The Virginia Business Litigation Blog

June 7, 2012

Leesburg Business Survives Motions to Dismiss

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.”

May 12, 2012

Burger King Manager Says He Was Fired For Having HIV

by Lee E. Berlik

Many people don’t realize that the Americans with Disabilities Act (ADA) protects not only employees with substantial hearing, visual, or mental impairments, but also those with HIV or AIDS. The ADA prohibits discrimination against “qualified individuals with disabilities.” Any physical or mental impairment that substantially limits one or more major life activities can qualify as a disability, and HIV disease is such an impairment.

Earlier this month in Norfolk, former Burger King manager Christopher Peña filed a discrimination suit against Burger King for allegedly terminating him upon learning he was HIV positive. Burger King says he was fired for poor performance. The complaint seeks compensatory damages for lost past and future wages, benefits, and emotional distress. It also seeks punitive damages, costs and attorney fees, reinstatement, and an injunction precluding further violations of the ADA.

Peña joined Burger King in 2004 and became a district manager, responsible for nine restaurants. When he learned he was HIV positive, he debated whether to tell the company but decided he should do so in case he reacted to his medications and had to miss work. He claims he had no disciplinary actions against him prior to disclosing his HIV status to a supervisor in June 2011. But shortly after the disclosure, one of his restaurants failed an audit, other restaurants within his management experienced service problems, and he dismissed an employee for stealing money. The company terminated his employment in September 2011.

May 7, 2012

Dissolving a Partnership for Frustration of Purpose

by Lee E. Berlik

Under Virginia law, a partner can apply for dissolution of a partnership under Virginia Code § 50-73.117(5) upon grounds that: (a) The economic purpose of the partnership is likely to be unreasonably frustrated; (b) Another partner has engaged in conduct relating to the partnership business which makes it not reasonably practicable to carry on the business in partnership with that partner; or (c) It is not otherwise reasonably practicable to carry on the partnership business in conformity with the partnership agreement. The Virginia Supreme Court recently had the opportunity to consider for the first time dissolution under the first and third prongs and found dissolution to be proper on the facts before it.

In 1978, Charles Russell set up trusts for the benefit of his daughter, Nina, and her two children, Robert and Isham. Nina and her brother, Eddie, were named co-trustees of the trusts. Charles also created Russell Realty Associates, a partnership, to invest in various properties, including real estate, with Charles, Eddie (individually) and Eddie and Nina as co-trustees holding the partnership interests. The partnership agreement provided that all partners would manage the business but, “in the event of any disagreement between them the decision of Edward Russell shall be controlling.” The agreement further gave Eddie authority, “by his sole act, to borrow, execute, and deliver instrument[s], including any deed or lease, on behalf of the partnership.” Under the agreement, partners did not have the right to withdraw from the partnership but partners could be added if all partners agreed.

After several years, Eddie was running the company and held half the partnership interests individually and the other half, with Nina, as co-trustee for Nina and her two sons. Though Eddie had authority to act for the partnership, he tried to resolve the many disagreements he and Nina had, some of which cost the partnership. At his death, Charles left more properties to Eddie and Nina as tenants in common. The siblings had to hire lawyers to resolve their disagreements over those properties and a mediator remained involved long term.

May 2, 2012

Virginia Court Denies Judgment on the Pleadings in Domain Name Dispute

by Lee E. Berlik

As noted previously on this blog, the Anticybersquatting Consumer Protection Act (“ACPA”) permits litigation to be filed against an infringing domain name itself, not just against the owner of the domain name. Which entity should file responsive pleadings in such a case, the domain name or its owner? In Sauikit LLC v. Cydia.com, the Eastern District of Virginia opined that form should not prevail over substance.

Saurikit brought an action against the domain name cydia.com alleging violations of the ACPA. Defendant’s Answer stated that Cykon Technology (“Cykon”) owned the domain name, but the defendant’s attorney signed the answer “Counsel for Cydia.com” instead of “Counsel for Cykon.” Saurikit moved for judgment on the pleadings, arguing that there was no answer on file by a claimant since the property rather than the owner of the property filed the Answer.

A successful judgment on the pleadings requires the moving party to demonstrate that no issues of material fact exist and that it is entitled to judgment as a matter of law. In deciding a motion for a judgment on the pleadings, courts view the facts in the light most favorable to the non-moving party.

April 30, 2012

Arlington Sheriff’s Office Wins Summary Judgment in Title VII Case

by Lee E. Berlik

A former employee of the Arlington County Sheriff’s Office failed to produce sufficient evidence of race discrimination to survive summary judgment. Such was the determination of Judge O’Grady of the Eastern District of Virginia, who entered summary judgment in favor of Arlington Sheriff Beth Arthur.

The case had been brought by former Inmate Services Counsel Robert Currie. Currie, an African-American male, alleged that he was racially discriminated against in 2009, when: (1) a watermelon was left on his desk by an African-American co-worker; (2) a Caucasian deputy made the statement “[t]here goes the neighborhood” on several occasions when Currie approached him; and (3) a Latino supply assistant referred to Currie as “boy” when addressing him.

Currie filed a charge of discrimination with the Equal Employment Opportunity Commission (EEOC), claiming that he was discriminated against and was placed on probation in 2009 in retaliation for the fact that his lawyer had written to the Sherriff’s Office after the watermelon incident. The EEOC issued a Notice of Right to Sue in 2011. Two months later, Currie was terminated by Sheriff Arthur, allegedly as a result of an investigation that found that Currie violated policy, made false statements, treated an inmate unprofessionally, and retaliated against inmates.

April 23, 2012

Lawyers Argue Contacting Advertisers Is Tortious Interference

by Lee E. Berlik

Not everyone was happy when KIBZ 104.1 FM (The Blaze) replaced its rock format with new programming. One unhappy listener tried contacting the radio station to express his displeasure but had trouble reaching a live person. So he took his complaints to the station’s advertisers. He succeeded in getting a response, but it came in the form of a cease-and-desist letter from the station’s lawyers, accusing him of defamation and of tortiously interfering with the station’s contractual relationships.

Three Eagles Communications, a Colorado-based company, had rearranged its programming for a Lincoln, Nebraska radio station, The Blaze. It brought in a show from the Omaha market, replacing or rearranging other programming to do so. The new show included political, pop culture and off-color commentary. Many listeners objected to the changes and banded together to boycott the show. They established a Facebook page, started a petition, published a list of those who advertised with the show, and included information on how to contact members of Three Eagles management. They also held a public event, sent emails and letters to Three Eagles management, and sent emails to advertisers with The Blaze. Some stated Three Eagles was not a local operation.

Ted Pool was among those who opposed the changes. He sent emails to some Blaze advertisers objecting to the changes, attributing them to regional and out-of-state decisions, and encouraged the email recipients to sign the petition. He urged the recipients to contact Three Eagles to ask if the company would continue “jeopardizing YOUR advertising dollars by being associated with” the new show.

April 17, 2012

Summary Judgment Reversed Due to Ambiguity in Contract

by Lee E. Berlik

Swiftships Shipbuilders and its defense contract procurement consultant, Lion Associates, are currently in a dispute over a $181 million contract awarded to Swiftships by the United States Navy. In February 2009, Swiftships, which specializes in military vessels, submitted a capability summary to the Naval Sea Systems Command (NAVSEA) in response to a Navy announcement seeking coastal patrol boats to supply to the Iraqi government. After not receiving a response in two months, Swiftships hired Lion Associates to provide marketing and promotion services to attract potential Swiftships clients. In exchange, Swiftships would pay Lion Associates $7,500 a month for 12 months and “3% of each new contract obtained by Lion.” Swiftships later revised the contract so that the 3% commission was limited to “each new contract brought to Swift[ships], which was obtained by Lion.” In the meantime, Admiral Lyons, the CEO, President, and sole member of Lion Associates, worked on procuring the Navy contract for Swiftships by assuring a high-ranking NAVSEA admiral that Swiftships could manage the entire job by itself. The contract was awarded to Swiftships a few months after the singing of the revised contract between Lion Associates and Swiftships, but Swiftships refused to pay Lion Associates the 3% commission on the Navy contract because it did not think that Lion Associates had brought the Navy contract to Swiftships.

Lion Associates sued for breach of contract and unjust enrichment. It argued that it was entitled to a little over $6 million in compensatory damages because the 3% payment provision applied to any contract that Swiftships was unable to obtain without Lion Associates assistance. The Eastern District of Virginia granted summary judgment in favor of Swiftships on both claims, but the United States Fourth Circuit Court of Appeals remanded the case after finding that the contract was ambiguous and that evidence should have been considered to determine its meaning and whether it was breached.

In a breach of contract claim, a court must determine if contractual provisions have been violated by looking at the actual language of the document. If the contract language is ambiguous, the trier of fact can look to extrinsic parol evidence to determine the parties’ intent as to certain provisions. However, resort to extrinsic evidence is limited to situations where language is “susceptible to more than one reasonable construction,” when considered in the context of the contract as a whole.

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