Virginia Business Litigation Lawyer Blog

In Virginia, non-compete agreements will be enforced if they are narrowly drawn to protect the employer's business interests, if they are not unduly restrictive of the employee's ability to earn a living, and if they are not against public policy. While noncompetes are often struck down as disfavored restraints on trade, a recent Fairfax County decision demonstrates that, when properly drafted, a non-compete or non-solicitation agreement can be a valuable tool for any business wanting to protect its competitive position in the marketplace.

Preferred Systems Solutions, Inc. v. GP Consulting, LLC, involved a dispute between a government IT contractor, Preferred Systems Solutions ("PSS") and GP Consulting, an IT consulting firm. On October 1, 2003, PSS and GP entered into an agreement in which GP would provide certain consulting services to PSS in connection with a project for the Defense Logistics Agency involving Enterprise Resource Planning software. The agreement included a non-compete provision prohibiting GP from competing with PSS for 12 months after the completion or termination of the agreement.

On February 1, 2010, GP terminated the agreement. Its last day working for PSS was February 12, 2010. Four days later, its sole member and manager, Sreenath Gajulapalli, started working for Accenture, a direct competitor of PSS, performing the same duties that he had performed for PSS. Judge R. Terrence Ney ruled that Mr. Gajulapalli's conduct was in direct violation of the non-compete agreement, which provided (in pertinent part) that:

"During the term of this Agreement and for twelve (12) months thereafter, [GP] hereby covenants and agrees that [it] will not, either directly or indirectly: (a) enter into a contract as a subcontractor with Accenture, LLP and or DLA to provide the same or similar support that PSS is providing to Accenture, LLP and/or DLA and in support of the DLA Business Systems Modernization (BSM) program."

At trial, Gajulapalli admitted upon cross-examination that after he left PSS for Accenture, he worked for Accenture on the same project, at the same desk, at the same computer, and on the same problems that he used while working at PSS - just three days after leaving PSS. The court was also persuaded by the testimony of a senior vice president of PSS that there were 400-500 SAP programmer jobs in the metro D.C. area when GP entered into its contract with Accenture. Therefore, the non-compete didn't harm Gajulapalli's ability to earn a living as a SAP programmer.

For breach of the non-compete agreement, Judge Ney entered judgment against GP Consulting in the amount of $172,395.96, the damages incurred by PSS during the 12-month non-compete period.

Several exercise machines manufactured by ICON Health & Fitness, Inc., which permit a person to play blackjack, poker, and other games while exercising, don't infringe patents held by Fitness Gaming Corp. (FGC) for a device that combines an electronic game of chance and a piece of exercise equipment. This was the decision of U.S. District Judge Claude M. Hilton of the Eastern District of Virginia in an August 12, 2011, ruling on ICON's motion for summary judgment of non-infringement.

FGC had sued ICON for patent infringement, but the judge found, reviewing both the language of the patent and its prosecution history, that this claim had no substance and that as a matter of law, ICON hadn't infringed the patents. "The specification and prosecution history make clear what the claims require as a matter of law, and FGC has no evidence that the accused devices have what the claims require," Judge Hilton wrote.

The key point was that in obtaining the patent, FGC carefully specified that the patents involved a "combination of an electronic game of chance device and a piece of exercise equipment." FGC's patent application specifically equated the term "electronic game of chance device" with the term "legalized gambling device." The prosecution history showed that FGC made this limitation in order to respond to objections from the patent office that an existing patent, involving the combination of exercise equipment and a video display showing the progress of a bicycle on a track, had anticipated FGC's patent and that FGC had therefore applied for something that wasn't novel. FGC, in its own words, said that it only wanted a patent on an exercise machine that was combined with a gambling device.

FGC, in the patent office proceeding, disavowed any coverage of a device that "did not accept a wager from a user and permit a payout based on random events as governed by the controlling gaming and casino regulatory bodies." In other words, in order to use a machine of the type covered by FGC's patents, a person makes a wager of money by using a device such as a slot machine, and at the same time uses exercise equipment. As long as both the physical exercise and the gambling activity continue, the machine will continue to function.

The devices manufactured by ICON, however, involve no actual wagering. They do permit a user to play "Blackjack" or "Texas Hold 'Em" while exercising - but only for imaginary "credits" that have no monetary value. The devices don't accept cash, credit cards, or other forms of money, and don't pay out any money in the form of cash or any other form. They, in fact, are devices that don't accept wagers and don't make payouts based on random events as governed by gambling regulatory bodies - precisely the type of patent coverage that FGC had disavowed.

Accordingly, Judge Hilton rejected FGC's claim and found that as a matter of law, there was no infringement here.

Pincher's Crab Shack, a restaurant chain with seven locations in Southwest Florida, is taking on fast-food giant Wendy's in a trademark lawsuit. In a case filed in federal court on July 12, 2011, Pincher's asserts that Wendy's has stolen its trademarked slogan, "You Can't Fake Fresh," and used it in its advertising on television, radio, and the Internet. Wendy's actions "are likely to cause public confusion, mistake, or deception, and constitute trademark infringement," Pincher's attorneys wrote in their complaint, which alleges infringement, unfair competition, and false statements of origin under both federal and Florida law. Pincher's is seeking more than $2 million in damages.

"Defendants have openly and actively engaged in the unauthorized, infringing, unlicensed, and imitative use of the exact same trademark registered exclusively to Plaintiff, namely YOU CAN'T FAKE FRESH for the exact same services protected in Plaintiff's federal registration, namely 'restaurant services,' in the exact same geographic area in which Plaintiff uses its Mark, in commercial advertising and in exact and direct competition with Plaintiff," wrote Pincher's attorney Jennifer Whitelaw of Naples, Fla., in the complaint. Whitelaw was also quoted in the press as saying, "It's a great trademark. Our client worked hard to create it and our legal team worked hard to protect it and to successfully register it. From there, apparently it caught the eye of another suitor. Admiring our client's mark is understandable, but this is a bit more admiration than what the law allows."

Slogans are protectable under federal trademark law, provided they are used in such a way as to identify and distinguish the trademark owner's goods and services from those of others. Because the touchstone for liability in any trademark action is the likelihood of confusion, however, trademark infringement does not necessarily occur where slogans serve a subsidiary role to a service provider's "main" trademark. In other words, if "You Can't Fake Fresh" is always preceded in advertising by either "Pincher's Crab Shack" or "Wendy's," it may be difficult to prove consumer confusion.

But Pincher's also seeks to recover for trademark dilution, which does not require proof of actual (or even likely) confusion. The lawsuit claims that the association of the slogan with Wendy's products, since they are not the "genuine article" of Pincher's and may be inferior to Pincher's food, will "continue to damage and dilute the goodwill" that Pincher's has developed regarding its food.

A U.S. district judge in Virginia has adopted a magistrate judge's recommendation to deny a Minnesota man's motion to dismiss a trademark complaint against him in a case that centered around an automobile service center franchise, and to enter a judgment against the service center he operated in an amount to be determined by an accounting of its profits during the period it infringed the plaintiff's trademarks by using its logos after being denied franchisee status.

Precision Franchising LLC, a Virginia company, licenses an automobile service system and owns several associated trademarks. Precision permits its licensees to use its business methods and its marks. Motorscope, Inc., was one of Precision Franchising's franchisees. Lene Corporation, a Minnesota company with its principal place of business in Minnesota--a company that was wholly owned by Cary Lene-Tarango, the Minnesota businessman--attempted to purchase Motorscope's franchise and to assume Motorscope's rights and duties under the franchise agreement. Precision Franchising denied permission to Lene to make the purchase, finding that Lene's balance sheet did not show it to be financially sound.

Lene went ahead in any case and started to use Precision Franchising's trademarks as if it were indeed a franchisee. Since at no time was Lene a franchisee of Precision Franchising, Precision Franchising sued Lene and Tarango in the U.S. District Court for the Eastern District of Virginia under the Lanham Act for unfair competition and trademark infringement. Neither defendant filed an answer to the complaint. Tarango, however, filed a letter that was treated as a motion to dismiss, asserting that the court did not have personal jurisdiction over him since he is located in Minnesota and had no significant contacts with the Commonwealth of Virginia.

The magistrate judge, Thomas Rawles Jones Jr., as well as District Judge Anthony J. Trenga, found sufficient facts to assert personal jurisdiction over both defendants, in that Tarango had accessed Precision Franchising's proprietary electronic database, which is located in Virginia, and because Tarango sent an e-mail to a Precision Franchising employee, also located in Virginia, to follow up on such a request. These contacts were deemed sufficient to satisfy Virginia's long-arm statute.

In deciding to award damages against the service center, the court considered the following factors:

(1) whether the defendant had the intent to confuse or deceive, (2) whether sales have been diverted, (3) the adequacy of other remedies, (4) any unreasonable delay by the plaintiff in asserting his rights, (5) the public interest in making the misconduct unprofitable, and (6) whether it is a case of palming off.

Finding that these factors weighed in favor of granting damages, the court held that the plaintiff was entitled to damages "equal to Lene Corp.'s profits earned during the period it operated the service center and plaintiff's costs in bringing this action."

In a case that turns on a law firm's ethical obligations to avoid conflicts of interest, a large D.C. law firm has once again been procedurally rebuffed in its effort to have a federal judge in the District of Columbia declare that it has not violated any ethics rules in a high-profile environmental case.

Patton Boggs, a major D.C. firm, represents various parties in Ecuador that are involved in high-stakes environmental litigation against Chevron. A lobbying subsidiary of Patton Boggs, the Breaux Lott Leadership Group, has done work on behalf of Chevron on similar issues. Gibson Dunn, the law firm representing Chevron, is taking the position that Patton Boggs has a conflict of interest and has tried to have Patton Boggs removed from the case.

Patton Boggs moved in U.S. District Court for the District of Columbia for a declaratory ruling that it does not have such a conflict. Last April, however, U.S. District Judge Henry Kennedy dismissed this case, finding that the courts that are actually hearing the environmental cases against Chevron are best equipped to handle that issue. Judge Kennedy also ruled that Patton Boggs could not amend its complaint to allege that Chevron and Gibson Dunn had tortiously interfered with its contract with the Ecuadorian plaintiffs and had engaged in a civil conspiracy, since Patton Boggs had not alleged facts suggesting that they had caused any actual breach of the contract.

Patton Boggs moved for reconsideration of the dismissal and sought leave to add new claims to its complaint. On July 8, 2011, however, Judge Kennedy denied this reconsideration motion as well. The judge restated his prior ruling that other courts, not his, were best situated to resolve the issue of whether Patton Boggs had a conflict of interest and that it would be prudent for him to abstain from deciding that issue.

In response to Patton Boggs' contention that he had applied the wrong standard for tortious interference, Judge Kennedy found that the law firm's new theory of tortious interference was not viable because at no point did the firm assert that it had suffered any pecuniary loss from the actions of Chevron or Gibson Dunn. "Damages are an essential element of any tortious interference claim," Judge Kennedy wrote.

Courts don't often grant requests to "pierce the corporate veil" - in other words, to disregard the existence of a corporation and to hold a shareholder personally liable for the corporation's debts - but in a recent Virginia case, a judge did just that, entering a personal judgment against a corporation's sole shareholder for nearly $140,000. His mistake? Failing to observe corporate formalities, and arranging for the corporation to enter into a contract while grossly undercapitalized.

Advance Technologies, Inc., had been hired as a sub-subcontractor by subcontractor ACE Electric Company on a boiler maintenance project for the University of Richmond. ACE, however, soon terminated Advance from the project, and Advance went out of business. In December 2009, a default judgment was entered against Advance for more than $137,500. ACE was unable to recover any of this money from Advance, so it sued Erik Butler, the sole shareholder, officer, and director of Advance, in an attempt to pierce the corporate veil and recover funds from Butler's personal assets to satisfy the judgment. ACE's lawyers also invoked a "reverse piercing" theory by seeking to impose liability against Butler's wife, DeAnne Butler, and from another corporation, ADVTEC, Inc., of which she was the sole officer, shareholder, and director. ACE claimed that ADVTEC was created by DeAnne Butler in a fraudulent attempt to avoid the debts incurred by Advance.

In an opinion handed down on April 29, 2011, Judge Gary A. Hicks of the Circuit Court of Henrico County wrote that piercing the veil and permitting a plaintiff to recover from the personal assets of a shareholder is "an extraordinary remedy that is infrequently granted." The judge pointed out that there are generally sound legal and economic reasons for granting immunity to shareholders. However, the judge noted, exceptions do exist. In this case, the judge wrote, the evidence was "sufficient to pierce the corporate veil as to Erik Butler." The court found that Butler failed to adhere to corporate formalities (such as conducting annual meetings and maintaining separate books for the corporation), and that when Advance entered into the contract with ACE, Advance was "grossly undercapitalized." It had only between $10,000 and $15,000 in the bank, and owed back taxes both to the IRS and to Virginia authorities. Under these circumstances, Judge Hicks wrote, it would be a "profound injustice" not to permit ACE to go after Erik Butler's personal assets to satisfy the default judgment.

Judge Hicks rejected, however, the attempt to reverse-pierce by holding the newly formed ADVTEC liable for the judgment against Advance. He wrote that although trial evidence "creates a suspicion that ADVTEC is nothing more than the alter ego of Advance," ACE did not prove by clear and convincing evidence that this is the case. Both Erik and DeAnne Butler testified that DeAnne, not Erik, was the ultimate decision maker at ADVTEC and that there were legitimate business reasons for the creation of that company. Accordingly, the judge declined to pierce that particular corporate veil.