The Virginia Business Litigation Blog

March 16, 2011

Summary Judgment Granted in Breach of Contract Action

A U.S. district judge in Virginia has ruled that a restaurant chain operator is liable for breach of contract and is obligated to pay a franchise consulting company for sales and marketing services that the consultant performed for the chain under the contract between the two companies. Rejecting the contract defenses of lack of standing, fraudulent inducement, lack of specificity, lack of mutuality, and unconscionability, U.S. District Judge T.S. Ellis, III, of the Eastern District of Virginia, granted summary judgment in favor of the consultant.

The case arose from a 2008 contract between Freshii Development, LLC, which owns a chain of healthy fast-food restaurants, and Fransmart, LLC, an Alexandria, Va.-based company that agreed, in exchange for a percentage of franchise fees and revenues, to help Freshii expand by finding appropriate franchisees for its restaurants. In early 2010, Fransmart restructured its business and set up a new company to which it assigned its contracts and transferred its assets and liabilities. Freshii then stopped paying Fransmart under the contract, and Fransmart sued for breach. Freshii asserted five defenses to the lawsuit, all of which Judge Ellis rejected.

Freshii first argued that Fransmart lacked standing because the 2008 agreement was a personal services contract and therefore not assignable to a separate entity (such as the “new Fransmart”) without Freshii’s consent. Judge Ellis rejected this defense, noting that many aspects of the agreement led to the conclusion that it was not a personal services contract. For example, the agreement was between two corporate entities, it was for a duration of ten years, and it did not identify any individual as being material to performance. In any event, the judge wrote, it was not necessary to reach that issue because the contract contained a “successors and assigns” clause, stating that “the provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and to their successors and assigns.” This language, the court found, demonstrated that the parties intended the agreement to be assignable to a successor entity like the new Fransmart.

March 7, 2011

How IronClad Is Your Non-Compete Agreement?

by Lee E. Berlik

In Virginia, employers who wish to restrict their employees from competing with them in a new job need to write restrictive covenants tightly and narrowly and should define all the key terms in their noncompete and nonsolicitation agreements carefully – or the courts will not enforce the covenants and former employees will be free to disregard the restrictions. That’s one of the messages of a ruling handed down recently by Judge Frederick B. Lowe of the Virginia Beach Circuit Court in a case involving a nurse practitioner who left a medical group to set up her own competing practice.

Ameanthea Blanco was a family nurse practitioner employed by Patient First Richmond Medical Group, LLC, which provided primary and urgent care to patients. She signed an employment agreement in January 2010 that contained non-competition and non-solicitation provisions. In August 2010, she resigned from Patient First, and a little over a month later, she opened her own practice nearby. Patient First sued Blanco for an injunction to enforce the non-competition and non-solicitation provisions, but the circuit judge declined to issue an injunction, finding the relevant portions of the agreement to be unenforceable.

The noncompete agreement barred Blanco, for two years after she left the company, from performing medical services of the type that she performed at Patient First in the previous 12 months, anywhere within a seven-mile radius of any Patient First center at which she “regularly provided medical services.” She was restricted from doing so as an “agent, officer, director, member, partner, shareholder, independent contractor, owner or employee,” and the prohibition applied if she did so “directly or indirectly.”

February 25, 2011

DreamWorks Accused of Copying Kung Fu Panda Concept

by Lee E. Berlik

Boston-area illustrator Jayme Gordon has filed a copyright infringement lawsuit in federal court in Massachusetts, alleging that DreamWorks stole his idea. The intellectual property lawyers who filed the complaint against DreamWorks point out a number of striking similarities between DreamWorks’ chubby, fighting panda and a panda drawn and copyrighted years ago by the plaintiff. The attorneys write that DreamWorks’ “Kung Fu Panda” and “Secrets of the Furious Five,” a short animated direct-to-video film, both “feature characters, character depictions, character personality traits, illustrations, expression, settings, story elements, plot and sequences of events that are unlawful copies and derivatives of the copyrightable elements embodied in Gordon’s Kung Fu Panda Power Work.”

To prove copyright infringement, it’s not enough to merely show that two works are very similar. The plaintiff will need to show not only substantial similarity between the copyrighted work and the alleged infringing work, but that DreamWorks, the alleged infringer, had access to the plaintiff’s copyrighted material. In this case, Mr. Gordon specifies exactly who at DreamWorks he believes had access to his panda illustrations at the time that Kung Fu Panda was being developed, and how they may have gotten into those executives’ hands.

Kung Fu Panda, released in 2008, features an overweight, food-loving panda named Po (voiced by Jack Black) who is trained in the martial arts by a small red panda named Master Shifu (voiced by Dustin Hoffman). The film grossed more than $630 million worldwide, and a sequel is coming out in May. Mr. Gordon claims that he first came up with the idea of a rotund Kung-Fu-fighting giant panda named Kidd who loves to eat Chinese food and who learns the martial arts from a small red panda named Redd. His copyright attorneys write in the complaint that Gordon had a collaborator create sketches of these characters in the 1990s and that around the same time, he put the sketches on clothing that he sold in the Boston area. Gordon also alleges that he sent a portfolio of his work featuring these characters and others to several studios, including DreamWorks, but received a letter of rejection in 1999.

February 11, 2011

Zynga Lawyer Responds to Blingville Lawsuit

by Lee E. Berlik

Does use of the name “Blingville” by a small game developer from Harpers Ferry, West Virginia, infringe the trademark rights of Zynga, creator of FarmVille? Does Zynga have a monopoly on Facebook applications ending in “ville”? Blingville has filed a declaratory judgment action in the Northern District of West Virginia to find out.

Zynga’s games have been extremely popular – and profitable – on Facebook in the last two years. The company says it has more than 295 million monthly active users on site for its six games — CityVille, FarmVille, FishVille, FrontierVille, PetVille, and YoVille. Blingville is just getting started with commercializing its game. It says another company, Overtime Apps, registered the Blingville.com domain name in October 2004 and that in November 2010, it filed a trademark registration application for the use of the name. Then, according to Blingville, Overtime Apps assigned its rights in the trademark to Blingville.

When Zynga got wind of what Blingville was doing, it sent several cease-and-desist letters to Blingville, claiming trademark infringement and threatening to sue for alleged violations of the Lanham Act. “Use of the name,” Zynga’s deputy general counsel told an online magazine, “is an obvious attempt to capitalize on the fame and goodwill associated with Zynga’s family of ‘ville’ games which includes FarmVille and CityVille. We are prepared to take all necessary steps to protect our intellectual property rights.”

January 22, 2011

Managing Agents Must Travel to Virginia for Depositions

by Lee E. Berlik

During discovery, an examining party has the power to compel the deposition of a corporate defendant’s “managing agents.” If the plaintiff’s lawyer designates an individual to testify who is not an officer, director, or managing agent of the corporate defendant, the lawyer must resort to Federal Rule of Civil Procedure 45, which governs subpoenas issued to third parties. For that reason, there is often a lot of disagreement among litigants regarding whether a particular individual qualifies as a managing agent of the corporation. Another common point of contention is whether foreign managing agents must come to Virginia for their depositions.

In DuPont v. Kolon Industries, a trade secrets case involving alleged misappropriation of confidential commercial information relating to Kevlar, Judge Payne of the Eastern District of Virginia (Richmond Division) utilized a four-factor test to determine whether employees could be classified as “managing agents,” adopting a test laid out in a 1996 Maryland case. Judge Payne wrote that courts faced with the issue should consider:

the discretionary authority that the corporation vests in the employee;

December 30, 2010

Virginia Consumer Protection Act Enforced Against Roofer

by Lee E. Berlik

Lawyers representing Ryerson, Inc., a metal roofing company, were called upon recently to defend the company against the claims of two homeowners who alleged that Ryerson failed to honor the warranty on its roofing system and that such failure violated the Virginia Consumer Protection Act (“VCPA”). The lawyers argued that Ryerson could not be liable under the VCPA because all statements made in its warranty were statements of opinion rather than factual misrepresentations. The Eastern District of Virginia disagreed.

The VCPA was enacted to promote fair and ethical standards of dealings between suppliers and the consuming public. (See Va. Code § 59.1-197). It contains provisions that make it unlawful for a supplier to misrepresent that goods and services are of “a particular standard, quality, grade, style, or model,” and prohibits suppliers from using “any other deception, fraud, false pretense, false promise, or misrepresentation in connection with a consumer transaction.” (See Va. Code § 59.1-200(A)(6), (14)).

In Gottlieb v. Ryerson, the Gottliebs (according to the Complaint) hired a contractor to install a Ryerson steel roof on their gazebo and house. The roof came with a 20-year warranty, which assured the Gottliebs that the warranty was “low-risk, no-nonsense, [and] ironclad.” The warranty materials also stated that Ryerson would honor the warranty “at any time and as often as needed within the 20-year period” from the installation date, and that the warranty entitled the homeowners to “complete repair or replacements of any covered problem–freight and labor included.”

November 28, 2010

Judge Cacheris Permits Vicarious Copyright Infringement Claim to Proceed

by Lee E. Berlik

Recovering damages for copyright infringement may be difficult in situations where the infringing party is “dummy” or “shell” corporation with no assets that can be used to satisfy a judgment. Sometimes, however, there may be a parent corporation or other entity that may be held liable on a theory of “vicarious liability.” As demonstrated by a recent decision of Judge Cacheris of the District Court for the Eastern District of Virginia, this doctrine may be utilized to pursue a contractor for the infringing activities of its subcontractor, even if the contractor knows nothing about the alleged infringement.

In Softech Worldwide, LLC v. Internet Technology Broadcasting Corp., Fedstore Corporation entered into a contract with the United States Department of Veterans Affairs (the “VA”) to develop various software, including software relating to the Digital-Media-Architecture (“DMA”) Pilot Project–a platform for scaling electronic media to various electronic devices. Fedstore subcontracted the work to Internet Technology Broadcasting Corporation (“ITBC”), who in turn hired the Plaintiff, Softech Worldwide, LLC, to perform various software services under the VA contract. Softech claims it performed these services from 2002 until early 2010, and that in early 2010, ITBC stopped making regular payments. Shortly thereafter, Softech claims it delivered the DMA source code and other proprietary information to ITBC at its request, and that ITBC refused to return the materials while continuing to use, maintain, and update Softech’s products.

Softech sued both ITBC and Fedstore for copyright infringement and violation of Virginia’s Uniform Trade Secrets Act. Fedstore moved to dismiss the case for failure to state a claim. Fedstore’s position was essentially that the claims pertained to actions allegedly taken by ITBC, not by Fedstore. Softech responded that Fedstore should be held responsible under theories of contributory liability and vicarious liability.

September 26, 2010

Discrimination Claims in Virginia Must Be Brought Promptly

by Lee E. Berlik

Virginia is a “deferral state” for Title VII purposes, meaning that it has a state law prohibiting discriminatory employment practices and has a state or local agency (e.g., the Virginia Council on Human Rights) authorized to grant relief from such practices. To allege discriminatory employment practices in deferral states like Virginia, prior to filing any lawsuit, an aggrieved employee must exhaust administrative remedies by initiating an EEOC charge within 300 days. Otherwise, the claim will be forever barred. (See 42 U.S.C. § 2000e-5(e)(1)). In a case decided recently by Judge Spencer of the Eastern District of Virginia, a plaintiff found this out the hard way.

In McKelvy v. Capital One Services, LLC, the plaintiff was an African-American Director of IT services, over 40 years of age. After obtaining a “right-to-sue” letter from the EEOC, he sued Capital One, claiming that the removal of his supervisory responsibilities and the failure to promote him was based on his race or his age, and thus violated Title VII’s prohibitions against unlawful discrimination in employment. Finding that the alleged discrimination took place more than 300 days before the plaintiff filed his EEOC charge, the court granted summary judgment in Capital One’s favor and dismissed the plaintiff’s claims with prejudice.

The court also observed that, even if the plaintiff had not failed to exhaust administrative remedies, he could not prevail on his claim because he failed to present supportive facts (beyond his personal belief), to rebut Capital One’s assertion that his direct reports were taken away because other associates complained about his leadership style and because of some poor performance appraisals. To survive a motion for summary judgment, a plaintiff must come forward with supportive evidence.

September 12, 2010

Virginia Trade Secrets Act Analyzed by Fairfax Court

by Lee E. Berlik

What is a trade secret? In Virginia, trade secrets generally consist of commercial information that (1) derives independent economic value from not being generally known to, and not being readily ascertainable by proper means by, other businesses which would benefit from its disclosure; and (2) is the subject of reasonable efforts by the business to be kept secret. (The full definition is provided in the Virginia Uniform Trade Secrets Act itself, found at Va. Code § 59.1-336). Judge Bellows of Fairfax County Circuit Court recently had the occasion to consider the extent to which vendor and customer lists may qualify as protectible trade secrets.

Tryco, Inc. v. U.S. Medical Source, LLC involved a dispute chiefly between Tryco, a small business authorized to sell medical and dental equipment to the United States government, and former employee Brian Thomas, who had left Tryco to join U.S. Medical Source, LLC (“USMS”), a competing firm founded by his sister-in-law. Prior to leaving, Mr. Thomas cleaned out his desk and copied his personal files onto a flash drive. In the process, however, he also (inadvertently, the court found) copied two Tryco documents, one containing a list of buyer contact information and other providing certain information regarding Tryco’s vendors. When accused by Tryco of stealing confidential information for the purpose of benefiting a competitor, Mr. Thomas promptly returned the entire flash drive, explaining that the copying was inadvertent and stating that he never copied the drive, never showed it to anyone at USMS, and never used it.

Tryco sued both Mr. Thomas and USMS for misappropriation of trade secrets. Tryco also brought claims for civil conspiracy under Virginia’s business conspiracy statute, breach of fiduciary duty, and tortious interference. After four days of trial testimony, the defendants moved to strike Tryco’s evidence as insufficient to state a claim. Judge Bellows agreed with the defendants the Tryco had failed to prove theft of trade secrets within the meaning of the Virginia Uniform Trade Secrets Act, and found in favor of the defendants on all counts.

August 31, 2010

Noncompete Agreements: Getting Them to Stick

by Lee E. Berlik

Non-competition and non-solicitation clauses found in employment agreements often do not provide employers with the protection the employers assume they are getting. Virginia courts will refuse to enforce such “noncompetes” if they are written in vague terms or if they are broader than necessary to meet the employer’s legitimate business interests. As restraints on trade, restrictive covenants are disfavored by the courts. Consequently, any ambiguities in the contract will be construed in the employee’s favor. Fairfax Circuit Court Judge Michael F. Devine recently illustrated these principles in Daston Corp. v. MiCore Solutions, Inc., in which he upheld a nonsolicitation clause but struck down a noncompete agreement as unenforceable.

The case was brought by Daston Corporation, an information technology company that provides, among other things, a range of services based on Google Apps software, against two former employees who went to work for MiCore Solutions, a business offering similar services. Both employees had signed identical employment agreements with Daston containing both a noncompete clause and a nonsolicitation clause. The employees sought to dismiss Daston’s claims, arguing that the employment agreement’s restrictions were unenforceable. Judge Devine agreed in part and disagreed in part.

The court began its analysis by noting that, in Virginia, non-competition agreements will be enforced only “if the contract is narrowly drawn to protect the employer’s legitimate business interest, is not unduly burdensome on the employee’s ability to earn a living, and is not against public policy.”

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