Articles Posted in Business and Corporate

In Virginia, independent contractors can be held to noncompete agreements to the same extent as regular employees. But beware. A Fairfax County Circuit Court judge decided last month that all bets are off if the “independent contractor” should really have been classified as an employee. Although the Virginia Supreme Court has not yet spoken on the subject, Judge John M. Tran crafted a lengthy, well-reasoned opinion in Reading and Language Learning Center v. Sturgill holding that misclassifying employees as independent contractors violates Virginia public policy and is grounds for voiding the contract–including its noncompete and nonsolicitation provisions–even if the misclassification is unintentional. In other words, reasoned Judge Tran, independent contractors will only be bound by noncompete agreements if they have been properly classified as independent contractors.

Reading and Language Learning Center (“RLLC”) is a speech therapy practice that provides services to people with speech, language, or reading disorders. In 2014, Charlotte Sturgill was a recent graduate of a master’s program in speech-language pathology. To obtain her license and certification, Sturgill was required to complete a supervised clinical fellowship, which she arranged to do with RLLC. RLLC hired her with an agreement titled “Agreement between Private Practitioner and Independent Practitioner” which classified Sturgill as an independent contractor and contained the following non-compete clause:

RLLC and the Consultant agree not to employ any contracted employee or contract with any current client of the Other for a period of two (2) years after the expiration of the contract between RLLC and the Consultant.

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The Stored Communications Act (“SCA”), found at 18 U.S.C. §§ 2701-2712, establishes both a criminal offense and a civil cause of action against anyone who “intentionally accesses without authorization a facility through which an electronic communication service is provided” or “intentionally exceeds an authorization to access that facility,” and by doing so “obtains, alters, or prevents authorized access to a wire or electronic communication while it is in electronic storage in such system.” Successful plaintiffs may obtain damages, equitable or declaratory relief, and reasonable attorney’s fees. (See 18 U.S.C. § 2707(b)). In the employment context, the SCA is often understood to place restrictions on those situations in which an employer can access its employees’ private email accounts (i.e., accounts maintained by third-party email service providers like Google, Microsoft, and Yahoo). A few weeks ago, the Western District of Virginia decided Hoofnagle v. Smyth-Wythe Airport Commission, in which it rejected various justifications offered by an employer for accessing a former employee’s private Yahoo! email account.

Charles H. Hoofnagle was a government employee who worked as the Operations Manager for Mountain Empire Airport in Rural Retreat, Virginia. He reported to the Smyth-Wythe Airport Commission and his duties included answering phone calls and responding to emails from the public and customers. The Commission, however, did not have in place an official policy regarding use of computers or email. The airport did not even provide employees with an email address, so Hoofnagle created a Yahoo! Mail address, charliemkj@yahoo.com, which he used for both personal and business purposes. (MKJ is the airport’s FAA idendifier code). It was this Yahoo! address that was held out to the public as an official contact for the airport and provided to nearly all vendors and customers.

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A “teaming agreement” is an agreement between two or more contractors to “team up” by combining their resources to bid on a major government contract, thereby increasing the likelihood of securing the work. Often, they will be drafted to require that the prime contractor use the subcontractor specified in the teaming agreement if the bid is accepted, but this is not always the case. Teaming agreements can be very appealing to smaller subcontractors, or subcontractors who don’t qualify to bid on a particular government contract, because they allow opportunities to work in tandem with larger or more qualified firms to gain access to lucrative government-contract work they would otherwise be excluded from. But are such agreements enforceable? Not always.

A “letter of intent,” like a teaming agreement, is a document signed by the parties that contemplates the formation of a formal contract to be executed at some point in the future. Virginia courts treat such agreements as “agreements to agree,” which basically means that the parties are agreeing to attempt in good faith to negotiate the terms of a formal agreement with respect to a particular subject matter. Letters of intent are typically short and devoid of material terms that would be necessary to make the agreement binding in court. There’s nothing preventing two parties from entering into an actual contract, intending to be bound, and calling it a “letter of intent,” but absent evidence of such an intention to be bound, such agreements will not be enforceable.

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Earlier this month I wrote about the case of a dentist who had sued a consultant for breach of fiduciary duty and failed. The court in that case found that the allegations were insufficient to establish the existence of an agency relationship, and without such a relationship, the consultant owed no fiduciary duty to the dentist. In a similar case between a medical doctor and a consultant, Bocek v. JGA Associates, the trial court reached the same conclusion, but was reversed on appeal, the Fourth Circuit holding that the doctor had proved as a matter of law that the defendants were agents of the doctor and had breached fiduciary obligations by misappropriating a business opportunity for themselves. When the case went back to the trial court, the only issue was to determine the appropriate remedies for the consultants’ breach of fiduciary duty. The latest opinion offers a helpful guide as to the potential remedies available in breach-of-fiduciary-duty cases. What follows is a brief summary of the various forms of relief discussed in the opinion.

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Derivative actions are a mainstay of modern business litigation. They allow a shareholder of a corporation to enforce a right the corporation has but is wrongfully refusing to enforce. Normally, corporate management would be responsible for deciding whether to pursue litigation against someone, but sometimes it’s the management itself–such as an officer or director–that is causing the problem. In such situations, the board of directors may be reluctant to initiate a lawsuit against one of their own, so allowing a shareholder to bring the suit in the name of the corporation can be the only practical way to protect the interests of the corporation. Still, derivative suits are considered an extraordinary procedural device, permitted only when it is clear that the corporation will not act to enforce its rights. The pleading requirements are laid out in Federal Rule of Civil Procedure 23.1.

Because it’s normally up to the board of directors to decide whether to pursue litigation in the interest of the corporation or shareholders, it’s necessary to plead both the plaintiff’s demand on the corporation and the corporation’s refusal to comply. Under Rule 23.1, any complaint purporting to be a derivative action must state with particularity (a) any effort by the plaintiff to obtain the desired action from the directors or comparable authority and, if necessary, from the shareholders or members; and (b) the reasons for not obtaining the action or not making the effort. The reason for this requirement is that derivative suits may proceed only if the shareholder shows that the board’s refusal was wrongful. If the board’s refusal to pursue litigation is justified, there will not be grounds for a derivative action.
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Most Virginia litigators will tell you that there are four elements to a claim of tortious interference with contractual relations in Virginia: (1) the existence of a valid contractual relationship or business expectancy; (2) knowledge of the relationship or expectancy on the part of the interferor; (3) intentional interference inducing or causing a breach or termination of the relationship or expectancy; and (4) resultant damage to the party whose relationship or expectancy has been disrupted.

There is a line of cases in federal court, however, that recognizes a fifth, “unstated” element of tortious interference; namely, the existence of a competitive relationship between the party interfered with and the interferor. In 17th St. Associates, LLP v. Markel Int’l Ins. Co., 373 F. Supp. 2d 584, 600 (E.D. Va. 2005), the court found that a reading of pertinent Virginia Supreme Court cases implied that “the tort of intentional interference with a business expectancy contain[s] a fifth, unstated element to the prima facie case: a competitive relationship between the party interfered with and the interferor.”
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The Racketeer Influenced and Corrupt Organizations Act (commonly known as “RICO“) became effective on October 15, 1970. It was originally intended primarily to assist in the prosecution of mafia leaders, as it permitted them to be tried for crimes they ordered others to do rather than committed themselves. Congress never intended to limit RICO to organized crime, however. G. Robert Blakey, the primary author of the statute, once told Time Magazine, “We don’t want one set of rules for people whose collars are blue or whose names end in vowels, and another set for those whose collars are white and have Ivy League diplomas.” The statute includes a civil provision, found at 18 USC § 1964(c), that has proven particularly popular in business litigation as it allows for the recovery of treble damages and attorneys fees.

RICO makes it unlawful for any person employed by or associated with any enterprise engaged in, or the activities of which affect, interstate or foreign commerce, to conduct or participate, directly or indirectly, in the conduct of such enterprise’s affairs through a pattern of racketeering activity or collection of unlawful debt. (See 18 USC § 1962(c)). Key concepts in civil RICO cases typically include whether a true “enterprise” exists, whether the defendant has engaged in “racketeering activity,” and, if so, whether such activity constitutes a “pattern.”
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Suppose you’re a senior executive at a company that regularly transacts large volumes of business with another company, when the wife of the other company’s CEO files what you believe to be an unwarranted sexual harassment lawsuit against your company, presumably with the consent or approval of her husband. I suspect many would assume that you would have the right to cease doing business with that company due to the strain on the relationship caused by the wife’s lawsuit. Shouldn’t you have the right to decide for yourself which companies deserve your business? Well, be careful. In an opinion written by Eastern District of Virginia Judge James C. Cacheris last month, the court found that allegations like these were sufficient to state a claim for tortious interference with contract under Virginia law.

Tortious interference is a legal theory that requires a plaintiff to allege (and eventually prove) the following elements: (1) the existence of a valid contractual relationship or business expectancy; (2) knowledge of the relationship or expectancy on the part of the interferor; (3) intentional interference inducing or causing a breach or termination of the relationship or expectancy; and (4) resultant damage to the party whose relationship or expectancy has been disrupted. If the contract is “at will,” such as the typical employment contract that either party is free to terminate at any time, it must also be proven that the defendant employed “improper methods.” After the case of Stephen M. Stradtman v. Republic Services, Inc., it would appear that “business retaliation” can qualify as the required “improper method” to support a tortious interference claim.
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“I made a copy of the client list because they are my clients; I won the business for my company” is a refrain I hear often in consulting with former employees. We’re sorry to have to tell you that this commonly held belief is not accurate. Those clients and customers you may have generated as an employee are not “yours” to take with you. They belong to the company. Making a copy of such a list by printing it, downloading a file, copying it onto a flash drive, or emailing the list to yourself can get you into a lot of trouble because such actions violate Virginia common law as well as certain Virginia statutes. This is true whether or not employees are subject to a noncompete or nonsolicitation agreement. Here are several laws a former or soon-to-be former employee may be violating by copying or taking a former employer’s client or customer list:

If you copy, download, or upload the company’s client and/or customer lists, you may be committing the business tort (the legal term for a civil “wrong”) of conversion. Conversion is the wrongful exercise over another’s property, which deprives the owner of possession, or any act of dominion wrongfully exerted over the property in denial of or inconsistent with the owner’s rights. This means that if your former employer gets its IT people to inspect your computer or work phone and discovers you’ve taken a client list, you may be found liable for conversion of the employer’s property.
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Last month, I wrote about blue-penciling of non-competition and non-solicitation agreements and about the fact that if you are dealing with an unenforceable noncompete in Virginia, the entire clause will likely be stricken rather than amended. If you are a Virginia employer seeking to ensure your employees are actually bound by their agreements not to complete with your business post-employment, one thing you may be able to do is specify in the agreement that it will be governed by the law of a different state (i.e., one whose laws permit blue-penciling or which are otherwise considered more favorable to employers). This approach, however, will only be viable if your company (or the employee) has some significant connection with the selected state, as it is considered a violation of due process rights to surprise employees with arbitrary choice-of-law provisions. There is an easier way to ensure the noncompete provisions have teeth: make the obligations severable.

Virginia law will permit you to include a “severability clause” when drafting a noncompete agreement, permitting the court to analyze and enforce the various noncompete and non-solicitation provisions separately. The benefit to employers is that if the court finds one of the sections overly broad and therefore unenforceable, the court can “sever” the unenforceable provision and enforce the other sections, provided they don’t suffer from the same enforceability issues. For this to work, the parties need to reach an agreement (preferably expressed explicitly in the contract itself) to the effect that any restrictive covenant found by a court to be unenforceable can be severed from the agreement, leaving the remainder of the provisions intact. Such a clause might look something like this:

Severability. If any clause, provision, covenant or condition of this Agreement, or the application thereof to any person, place or circumstance, shall be held to be invalid, unenforceable, or void, the remainder of this Agreement shall remain in full force and effect.

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