Virginia Business Litigation Lawyer Blog

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.

Next, Freshii argued that Fransmart fraudulently induced it to enter into the contract by misrepresenting its business model for marketing franchises and its financial strength. The judge found, however, that under Virginia law, promises regarding future actions such as promised marketing activities don't constitute fraud. In addition, there was insufficient evidence that Freshii relied on these statements. The claims regarding Fransmart's financial condition also didn't constitute fraud because there wasn't clear and convincing evidence that Fransmart was actually in financial trouble and because its opinions about its future viability can't be the basis of fraud claims in Virginia.

Freshii also asserted that the contract was unenforceable for lack of specificity regarding Fransmart's obligations. Judge Ellis ruled that the marketing and sales contract contained "all the essential terms required for a services contract under Virginia law," and that contractual terms requiring "marketing" and "selling" were specific enough to be enforceable.

Freshii asserted that the contract was invalid for lack of mutuality because its only recourse in the event of breach was termination of the contract. Judge Ellis found, however, that nothing in the contract prohibited Freshii from suing for breach of contract and damages.

Finally, Freshii argued that the agreement was unenforceable because it contained unconscionable terms. Judge Ellis replied that these were sophisticated businessmen entering into an arms-length deal and that there was insufficient evidence of unconscionability. Freshii may have been unhappy with the deal, but that didn't constitute grounds to void it.

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."

In his ruling, Judge Lowe summarized Virginia case law on covenants not to compete and concluded that they must be reasonable from the standpoint of the employer, the employee, and sound public policy, and that the employer bears the burden of proof and that any ambiguities are to be construed against the employer. The judge noted that the "critical issue" in examining cases of this type is "whether the functional reach of the covenant is overbroad." In this case, he found that it was overbroad for several reasons. First, it was not limited to businesses that actually compete against Patient First, because it bars even "indirect" involvement and even involvement as a shareholder. That would mean that Blanco could not even own shares in a public company if the company provided the same services as Patient First at any location within seven miles of where Blanco "regularly provided medical services." Many such public companies, the judge noted, do not compete with Patient First.

Furthermore, the agreement did not define the "medical services" that are barred, nor did it define the term "indirectly." Accordingly, the judge ruled that the covenant not to compete "is overbroad and uncertain in its functional reach, and is unenforceable." He reached the same conclusion, for the same reasons, regarding the covenant prohibiting the solicitation of staff.

It's clear, therefore, that in Virginia, a non-compete clause must be fairly precisely tailored to the employer's needs and must act only against activities or businesses that compete directly with the employer. Does your noncompete prohibit the former employee from owning stock in a publicly-traded competing company? If it does, regardless of whatever other terms it contains, most Virginia courts would likely strike it as unenforceable.