Business and Corporate Category Archives — Page 5 of 6 — The Virginia Business Litigation Blog Published by Virginia and Washington, D.C. Litigation & Appeals Attorney

May 31, 2012

Non-Compete Agreement with Former Bank Executives Deemed Enforceable

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.

May 18, 2012

Northern Virginia Winery Prevails in Virginia Supreme Court

by Lee E. Berlik

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.”

May 7, 2012

Dissolving a Partnership for Frustration of Purpose

by Lee E. Berlik

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.

April 23, 2012

Lawyers Argue Contacting Advertisers Is Tortious Interference

by Lee E. Berlik

Not everyone was happy when KIBZ 104.1 FM (The Blaze) replaced its rock format with new programming. One unhappy listener tried contacting the radio station to express his displeasure but had trouble reaching a live person. So he took his complaints to the station’s advertisers. He succeeded in getting a response, but it came in the form of a cease-and-desist letter from the station’s lawyers, accusing him of defamation and of tortiously interfering with the station’s contractual relationships.

Three Eagles Communications, a Colorado-based company, had rearranged its programming for a Lincoln, Nebraska radio station, The Blaze. It brought in a show from the Omaha market, replacing or rearranging other programming to do so. The new show included political, pop culture and off-color commentary. Many listeners objected to the changes and banded together to boycott the show. They established a Facebook page, started a petition, published a list of those who advertised with the show, and included information on how to contact members of Three Eagles management. They also held a public event, sent emails and letters to Three Eagles management, and sent emails to advertisers with The Blaze. Some stated Three Eagles was not a local operation.

Ted Pool was among those who opposed the changes. He sent emails to some Blaze advertisers objecting to the changes, attributing them to regional and out-of-state decisions, and encouraged the email recipients to sign the petition. He urged the recipients to contact Three Eagles to ask if the company would continue “jeopardizing YOUR advertising dollars by being associated with” the new show.

April 17, 2012

Summary Judgment Reversed Due to Ambiguity in Contract

by Lee E. Berlik

Swiftships Shipbuilders and its defense contract procurement consultant, Lion Associates, are currently in a dispute over a $181 million contract awarded to Swiftships by the United States Navy. In February 2009, Swiftships, which specializes in military vessels, submitted a capability summary to the Naval Sea Systems Command (NAVSEA) in response to a Navy announcement seeking coastal patrol boats to supply to the Iraqi government. After not receiving a response in two months, Swiftships hired Lion Associates to provide marketing and promotion services to attract potential Swiftships clients. In exchange, Swiftships would pay Lion Associates $7,500 a month for 12 months and “3% of each new contract obtained by Lion.” Swiftships later revised the contract so that the 3% commission was limited to “each new contract brought to Swift[ships], which was obtained by Lion.” In the meantime, Admiral Lyons, the CEO, President, and sole member of Lion Associates, worked on procuring the Navy contract for Swiftships by assuring a high-ranking NAVSEA admiral that Swiftships could manage the entire job by itself. The contract was awarded to Swiftships a few months after the singing of the revised contract between Lion Associates and Swiftships, but Swiftships refused to pay Lion Associates the 3% commission on the Navy contract because it did not think that Lion Associates had brought the Navy contract to Swiftships.

Lion Associates sued for breach of contract and unjust enrichment. It argued that it was entitled to a little over $6 million in compensatory damages because the 3% payment provision applied to any contract that Swiftships was unable to obtain without Lion Associates assistance. The Eastern District of Virginia granted summary judgment in favor of Swiftships on both claims, but the United States Fourth Circuit Court of Appeals remanded the case after finding that the contract was ambiguous and that evidence should have been considered to determine its meaning and whether it was breached.

In a breach of contract claim, a court must determine if contractual provisions have been violated by looking at the actual language of the document. If the contract language is ambiguous, the trier of fact can look to extrinsic parol evidence to determine the parties’ intent as to certain provisions. However, resort to extrinsic evidence is limited to situations where language is “susceptible to more than one reasonable construction,” when considered in the context of the contract as a whole.

February 21, 2012

Noncompete Covenants and Covenants Restricting Land Tested By Different Standards

by Lee E. Berlik

Under Virginia law, covenants restricting the free use of land are not favored and must be strictly construed. Restrictive covenants that are unreasonably broad will not be enforced. There is a growing body of case law in Virginia governing noncompete covenants in employment contracts, but does that body of law apply to restrictive covenants in deeds? Earlier this month, the Fourth Circuit answered that question in the negative.

BP Products v. Stanley involved an appeal from the Eastern District of Virginia by BP Products North America, which had lost its motion for summary judgment against Charles V. Stanley and his business, Telegraph Petroleum Properties. BP had sued Stanley and his company to enforce a restrictive covenant in a deed, but the district court found that the restriction was overbroad and unenforceable. The Court of Appeals disagreed and reversed, finding that when analyzed under the appropriate test, the challenged prohibition was too inconsequential to invalidate the entire covenant.

Stanley leased a service station from BP in Alexandria, Virginia, subject to an agreement containing a restriction against selling fuel that was not BP-branded. Following a disagreement regarding the price of the fuel, Stanley stopped selling BP-branded fuel and started selling AmeriGO fuel, prompting the lawsuit. BP Pump.jpg

January 7, 2012

Fairfax Court Finds Mere Reference to By-Laws Insufficient to Incorporate Into Contract

by Lee E. Berlik

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.

December 31, 2011

Who Owns an Employee’s Twitter Following?

by Lee E. Berlik

Does an employer have any sort of ownership interest in its employees’ tweets or Twitter following? This very current social-media question may be tested in a lawsuit originally filed last July in federal court in California by PhoneDog, a South Carolina-based company that reviews mobile phones and services online, against former employee Noah Kravitz. An amended complaint in the case, filed on November 29, 2011, has attracted considerable media attention.

When Kravitz worked for PhoneDog as a product reviewer and video blogger from 2006 to 2010, he tweeted under the handle @PhoneDog_Noah and attracted some 17,000 followers for his comments and opinions on Twitter. When he left the company, he continued tweeting under the name @NoahKravitz. But he didn’t create a new account with that name; instead, he kept the account (with all its followers) and just changed the Twitter handle to @NoahKravitz. Eight months later, PhoneDog sued Kravitz, alleging that his continued use of the account and his tweeting to his followers constitute a misappropriation of PhoneDog’s trade secrets, intentional interference with prospective economic relationships, and conversion. Phone Dog said that it had suffered loss of advertising revenue as a result and that Kravitz “was unjustly enriched by obtaining the business of PhoneDog’s Followers.”

PhoneDog essentially claims ownership rights due to the fact that it directs its employees to maintain Twitter accounts and instructs them to tweet links to PhoneDog’s website, thus increasing PhoneDog’s page views and generating advertising revenue for PhoneDog. PhoneDog said in the complaint that since Kravitz now works for TechnoBuffalo, a competitor of PhoneDog, he is exploiting PhoneDog’s confidential information on behalf of a competitor. PhoneDog is seeking $340,000 in damages — $2.50 per month per Twitter follower for eight months. Although PhoneDog said in the complaint that “industry standards” peg the value of a Twitter follower at $2.50 per month, the company did not give a source for that estimate. Nor did PhoneDog attempt to distinguish between people who followed Kravitz because of his connection to PhoneDog and those followers who are merely friends of his or enjoy his commentary.

December 12, 2011

Virginia Limited Liability Company (LLC) Membership Interests Analogous to Partnership

by Lee E. Berlik

The Virginia Supreme Court ruled on November 4, 2011, that membership in a Virginia limited liability company is comprised of two components–a control interest and a financial interest–and that only the financial interest is transferable by will when a member dies. Moreover, the court held that a devisee or assignee of a financial interest has no control interest in the limited liability company without becoming a member, just as a control interest in a partnership “cannot be bestowed on another by the unilateral act of a partner.”

The financial interest involves only the right to share in the company’s profits and losses and to receive distributions. It does not entail the right to participate in the management or control of the company’s affairs.

In 1991, the Virginia legislature enacted the Limited Liability Company Act, creating the limited liability company as a hybrid entity, similar in some respects to a partnership and in other respects to a corporation. The statute provides that the transferability of a member’s interest in an LLC should be similar to the transferability of a partner’s interest in a partnership. Last Will.jpg Under the Uniform Partnership Act, the transfer of a partner’s interest in a partnership entitles the transferee only to the financial rights, not the control rights.

September 26, 2011

Law of Fraudulent Conveyances Outlined by Virginia Supreme Court

by Lee E. Berlik

Once a plaintiff has introduced evidence to establish a “badge of fraud,” a prima facie case of fraudulent conveyance is established and the burden shifts to the defendant to establish that the transaction was not fraudulent. So held the Virginia Supreme Court, in reversing the Henrico County Circuit Court’s decision to strike the plaintiff’s evidence and enter judgment in favor of the defendant.

Fox Rest Associates, L.P. v. Anne B. Little involved a dispute between George B. Little, an attorney and the general partner of Fox Rest Apartments, and the limited partners of Fox Rest Apartments, arising out of an alleged sale of the apartments by the general partner without the consent or knowledge of the limited partners. After learning that the limited partners planned to sue him, Mr. Little made various transfers, including transfers into an account at SunTrust Bank held jointly with his wife. The limited partners filed a derivative action against Fox Rest for malpractice, double billing, and other claims. The limited partners obtained a judgment but were unable to collect approximately $856,400. They then proceeded to file a fraudulent conveyance action to attempt to set aside various transfers as fraudulent.

The trial court struck the limited partners’ evidence, finding that they had produced insufficient evidence of fraudulent intent. The Supreme Court, however, reversed. Under Virginia law, it pointed out, to survive a motion to strike, a plaintiff need only introduce evidence of “badges of fraud.” Badges (or presumptions) of fraud include: