Business and Corporate Category Archives — Page 4 of 6 — The Virginia Business Litigation Blog Published by Virginia and Washington, D.C. Litigation & Appeals Attorney

May 20, 2013

Prior to Derivative Suit, Shareholder Demand Must Clearly Identify Wrong and Demand Action

A shareholder acting on behalf of a corporation may bring a “derivative suit” against corporate directors and management for fraud, mismanagement, self-dealing or dishonesty. Before bringing such a suit, the shareholder must make a written demand that clearly identifies the alleged wrong and demands the corporation take action to redress it. A court will examine a complaint and a written demand to insure that they are sufficiently connected. A Norfolk Circuit Court recently addressed the sufficiency of a demand letter in Williams v. Stevens and Dornemann.

Alex Williams, Eric Stevens and Karl Dornemann were the sole shareholders of Dogsbollocks, Inc., a corporation that managed restaurants. Williams alleged that Stevens and Dornemann (the defendants) prevented him from involvement with the corporation and refused to give him pertinent corporate information. He also alleged that the defendants developed a restaurant independently. Williams’ attorney sent two letters to the defendants. The first letter demanded access to the corporation’s financial records and requested the name of the corporation’s accounting firm, and the second letter accused defendants of ignoring the first letter and gave the defendants notice that Williams was requesting financial records pursuant to Virginia Code § 13.1-774. Williams later filed a derivative suit. In response to an Amended Complaint, defendants filed a plea in bar, arguing that Williams’ suit was barred because he failed to make a written demand before bringing the derivative action. Williams contended that his two letters fulfilled the demand requirement.

The court considered what components a document must contain in order to satisfy the written demand requirement. No Virginia court had previously addressed the question, so the court looked to rules established in North Carolina, where the demand requirement is almost identical to Virginia’s. Neither state’s statutes specify the form of the demand other than requiring it to be written. North Carolina courts have held that the document should set forth the facts of share ownership and describe the remedy demanded with enough specificity to allow the corporation to correct the problem or bring a lawsuit on its own behalf. See e.g., LeCann v. CHL II, LLC, 2011 NCBC 29 (2011). In North Carolina, emails, sworn affidavits and letters have satisfied the written demand requirement where they identified the allegedly wrongful acts and demanded redress in a clear and particular manner sufficient to put the corporation on notice as to the substance of the shareholder’s complaint.

April 15, 2013

An Unsigned Contract is No Party for Wiz Khalifa

by Lee E. Berlik

Musical artist Cameron Jibril Thomaz, better known as “Wiz Khalifa,” recently saw his breach of contract case against It’s My Party get dismissed. Mr. Thomaz had hired The Agency Group as his booking agent for a new tour which would have included a concert at The Patriot Center in Northern Virginia. The Agency Group asked It’s My Party Inc. (I.M.P.) to promote the concert, and it represented to I.M.P. that Mr. Thomaz would soon release a new album. The Agency Group emailed a contract to I.M.P. and asked I.M.P. to sign and return it to The Agency Group for approval and signature by Mr. Thomaz. The contract provided that it would not be binding unless signed by all parties. The contract was never signed.

Mr. Thomaz’ release of a new album was crucial to I.M.P.’s interest in promoting the concert because it did not believe he could attract a sufficient number of fans to warrant his appearance at the venue without the support of a new album. I.M.P. asserted that the parties tentatively agreed upon a date for the concert and the terms of I.M.P.’s promotion of the concert, but it denied having committed to promote the concert.

Mr. Thomaz argued that the parties entered into a contract for him to perform a live concert and that he relied on I.M.P.’s representations in turning down an opportunity to perform on the same date at a different venue using a different promoter. According to Mr. Thomaz, I.M.P. partially performed the contract by advertising, promoting and marketing the concert. He also contends that he partially performed the contract but that I.M.P. refused to pay him any money and canceled the concert after fans already had purchased tickets. I.M.P. asserted that it declined to execute the contract but agreed to reschedule the concert because Mr. Thomaz’s album release was delayed. The Agency Group and I.M.P. agreed to sell tickets to the concert before finalizing the agreement, but as I.M.P. had predicted, sales tanked in the absence of the album release. The parties were unable to come to mutually agreeable terms, and I.M.P. ultimately cancelled the concert and withdrew its offer to promote it. Mr. Thomaz sued I.M.P. for breach of contract and I.M.P. moved to dismiss the complaint.

February 1, 2013

Feeling the Effects of Out-of-State Conduct Won’t Guarantee Personal Jurisdiction Over Nonresident

by Lee E. Berlik

When analyzing personal jurisdiction, the Fourth Circuit (which includes both Virginia and South Carolina) had held that it is proper to consider the location where the effects of the alleged wrongdoing are felt. The so-called “effects test” is applied narrowly, however, and cannot be used to supplant the minimum contacts analysis required by the United States Constitution. The United States District Court for the District of South Carolina recently had occasion to apply the test in Power Beverages v. Side Pocket Foods.

Power Beverages, a South Carolina company, contracted with Side Pocket, an Oregon distillery, to manufacture and sell Ying Yang vodka and ship the product where directed. Power Beverages wired money to Side Pocket in Oregon to pay for materials, and Side Pocket delivered the vodka to a South Carolina licensed distributor.

A dispute arose between the founders of Power Beverages, and one of the founders demanded that Power Beverages cease operations. Side Pocket informed Power Beverages that the contract between them would terminate in thirty days, and it sent Power Beverages a final invoice which Power Beverages contested. Upon direction from one of the founders, Side Pocket released the remaining inventory to a distributor in California. Power Beverages then sued Side Pocket in South Carolina for breach of contract, fraud, conversion, unfair trade practices and conspiracy. Side Pocket argued that the South Carolina court lacked personal jurisdiction over it.

October 8, 2012

Non-Compete Held Enforceable, Lost Profits Sufficiently Proven

by Lee E. Berlik

The Supreme Court of Virginia recently heard appeals in Preferred Systems Solutions, Inc. v. GP Consulting, LLC, a Fairfax non-compete case previously covered by this blog. The case involved a dispute between a government contractor, Preferred Systems Solutions, Inc. (PSS) and its subcontractor, GP Consulting, LLC (GP). GP terminated its contract with PSS and entered into a contract with a PSS competitor. PSS sued GP alleging breach of contract, misappropriation of trade secrets and tortious interference with contract. The trial court awarded PSS compensatory damages based on its finding that GP breached the non-compete clause in the parties’ contract and that PSS was entitled to recover its lost profits, which it had proven with reasonable certainty. The Virginia Supreme Court affirmed.

Contracts that limit competition are not favored in Virginia and are enforceable only if narrowly drawn to protect an employer’s legitimate business interest, not unduly burdensome on an employee’s ability to earn a living and not against public policy. The court considers the function, geographic scope, and duration of the restriction in evaluating these factors.

Here, the court found that the function of the non-compete clause was narrowly drawn as it was limited to work in support of a particular program run under the auspices of a particular government agency and limited to the same or similar type of Money Stream.jpg information technology support offered by PSS. Likewise, the twelve month duration of the non-compete was narrowly drawn in the court’s view. The court found that the lack of a specific geographic limitation was not fatal to the non-compete clause because it was so narrowly drawn to this particular project and the handful of companies in direct competition with PSS. Accordingly, the court found that the clause was enforceable.

September 17, 2012

Attorneys’ Eyes Only Expert Reports Sealed From Public Scrutiny

by Lee E. Berlik

The law presumes that the public should have access to judicial records. This presumption stems from both common law and First Amendment concerns and may be abrogated only in unusual circumstances. Fourth Circuit case law indicates that a district court can seal court documents if competing interests outweigh the public’s right to access.

When faced with a request to seal documents, a court must first determine the source of the right to access in order to weigh the competing interests. The court must then (1) give notice of the request to seal and allow interested parties a reasonable opportunity to object; (2) consider less drastic alternatives to sealing the documents; and (3) provide specific reasons and factual findings supporting its decision to seal the documents. A local rule in the United States District Court for the Eastern District of Virginia requires the party moving to seal documents to provide (1) a non-confidential description of the documents to be sealed; (2) a statement as to why sealing is necessary; (3) references to governing case law; and (4) a statement as to the period of time the party seeks to have the matter sealed and as to how the matter is to be handled upon unsealing.

In a recent case in the Eastern District of Virginia, East West, LLC v. Rahman, the plaintiff sought to seal four exhibits relating to the parties’ expert reports. The reports were designated “Attorney’s Eyes Only” under a confidentiality order entered during discovery that allowed the parties to so designate documents that contained highly sensitive business or personal information, the disclosure of which might cause significant harm.

August 1, 2012

An Agreement to Agree is not a Binding Contract in Virginia

by Lee E. Berlik

A “letter of intent” which recites the terms of a transaction contemplated in the future, or which sets forth terms to be embodied in a more formal agreement to be executed at a later time, is presumed to be a non-binding “agreement to agree” rather than an enforceable contract. In Virginia, unlike some other jurisdictions, a letter of intent, reflecting each party’s commitment to negotiate open issues in good faith to reach a contractual objective within an agreed framework, will not be construed as a binding contract absent circumstances suggesting the parties intended to bind themselves. The Eastern District of Virginia recently dealt with this issue in Virginia Power Energy Marketing, Inc. v. EQT Energy, LLC.

EQT contracted with a pipeline to buy natural gas once the pipeline completed its expansion. The purchase was subject to the pipeline’s FERC (Federal Energy Regulatory Commission) gas tariff and applicable laws, orders, rules and regulations. EQT then sought to sell some of the excess capacity to VPEM, a distributer, in a non-biddable release. By regulation, a non-biddable release must use the maximum applicable rate. The parties signed a letter of intent (LOI) for 30,000 dekatherms per day with the rate to be paid as the lesser of $0.84 per dekatherm or the rate applicable to EQT under the NLRA (the negotiated rate letter agreement between the pipeline and EQT). Subsequently, the applicable rate was set at $0.88 so either the LOI rate had to be revised or EQT was free to release the capacity to the highest bidder.

The letter of intent stated EQT “propose[d] to release a portion of (the pipeline’s capacity) to VPEM.” Before the pipeline completed its expansion, however, gas prices rose and the value of EQT’s capacity increased. EQT received bids that exceeded VPEM’s and asked VPEM to pay an additional $12 million for the capacity. VPEM refused and EQT abandoned the transaction. VPEM then sued EQT in the Eastern District of Virginia for breach of contract.

July 9, 2012

Liquidated Damages Affirmed for Breach of Non-Solicitation Agreement

by Lee E. Berlik

The Fourth Circuit Court of Appeals has affirmed a Western District of Virginia ruling upholding a non-solicitation clause in a contract for trained personnel. ProTherapy Associates, LLC contracted with nine nursing homes to provide and train licensed physical and occupational therapy and speech/language pathology personnel. To protect its interests, it included in each contract a restrictive covenant precluding the nursing homes from “directly or indirectly” soliciting or hiring Pro Therapy employees:

“Non-Solicitation. During the term of this Agreement and for one year thereafter, [the nursing home] shall not, directly or indirectly, for [the nursing home] or on behalf of any other person or business entity for the benefit of [the nursing home]: (a) solicit, recruit, entice or persuade any Therapists or other employees or contractors of [ProTherapy] who had contact with [the nursing home] pursuant to this Agreement to become employees or contractors of [the nursing home] responsible for providing services to Patients like the Services hereunder; or (b) employ or use as an independent contractor any individual who was employed or utilized as a contractor by [ProTherapy] for the provision of Services at any time during the twelve (12) months prior to such proposed employment or contracting. Recognizing that compensatory monetary damages resulting from a breach of this section would be difficult to prove, [the nursing home] agrees that such breach will render it liable to [ProTherapy] for liquidated damages in the amount of ten thousands dollars ($10,000) for each such individual.”

When the nursing homes asked for a rate reduction, ProTherapy provided a new contract with the same clause. The contract also permitted either party to terminate the contract with 90-days’ notice. Just weeks later, the parent company of the nursing homes gave ProTherapy 90-days’ notice and hired Reliant Pro Rehab, LLC to do the same job at a lower cost. During the remaining 90-day period, Reliant began recruiting ProTherapy’s personnel who were still working in the nursing homes. Reliant was able to meet with them because the nursing homes provided lists of the ProTherapy personnel and helped make them available. As a result, Reliant hired sixty four of the ProTherapy therapists for its contract.

June 7, 2012

Leesburg Business Survives Motions to Dismiss

by Lee E. Berlik

Precision Franchising, LLC, a Virginia limited liability company based in Leesburg, licenses the Precision Tune Auto Care system. Catalin Gatej entered into a franchise agreement to operate a Precision Tune Auto Care system in Massachusetts. The agreement required Gatej to pay Precision Franchising an operating fee of 7.5 percent of weekly gross sales and an advertising fee equal to 1.5 percent of gross weekly sales. It also required him to spend 7.5 percent of gross weekly sales for advertising directly benefiting Precision Franchising. When Precision Franchising sued for breach of contract, Gatej moved to dismiss on two separate grounds. The court rejected both of them.

In 2011, Gatej ceased operations and transferred assets to another who is not operating as a Precision Tune Auto Center. Precision Franchising sued for breach of contract seeking $55,055.97 for required advertising Gatej hadn’t spent while he ran the center, $86,756.40 for lost profits due to the early termination of operation, and attorney fees and costs.

Gatej moved to dismiss the complaint. Because the parties were from different states, jurisdiction in this case was based on diversity. In such cases, at least $75,000 must be in controversy and Gatej claimed the company’s claims could not satisfy that requirement. He also claimed the wrong party sued him because Precision Franchising, LLC was not the company with which he’d signed the agreement.

May 31, 2012

Non-Compete Agreement with Former Bank Executives Deemed Enforceable

by Lee E. Berlik

Although Virginia courts often view non-compete covenants with disfavor, the United States District court for the Eastern District of Virginia recently upheld a non-compete agreement executed between Capital One and two of its former executives. A few months after acquiring North Fork Bank in late 2006, Capital One executed a Separation Agreement (“Agreement”) with the president of its Banking Segment, John Kanas, and Executive Vice President of Commercial Banking, John Bohlsen, both of whom previously held executive positions at North Fork Bank. The Agreement stipulated that Kanas and Bohlsen could not “engage in a Competitive Business . . . in New York, New Jersey, or Connecticut” for five years after leaving Capital One, except that they could own less than 10% of any entity for investment purposes, provide services to a competitor that Capital One did not offer, and work for a private equity firm, investment bank, or hedge fund.

Two years after leaving Capital One, Kanas and Bohlsen opened BankUnited, which only had branches in Florida but held portfolios secured by property located in the Tri-State Area. BankUnited formed a subsidiary the following year that acquired a company that made loans secured by equipment also located in the Tri-State Area. Finally, in 2011, BankUnited entered into negotiations to acquire New York-based bank Herald National, with the stipulation that Kanas and Bohlsen would not provide services to Herald National until the termination of the Agreement. Capital One sued Kanas and Bohlsen for breach of the Agreement. Kanas and Bohlsen sought summary judgment, claiming the non-compete provision in the Agreement was an unreasonable restraint of competition and should be deemed void.

In Virginia, unreasonable covenants not to compete are unenforceable. “A reasonable non-compete is: (1) narrowly drawn [as to geographic scope, duration, and function of the restriction] to protect the employer’s legitimate business interest, (2) not unduly burdensome on the employee’s ability to earn a livelihood, and (3) consistent with public policy.” Virginia courts are less likely to void non-compete covenants if they are found in agreements concerning a sale of a business or goodwill, and if policy considerations would support enforcement of the covenant. If the non-compete provisions are contained in agreements concerning the employer-employee relationship, then the employer has a heavier burden in demonstrating the reasonableness of the provision restricting competition. “Greater latitude is allowed in determining the reasonableness of a restrictive covenant when the covenant relates to the sale of a business,” the court noted.

May 18, 2012

Northern Virginia Winery Prevails in Virginia Supreme Court

by Lee E. Berlik

The sale of wine on vineyard premises is an integral part of the winery agricultural business. So says the Virginia Supreme Court which has just reversed a Circuit Court decision that forced a Fauquier County vineyard to shut its doors.

Charles and Lori Marterella bought a parcel of land in Bellevue Farms, a Fauquier County subdivision, with the intention of starting a winery. As land purchasers, they agreed to abide by the applicable subdivision covenants. Among these were Article II, Section I, which states “[all] tracts … shall be exclusively used for residential, agricultural, and recreational purposes,” and Article III, Section 3, which states “[n]o commercial enterprises may be undertaken on the property, which, in the [Site] Committee’s opinion, is in conflict with the goals of these Covenants.”

The Site Committee was established to rule on certain property uses of the landowners. In 1994, it created an informal handbook that stated, among other things: “Agriculture is the only commercial activity expressly permitted under the covenants. Any other work whether as a self-employed person or as an employee that causes external change to your property or leads to regular visits by customers, suppliers, business associates, or others is not acceptable. If you wish to engage in non-agricultural business activity, the Committee will rule on its acceptability and the Board would then approve or disapprove your request.”