Contracts Category Archives — Page 6 of 8 — The Virginia Business Litigation Blog Published by Virginia and Washington, D.C. Litigation & Appeals Attorney

February 21, 2012

Noncompete Covenants and Covenants Restricting Land Tested By Different Standards

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 29, 2012

Arbitrating Arbitrability

by Lee E. Berlik

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.”

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.

November 5, 2011

Broad Non-Compete Agreements Less Likely to Be Enforced Today than 20 Years Ago

by Lee E. Berlik

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:

September 19, 2011

Arbitration Clause Not Enforceable if Procured by Fraud

by Lee E. Berlik

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.

September 12, 2011

Validity of Restrictive Covenants Turns on Facts of Each Case

by Lee E. Berlik

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.

September 5, 2011

Attorneys’ Fees Must Be Reasonable, Despite What Contract Says

by Lee E. Berlik

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 Money v2.jpg (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.

August 29, 2011

To Be Enforceable, Non-Compete Agreements Should Be Narrow in Scope

by Lee E. Berlik

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:

June 4, 2011

Virginia Noncompete, Formed After Termination of Employment, Upheld as Reasonable

by Lee E. Berlik

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.

April 11, 2011

Judge Alper Grants Limited Discovery to Lacoste in Counterfeiting Case

by Lee E. Berlik

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.