Virginia Business Litigation Lawyer Blog

Although Virginia courts often view non-compete covenants with disfavor, the United States District court for the Eastern District of Virginia recently upheld a non-compete agreement executed between Capital One and two of its former executives. A few months after acquiring North Fork Bank in late 2006, Capital One executed a Separation Agreement ("Agreement") with the president of its Banking Segment, John Kanas, and Executive Vice President of Commercial Banking, John Bohlsen, both of whom previously held executive positions at North Fork Bank. The Agreement stipulated that Kanas and Bohlsen could not "engage in a Competitive Business . . . in New York, New Jersey, or Connecticut" for five years after leaving Capital One, except that they could own less than 10% of any entity for investment purposes, provide services to a competitor that Capital One did not offer, and work for a private equity firm, investment bank, or hedge fund.

Two years after leaving Capital One, Kanas and Bohlsen opened BankUnited, which only had branches in Florida but held portfolios secured by property located in the Tri-State Area. BankUnited formed a subsidiary the following year that acquired a company that made loans secured by equipment also located in the Tri-State Area. Finally, in 2011, BankUnited entered into negotiations to acquire New York-based bank Herald National, with the stipulation that Kanas and Bohlsen would not provide services to Herald National until the termination of the Agreement. Capital One sued Kanas and Bohlsen for breach of the Agreement. Kanas and Bohlsen sought summary judgment, claiming the non-compete provision in the Agreement was an unreasonable restraint of competition and should be deemed void.

In Virginia, unreasonable covenants not to compete are unenforceable. "A reasonable non-compete is: (1) narrowly drawn [as to geographic scope, duration, and function of the restriction] to protect the employer's legitimate business interest, (2) not unduly burdensome on the employee's ability to earn a livelihood, and (3) consistent with public policy." Virginia courts are less likely to void non-compete covenants if they are found in agreements concerning a sale of a business or goodwill, and if policy considerations would support enforcement of the covenant. If the non-compete provisions are contained in agreements concerning the employer-employee relationship, then the employer has a heavier burden in demonstrating the reasonableness of the provision restricting competition. "Greater latitude is allowed in determining the reasonableness of a restrictive covenant when the covenant relates to the sale of a business," the court noted.

Even applying the tougher standard applicable in the employer-employee context, the court found the restriction reasonable. First, the Agreement was narrowly drawn to the Tri-State area for a historically accepted 5-year period to protect Capital One's legitimate business interests, which were threatened by Kanas and Bohlsen's ability to start a competing bank and by their former access to Capital One's confidential information. The Agreement was also narrowly tailored in its non-compete restriction because it prohibited Kanas and Bohlsen from engaging in "the consumer and commercial banking business" "engaged in" by Capital One "as of the Separation Date."

Second, Kanas and Bohlsen were more than able to earn a livelihood: they received $42 million in restricted stock in exchange for the non-compete agreement and the Agreement's exceptions leave room for Kanas and Bohlsen to find new jobs. As to public policy considerations, the court emphasized that Kanas and Bohlsen are extremely sophisticated parties with sophisticated counsel, held an equal bargaining advantage to Capital One, and would have a huge windfall in the amount of $42 million if this contract is not enforced.

Judge Leonie M. Brinkema was not impressed with the trademark infringement case filed by Wag'N Enterprises, a pet-safety company based in Herndon, Virginia, against a California nonprofit known as Redrover. Entering summary judgment in favor of Redrover, she essentially found that no reasonable jury could find that Wag'N's mark, "Wag'N Rover Respond'R" was confusingly similar to RedRover's "RedRover Responder."

Trademark infringement exists where a valid and protectable mark is used by the defendant in a way that causes a likelihood of confusion in consumers. If the plaintiff does not hold a federally registered trademark, a valid and protectable mark may still exist where "the mark is used in commerce and is distinctive." In determining the likelihood of confusion, some factors that a court may consider are: (1) the strength or distinctiveness of the mark (i.e., whether it is generic, descriptive, suggestive, arbitrary, or fanciful); (2) the similarity of the marks; (3) the similarity of the goods/services the marks identify; (4) the similarity of the facilities the two parties use in their businesses; (5) the similarity of the advertising used by the two parties; (6) the defendant's intent; and (7) actual confusion.

The court found that although Wag'N held valid and protectable marks in the registered name Wag'N Rover Respond'R and the unregistered but distinctive mark Rover Respond'R, there was no evidence that the RedRover Responders actually confused consumers. Specifically rejecting the Plaintiff's argument that RedRover's product "incorporates the essential essence" of its mark, the court noted that the marks do not share any identical words, the marks are not similar in meaning, and the companies have completely different logos with different typefaces, designs, and emphasis. Even if the names are similar, the court found, consumers do not see them in the same contexts, since Wag'N Rover Respond'R only has its name on its emergency kits and the mark RedRover Responders is found only on volunteer t-shirts and a brochure explaining the program.

The court also found in favor of RedRover Responders with regard to the remaining factors. Wag'N's trademarks lacked "commercial strength" because there was no evidence of substantial advertising expenditures or that consumers associated the marks with Wag'N. In addition, the court found that RedRover did not name its program in bad faith, considering the testimony of RedRover's CEO that she had never heard of Wag'N prior to the lawsuit, even after the company had run a trademark search.

The sale of wine on vineyard premises is an integral part of the winery agricultural business. So says the Virginia Supreme Court which has just reversed a Circuit Court decision that forced a Fauquier County vineyard to shut its doors.

Charles and Lori Marterella bought a parcel of land in Bellevue Farms, a Fauquier County subdivision, with the intention of starting a winery. As land purchasers, they agreed to abide by the applicable subdivision covenants. Among these were Article II, Section I, which states "[all] tracts ... shall be exclusively used for residential, agricultural, and recreational purposes," and Article III, Section 3, which states "[n]o commercial enterprises may be undertaken on the property, which, in the [Site] Committee's opinion, is in conflict with the goals of these Covenants."

The Site Committee was established to rule on certain property uses of the landowners. In 1994, it created an informal handbook that stated, among other things: "Agriculture is the only commercial activity expressly permitted under the covenants. Any other work whether as a self-employed person or as an employee that causes external change to your property or leads to regular visits by customers, suppliers, business associates, or others is not acceptable. If you wish to engage in non-agricultural business activity, the Committee will rule on its acceptability and the Board would then approve or disapprove your request."

With a vineyard already operating nearby, and the statement in the handbook, the Marterellas started their winery, believing it was within the rules. But neighbors complained. The Bellevue Landowners' Council, Inc. (BLOC) sought an injunction precluding the retail sale of wine on the Marterellas' property, claiming the sales constituted a commercial activity. BLOC did not challenge the growing or bottling of the wine.

The Marterellas argued that wine production is an agricultural enterprise and the on-site retail sale of wine is an integral and essential aspect of the economic viability of that enterprise. The handbook, they concluded, therefore expressly permitted them to sell wine on the premises. They also pointed to the nearby winery to support their assertion that such operations were permitted. That winery had obtained approval and was subject to limits as to how much it could produce.

At trial, the jury returned a verdict in favor of the Marterellas, but the trial judge set the verdict aside and ruled in favor of BLOC. The Virginia Supreme Court restored the jury's decision, paving the way for the Marterellas to re-open.

The wine industry has blossomed in Virginia in the past decade and this ruling will likely push the number of wineries in the Commonwealth even higher. Wine country tours, on-site wine tastings, demonstrations, and sales bring dollars and jobs to Virginia while preserving open land in agriculture.

Many people don't realize that the Americans with Disabilities Act (ADA) protects not only employees with substantial hearing, visual, or mental impairments, but also those with HIV or AIDS. The ADA prohibits discrimination against "qualified individuals with disabilities." Any physical or mental impairment that substantially limits one or more major life activities can qualify as a disability, and HIV disease is such an impairment.

Earlier this month in Norfolk, former Burger King manager Christopher Peña filed a discrimination suit against Burger King for allegedly terminating him upon learning he was HIV positive. Burger King says he was fired for poor performance. The complaint seeks compensatory damages for lost past and future wages, benefits, and emotional distress. It also seeks punitive damages, costs and attorney fees, reinstatement, and an injunction precluding further violations of the ADA.

Peña joined Burger King in 2004 and became a district manager, responsible for nine restaurants. When he learned he was HIV positive, he debated whether to tell the company but decided he should do so in case he reacted to his medications and had to miss work. He claims he had no disciplinary actions against him prior to disclosing his HIV status to a supervisor in June 2011. But shortly after the disclosure, one of his restaurants failed an audit, other restaurants within his management experienced service problems, and he dismissed an employee for stealing money. The company terminated his employment in September 2011.

Peña claims other managers in the company had similar problems but were not subjected to the disciplinary action he received. He asserts that he performed well and that Burger King created a record of poor performance as a pretext for terminating him once the company learned of his HIV status.

Pretextual terminations are not new. Employers who fear higher health insurance or accommodation costs have terminated HIV positive employees. And though HIV is not on the Centers for Disease Control and Prevention list of infectious and communicable diseases transmissible through food handling, some in the restaurant business still harbor fears regarding HIV.

Under Virginia law, a partner can apply for dissolution of a partnership under Virginia Code § 50-73.117(5) upon grounds that: (a) The economic purpose of the partnership is likely to be unreasonably frustrated; (b) Another partner has engaged in conduct relating to the partnership business which makes it not reasonably practicable to carry on the business in partnership with that partner; or (c) It is not otherwise reasonably practicable to carry on the partnership business in conformity with the partnership agreement. The Virginia Supreme Court recently had the opportunity to consider for the first time dissolution under the first and third prongs and found dissolution to be proper on the facts before it.

In 1978, Charles Russell set up trusts for the benefit of his daughter, Nina, and her two children, Robert and Isham. Nina and her brother, Eddie, were named co-trustees of the trusts. Charles also created Russell Realty Associates, a partnership, to invest in various properties, including real estate, with Charles, Eddie (individually) and Eddie and Nina as co-trustees holding the partnership interests. The partnership agreement provided that all partners would manage the business but, "in the event of any disagreement between them the decision of Edward Russell shall be controlling." The agreement further gave Eddie authority, "by his sole act, to borrow, execute, and deliver instrument[s], including any deed or lease, on behalf of the partnership." Under the agreement, partners did not have the right to withdraw from the partnership but partners could be added if all partners agreed.

After several years, Eddie was running the company and held half the partnership interests individually and the other half, with Nina, as co-trustee for Nina and her two sons. Though Eddie had authority to act for the partnership, he tried to resolve the many disagreements he and Nina had, some of which cost the partnership. At his death, Charles left more properties to Eddie and Nina as tenants in common. The siblings had to hire lawyers to resolve their disagreements over those properties and a mediator remained involved long term.

In 2003, the siblings began discussions on distribution, whether Rob would become a partner, and whether the partnership should become a limited liability company (LLC). Again, they retained counsel. Eddie tried to negotiate resolutions but Nina was unresponsive and delayed decisions. In response, Eddie refused to agree to add Rob as a partner. Nina then insisted on being included in all aspects of the business' management, interfered in business actions and accused Eddie of breaching his fiduciary duty because he didn't convert the partnership to a LLC.

When Nina and Rob's efforts thwarted lucrative land deals, Eddie filed suit to dissolve the partnership, claiming they had frustrated the partnership's economic purpose and rendered the partnership's management not "reasonably practicable." Nina filed an intervenor complaint alleging Eddie had breached his fiduciary obligations, seeking equitable accountings and declaratory relief on her sons' rights to distributions, and attempting to have Eddie removed as co-trustee. The Chesapeake Circuit Court granted dissolution of the partnership and rejected Nina's claims. Nina appealed.

The Virginia Supreme Court applied the strict standard for judicial dissolution it had applied to a LLC in an earlier case which required deferring to the partnership agreement and only permitting dissolution where the circumstances fit specific statutory conditions. The Court rejected Nina's argument that comments to the Revised Uniform Partnership Act (RUPA) required a showing of poor financial performance for the 'economic purpose' test, the first prong, to apply. Neither § 50-73.117(5) nor the RUPA requires financial failure to meet the 'economic purpose' prong for dissolution. Moreover, the partners' expectations were not limited to economic success. The partners also expected to be able to conduct the business efficiently and productively to maximize returns. Instead, the constant disagreements, delays, working at cross purposes and acrimony cost the partnership in unnecessary higher costs and lost lucrative deals. Finding sufficient evidence in the record to support the lower court's ruling, the Court affirmed the ruling, paving the way for the dissolution.

As noted previously on this blog, the Anticybersquatting Consumer Protection Act ("ACPA") permits litigation to be filed against an infringing domain name itself, not just against the owner of the domain name. Which entity should file responsive pleadings in such a case, the domain name or its owner? In Sauikit LLC v. Cydia.com, the Eastern District of Virginia opined that form should not prevail over substance.

Saurikit brought an action against the domain name cydia.com alleging violations of the ACPA. Defendant's Answer stated that Cykon Technology ("Cykon") owned the domain name, but the defendant's attorney signed the answer "Counsel for Cydia.com" instead of "Counsel for Cykon." Saurikit moved for judgment on the pleadings, arguing that there was no answer on file by a claimant since the property rather than the owner of the property filed the Answer.

A successful judgment on the pleadings requires the moving party to demonstrate that no issues of material fact exist and that it is entitled to judgment as a matter of law. In deciding a motion for a judgment on the pleadings, courts view the facts in the light most favorable to the non-moving party.

Saurikit relied on Caesars World, Inc. v. Caesars-Palace.com, in which the court found that the Answer should have been filed on behalf of the claimant seeking to assert an interest in the domain name rather than on behalf of the domain name itself. In Caesars World, the defendant was refusing to identify the sponsor of the litigation and was not participating in discovery. The court was concerned about its ability to determine the interests of persons relative to the domain name and therefore rejected the Answer, reasoning that as an inanimate object, the domain name could not hire attorneys to file an answer.

The court in Saurikit distinguished Caesars World. Here, Cykon had argued its ownership interest in the domain name and had engaged Saurikit in discovery and settlement negotiations. The face of the pleadings made clear that Cykon was the owner of the domain name and was a claimant in the case. Additionally, earlier pleadings in the case noted that Cykon was owner of the domain name and had engaged counsel to represent its interests in the matter. In previous motions, the court had recognized Cykon as the claimant in the case. For these reasons, the court found Cykon's answer sufficient and denied Saurikit's motion for judgment on the pleadings.