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.
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.
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.”
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.”
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.
“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.
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.
In Virginia, covenants not to compete (a.k.a. non-competition agreements or simply “noncompetes”) are considered restraints on trade and are therefore disfavored in the law. Unlike California, which prohibits them outright, Virginia will enforce such agreements if (and only if) they (1) satisfy the general principles of contract formation and enforceability, and (2) are no broader than necessary to protect the employer’s legitimate business interests. In examining breadth and overall reasonableness, Virginia courts will look primarily to provisions regarding the duration of the restriction, the geographic scope, and the activities that the agreement purports to restrict. What happens, you might ask, if a noncompete is found to be just a tad broader than it needs to be to protect the employer’s interests? Will it still be enforced to the “fullest extent of the law,” disregarding whatever phrase rendered the agreement overly broad? While that might seem the most fair outcome to many employers, if the agreement is governed by Virginia law, the noncompete will be stricken in its entirety and the employee will be free to compete as if the agreement never existed.
In some states, courts will modify any noncompete deemed unreasonable and enforce it to a degree deemed reasonable. For example, if a noncompete prohibits competitive activity for a 5-year period when the business really can’t justify imposing such a restriction beyond one year, the noncompete will be enforced but only for one year rather than the five stated in the agreement. This practice has become known as blue-penciling. Other states allow blue-penciling only if the restrictive covenant as a whole does not reveal any deliberate intent by the employer to place unreasonable and oppressive restraints on the employee. Virginia, however, does not allow blue-penciling at all. As a general rule, unreasonable covenants not to compete will be declared void and unenforceable, and courts will not modify them by re-writing contracts previously agreed to by the parties.
Virginia’s business conspiracy statute provides for civil liability and treble damages where “[a]ny two or more persons…combine, associate, agree, mutually undertake or concert together for the purpose of…willfully and maliciously injuring another in his reputation, trade, business or profession….” See Va. Code § 18.2-499, 500. The cause of action is popular among plaintiffs’ lawyers not only because of the triple-damages provision but also because a successful plaintiff can recover attorneys’ fees. To state a valid claim for statutory business conspiracy, a plaintiff must allege three key elements: that the defendants (1) engaged in concerted action, (2) with legal malice, (3) that resulted in damages. “Concerted action” refers to the requirement that the defendants combined together to effect a preconceived plan and unity of design and purpose. “Legal malice” (not to be confused with actual malice, common-law malice, or New York Times malice) requires a showing that the defendant acted “intentionally, purposefully, and without lawful justification.” The legal-malice standard allows a plaintiff to recover even if the defendant’s primary and overriding purpose in forming the conspiracy was to benefit himself rather than injure the plaintiff’s reputation, trade, or business, provided that causing such injury is at least one of the purposes of forming the conspiracy.
Late last week, Judge Moon of the Western District of Virginia allowed such a claim to go forward against Sandy Spring Bank. The plaintiff, Christopher Jaggars, was in the business of purchasing residential real estate for the purpose of renting the property to tenants and holding it as an investment so that he could later sell the property at an appreciated value. According to the allegations of his amended complaint, he was targeted as a potential victim of the DpFunder Program scheme by a company called Global Direct Sales. The scheme allegedly involved a fairly complicated money-laundering arrangement pursuant to which a small group of individuals and mortgage companies arranged to loan the plaintiff money for real estate investment, mislead the settlement agent into transferring a portion of the loan proceeds to another company, which transferred them to Global Direct, which conspired with Sandy Spring Bank to open a new account in Mr. Jaggars’ name (without his knowledge or consent) to receive the funds, all in violation of the Patriot Act. Then, the allegations continue, Global Direct issued a fraudulent Form 1099, falsely showing that it had paid $43,500 in sales commissions to Mr. Jaggars, presumably to allow Global Direct to conceal the loan proceeds and to shift tax liability from Global Direct to Mr. Jaggars.
Liquidated damages are damages the amount of which has been agreed upon in advance by the contracting parties. When a contract contains a liquidated-damages provision, the amount of damages in the event of a breach is either specified, or a precise method for determining the sum of damages is laid out. This is often done in situations where the parties agree that the harm likely to be caused by a breach would be difficult or impossible to measure with any precision, so they agree on a figure in advance and dispense with the time and effort that would otherwise be involved in proving compensatory damages at trial. Another benefit often cited is the ability to control exposure to risk that normally is inherent in business litigation.
Fairfax Circuit Court judge Charles J. Maxfield was recently presented with the interesting question of whether to enforce an optional liquidated damages clause, an issue not yet decided by the Virginia Supreme Court. Sagatov Builders LLC v. Hunt involved a sale of real estate. The seller alleged the buyer was supposed to pay a $50,000 deposit but didn’t. The parties’ contract contained the following provision:
If the Purchaser is in default, the Seller shall have all legal and equitable remedies, retaining the Deposit until such time as those damages are ascertained, or the Seller may elect to terminate the contract and declare the Deposit forfeited as liquidated damages and not as a penalty …. If the Seller does not elect to accept the Deposit as liquidated damages, the Deposit may not be the limit of the Purchaser’s liability in the event of a default.