The Virginia Business Litigation Blog

September 22, 2014

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

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.

July 10, 2014

Bringing Lawsuit to Stifle Online Criticism Held Ground for Awarding Attorneys’ Fees

by Lee E. Berlik

Virginia lacks an anti-SLAPP statute, but that doesn’t mean filing a frivolous lawsuit focused on eliminating criticism rather than enforcing actual legal rights can’t result in being ordered to reimburse the defendant’s legal fees. Some creative plaintiffs, finding themselves the subject of online criticism but not wanting to sue for defamation either because of an inability to satisfy the elements of the actionable libel or slander or because of other potential problems with bringing a defamation claim, have resorted to copyright law in pursuit of their goals. But as demonstrated by a recent decision of the Western District of Virginia, if the plaintiff has no valid copyright-infringement claim and/or takes unreasonable positions (either in making arguments to the court or in the process of settlement negotiations), the court has the authority not only to dismiss the case but to order the plaintiff to pay the defendant a reasonable amount of attorneys’ fees.

In Ergun M. Caner v. Jonathan Autry, the court found that “Plaintiff filed a copyright infringement suit to stifle criticism, not to protect any legitimate interest in his work” and ordered him to pay Mr. Autry $34,389.59 in attorneys’ fees and costs. The court described the facts of the case essentially as follows:
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June 10, 2014

Virginia’s Economic Loss Rule

by Lee E. Berlik

A plaintiff filing a lawsuit usually wants to demand as much money as possible, both for the intimidation value and because in Virginia state court, you cannot recover damages in an amount greater than what you asked for in the complaint, even if the jury awards it. Plaintiffs are thus often tempted to include demands for punitive damages, which can add as much as $350,000 to a recovery. (Punitives are capped at $350,000 in Virginia). Punitive damages, however, are not available in contract disputes. This creates a situation where the plaintiff’s attorney often tries to craft the complaint in such a way as to make it appear that the defendant not only breached a contract but committed one or more related torts as well, such as fraud, tortious interference with contract, or business conspiracy. Enter the “economic loss rule.”

Designed to maintain the distinctions between contract claims and tort claims, the economic loss rule provides that where the plaintiff is a party to a contract and has suffered only disappointed economic expectations, such as damages for inadequate value, the cost to repair a defective product, or lost profits (as opposed to damage to persons or property), his remedy sounds in contract and not tort. In other words, if the plaintiff did not receive the benefit that he bargained for, his losses will be deemed merely economic and he will not be permitted to recover on a tort theory. An exception would apply if the contract itself was fraudulently induced.
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June 2, 2014

Motions to Reconsider – A Primer

by Lee E. Berlik

Suppose you lose a motion you thought you would almost certainly win. “The court got it wrong,” you tell yourself, perhaps even sincerely. Do you file a follow-up motion asking the court to change its mind? Or do you file it away in the “grounds for appeal” category? Motions for reconsideration are disfavored in every jurisdiction and you’ve already lost once–so the odds are against you–but if the court made a clear mistake of law, it can make sense to inform the court of the mistake. The permissible grounds for seeking reconsideration depend on whether you’re in federal court or state court.

The Federal Rules of Civil Procedure do not expressly allow motions for reconsideration, but district courts generally treat them as being filed under Rule 59 or 60. Still, reconsideration of a judgment is considered an extraordinary remedy which will be granted only sparingly. Rule 60(b) allows for “relief from a final judgment, order, or proceeding” in certain circumstances. Those circumstances include mistake, excusable neglect, newly discovered evidence, fraud by an opposing party, and “any other reason that justifies relief.” That catch-all is not as broad as it sounds, however. The Fourth Circuit has held that Rule 60(b) “does not authorize a motion merely for reconsideration of a legal issue” and that Rule 60 cannot be used to make a motion simply asking the court to change its mind. In federal courts sitting in Virginia, motions for reconsideration cannot be granted where the moving party simply seeks to have the court rethink what it has already thought through–regardless of whether its decision is right or wrong.
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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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April 9, 2014

West Virginia Bank Wins Dismissal of Contract Claim for Lack of Personal Jurisdiction

by Lee E. Berlik

Virginia’s long-arm statute extends personal jurisdiction to the fullest extent permitted by due process. A Virginia court may exercise specific jurisdiction over a defendant when the defendant has sufficient minimum contracts with Virginia such that the maintenance of the suit does not offend traditional notions of fair play and substantial justice. To establish “minimum contacts,” a plaintiff must show that the defendant purposefully directed activities at Virginia residents and that the litigation results from alleged injuries arising out of those activities. A court may exercise general jurisdiction over a defendant whose activities in Virginia have been continuous and systematic. A court with general jurisdiction over a defendant may adjudicate claims entirely distinct from the defendant’s in-state activities. To survive a motion to dismiss for lack of personal jurisdiction under Federal Rule of Civil Procedure Rule 12(b)(2), a plaintiff must demonstrate personal jurisdiction by a preponderance of the evidence. In Hunt v. Calhoun County Bank, the United States District Court for the Eastern District of Virginia analyzed whether it could exercise personal jurisdiction over non-residents in a contract dispute.

James L. Bennett (“Bennett”) is the president and a board member of Calhoun County Bank (the “Bank”), a West Virginia corporation. In June 2007, William H.G. Hunt, Sr. (“Hunt”), a Virginia resident, entered a contract with the Bank in which the Bank agreed to sell Hunt royalty interests for $40,000. Hunt sued the Bank and Bennett for breach of contract and fraud alleging that he transferred $40,000 to an agent of the Bank but that the Bank refused to transfer the royalty interests. He asserts that he suffered over $180,000 in damages as a result of the Bank’s breach and he seeks specific performance or compensatory damages. Hunt also alleges that Bennett fraudulently misrepresented his intention to transfer the royalty interests. The Bank and Bennett moved to dismiss for lack of personal jurisdiction and also for failure to state a claim upon which relief can be granted.
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March 26, 2014

To Establish Personal Jurisdiction, Minimum Contacts Must Be With Forum State, Not Just its Resident

by Lee E. Berlik

Due Process is satisfied when a non-resident has sufficient minimum contacts with a state such that exercise of jurisdiction over him does not offend traditional notions of fair play and substantial justice. The minimum contacts analysis focuses on the relationship between the defendant, the forum and the litigation, and the defendant’s conduct must create a substantial connection with the forum state. The relationship must arise out of contacts that defendant himself creates with the forum state, and the contact must be with the forum state itself rather than merely with persons who reside there. The United States Supreme Court recently addressed these concepts in Walden v. Fiore.

Anthony Walden was working as a DEA agent at the Atlanta airport when, after using a drug-sniffing dog to perform a sniff test, he seized almost $97,000 in cash that Nevada residents Gina Fiore and Keith Gipson claimed to have won gambling in San Juan. Walden later helped draft an affidavit to establish probable cause. Fiore and Gipson sued Walden in Nevada alleging violation of their Fourth Amendment rights. Specifically, they asserted that Walden violated their rights by (1) seizing the cash without probable cause; (2) keeping the money after concluding it did not come from drug-related activity; (3) drafting and forwarding a probable cause affidavit to support a forfeiture action while knowing the affidavit contained false statements; (4) willfully seeking forfeiture while withholding exculpatory information; and (5) withholding that exculpatory information from the United States Attorney’s Office.
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March 24, 2014

To Enjoin Violation of Non-Compete, Must Prove Legitimate Business Interest

by Lee E. Berlik

To obtain a preliminary injunction in Virginia, a plaintiff must show (1) that he is likely to succeed on the merits; (2) that he is likely to suffer irreparable harm in the absence of preliminary relief; (3) that the balance of equities tips in his favor; and (4) that an injunction is in the public interest. Real Truth About Obama v. Federal Election Com’n, 575 F.3d 342 (4th Cir. 2009). To enjoin an ex-employee from violating his non-compete agreement, getting past the first element requires the plaintiff to persuade the court that the noncompete is no broader than necessary to protect a legitimate business interest. Courts will examine the function, scope, duration, and overall reasonableness of the restriction when making this determination. An opinion issued earlier this month in Fairfax County Circuit Court demonstrates what a high burden this can be for a plaintiff seeking to prevent its employees from working for a competitor.

Wings, LLC, provides commercial and residential vinyl, fabric, and leather repair services in Northern Virginia, the District of Columbia, Southern Maryland, and West Virginia. Wings’ customers consist primarily of auto dealerships and collision centers who hire Wings to repair car interiors on site. Wings hired two gentlemen as vinyl, velour and leather repair technicians and required them to sign agreements containing non-solicitation and non-competition provisions that prohibited them from working as technicians anywhere in Virginia, Maryland, West Virginia, and any other state in which Wings transacted business, for a period of two years following the termination of employment. (See pages 2 and 3 of the opinion for the full text of the noncompete provision).
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