Business and Corporate Category Archives — Page 3 of 6 — The Virginia Business Litigation Blog Published by Virginia and Washington, D.C. Litigation & Appeals Attorney

October 6, 2014

Severance of Non-Compete Restrictions in Virginia

Last month, I wrote about blue-penciling of non-competition and non-solicitation agreements and about the fact that if you are dealing with an unenforceable noncompete in Virginia, the entire clause will likely be stricken rather than amended. If you are a Virginia employer seeking to ensure your employees are actually bound by their agreements not to complete with your business post-employment, one thing you may be able to do is specify in the agreement that it will be governed by the law of a different state (i.e., one whose laws permit blue-penciling or which are otherwise considered more favorable to employers). This approach, however, will only be viable if your company (or the employee) has some significant connection with the selected state, as it is considered a violation of due process rights to surprise employees with arbitrary choice-of-law provisions. There is an easier way to ensure the noncompete provisions have teeth: make the obligations severable.

Virginia law will permit you to include a “severability clause” when drafting a noncompete agreement, permitting the court to analyze and enforce the various noncompete and non-solicitation provisions separately. The benefit to employers is that if the court finds one of the sections overly broad and therefore unenforceable, the court can “sever” the unenforceable provision and enforce the other sections, provided they don’t suffer from the same enforceability issues. For this to work, the parties need to reach an agreement (preferably expressed explicitly in the contract itself) to the effect that any restrictive covenant found by a court to be unenforceable can be severed from the agreement, leaving the remainder of the provisions intact. Such a clause might look something like this:

Severability. If any clause, provision, covenant or condition of this Agreement, or the application thereof to any person, place or circumstance, shall be held to be invalid, unenforceable, or void, the remainder of this Agreement shall remain in full force and effect.

September 22, 2014

Virginia Won’t Allow You to Blue-Pencil that Non-Compete

by Lee E. Berlik

In Virginia, covenants not to compete (a.k.a. non-competition agreements or simply “noncompetes”) are considered restraints on trade and are therefore disfavored in the law. Unlike California, which prohibits them outright, Virginia will enforce such agreements if (and only if) they (1) satisfy the general principles of contract formation and enforceability, and (2) are no broader than necessary to protect the employer’s legitimate business interests. In examining breadth and overall reasonableness, Virginia courts will look primarily to provisions regarding the duration of the restriction, the geographic scope, and the activities that the agreement purports to restrict. What happens, you might ask, if a noncompete is found to be just a tad broader than it needs to be to protect the employer’s interests? Will it still be enforced to the “fullest extent of the law,” disregarding whatever phrase rendered the agreement overly broad? While that might seem the most fair outcome to many employers, if the agreement is governed by Virginia law, the noncompete will be stricken in its entirety and the employee will be free to compete as if the agreement never existed.

In some states, courts will modify any noncompete deemed unreasonable and enforce it to a degree deemed reasonable. For example, if a noncompete prohibits competitive activity for a 5-year period when the business really can’t justify imposing such a restriction beyond one year, the noncompete will be enforced but only for one year rather than the five stated in the agreement. This practice has become known as blue-penciling. Other states allow blue-penciling only if the restrictive covenant as a whole does not reveal any deliberate intent by the employer to place unreasonable and oppressive restraints on the employee. Virginia, however, does not allow blue-penciling at all. As a general rule, unreasonable covenants not to compete will be declared void and unenforceable, and courts will not modify them by re-writing contracts previously agreed to by the parties.
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September 2, 2014

Virginia’s Business Conspiracy Statute

by Lee E. Berlik

Virginia’s business conspiracy statute provides for civil liability and treble damages where “[a]ny two or more persons…combine, associate, agree, mutually undertake or concert together for the purpose of…willfully and maliciously injuring another in his reputation, trade, business or profession….” See Va. Code § 18.2-499, 500. The cause of action is popular among plaintiffs’ lawyers not only because of the triple-damages provision but also because a successful plaintiff can recover attorneys’ fees. To state a valid claim for statutory business conspiracy, a plaintiff must allege three key elements: that the defendants (1) engaged in concerted action, (2) with legal malice, (3) that resulted in damages. “Concerted action” refers to the requirement that the defendants combined together to effect a preconceived plan and unity of design and purpose. “Legal malice” (not to be confused with actual malice, common-law malice, or New York Times malice) requires a showing that the defendant acted “intentionally, purposefully, and without lawful justification.” The legal-malice standard allows a plaintiff to recover even if the defendant’s primary and overriding purpose in forming the conspiracy was to benefit himself rather than injure the plaintiff’s reputation, trade, or business, provided that causing such injury is at least one of the purposes of forming the conspiracy.

Late last week, Judge Moon of the Western District of Virginia allowed such a claim to go forward against Sandy Spring Bank. The plaintiff, Christopher Jaggars, was in the business of purchasing residential real estate for the purpose of renting the property to tenants and holding it as an investment so that he could later sell the property at an appreciated value. According to the allegations of his amended complaint, he was targeted as a potential victim of the DpFunder Program scheme by a company called Global Direct Sales. The scheme allegedly involved a fairly complicated money-laundering arrangement pursuant to which a small group of individuals and mortgage companies arranged to loan the plaintiff money for real estate investment, mislead the settlement agent into transferring a portion of the loan proceeds to another company, which transferred them to Global Direct, which conspired with Sandy Spring Bank to open a new account in Mr. Jaggars’ name (without his knowledge or consent) to receive the funds, all in violation of the Patriot Act. Then, the allegations continue, Global Direct issued a fraudulent Form 1099, falsely showing that it had paid $43,500 in sales commissions to Mr. Jaggars, presumably to allow Global Direct to conceal the loan proceeds and to shift tax liability from Global Direct to Mr. Jaggars.
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July 30, 2014

Optional Liquidated Damages Clause Held Unenforceable

by Lee E. Berlik

Liquidated damages are damages the amount of which has been agreed upon in advance by the contracting parties. When a contract contains a liquidated-damages provision, the amount of damages in the event of a breach is either specified, or a precise method for determining the sum of damages is laid out. This is often done in situations where the parties agree that the harm likely to be caused by a breach would be difficult or impossible to measure with any precision, so they agree on a figure in advance and dispense with the time and effort that would otherwise be involved in proving compensatory damages at trial. Another benefit often cited is the ability to control exposure to risk that normally is inherent in business litigation.

Fairfax Circuit Court judge Charles J. Maxfield was recently presented with the interesting question of whether to enforce an optional liquidated damages clause, an issue not yet decided by the Virginia Supreme Court. Sagatov Builders LLC v. Hunt involved a sale of real estate. The seller alleged the buyer was supposed to pay a $50,000 deposit but didn’t. The parties’ contract contained the following provision:

If the Purchaser is in default, the Seller shall have all legal and equitable remedies, retaining the Deposit until such time as those damages are ascertained, or the Seller may elect to terminate the contract and declare the Deposit forfeited as liquidated damages and not as a penalty …. If the Seller does not elect to accept the Deposit as liquidated damages, the Deposit may not be the limit of the Purchaser’s liability in the event of a default.

May 12, 2014

No Tortious Interference Claim Without Actual Interference

by Lee E. Berlik

One of your top executives puts in his notice that he is leaving to join your fiercest competitor. Fortunately, he signed a noncompete that restricts him from doing just that. Your lawyer sends him a letter reminding him of his contractual obligations to your company, of course, but also recommends that you put the new employer on notice of the noncompete and threaten a tortious interference action against the company should it proceed to hire your employee. After all, he advises, the company has deeper pockets than the executive, and if the competitor hires him with knowledge of his contractual obligations to his existing employer, they are automatically on the hook for tortious interference. Right? Wrong, says the Fourth Circuit.

Similar facts were presented in Discovery Communications, LLC v. Computer Sciences Corporation. Discovery had an employment agreement with its chief accounting officer, Thomas Colan, which required Colan to remain with Discovery for a specific term. Discovery alleged that Colan breached his agreement by quitting his job prior to the expiration of the term to go work for CSC. Discovery alleged that it put CSC on notice of the employment agreement after CSC offered Colan employment but before the effective date of Colan’s resignation. Discovery argued that CSC tortiously interfered with the contract by hiring Colan after being put on notice of the employment agreement. The district court held that was not enough, and the Fourth Circuit agreed, affirming the dismissal of the case.
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March 17, 2014

Business Conspiracy Can Be Based On Tortious Interference

by Lee E. Berlik

Last September, I noted the case of Dunlap v. Cottman Transmissions Systems, LLC, in which the Fourth Circuit certified two questions to the Virginia Supreme Court seeking clarification with respect to Virginia’s business conspiracy statute and the applicable statute of limitations for tortious interference claims. The Virginia Supreme Court has now answered those questions, holding that causes of action for tortious interference with contract and tortious interference business expectancy qualify as the requisite “unlawful act” to proceed on a business conspiracy claim under Va. Code §§ 18.2-499 and -500 because both claims are predicated on an independent common law duty arising outside of contract. The court also held that claims for tortious interference are governed by § 8.01-243(B)’s five-year statute of limitations because such claims involve injury to property rights.

James Dunlap sued Cottman Transmission Systems, LLC, and Todd Leff for tortious interference with contract, tortious interference with business expectancy, and business conspiracy in violation of Virginia Code § 18.2-499 and § 18.2-500. The claims arose from Dunlap’s franchise agreements with AAMCO Transmissions, Inc. When a new owner of AAMCO (who already owned a controlling interest in Cottman) sought to convert Cottman Franchises into AAMCO franchises, Dunlap’s franchises were closed, and Dunlap claimed that the closings were due to a conspiracy between Cottman and others.
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February 17, 2014

Are Purchase Orders Enforceable Contracts?

by Lee E. Berlik

They can be. The Uniform Commercial Code provides that a contract for the sale of goods may be made in any manner sufficient to show agreement, and that “an order or other offer to buy goods for prompt or current shipment shall be construed as inviting acceptance either by a prompt promise to ship or by the prompt or current shipment of conforming or non-conforming goods.” In MidAtlantic International Inc. v. AGC Flat Glass North America Inc., a federal court in Norfolk examined whether purchase orders reflected an enforceable contract between the parties and concluded that they did.

MidAtlantic supplied Spanish dolomite to AGC under a contractual relationship that their predecessors began in the late 1990s. At the end of each calendar year, AGC sent MidAtlantic a purchase order providing a rough estimate of its needs for the coming year. AGC supplemented the annual purchase order with monthly orders that were more exact. Each purchase order set forth requirements and conditions for the delivery of the product and contained the price and quantity of the product, details regarding how the agreement could be cancelled, shipment requirements and other details necessary for both sides to understand how the transactions were to occur. The quantity of dolomite was occasionally altered via email and phone between the parties. Additionally, the purchase orders provided requirements for the chemical composition and physical properties of the product. For example, the maximum allowable levels of iron, silicon dioxide and acid insoluble particles were specified, and no acid insoluble particle was to be coarser than 30 mesh.
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January 2, 2014

Deceitful Behavior Not Enough to Warrant Preliminary Injunction

by Lee E. Berlik

Upon a litigant’s motion, a court can enter a “preliminary injunction” preventing a party from pursuing a particular course of action until the conclusion of a trial on the merits. A preliminary injunction is considered an extraordinary remedy and requires the moving party to establish that (1) he is likely to succeed on the merits of the case at trial; (2) he is likely to suffer irreparable harm unless the injunction is granted; (3) the balance of the equities tips in his favor; and (4) an injunction is in the public interest. The party must make a clear showing that he is likely to succeed on the merits. Where a defendant has acted in an underhanded manner, but the plaintiff is unable to establish these factors, a court will deny the request for injunctive relief. In BP Products v. Southside Oil, the United States District Court for the Eastern District of Virginia considered and denied BP’s request for a preliminary injunction even though it was clear that Southside had acted deviously.

Defendant Southside owns gas stations and also has fuel supply agreements with independent gas stations. BP decided to stop owning stations and simply sell gas to BP stations through middlemen. As part of its strategic plan, BP sold many of its Virginia gas stations to Southside, and Southside agreed to continue to market BP products at BP’s former stations. The parties renewed the contract in 2010 and agreed that BP would have a Right of First Offer (ROFO) as to any proposed sale of any of Southside assets. Before Southside sold any BP stations or changed any BP stations to other brands, it was required to provide a term sheet outlining its goals; BP could then either negotiate with Southside or allow negotiation with other buyers. Southside was not required to accept any offer by BP to purchase its assets.

The 2010 agreement also gave BP a Right of First Refusal (ROFR) requiring Southside to give BP written documentation regarding any proposed sale so that BP could determine whether to buy Southside’s entire business. The 2010 contract expired on October 2, 2013. During renewal negotiations, BP sent a “notice of non-renewal” indicating that if the parties failed to reach a new agreement by October 2, 2013, the contractual relationship would end. Southside declined to renew the agreement and the relationship ended.

October 29, 2013

Citizenship of LLC Members Determines LLC’s Citizenship for Diversity Purposes

by Lee E. Berlik

A federal court must determine that it has subject matter jurisdiction and personal jurisdiction and that venue is proper before it can adjudicate a matter. If it lacks any one of the three, the court will not proceed, and it need not examine whether the other two requirements are met. In diversity actions, subject matter jurisdiction is appropriate where the amount in controversy exceeds $75,000 and the dispute is between citizens of different states. In Liberty Mutual v. KB Home, the Newport News Division of the Eastern District of Virginia found that a plaintiff need not show with legal certainty that the amount-in-controversy requirement is met, but must allege the citizenship of all individual members of a defendant limited liability company to establish the citizenship of the LLC.

Liberty Mutual Fire Insurance Company filed a complaint against KB Home, KB Home Raleigh-Durham, Inc. and Stock Building Supply, LLC–a subcontractor for KB Home Raleigh-Durham–seeking a declaratory judgment that it had discharged its duties as defendants’ insurer in a North Carolina state court action. The KB Home defendants moved to dismiss for lack of subject matter jurisdiction, personal jurisdiction and improper venue.

To determine whether the amount in controversy requirement for subject matter jurisdiction is met, courts rely on the sum claimed by the plaintiff in good faith. A defendant contesting the amount in controversy must show that it is legally impossible for the plaintiff to recover the amount sought. Liberty Mutual’s complaint alleged in a simple and conclusory fashion that the amount in controversy exceeded the sum or value of $75,000. The defendants pointed out that the complaint also alleged that the insurance policy between the parties was exhausted such that the sum at stake could not exceed $75,000. Liberty Mutual responded that legal defense costs totaling $82,314.74 were at issue as evidenced by a legal billing invoice.

August 19, 2013

Personal Guarantors Don’t Have Many Ways to Avoid Payment Obligation

by Lee E. Berlik

Those who personally guarantee repayment of a loan need to understand that a personal guarantee means what it says: if the primary obligor fails to pay, expect the noteholder to come after you. In City National Bank v. Tress (from the Western District of Virginia), the court considered various defenses raised by the guarantor and rejected them all, granting summary judgment to the bank.

Imperial Capital Bank loaned $3.2 million to Roanoke Holdings, LLC. Moishe Tress and Yehuda Dachs signed a promissory note on behalf of Roanoke Holdings and personally guaranteed the loan. Roanoke Holdings defaulted on the loan and Tress and Dachs failed to make payments as personal guarantors. Imperial Capital went into receivership, however, and the receiver sold the note and guaranty to City National Bank. City National sued the guarantors and promptly moved for summary judgment. The summary judgment motion against Dachs was unopposed and granted. Tress opposed the motion and sought summary judgment himself.

Under Virginia law, a guaranty is a contract in which a guarantor agrees to be answerable for the debt of another in case of that person’s failure to pay. To recover on a guaranty, a party must show (1) the existence and ownership of the guaranty contract; (2) the terms of the primary obligation; (3) default; (4) and nonpayment of the amount due from the guarantor.