Virginia Business Litigation Lawyer Blog

Arbitrability--whether a contract creates a duty for the parties to arbitrate (rather than litigate) a particular grievance--is ordinarily a question of law to be decided by the court. Virginia, however, adheres to a public policy favoring freedom to contract. If two sophisticated businesses reach a deal providing that any arbitrability issues shall be resolved by binding arbitration rather than decided by a court, Virginia courts will enforce that agreement as written and defer to the arbitrator on questions of arbitrability.

An example is found in the recent case of Systems Research and Applications Corporation v. Rohde & Schwarz Federal System, Inc. SRA, a government contractor for the United States Agency for International Development (USAID), hired Rohde & Schwarz as a subcontractor for a project involving telecommunication services equipment in Lebanon. R&S did not complete its performance by the contract deadline and SRA refused to pay its invoices. SRA took the position that the dispute was a "Government Contract Dispute" which, under the terms of the subcontract, could not be submitted to arbitration. R&S disagreed and initiated arbitration proceedings. SRA responded with a declaratory judgment action and a motion to stay the arbitration. The court denied the motion to stay and dismissed the case.

The court found that parties may provide by contract that all matters will be subject to arbitration, including questions of arbitrabilty. However, because allowing an arbitrator to decide issues of arbitrability is contrary to the general rule, "courts should not assume that the parties agree to arbitrate arbitrability unless there is clear and unmistakable evidence that they did so."

R&S argued that the parties agreed to arbitrate all issues and pointed to a provision in the contract that incorporated the rules of the American Arbitration Association. SRA responded that the arbitration clause in question only covered particular types of claims. The court took the position that the arbitrator's authority to decide questions of arbitrability should not turn on whether the arbitration clause is narrow or broad. The court concluded that "the incorporation of the AAA Rules in the Subcontract's arbitration clause, and the waiver provision drafted by the SRA which by its terms bars this action, together constitute clear and unmistakable evidence that the parties intended for the issue of arbitrability to be decided by the arbitrator."

In Virginia, employment is presumed to be at-will, but that presumption can be rebutted with evidence that the employment is for a specific period of time or that it can be terminated only for just cause. Virginia law says that contracts are to be construed as written and if the terms of the contract are clear, then those terms are to be given their plain meaning. A separate writing that is referenced in a written contract is construed as part of that agreement only if it is referred to with specificity and there is some expression of an intent to incorporate its terms into the agreement. As explained in a recent opinion by Judge Bruce D. White of Fairfax, "in order to incorporate the provisions of another document into the employment contract, the plain language of the employment contract must clearly reference and incorporate the terms of the document being incorporated."

Johnson v. Versar was a lawsuit brought by William Johnson, Alexis Kayanan and Davy Jon Daniels against their former employer Versar, a government contractor based in Springfield, Virginia, for alleged breach of their employment contracts. They claimed that their employment was not at-will but was for a definite term. They based their argument on the fact that they received certain documents upon accepting employment that referenced Versar's by-laws, which provided that officers "may be removed" by a majority vote of the board of directors. Because a resolution was never passed, they claimed that they were terminated in violation of their employment agreements.

Judge White sustained Versar's demurrer with prejudice and dismissed the case. The Court found that the plaintiffs were at-will employees because the by-laws were not specifically and intentionally incorporated into the employment agreement. None of the offer letters referenced the by-laws, and the accompanying documents that did reference the by-laws did not indicate any intent to incorporate their terms as part of the employment agreement.

The Court went on to say that even if the by-laws were incorporated into the employment contract, the language of the by-laws was not strong enough to overcome the plaintiffs' at-will status. The by-laws only provided for how an officer "may" be removed. The use of that permissive word indicates that the possibilities for removal were not intended to be exhaustive. The by-laws did not provide that the employees could be removed only for just cause or that their employment was for a definite term, so their employment was deemed to be at-will.

In Virginia, "non-compete" agreements are enforceable if they are narrowly drawn to protect the employer's legitimate business interests, are not unduly burdensome on the employee's ability to earn a living, and are not against public policy. While Virginia courts have recognized that from a public policy perspective, businesses should be able to protect their client base from ex-employees who may leave their employ but continue in the same line of business, what is less clear is exactly which post-employment activities can be restricted before a non-compete becomes overly broad and therefore unenforceable.

The Virginia Supreme Court shed a little more light on the answer to this question yesterday, when it disagreed with itself and overruled Paramount Termite Control Co. v. Rector, 238 Va. 171 (1989). Relying on the precedent set by that case, Home Paramount Pest Control Companies, Inc. (the successor-in-interest to Paramount Termite Control) sued a former employee for breaching the same non-compete provision that was upheld in the earlier case. This time, however, the court struck it down.

The provision at issue stated as follows:

"The Employee will not engage directly or indirectly or concern himself/herself in any manner whatsoever in the carrying on or conducting the business of exterminating, pest control, termite control and/or fumigation services as an owner, agent, servant, representative, or employee, and/or as a member of a partnership and/or as an officer, director or stockholder of any corporation, or in any manner whatsoever, in any city, cities, county or counties in the state(s) in which the Employee works and/or in which the Employee was assigned during the two (2) years next preceding the termination of the Employment Agreement and for a period of two (2) years from and after the date upon which he/she shall cease for any reason whatsoever to be an employee of [Home Paramount]."

The court's main objection to these terms was with respect to the breadth of the activities being restricted, and that fact that it extended to activities that had nothing to do with the activity actually engaged in by the former employer. While the geographic scope and duration of the restriction and were reasonable, the clear overbreadth of the function element outweighed those elements and rendered the entire clause unenforceable.

The non-compete barred the former employee from "engaging even indirectly, or concerning himself in any manner whatsoever, in the pest control business, even as a passive stockholder of a publicly traded international conglomerate with a pest control subsidiary," noted the Court. Home Paramount did not have a legitimate business interest in preventing its former employees from owning stock in such corporations, so the provision was deemed overly broad.

Non-compete law in Virginia has evolved over the years. Blanket prohibitions against working for a competitor will not be upheld automatically, and often will be found overly broad. When a former employer seeks to prohibit its former employees from working for its competitors in any capacity, it must prove a legitimate business interest for doing so. In most cases, an employer is not going to be able to restrict its former employee from finding new employment with a competitor if the new job duties are unrelated to the tasks performed in the previous job.

Toyota Motor Sales, Inc., will not be able to take advantage of a mandatory arbitration clause in an online agreement with a Los Angeles woman because the agreement was obtained by fraud and is therefore entirely void, a California state appeals court has held.

Amber Duick was targeted by Toyota as one of the people who would take on the role of "Player 2" in an interactive ad campaign entitled "Your Other You." She sued Toyota and its advertising company, Saatchi & Saatchi North America, Inc., in 2009, after Toyota involved her in 2008 in an advertising campaign for its Matrix automobile as an evidently unwitting participant.

Sometime in 2008, Duick clicked a box on a Toyota-sponsored website entitled "Personality Evaluation Terms and Conditions." The website indicated that by clicking, she was agreeing to participate in a five-day "digital experience through Your Other You," and that she might receive emails, phone calls, or text messages from Toyota during that period. Duick soon found that instead of a personality test, she received several disconcerting emails from someone identifying himself as "Sebastian Bowler," which implied that Bowler enjoyed drinking to excess, owned a pit bull, had been running from law enforcement, and had damaged a hotel room. Duick was told that she was liable for the hotel damage, even though she had never been there and had never met Bowler. Finally, at the end of the process, Toyota revealed that this was all made up. It was a prank on Duick that was part of the ad campaign for the Matrix.

Duick suited Toyota and Saatchi for $10 million in California state court for damages and other relief, claiming intentional infliction of emotional distress, negligence, and false advertising. Toyota moved to compel arbitration and take the case out of the court system. The trial court refused to compel arbitration, and the California Court of Appeal affirmed.

The appeals court reasoned that the contract with Duick, including the arbitration clause, was void and unenforceable because it was obtained by fraud "in the inception"; in other words, that Duick was deceived by Toyota and Saatchi as to the nature of the act she was performing when she clicked the box. Thus there was no valid and enforceable contract.

The defendants "led Duick to believe that she was going to participate in a personality evaluation and nothing more," the court wrote. "In particular, a reasonable reader in Duick's position would not have known that she was signing up to be the target of a prank. It might have been possible to draft the terms and conditions in such a way as to correct that a misimpression, but defendants did not do so." Accordingly, the contract, including the arbitration clause, was held void and unenforceable under California law.

Virginia courts will not necessarily rule on the enforceability of a restrictive covenant in an employment agreement without first examining the facts. In a recent federal-court decision from Roanoke, Judge Wilson denied a defendant's motion for judgment on the pleadings in a case involving an alleged assignment of patent rights in violation of various contractual restrictions, finding that the factual record wasn't sufficiently developed to permit a ruling.

Travis Mickle, President of KemPharm, Inc., a small early-phase biopharmaceutical company, was working as a senior research scientist for Lotus Biochemical Corporation (which became New River Pharmaceuticals ("NRP")) in 2001. At that time, he entered into an employment agreement with Lotus. In 2005, he left the company and entered into a settlement agreement governing various post-employment responsibilities.

Shire LLC, a subsidiary of NRP, sued Mickle for breach of both the original employment agreement and the settlement agreement. Shire pointed to paragraphs in the employment agreement that make all discoveries or inventions made by Mickle the property of the company; that prohibit Mickle from disclosing company confidential information for his own benefit; and that require that all patents and other intellectual property developed by Mickle be assigned to the company.

Shire asserted that Mickle breached all these provisions by developing new intellectual property based on the assigned patents after he left NRP and by assigning his interests in those new patents to KemPharm, his new company, rather than to NRP.

Mickle and KemPharm, which was also a defendant, moved for judgment on the pleadings, contending that the contract provisions in question were restrictive covenants which, on their face, were unenforceable under Virginia law. Their lawyers argued that restrictive covenants will be enforced in Virginia only if they are narrowly drawn to protect the employer's legitimate business interest, if they are not unduly burdensome on the employee's ability to earn a living, and if they are not against public policy.

Judge Wilson held, however, that ruling on the case at this early stage would be premature. He found that the determination of whether such an agreement should be enforced in equity depends on the specific facts of the case. He also noted that while courts have found broadly worded noncompete agreements without express geographic limitations facially invalid, the Virginia Supreme Court has not held that the absence of those express limitations renders confidentiality clauses or assignment agreements invalid per se.

Many contracts provide that in the event of litigation arising out of a breach, the prevailing party will be entitled to recover "reasonable" attorneys' fees from the losing party. Some attorneys, however, hoping to obviate the need for a mini-trial regarding the reasonableness of the fees, draft contracts setting the attorneys' fees as a fixed percentage of the underlying obligation (e.g., 15% of the total amount due). But what happens when the underlying obligation is so large that applying the fixed percentage stated in the contract would result in awarding the prevailing party far more than it actually incurred in legal fees?

Judge Leonie M. Brinkema recently faced that question and ruled that the percentage-based attorneys-fee provision was unenforceable as a matter of law. Considering a request for attorneys' fees and costs after the conclusion of a commercial case, she rejected a finance company's contention that a flat 15 percent of the amount it recovered in the case should be awarded to it as attorneys' fees, even though the loan document in question specified that fees not less than 15 percent of the amount in question should be awarded.

Automotive Finance Corp. (AFC), based in Indiana, provided financing for several automobile dealer showrooms in Virginia. Later, it filed suit against the dealers and against three companies that guaranteed the debt. After a trial, Judge Brinkema awarded AFC $3,156,149 in damages. AFC then applied to the court for attorneys' fees in the amount of $473,422.35 (precisely 15 percent of the recovery) which amount exceeded the fees and costs it actually incurred. While finding AFC's argument "appealing in its simplicity," Judge Brinkema said the problem with it is that it "flies in the face of the applicable case law." The fees awarded in any piece of litigation, according to both Virginia and Indiana law, must be reasonable.

Courts in the Eastern District of Virginia examine twelve factors when evaluating the reasonableness of a claim for reimbursement of attorneys fees: (1) the time and labor expended; (2) the novelty and difficulty of the questions raised; (3) the skill required to properly perform the legal services rendered; (4) the attorneys' opportunity costs in pressing the instant litigation; (5) the customary fee for like work; (6) the attorneys' expectations at the outset of the litigation; (7) the time limitations imposed by the client or circumstances; (8) the amount in controversy and the results obtained; (9) the experience, reputation and ability of the attorney; (10) the undesirability of the case within the legal community in which the suit arose; (11) the nature and length of the professional relationship between attorney and client; and (12) attorneys' fees awards in similar cases.

Applying these factors, as well as Indiana law as required by the contract, the court found that 15 percent was unsupportable. She wrote, "To allow a party to recover more in an attorneys' fees award than it actually incurred in legal expenses would confer an unreasonable windfall on that party and would be fundamentally at odds with the basic principle that the party requesting fees bears the burden of proving that such fees are reasonable."

Instead, Judge Brinkema ruled, AFC is only entitled to "recoup the fees which it can prove that it actually and reasonably incurred." After making some deductions for duplicative time entries and deferring to the bankruptcy court on the reasonableness of fees incurred in that forum, Judge Brinkema awarded AFC the sum of $217,414.91 in fees and costs, less than half the amount requested.

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.

Not all noncompete agreements in Virginia are subject to the restrictive rules governing noncompete agreements formed between employers and employees. Noncompete agreements entered into between two sophisticated parties outside of the employment context may be governed by the less-restrictive standards that govern ordinary contracts. A federal court in Virginia recently denied a motion to dismiss a breach-of-contract claim on this basis, rejecting the argument that the noncompete agreement was unenforceable as a matter of law.

In McClain v. Carucci, a construction and engineering company sued a former employee for allegedly violating a noncompete agreement by forming a competitive company. The noncompete agreement was not entered into as part of the employment relationship, but was part of a larger settlement agreement the parties signed to resolve the company's allegations that the former employee had embezzled nearly $286,000 of the company's funds.

The court found that the justification for exercising heightened scrutiny of noncompete covenants in employment agreements does not apply where the noncompete covenant is part of a post-employment settlement contract. Virginia courts have already held that where a contract for the sale of a business between a vendor and buyer contains a covenant not to compete, greater latitude is allowed in determining the reasonableness of the noncompete than when the covenant arises out of an employment contract. A different standard applies because employees usually have comparatively little bargaining power, whereas the sale of a business usually involves sophisticated parties capable of negotiating at arm's length for a fair deal.

Similarly, since McClain and Carucci negotiated the terms of the noncompete after the employment relationship had ended, the usual concerns about unequal bargaining power were absent. Here, the court reasoned, the parties negotiated at arm's length; it was not a "take it or leave it" situation imposed by an employer. Therefore, the court applied a mere "reasonableness" standard to evaluate the noncompete and did not apply the more rigorous test requiring consideration of the duration of the restraint, the geographic scope of the restraint, and the extent of the activity being restricted.

Lacoste Alligator, S.A., which sells tennis shirts and other apparel with the distinctive green crocodile logo in high-end stores like Nordstrom and Saks Fifth Avenue, will get a chance to find out, through discovery in a lawsuit, which of its distributors (if any) have been selling its products to Costco and other warehouse stores without its express permission, in violation of its trademark rights and in breach of contract.

Lacoste, a Swiss company, is attempting to prevent its clothing from being sold in big-box and other unauthorized retail locations. The first problem facing Lacoste, however, was that although it believed that some distributor was making sales to those stores, it didn't know who it was. Accordingly, it filed a "John Doe" complaint in Arlington County Circuit Court on trademark-infringement, breach of contract, and other grounds, hoping to use discovery in the case to ferret out the identity of the distributor responsible for the unauthorized sales. After filing the "John Doe" suit, Lacoste promptly served a subpoena on Costco Wholesale Corp., trying to ascertain the source from which it was receiving Lacoste products for resale in its stores. Costco objected to handing over any documents, and Lacoste filed a motion to compel compliance with the subpoena.

Judge Joanne F. Alper overruled most of Costco's objections and held that Lacoste was entitled to the discovery subject to the entry of an appropriate protective order to prevent misuse of the information.

Costco had raised three objections to turning over the requested documents to Lacoste. First, Costco contended that the court lacked jurisdiction because it was pursuing a "John Doe" action without naming the defendant, a type of case that it asserted is permitted in Virginia only in uninsured motorist or "cybersmear" cases. Judge Alper, however, found nothing in Virginia law to bar the use of a "John Doe" suit in a commercial case like this one. Lawyers frequently use the "John Doe" lawsuit mechanism, in fact, when a defendant's identity is unknown.

Second, Costco contended that the identity of its suppliers is a protectable trade secret. The court agreed, but noted that trade secrets are not automatically insulated from discovery. Rather, courts should examine whether the desired information is relevant to the lawsuit and must consider whether the information can be disclosed while minimizing the risk of disclosure to third parties. Judge Alper found that the information was unquestionably relevant and that it could be disclosed within the confines of a protective order preserving its confidentiality.

The protective order also disposed of Costco's third argument: that the subpoena was overly broad and burdensome. The protective order limited Costco's obligation to comply with the subpoena to documents relevant only to the determination of John Doe's identity. Therefore, subject to the limitations provided in the protective order, the court ordered Costco to comply with the subpoena.

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.

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."

Approximately 10 years into the warranty, the Gottliebs claim the roof began to peel away and show signs of deterioration. They claim they placed several calls and sent several emails to Ryerson to discuss the roof issues, but say their attempts to communicate were largely ignored. A roofing contractor was hired to determine the cause, and he concluded that the finish coat had failed and that the roof needed to be replaced. Ryerson refused to replace the roof.

The court noted that "puffing" will usually not constitute fraud because "statements of this nature are generally regarded as mere expressions of opinion which cannot rightfully be relied upon" when the parties deal on equal terms. The court agreed with Ryerson that its statement that the warranty was "low-risk, no-nonsense, ironclad" was a mere statement of opinion and not actionable. On the other hand, however, the plaintiffs stated a plausible claim for relief under the VCPA because the statements that the warranty would be honored "at any time and as often as needed within the 20-year period" and that it would cover "complete repair or replacements of any covered problem" were unequivocal, specific, and factual.

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."

The non-solicitation clause in question provided that, for a period of two years after the termination of employment, "Employee will not, directly or indirectly, solicit, invite or by any way, manner or means, attempt to induce any of Daston's Customers to do business with a Competitor." The court upheld the clause as enforceable, finding that the plain language is no broader than necessary to meet Daston's legitimate interest and because it only applied to solicitations for services in direct competition with Daston's services, or services developed by Daston with the employee's assistance. The court observed that the non-solicitation clause did not unduly burden the employee's ability to earn a living in his chosen field because it allowed the employee to solicit customers to provide them with services that do not directly compete with Daston's services. The court rejected arguments that the language was impermissibly vague.

The noncompete, however, was deemed overbroad and unenforceable. The relevant language provided that, for one year after the termination of employment, "Employee will not...provide Services to any Client to which Employee...provided substantially similar or related Services during Employee's employment was Daston." The court found the phrase "substantially similar or related" to be both vague and overbroad in the sense that it appeared to restrict more than was necessary to protect Daston's legitimate business interests. Therefore, the court struck the clause and severed it from the rest of the employment agreement (as permitted by the contract's severability clause).

There are no guarantees when drafting noncompete agreements. As expressly noted by Judge Devine, language deemed enforceable in one case may be found overbroad and unenforceable in a different factual context. Each case will be decided on its unique facts. Still, there are certain considerations to keep in mind. First, do not make the noncompete broader than it really needs to be, either in terms of duration, geography, or scope. If the noncompete is overly broad, most Virginia judges will strike the clause in its entirety. They are not going to blue-pencil it to conform it to Virginia law. Similarly, ensure the language is not unduly burdensome on the employee's ability to earn a living in his chosen field. The language should focus on restricting activities that directly compete with the employer's services. Finally, write in plain English that is easy to understand. If the noncompete does not fairly apprise the employee of the prohibitions on his conduct, the clause will be stricken as impermissibly vague.

Virginia, unlike some other states, adheres to a policy favoring freedom to contract. Virginia law treats most businesses and individuals as presumptively capable of negotiating in their own best interests, and when a deal is reached and a contract is signed, courts rarely interfere with the result, however unfair that result may seem to outside parties.

In construction contracts, for example, it is common to find a "pay when paid" clause, stating that a subcontractor's right to any payments from the general contractor is expressly conditioned on the general contractor's first receiving payment from the owner. Some states go out of their way to protect subcontractors from the potential harsh consequences such a provision can cause. Virginia courts, however, will assume that the subcontractor was sophisticated enough to know what it was signing and will enforce contracts as written.

The freedom to contract includes the freedom to negotiate pay-when-paid clauses, and Virginia courts will enforce such clauses provided they are clear and unambiguous. In Universal Concrete Products v. Turner Construction, Universal, a subcontractor, entered into a written agreement with Turner, the general contractor, to install pre-cast concrete on the Granby Tower project in Norfolk, Virginia. When the real estate market collapsed, the owner became unable to finance the construction. Universal, however, substantially completed all of its work on the project, and naturally asked Turner to pay for its services. Turner refused to pay Universal because Turner had not been paid by the owner and the parties' subcontract contained a pay-when-paid clause.

The specific clause in question provided that the "obligation of Turner to make a payment under this Agreement, whether a progress or final payment, or for extras or change orders or delays to the Work, is subject to the express condition precedent of payment therefor by the Owner." While that language seems pretty clear, Universal argued that it was ambiguous in light of language in the contract between Turner and the owner, which provided that the owner would reimburse Turner for "payments made by the Construction Manager to Subcontractors in accordance with the requirements of the subcontracts," suggesting perhaps that Turner would pay Universal before being paid by the owner. The Eastern District of Virginia disagreed, and so did the Fourth Circuit.

The Fourth Circuit affirmed the district court's conclusion that the clause in the Turner-owner contract related only to the amount of the reimbursement, not to when those amounts would be paid. This language did not render the pay-when-paid clause ambiguous (and thus unenforceable) because it did not make its meaning "of doubtful import" or make it capable "of being understood in more than one way." The pay-when-paid clause was clear and unambiguous, so the subcontractor was not entitled to demand payment for its work until the contractor received payment from the owner.

Even in Virginia, which recently placed first in a ranking of the "Best States for Business" by Forbes.com, businesses often fail. Particularly in small companies, relationships among the owners sour and partnership disputes arise. Here in Fairfax County, where my practice is located, it is not uncommon for disgruntled partners to attempt to withdraw large sums from corporate bank accounts prior to dissolution or to attempt to block other owners' access to the company's accounts. Banks need to be careful not to get caught in the crossfire by inadvertently facilitating a wrongful cash grab by one of the business owners. Fortunately, as illustrated by a recent decision by Fairfax Judge Bellows, Virginia's adoption of the Uniform Commercial Code provides some valuable protection to banks.

Khan v. Alliance Bank (Fairfax Circuit Court, Dec. 22, 2009) involved a dispute between two owners of Advantage Title and Escrow, LLC, Khan and Kazmi. Both were authorized signatories on the company's account held with Alliance Bank. After the two had a falling out, Kazmi instructed the bank to remove Khan as a signatory. A few days later, Khan wrote a $35,000 check against Advantage Title's account in exchange for a cashier's check for that amount. Upon learning of the transaction, Kazmi sent an "Affidavit of Unauthorized Transaction" to Alliance Bank. This document alleged, under oath, that Khan obtained the cashier's check through fraud as Khan was (according to Kazmi) not authorized to withdraw funds from the company's account. In reliance on that affidavit, Alliance Bank canceled the cashier's check and credited $35,000 back to the Advantage account.

Normally, putting a stop-payment order on a check is not a big deal. But cashier's checks, which are governed by the UCC, are different. Unlike personal checks, cashier's checks carry a promise of the bank to the holder. For that reason Khan sued Alliance Bank, claiming that the promise was unconditional and that, by terminating payment, Alliance was liable to Khan for breach of contract and conversion.

The court disagreed and threw out the case. Under the applicable provisions of the UCC, a bank will only be liable for canceling a cashier's check if the bank acted "wrongfully." A bank is justified in refusing to honor a cashier's check if the bank "asserts a claim or defense of the bank that it has reasonable grounds to believe is available against the person entitled to enforce the instrument" or the bank "has a reasonable doubt whether the person demanding payment is the person entitled to enforce the instrument." See Va. Code § 8.3A-411(c).

In this case, Kazmi's affidavit gave Alliance Bank all the protection it needed. The affidavit (like all affidavits) was made under oath, and its allegations were reasonable on their face. Therefore, the court found, the sworn statement provided the bank with reasonable grounds to believe the check was procured by fraud, which is a defense to the negotiability of the check. Alliance Bank did not act "wrongfully" within the meaning of the UCC, so the court dismissed the case.