The Virginia Business Litigation BlogEarlier this month I wrote about the case of a dentist who had sued a consultant for breach of fiduciary duty and failed. The court in that case found that the allegations were insufficient to establish the existence of an agency relationship, and without such a relationship, the consultant owed no fiduciary duty to the dentist. In a similar case between a medical doctor and a consultant, Bocek v. JGA Associates, the trial court reached the same conclusion, but was reversed on appeal, the Fourth Circuit holding that the doctor had proved as a matter of law that the defendants were agents of the doctor and had breached fiduciary obligations by misappropriating a business opportunity for themselves. When the case went back to the trial court, the only issue was to determine the appropriate remedies for the consultants’ breach of fiduciary duty. The latest opinion offers a helpful guide as to the potential remedies available in breach-of-fiduciary-duty cases. What follows is a brief summary of the various forms of relief discussed in the opinion.
Agents Owe Fiduciary Duties to their Principals
To state a plausible breach-of-fiduciary-duty claim in Virginia, a plaintiff must allege enough facts to prove (1) the existence of a fiduciary duty, (2) the breach of that duty, and (3) resulting damages. The first element—existence of a fiduciary duty—is often the most difficult to prove. Fiduciary duties can arise in a number of different contexts, including between employee and employer, between corporate officer and corporation, and between principal and agent. The Western District of Virginia recently dealt with a case, Broadhead v. Watterson, in which agency was alleged as the basis for a breach-of-fiduciary-duty claim. The court reviewed the allegations and found them insufficient to state a valid claim.
The Virginia Supreme Court has defined agency as “a fiduciary relationship resulting from one person’s manifestation of consent to another person that the other shall act on his behalf and subject to his control, and the other person’s manifestation of consent so to act.” (See Reistroffer v. Person, 247 Va. 45, 48 (1994)). Such consent may be manifested expressly or may be inferred from the conduct of the parties and from the surrounding facts and circumstances. Independent contractors, as a rule, are not agents of any principal. The distinction between contractors and agents generally lies in the degree of control (or right to control) the methods or details of doing the work. There’s a presumption that a person acts on his own behalf and not as the agent of another, but this presumption can be rebutted with appropriate evidence.
No Tortious Interference if Contract Already Breached
Everybody knows you can get in trouble for breaching a contract. But did you know that you can also get sued for inducing someone else to breach a contract that you’re not even a party to? Virginia, like many states, recognizes a cause of action for “tortious interference with contract.” The tort requires proof of four elements: (1) the existence of a valid contractual relationship or business expectancy; (2) knowledge of the relationship or expectancy on the part of the interferor; (3) intentional interference inducing or causing a breach or termination of the relationship or expectancy; and (4) resultant damage to the party whose relationship or expectancy has been disrupted. (See Chaves v. Johnson, 230 Va. 112, 120 (1985)).
Basically, this means that if your business partner breaches a contract with you and the cause of the breach is the meddlings of a third person, your legal remedy may involve not only a breach-of-contract action against the business partner, but a tortious-interference claim against the meddler. This is a recognition of the value the law places on contract rights. Interfere with them at your peril.
Still, there won’t always be a culprit. Sometimes, contracting parties are simply unable to meet their obligations and have no choice but to breach. Other times, a third person might have induced the breach, but for reasons that the law regards as understandable and reasonable (and therefore privileged). Breaching a contract on the advice of counsel, for example, is unlikely to result in a tortious interference claim against the lawyer. And once a contract has been breached without the involvement of any third parties, no tortious interference claim will lie against anyone who wanders into the situation after-the-fact.
New Proportionality Requirement in Rule 26 Not that Big of a Deal
Much has been made of the latest amendments to the Federal Rules of Civil Procedure, effective December 1, 2015, some going so far as to call them “the most significant change to federal civil practice in the last decade.” In particular, Rule 26 has been amended to include a new “proportionality” provision. Rule 26(b)(1) now limits discovery to “any nonprivileged matter that is relevant to any party’s claim or defense and proportional to the needs of the case,” apparently imposing an enormous limitation on the scope of permissible discovery.
The concept of proportionality, however, is nothing new. Even before the 2015 Amendments, Rule 26 provided that discovery should be limited if it “is unduly burdensome or expensive, taking into account the needs of the case, the amount in controversy, limitations on the parties’ resources, and the importance of the issues at stake in the litigation.” The Eastern District of Virginia recently had a chance to grapple with the new rule in a defamation case, and the implication of the court’s holding is essentially that not much has changed, but that litigants and the court should pay a little extra attention to proportionality as they deal with discovery issues.
Non-Compete Agreements Enforceable Against Independent Contractors
Don’t think you can get out of your non-compete agreement just because you’re a contractor and not an employee. While it’s true that independent contractors, unlike regular employees, may not owe a fiduciary duty of loyalty to the party that hired them (hence their independence), a business may legitimately require its consultants and contractors to enter into binding non-compete and non-solicitation agreements that will restrict their right to compete with the business for a reasonable length of time after their contracts end.
A few weeks ago in Newport News, Judge Raymond A. Jackson allowed a case brought by tax-preparation firm Tax International against two of its former independent contractors to go forward, denying the defendants’ motions to dismiss. The litigation involved allegations not only that the defendants had violated their non-compete agreements but also that they committed trade secret misappropriation, tortious interference with business expectancy, copyright infringement, trademark infringement, false designation of origin, and unfair competition. Judge Jackson allowed all claims to go forward, finding the allegations plausible on their face.
Non-Compete Agreement Held Unenforceable Against Doctor
In Virginia, non-compete agreements are legal but they are not favored and not always enforceable. As restraints on free trade, they will only be enforced if the employer can prove the terms are (1) no broader than necessary to protect the employer’s legitimate business interests, (2) not unduly harsh or oppressive in curtailing the employee’s ability to make a living, and (3) not against public policy. Ultimately, the test is one of reasonableness, considering the circumstances of the business, the nature of the work, and any and all other facts that may be relevant. On December 14, 2015, allergist and immunologist Thomas Fame of Roanoke received some good news: he had been successful in challenging his two-year non-compete agreement, having persuaded the court that it unfairly restricted his right to earn a livelihood by practicing his specialty in his chosen home.
In determining whether a non-compete clause is reasonable, courts examine three factors: (1) the duration of the restriction, (2) the geographic scope of the restriction, and (3) the “function” of the restriction; namely, the precise activities the employee is restricted from engaging in. To be enforceable, the noncompete must be found reasonable as a whole, considering all three elements. If one of the factors is grossly unreasonable, it can invalidate the entire agreement, even if the other two factors are narrowly drawn. (See Home Paramount Pest Control Companies, Inc. v. Shaffer, 282 Va. 412, 419 (2011) (holding that “the clear overbreadth of the function here cannot be saved by narrow tailoring of geographic scope and duration”).
The Top 10 Lawyer Types You’re Most Likely to Need
Suppose you want to sue a contractor for breaching a contract, or you want to sue a competitor for stealing your employees. What kind of lawyer do you need? Should you just whip out the Yelp app and search for the nearest five-star-rated lawyer? If you’ve tried that, you may have been told by the highly rated lawyer that he or she doesn’t handle the particular legal problem you’re experiencing. There are many types of lawyers, and knowing which kind of lawyer you need is the first step towards hiring the right one. The attorney who did such an excellent job drafting your will may not be the best lawyer to challenge your non-compete agreement. Personally, I get many calls from prospective clients who want me to appeal their criminal conviction, or fight for custody of their kids, or get them out of a traffic ticket, and I don’t do any of those things. And lawyers who do handle such matters typically don’t practice in the sorts of business disputes and defamation matters that my firm typically handles.
So I thought I would offer this quick-and-dirty guide to what I consider to be the ten most in-demand types of lawyers for most individuals and small businesses. If you find yourself in need of legal advice or representation and don’t know what kind of lawyer you need, check out the descriptions below, locate the legal issue you’re experiencing, then narrow your search to focus on the type of lawyer that corresponds to your specific need. Continue reading
Use the Courts to Vindicate Rights, Not Intimidate Enemies
Litigation tactics designed to bully, harass, intimidate, or embarrass an opponent or opposing counsel are not permitted in Virginia courts. While litigants may gain great satisfaction from the knowledge that their lawsuit or counterclaim is causing the other side a great deal of expense and inconvenience, if the primary goal of the litigation is to cause pain, rather than vindicate legitimate legal rights, courts have the authority to impose sanctions. Notably, this is true even if the claim has merit. So held the Virginia Supreme Court on November 12, 2015, in Kambis v. Considine.
Most lawyers associate Va. Code § 8.01-271.1 (the state-level equivalent of Rule 11 of the Federal Rules of Civil Procedure) with frivolous pleadings – pleadings completely devoid of merit, unsupported by any foundation in law or fact, and having no reasonable chance of success. Lawyers know that if they file a complaint based on fanciful factual allegations and outdated legal citations, they can be sanctioned and ordered to reimburse the other party for legal fees incurred in having to respond. What’s noteworthy about the Kambis case is that it focused on the “improper purpose” prong of the sanctions test and clarified that sanctions may be awarded even if a pleading presents a valid claim fully supported by the facts and the law.
Termination for Demanding Payment of Earned Bonus Held Actionable
Here in Virginia, employment is presumed to be “at-will”: an employer can terminate the employment relationship with or without cause, upon reasonable notice, for any reason or no reason at all. Employees have the same right. The employment-at-will doctrine is particularly strong in Virginia, but there are some limited exceptions. An employee cannot be terminated without cause if an applicable employment agreement requires good cause for termination. A termination will also be deemed unlawful if it violates state or federal anti-discrimination laws or if the reason for the termination violates public policy.
Under the public policy exception to the employment-at-will doctrine, an employer may not terminate an employee in violation of explicit statements of public policy or in violation of laws that don’t expressly state a public policy but are designed to protect property rights, personal freedoms, health, safety, or welfare of the people in general and are in furtherance of an underlying and established public policy. Bowman v. State Bank of Keysville, 229 Va. 534 (1985). In practice, courts apply the public-policy exception only in rare circumstances, and not every violation of public policy will give rise to a valid wrongful discharge claim.
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Proximate Cause Is Required to Win Your Fraud Claim
To state a cause of action for fraud in Virginia, a plaintiff must plead that there was (1) a false representation of (2) a material fact, (3) made intentionally and knowingly, (4) with intent to mislead, and that the plaintiff (5) reasonably relied on that false representation and (6) that his reliance resulted in damages. What lawyers and judges often overlook is that to survive demurrer, a plaintiff must also show (as part of the causation requirement of elements 5 and 6) that the damage was proximately caused by the defendant’s alleged misrepresentation. (See, e.g., Cohn v. Knowledge Connections, Inc., 266 Va. 362, 369 (2003); Murray v. Hadid, 238 Va. 722, 731 (1989)). Not just caused–proximately caused.
The Virginia Supreme Court has defined proximate cause of an event as “that act or omission which, in natural and continuous sequence, unbroken by an efficient intervening cause, produces the event, and without which that event would not have occurred.” Beale v. Jones, 210 Va. 519, 522 (1970). According to the Restatement of Torts, the concept of proximate cause encompasses both (1) causation in fact, which exists where a plaintiff’s reasonable reliance is a “substantial factor in determining the course of conduct” that results in the plaintiff’s loss; and (2) legal causation, which exists where the loss might “reasonably be expected to result from the reliance.” (See Restatement (Second) of Torts §§ 546, 548A). It’s this second element that is most often neglected. Proximate cause is more than simple “but for” causation, which refers only to the first element of the test (i.e., causation in fact).