Articles Posted in Business and Corporate

Noncompete agreements are typically found in employment agreements between employers and their employees. But that’s not the only place these clauses are found. Sometimes you’ll have two sophisticated companies of roughly equal bargaining power who, for whatever reason, wish to enter into a binding agreement placing restrictions on the one of the entity’s ability to compete with the other. Perhaps one company has acquired or merged with another and needs to ensure that the target company’s former officers and directors don’t immediately form a competing business and take their old clients with them. Or perhaps, as was the case recently in the dispute between wood-flooring contractors Lumber Liquidators and Cabinets To Go, two businesses with overlapping ownership simply seek to reach an agreement to reduce competition and minimize the sharing of confidential information. The important thing to note is that most of the reasons Virginia courts disfavor noncompete agreements have to do with fairness to the employee and do not apply when the two contracting parties are both businesses. Therefore, courts are much more likely to enforce noncompete agreements found in a business-to-business context than in an employment setting.

The basic facts of Lumber Liquidators v. Cabinets To Go are as follows. About 10 years ago, hardwood flooring retailer Lumber Liquidators learned that its Chairman and largest shareholder, Thomas D. Sullivan, was also involved in the ownership and operation of Cabinets To Go, which sold kitchen and bath fixtures and building supplies. Concerned that Sullivan might divert business opportunities or confidential business information over to Cabinets To Go, Lumber Liquidators entered into a number of agreements with Cabinets To Go. Among the agreements formed between the companies was a pair of “reciprocal restrictive covenants” in which Cabinets To Go agreed not to engage in the sale of hardwood flooring anywhere in the world during the term of the agreement and a period of two years thereafter. Lumber Liquidators similarly agreed not to sell kitchen cabinets.

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A conspiracy to harm another’s business may be actionable under Virginia’s business-conspiracy statute, which provides for a cause of action where two or more people “combine, associate, agree, mutually undertake or concert together for the purpose of…willfully and maliciously injuring another in his reputation, trade, business or profession by any means whatever.” (See Va. Code §§ 18.2-499, 18.2-500). To prevail in a lawsuit for business conspiracy in Virginia, a plaintiff must prove (1) a combination of two or more people or entities for the purpose of willfully and maliciously injuring the plaintiff in his business; and (2) damage that resulted from the combination. A combination exists where there is concerted action designed to “effect a preconceived plan and unity of design and purpose.” (Schlegel v. Bank of America, 505 F. Supp. 2d 321, 326 (W.D. Va. 2007)). When the people being sued for conspiracy work for the same company, a question arises as to whether the first element–the requirement of “two of more people”–can be satisfied. The intra-corporate immunity doctrine holds that employees working for the same company are generally immune from conspiracy claims when acting on behalf of their employer. This is because a corporation acts through its employees, so the the employees’ actions are really the corporation’s actions and a corporation cannot conspire with itself. In other words, a business-conspiracy claim requires concerted action of at least two legally distinct persons or entities. A corporation can’t conspire with its employees, and its employees can’t conspire with each other if they are acting within the scope of their employment. As with most areas of the law, however, there are exceptions.

Some courts recognize an exception to the intracorporate immunity doctrine where the employee has an “independent personal stake” in achieving the goals of the conspiracy. Although the Virginia Supreme Court has not recognized any such exception, federal courts sitting in Virginia and applying Virginia law have applied it on several occasions. (See, for example, Greenville Publishing Company v. Daily Reflector, Inc., 496 F.2d 391 (4th Cir. 1974) (observing that an exception to the intracorporate immunity doctrine “may be justified when the officer has an independent personal stake in achieving the corporation’s illegal objective.”); Cvent, Inc. v. Eventbrite, Inc., 739 F. Supp. 2d 927 (E.D. Va. 2010)). Even if you’re in a court that does recognize a personal-stake exception, it will apply only to those cases in which the conspirator gained an independent personal benefit from the conspiracy. This benefit must be separate and distinct from the corporate benefit enjoyed by the employer.

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Virginia does recognize a legal cause of action for improper interference with an anticipated business contract. The tort is known as “tortious interference with business expectancy,” “tortious interference with future economic benefit,” “tortious interference with prospective economic advantage,” or some variant of that phrase. It’s what you sue for when your business is about to close on a big deal but then the whole thing is called off as the result of some form of meddling by a third party. You’re not suing for breach of contract at this point because there is no contract. Instead, you’re suing for the loss of an anticipated future economic benefit. For the claim to be valid, however, there must be reason to believe that you would have closed on the deal were in not for the defendant’s unlawful conduct. There is no claim for interference with a contract you merely hoped to enter into, or for interference with a mere possibility of some economic benefit.

Tortious interference with business expectancy requires proof of the following elements: (1) the existence of a business relationship or expectancy, with a probability (not just possibility) of future economic benefit to the plaintiff; (2) the defendant’s knowledge of the relationship or expectancy; (3) a reasonable certainty that absent defendant’s intentional misconduct, plaintiff would have continued in the relationship or realized the expectancy; and (4) damages to the plaintiff.

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Not long ago, Serco, Inc., won summary judgment on various claims asserted against it by L-3 Communications Corp. and L-3 Applied Technologies, Inc., including claims for statutory business conspiracy, common law conspiracy, and tortious interference with business expectancy. On appeal to the Fourth Circuit, however, the court found that the district court erred in granting summary judgment on the conspiracy claims and sent the case back to the Eastern District of Virginia for further proceedings.

The dispute centered around rights to a lucrative government contract. In 2004, the Air Force awarded a prime contract to Serco that called for testing and upgrading services to protect certain Air Force sites from “high altitude electromagnetic pulse” (“HEMP“) events. The Air Force would periodically issue work orders for various projects, and if Serco could not complete the work itself, it could issue a request for proposals (“RFP”) to invite subcontractors to bid on the work.

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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,, 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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