alleged he:

deactivated all administrator accounts except his own and refused to share the master password with his replacement
changed the responsible-party contact information on Federated IT’s Amazon Web Services account to “Anthony Enterprises”
modified Federated IT’s Help Desk email address to redirect emails to his personal email account
deleted files from a SharePoint project folder, including encryption keys, account information, and network diagram files
wiped the hard drive on his work laptop
made unauthorized copies of the Army’s servers which contained their Financial Management System
attempted thousands of “brute force cyberattacks” against the Chief of Chaplains’ web application system, which necessitated a shutdown of one of Federated IT’s servers.

February 17, 2020

Non-Compete Agreements Between Businesses More Likely to Be Held Enforceable

by Lee E. Berlik

Noncompete agreements are typically found in employment agreements between employers and their employees. But that’s not the only place these clauses are found. Sometimes you’ll have two sophisticated companies of roughly equal bargaining power who, for whatever reason, wish to enter into a binding agreement placing restrictions on the one of the entity’s ability to compete with the other. Perhaps one company has acquired or merged with another and needs to ensure that the target company’s former officers and directors don’t immediately form a competing business and take their old clients with them. Or perhaps, as was the case recently in the dispute between wood-flooring contractors Lumber Liquidators and Cabinets To Go, two businesses with overlapping ownership simply seek to reach an agreement to reduce competition and minimize the sharing of confidential information. The important thing to note is that most of the reasons Virginia courts disfavor noncompete agreements have to do with fairness to the employee and do not apply when the two contracting parties are both businesses. Therefore, courts are much more likely to enforce noncompete agreements found in a business-to-business context than in an employment setting.

The basic facts of Lumber Liquidators v. Cabinets To Go are as follows. About 10 years ago, hardwood flooring retailer Lumber Liquidators learned that its Chairman and largest shareholder, Thomas D. Sullivan, was also involved in the ownership and operation of Cabinets To Go, which sold kitchen and bath fixtures and building supplies. Concerned that Sullivan might divert business opportunities or confidential business information over to Cabinets To Go, Lumber Liquidators entered into a number of agreements with Cabinets To Go. Among the agreements formed between the companies was a pair of “reciprocal restrictive covenants” in which Cabinets To Go agreed not to engage in the sale of hardwood flooring anywhere in the world during the term of the agreement and a period of two years thereafter. Lumber Liquidators similarly agreed not to sell kitchen cabinets.

October 11, 2019

The Independent Personal Stake Exception to Intra-Corporate Immunity

by Lee E. Berlik

A conspiracy to harm another’s business may be actionable under Virginia’s business-conspiracy statute, which provides for a cause of action where two or more people “combine, associate, agree, mutually undertake or concert together for the purpose of…willfully and maliciously injuring another in his reputation, trade, business or profession by any means whatever.” (See Va. Code §§ 18.2-499, 18.2-500). To prevail in a lawsuit for business conspiracy in Virginia, a plaintiff must prove (1) a combination of two or more people or entities for the purpose of willfully and maliciously injuring the plaintiff in his business; and (2) damage that resulted from the combination. A combination exists where there is concerted action designed to “effect a preconceived plan and unity of design and purpose.” (Schlegel v. Bank of America, 505 F. Supp. 2d 321, 326 (W.D. Va. 2007)). When the people being sued for conspiracy work for the same company, a question arises as to whether the first element–the requirement of “two of more people”–can be satisfied. The intra-corporate immunity doctrine holds that employees working for the same company are generally immune from conspiracy claims when acting on behalf of their employer. This is because a corporation acts through its employees, so the the employees’ actions are really the corporation’s actions and a corporation cannot conspire with itself. In other words, a business-conspiracy claim requires concerted action of at least two legally distinct persons or entities. A corporation can’t conspire with its employees, and its employees can’t conspire with each other if they are acting within the scope of their employment. As with most areas of the law, however, there are exceptions.

Some courts recognize an exception to the intracorporate immunity doctrine where the employee has an “independent personal stake” in achieving the goals of the conspiracy. Although the Virginia Supreme Court has not recognized any such exception, federal courts sitting in Virginia and applying Virginia law have applied it on several occasions. (See, for example, Greenville Publishing Company v. Daily Reflector, Inc., 496 F.2d 391 (4th Cir. 1974) (observing that an exception to the intracorporate immunity doctrine “may be justified when the officer has an independent personal stake in achieving the corporation’s illegal objective.”); Cvent, Inc. v. Eventbrite, Inc., 739 F. Supp. 2d 927 (E.D. Va. 2010)). Even if you’re in a court that does recognize a personal-stake exception, it will apply only to those cases in which the conspirator gained an independent personal benefit from the conspiracy. This benefit must be separate and distinct from the corporate benefit enjoyed by the employer.

September 27, 2019

Tortious Interference with Anticipated Future Contract

by Lee E. Berlik

Virginia does recognize a legal cause of action for improper interference with an anticipated business contract. The tort is known as “tortious interference with business expectancy,” “tortious interference with future economic benefit,” “tortious interference with prospective economic advantage,” or some variant of that phrase. It’s what you sue for when your business is about to close on a big deal but then the whole thing is called off as the result of some form of meddling by a third party. You’re not suing for breach of contract at this point because there is no contract. Instead, you’re suing for the loss of an anticipated future economic benefit. For the claim to be valid, however, there must be reason to believe that you would have closed on the deal were in not for the defendant’s unlawful conduct. There is no claim for interference with a contract you merely hoped to enter into, or for interference with a mere possibility of some economic benefit.

Tortious interference with business expectancy requires proof of the following elements: (1) the existence of a business relationship or expectancy, with a probability (not just possibility) of future economic benefit to the plaintiff; (2) the defendant’s knowledge of the relationship or expectancy; (3) a reasonable certainty that absent defendant’s intentional misconduct, plaintiff would have continued in the relationship or realized the expectancy; and (4) damages to the plaintiff.

July 9, 2019

Business Conspiracy Claims Survive Under Third-Party Rule

by Lee E. Berlik

Not long ago, Serco, Inc., won summary judgment on various claims asserted against it by L-3 Communications Corp. and L-3 Applied Technologies, Inc., including claims for statutory business conspiracy, common law conspiracy, and tortious interference with business expectancy. On appeal to the Fourth Circuit, however, the court found that the district court erred in granting summary judgment on the conspiracy claims and sent the case back to the Eastern District of Virginia for further proceedings.

The dispute centered around rights to a lucrative government contract. In 2004, the Air Force awarded a prime contract to Serco that called for testing and upgrading services to protect certain Air Force sites from “high altitude electromagnetic pulse” (“HEMP“) events. The Air Force would periodically issue work orders for various projects, and if Serco could not complete the work itself, it could issue a request for proposals (“RFP”) to invite subcontractors to bid on the work.

September 11, 2016

How Some Independent Contractors May Be Able to Escape Their Noncompete Restrictions

by Lee E. Berlik

In Virginia, independent contractors can be held to noncompete agreements to the same extent as regular employees. But beware. A Fairfax County Circuit Court judge decided last month that all bets are off if the “independent contractor” should really have been classified as an employee. Although the Virginia Supreme Court has not yet spoken on the subject, Judge John M. Tran crafted a lengthy, well-reasoned opinion in Reading and Language Learning Center v. Sturgill holding that misclassifying employees as independent contractors violates Virginia public policy and is grounds for voiding the contract–including its noncompete and nonsolicitation provisions–even if the misclassification is unintentional. In other words, reasoned Judge Tran, independent contractors will only be bound by noncompete agreements if they have been properly classified as independent contractors.

Reading and Language Learning Center (“RLLC”) is a speech therapy practice that provides services to people with speech, language, or reading disorders. In 2014, Charlotte Sturgill was a recent graduate of a master’s program in speech-language pathology. To obtain her license and certification, Sturgill was required to complete a supervised clinical fellowship, which she arranged to do with RLLC. RLLC hired her with an agreement titled “Agreement between Private Practitioner and Independent Practitioner” which classified Sturgill as an independent contractor and contained the following non-compete clause:

RLLC and the Consultant agree not to employ any contracted employee or contract with any current client of the Other for a period of two (2) years after the expiration of the contract between RLLC and the Consultant.