The Virginia Business Litigation Blog

August 1, 2012

An Agreement to Agree is not a Binding Contract in Virginia

A “letter of intent” which recites the terms of a transaction contemplated in the future, or which sets forth terms to be embodied in a more formal agreement to be executed at a later time, is presumed to be a non-binding “agreement to agree” rather than an enforceable contract. In Virginia, unlike some other jurisdictions, a letter of intent, reflecting each party’s commitment to negotiate open issues in good faith to reach a contractual objective within an agreed framework, will not be construed as a binding contract absent circumstances suggesting the parties intended to bind themselves. The Eastern District of Virginia recently dealt with this issue in Virginia Power Energy Marketing, Inc. v. EQT Energy, LLC.

EQT contracted with a pipeline to buy natural gas once the pipeline completed its expansion. The purchase was subject to the pipeline’s FERC (Federal Energy Regulatory Commission) gas tariff and applicable laws, orders, rules and regulations. EQT then sought to sell some of the excess capacity to VPEM, a distributer, in a non-biddable release. By regulation, a non-biddable release must use the maximum applicable rate. The parties signed a letter of intent (LOI) for 30,000 dekatherms per day with the rate to be paid as the lesser of $0.84 per dekatherm or the rate applicable to EQT under the NLRA (the negotiated rate letter agreement between the pipeline and EQT). Subsequently, the applicable rate was set at $0.88 so either the LOI rate had to be revised or EQT was free to release the capacity to the highest bidder.

The letter of intent stated EQT “propose[d] to release a portion of (the pipeline’s capacity) to VPEM.” Before the pipeline completed its expansion, however, gas prices rose and the value of EQT’s capacity increased. EQT received bids that exceeded VPEM’s and asked VPEM to pay an additional $12 million for the capacity. VPEM refused and EQT abandoned the transaction. VPEM then sued EQT in the Eastern District of Virginia for breach of contract.

July 30, 2012

Without Proof of Meritorious Defense, Default Stands

by Lee E. Berlik

A defendant who failed to timely answer a complaint was recently rebuffed in his attempt to set aside the ensuing entry of default. Magistrate Judge Davis of the Eastern District of Virginia found that a brief filed by defendant’s counsel, which consisted of a single page referring the Court to an affidavit filled with grammatical errors and incoherent statements, failed to meet a “minimum threshold of proficiency” and demonstrated “a lack of respect for this Court.” The court found that the defendant failed to show “good cause” under Rule 55(c) for setting aside the default in that he failed to establish the existence of a meritorious defense.

MSSI Acquisition (“MSSI”) sued Tariq Azmat for breach of a financing contract in December 2011. Process was served (and later mailed) on Azmat’s cousin at Azmat’s residence on December 7, but Azmat claimed to have not come across the notice until February 2012 because he was on multiple trips and did not have a chance to check his mail until then. When Azmat failed to respond in a timely manner, MSSI filed for a default judgment on February 17, 2012. Azmat promptly reacted and filed a motion to set aside the default entered against him on March 12, 2012, asserting that he was fraudulently induced into making the financing contract with an insolvent corporation and that the contract in question had been rescinded anyway.

In Virginia, fraudulent inducement exists where a party intentionally and knowingly makes a false representation of a material fact and the other party suffers damages as a result of relying on that misrepresentation. In this case, the court found that Azmat could not have reasonably relied on any alleged misrepresentations as to MSSI’s solvency because the contract language drafted by Azmat’s own attorney referred to MSSI’s bankruptcy reorganization and Azmat had access to MSSI’s financial information, since the company was publicly traded. Moreover, the court pointed out that Azmat failed later to disavow the contract, even though he clearly knew about MSSI’s insolvency by that point, thus suggesting he did not rely on the misrepresentation that MSSI was solvent in deciding whether to enter into the financing contract.

July 23, 2012

Retaliation Claim Dismissed for Failure to Exhaust Administrative Remedies

by Lee E. Berlik

The exhaustion of remedies doctrine requires parties to initiate and follow administrative procedures before seeking relief from the courts. The rationale behind the doctrine is that administrative agencies have specialized personnel, experience, and expertise to handle matters that arise under their jurisdiction. Additionally, an administrative complaint puts parties on notice of alleged wrongdoing, and administrative proceedings allow parties to resolve their disputes in a more efficient and less formal manner.

To allege discriminatory employment practices in a deferral state like Virginia, prior to filing any lawsuit, an aggrieved employee must exhaust administrative remedies by initiating an EEOC charge. Otherwise, the claim will be forever barred. The United States District Court for the Western District of Virginia recently addressed the exhaustion of remedies requirement in Kerney v. Mountain States Health Alliance.

Keltie Kerney was the Home Health Director at Norton Community Hospital (“NCH”) when she began having medical problems with her eye. She informed NCH that her medical problems would require medical leave and possibly future accommodation in order to continue her employment. NCH granted Kerney medical leave from August 19, 2010 through December 14, 2010 when her physician released her to return to work “with accommodations.” Upon her return to work, the hospital terminated Kerney. Kerney claims that the hospital discriminated against her on the basis of her age and disability and that it retaliated against her for her request for medical accommodations. Kerney brought suit against NCH and its owner, Mountain States Health Alliance (“MSHA”) under the Age Discrimination in Employment Act of 1967 (“ADEA”) and the Americans with Disabilities Act (“ADA”).

July 13, 2012

No Trademark for WAGGIN’ STRIPS

by Lee E. Berlik

Midwestern Pet Foods, Inc. (Midwestern) applied for a trademark on its dog treat product, WAGGIN’ STRIPS. The Societe des Produits Nestle S.A. (Nestle), which holds the trademark on a similar dog treat, BEGGIN’ STRIPS, challenged the application, claiming Midwestern’s proposed mark would infringe on its mark. The Trademark Trial and Appeal Board found Nestle failed to prove its BEGGIN’ STRIPS mark was famous enough that the WAGGIN’ STRIPS mark would dilute it. But it found the proposed WAGGIN’ STRIPS mark would likely confuse consumers because “the goods are identical, the channels of trade and classes of purchasers are the same, and the marks are similar in appearance, sound, connotation and commercial impression.” It denied the application.

Midwestern appealed on several bases. It argued that Nestle should not have been allowed to introduce evidence of the BEGGIN’ STRIPS mark’s fame that postdated the WAGGIN’ STRIP’s application because such evidence must predate an applicant’s filing date to be used to analyze the likelihood of confusion. The Federal Circuit rejected this assertion as a misreading of the law.

Though not relevant to the question of dilution, evidence of post-application fame is relevant when considering likelihood of confusion. To show dilution, Nestle had to show its mark was famous before Midwestern filed its intent-to-use application. Failing that, however, Nestle could still use evidence of the BEGGIN’ STRIPS mark’s strength in showing likelihood of confusion, even if that strength (fame) occurred later.

July 9, 2012

Liquidated Damages Affirmed for Breach of Non-Solicitation Agreement

by Lee E. Berlik

The Fourth Circuit Court of Appeals has affirmed a Western District of Virginia ruling upholding a non-solicitation clause in a contract for trained personnel. ProTherapy Associates, LLC contracted with nine nursing homes to provide and train licensed physical and occupational therapy and speech/language pathology personnel. To protect its interests, it included in each contract a restrictive covenant precluding the nursing homes from “directly or indirectly” soliciting or hiring Pro Therapy employees:

“Non-Solicitation. During the term of this Agreement and for one year thereafter, [the nursing home] shall not, directly or indirectly, for [the nursing home] or on behalf of any other person or business entity for the benefit of [the nursing home]: (a) solicit, recruit, entice or persuade any Therapists or other employees or contractors of [ProTherapy] who had contact with [the nursing home] pursuant to this Agreement to become employees or contractors of [the nursing home] responsible for providing services to Patients like the Services hereunder; or (b) employ or use as an independent contractor any individual who was employed or utilized as a contractor by [ProTherapy] for the provision of Services at any time during the twelve (12) months prior to such proposed employment or contracting. Recognizing that compensatory monetary damages resulting from a breach of this section would be difficult to prove, [the nursing home] agrees that such breach will render it liable to [ProTherapy] for liquidated damages in the amount of ten thousands dollars ($10,000) for each such individual.”

When the nursing homes asked for a rate reduction, ProTherapy provided a new contract with the same clause. The contract also permitted either party to terminate the contract with 90-days’ notice. Just weeks later, the parent company of the nursing homes gave ProTherapy 90-days’ notice and hired Reliant Pro Rehab, LLC to do the same job at a lower cost. During the remaining 90-day period, Reliant began recruiting ProTherapy’s personnel who were still working in the nursing homes. Reliant was able to meet with them because the nursing homes provided lists of the ProTherapy personnel and helped make them available. As a result, Reliant hired sixty four of the ProTherapy therapists for its contract.

June 25, 2012

Court Declines to Amend Judgment under Rule 59(e)

by Lee E. Berlik

After a federal court enters a judgment, a litigant has 28 days to file a motion to amend the judgment pursuant to Federal Rule of Civil Procedure 59(e). This rule allows a district court to correct its own errors and spare the parties and appellate courts the burden of unnecessary appeal. A Rule 59(e) motion is an extraordinary remedy to be used sparingly, and a court can grant such a motion only in narrow circumstances: (1) to accommodate an intervening change in controlling law; (2) to account for new evidence not available at trial; or (3) to correct a clear error of law or prevent manifest injustice. A party’s mere disagreement with a ruling does not warrant a Rule 59(e) motion, and parties may not use it to raise arguments or legal theories that could have been pursued before judgment. The United States District Court for the Eastern District of Virginia (Alexandria division) recently addressed this rule in Western Industries-North, LLC v. Blaine Lessard.

Lessard was an employee of Western, a pest control company. When Western terminated Lessard’s employment, Lessard had possession of a bedbug scent dog named Dixie, and a dispute arose over which party owned the dog. The court granted Western’s Emergency Motion for a Temporary Restraining Order and directed Lessard to return Dixie to Western. After an evidentiary hearing on Western’s Emergency Motion for a Preliminary Injunction, the court found that Western failed to satisfy the heightened showing required for a mandatory preliminary injunction and ordered Western to return Dixie to Lessard. Western then filed a Motion for Reconsideration pursuant to Rule 59(e) and attached the Declaration of William Whitstine, the owner of the canine academy that trained Dixie and Lessard.

Western argued that the court should have treated its request for injunctive relief as a request for a prohibitive injunction rather than a mandatory injunction. A prohibitive injunction maintains the status quo, whereas a mandatory injunction alters the status quo and therefore requires a heightened standard of review. The court noted that the status quo is the last uncontested status between the parties which preceded the controversy. Lessard had possession of Dixie when Western terminated him and the controversy arose; therefore, the status quo is Lessard’s possession of Dixie, and an order requiring Lessard to return Dixie to Western would have altered the status quo. Accordingly, the court’s characterization of the injunctive relief as mandatory and subject to heightened scrutiny was proper.

June 7, 2012

Leesburg Business Survives Motions to Dismiss

by Lee E. Berlik

Precision Franchising, LLC, a Virginia limited liability company based in Leesburg, licenses the Precision Tune Auto Care system. Catalin Gatej entered into a franchise agreement to operate a Precision Tune Auto Care system in Massachusetts. The agreement required Gatej to pay Precision Franchising an operating fee of 7.5 percent of weekly gross sales and an advertising fee equal to 1.5 percent of gross weekly sales. It also required him to spend 7.5 percent of gross weekly sales for advertising directly benefiting Precision Franchising. When Precision Franchising sued for breach of contract, Gatej moved to dismiss on two separate grounds. The court rejected both of them.

In 2011, Gatej ceased operations and transferred assets to another who is not operating as a Precision Tune Auto Center. Precision Franchising sued for breach of contract seeking $55,055.97 for required advertising Gatej hadn’t spent while he ran the center, $86,756.40 for lost profits due to the early termination of operation, and attorney fees and costs.

Gatej moved to dismiss the complaint. Because the parties were from different states, jurisdiction in this case was based on diversity. In such cases, at least $75,000 must be in controversy and Gatej claimed the company’s claims could not satisfy that requirement. He also claimed the wrong party sued him because Precision Franchising, LLC was not the company with which he’d signed the agreement.

May 31, 2012

Non-Compete Agreement with Former Bank Executives Deemed Enforceable

by Lee E. Berlik

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 23, 2012

Weak Mark, Lack of Confusion Leads to Summary Judgment for Defendant

by Lee E. Berlik

Judge Leonie M. Brinkema was not impressed with the trademark infringement case filed by Wag’N Enterprises, a pet-safety company based in Herndon, Virginia, against a California nonprofit known as Redrover. Entering summary judgment in favor of Redrover, she essentially found that no reasonable jury could find that Wag’N’s mark, “Wag’N Rover Respond’R” was confusingly similar to RedRover’s “RedRover Responder.”

Trademark infringement exists where a valid and protectable mark is used by the defendant in a way that causes a likelihood of confusion in consumers. If the plaintiff does not hold a federally registered trademark, a valid and protectable mark may still exist where “the mark is used in commerce and is distinctive.” In determining the likelihood of confusion, some factors that a court may consider are: (1) the strength or distinctiveness of the mark (i.e., whether it is generic, descriptive, suggestive, arbitrary, or fanciful); (2) the similarity of the marks; (3) the similarity of the goods/services the marks identify; (4) the similarity of the facilities the two parties use in their businesses; (5) the similarity of the advertising used by the two parties; (6) the defendant’s intent; and (7) actual confusion.

The court found that although Wag’N held valid and protectable marks in the registered name Wag’N Rover Respond’R and the unregistered but distinctive mark Rover Respond’R, there was no evidence that the RedRover Responders actually confused consumers. Specifically rejecting the Plaintiff’s argument that RedRover’s product “incorporates the essential essence” of its mark, the court noted that the marks do not share any identical words, the marks are not similar in meaning, and the companies have completely different logos with different typefaces, designs, and emphasis. Even if the names are similar, the court found, consumers do not see them in the same contexts, since Wag’N Rover Respond’R only has its name on its emergency kits and the mark RedRover Responders is found only on volunteer t-shirts and a brochure explaining the program.

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.”

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