The Virginia Business Litigation Blog

September 26, 2011

Law of Fraudulent Conveyances Outlined by Virginia Supreme Court

Once a plaintiff has introduced evidence to establish a “badge of fraud,” a prima facie case of fraudulent conveyance is established and the burden shifts to the defendant to establish that the transaction was not fraudulent. So held the Virginia Supreme Court, in reversing the Henrico County Circuit Court’s decision to strike the plaintiff’s evidence and enter judgment in favor of the defendant.

Fox Rest Associates, L.P. v. Anne B. Little involved a dispute between George B. Little, an attorney and the general partner of Fox Rest Apartments, and the limited partners of Fox Rest Apartments, arising out of an alleged sale of the apartments by the general partner without the consent or knowledge of the limited partners. After learning that the limited partners planned to sue him, Mr. Little made various transfers, including transfers into an account at SunTrust Bank held jointly with his wife. The limited partners filed a derivative action against Fox Rest for malpractice, double billing, and other claims. The limited partners obtained a judgment but were unable to collect approximately $856,400. They then proceeded to file a fraudulent conveyance action to attempt to set aside various transfers as fraudulent.

The trial court struck the limited partners’ evidence, finding that they had produced insufficient evidence of fraudulent intent. The Supreme Court, however, reversed. Under Virginia law, it pointed out, to survive a motion to strike, a plaintiff need only introduce evidence of “badges of fraud.” Badges (or presumptions) of fraud include:

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:

August 19, 2011

Judge Hilton Grants Summary Judgment of Non-Infringement for ICON

by Lee E. Berlik

Several exercise machines manufactured by ICON Health & Fitness, Inc., which permit a person to play blackjack, poker, and other games while exercising, don’t infringe patents held by Fitness Gaming Corp. (FGC) for a device that combines an electronic game of chance and a piece of exercise equipment. This was the decision of U.S. District Judge Claude M. Hilton of the Eastern District of Virginia in an August 12, 2011, ruling on ICON’s motion for summary judgment of non-infringement.

FGC had sued ICON for patent infringement, but the judge found, reviewing both the language of the patent and its prosecution history, that this claim had no substance and that as a matter of law, ICON hadn’t infringed the patents. “The specification and prosecution history make clear what the claims require as a matter of law, and FGC has no evidence that the accused devices have what the claims require,” Judge Hilton wrote.

The key point was that in obtaining the patent, FGC carefully specified that the patents involved a “combination of an electronic game of chance device and a piece of exercise equipment.” FGC’s patent application specifically equated the term “electronic game of chance device” with the term “legalized gambling device.” The prosecution history showed that FGC made this limitation in order to respond to objections from the patent office that an existing patent, involving the combination of exercise equipment and a video display showing the progress of a bicycle on a track, had anticipated FGC’s patent and that FGC had therefore applied for something that wasn’t novel. FGC, in its own words, said that it only wanted a patent on an exercise machine that was combined with a gambling device.

August 16, 2011

Pincher’s Fights Wendy’s For Trademark Rights to Slogan

by Lee E. Berlik

Pincher’s Crab Shack, a restaurant chain with seven locations in Southwest Florida, is taking on fast-food giant Wendy’s in a trademark lawsuit. In a case filed in federal court on July 12, 2011, Pincher’s asserts that Wendy’s has stolen its trademarked slogan, “You Can’t Fake Fresh,” and used it in its advertising on television, radio, and the Internet. Wendy’s actions “are likely to cause public confusion, mistake, or deception, and constitute trademark infringement,” Pincher’s attorneys wrote in their complaint, which alleges infringement, unfair competition, and false statements of origin under both federal and Florida law. Pincher’s is seeking more than $2 million in damages.

“Defendants have openly and actively engaged in the unauthorized, infringing, unlicensed, and imitative use of the exact same trademark registered exclusively to Plaintiff, namely YOU CAN’T FAKE FRESH for the exact same services protected in Plaintiff’s federal registration, namely ‘restaurant services,’ in the exact same geographic area in which Plaintiff uses its Mark, in commercial advertising and in exact and direct competition with Plaintiff,” wrote Pincher’s attorney Jennifer Whitelaw of Naples, Fla., in the complaint. Whitelaw was also quoted in the press as saying, “It’s a great trademark. Our client worked hard to create it and our legal team worked hard to protect it and to successfully register it. From there, apparently it caught the eye of another suitor. Admiring our client’s mark is understandable, but this is a bit more admiration than what the law allows.”

Slogans are protectable under federal trademark law, provided they are used in such a way as to identify and distinguish the trademark owner’s goods and services from those of others. Because the touchstone for liability in any trademark action is the likelihood of confusion, however, trademark infringement does not necessarily occur where slogans serve a subsidiary role to a service provider’s “main” trademark. In other words, if “You Can’t Fake Fresh” is always preceded in advertising by either “Pincher’s Crab Shack” or “Wendy’s,” it may be difficult to prove consumer confusion.

August 13, 2011

Trademark Infringement Leads to Disgorgement of Profits By Franchisee Wannabe

by Lee E. Berlik

A U.S. district judge in Virginia has adopted a magistrate judge’s recommendation to deny a Minnesota man’s motion to dismiss a trademark complaint against him in a case that centered around an automobile service center franchise, and to enter a judgment against the service center he operated in an amount to be determined by an accounting of its profits during the period it infringed the plaintiff’s trademarks by using its logos after being denied franchisee status.

Precision Franchising LLC, a Virginia company, licenses an automobile service system and owns several associated trademarks. Precision permits its licensees to use its business methods and its marks. Motorscope, Inc., was one of Precision Franchising’s franchisees. Lene Corporation, a Minnesota company with its principal place of business in Minnesota–a company that was wholly owned by Cary Lene-Tarango, the Minnesota businessman–attempted to purchase Motorscope’s franchise and to assume Motorscope’s rights and duties under the franchise agreement. Precision Franchising denied permission to Lene to make the purchase, finding that Lene’s balance sheet did not show it to be financially sound.

Lene went ahead in any case and started to use Precision Franchising’s trademarks as if it were indeed a franchisee. Since at no time was Lene a franchisee of Precision Franchising, Precision Franchising sued Lene and Tarango in the U.S. District Court for the Eastern District of Virginia under the Lanham Act for unfair competition and trademark infringement. Neither defendant filed an answer to the complaint. Tarango, however, filed a letter that was treated as a motion to dismiss, asserting that the court did not have personal jurisdiction over him since he is located in Minnesota and had no significant contacts with the Commonwealth of Virginia.

August 8, 2011

D.C. Law Firm Loses Motion to Reconsider Dismissal of D.J. Action

by Lee E. Berlik

In a case that turns on a law firm’s ethical obligations to avoid conflicts of interest, a large D.C. law firm has once again been procedurally rebuffed in its effort to have a federal judge in the District of Columbia declare that it has not violated any ethics rules in a high-profile environmental case.

Patton Boggs, a major D.C. firm, represents various parties in Ecuador that are involved in high-stakes environmental litigation against Chevron. A lobbying subsidiary of Patton Boggs, the Breaux Lott Leadership Group, has done work on behalf of Chevron on similar issues. Gibson Dunn, the law firm representing Chevron, is taking the position that Patton Boggs has a conflict of interest and has tried to have Patton Boggs removed from the case.

Patton Boggs moved in U.S. District Court for the District of Columbia for a declaratory ruling that it does not have such a conflict. Last April, however, U.S. District Judge Henry Kennedy dismissed this case, finding that the courts that are actually hearing the environmental cases against Chevron are best equipped to handle that issue. Judge Kennedy also ruled that Patton Boggs could not amend its complaint to allege that Chevron and Gibson Dunn had tortiously interfered with its contract with the Ecuadorian plaintiffs and had engaged in a civil conspiracy, since Patton Boggs had not alleged facts suggesting that they had caused any actual breach of the contract.

August 1, 2011

Virginia Court Pierces Corporate Veil But Declines to “Reverse Pierce”

by Lee E. Berlik

Courts don’t often grant requests to “pierce the corporate veil” – in other words, to disregard the existence of a corporation and to hold a shareholder personally liable for the corporation’s debts – but in a recent Virginia case, a judge did just that, entering a personal judgment against a corporation’s sole shareholder for nearly $140,000. His mistake? Failing to observe corporate formalities, and arranging for the corporation to enter into a contract while grossly undercapitalized.

Advance Technologies, Inc., had been hired as a sub-subcontractor by subcontractor ACE Electric Company on a boiler maintenance project for the University of Richmond. ACE, however, soon terminated Advance from the project, and Advance went out of business. In December 2009, a default judgment was entered against Advance for more than $137,500. ACE was unable to recover any of this money from Advance, so it sued Erik Butler, the sole shareholder, officer, and director of Advance, in an attempt to pierce the corporate veil and recover funds from Butler’s personal assets to satisfy the judgment. ACE’s lawyers also invoked a “reverse piercing” theory by seeking to impose liability against Butler’s wife, DeAnne Butler, and from another corporation, ADVTEC, Inc., of which she was the sole officer, shareholder, and director. ACE claimed that ADVTEC was created by DeAnne Butler in a fraudulent attempt to avoid the debts incurred by Advance.

In an opinion handed down on April 29, 2011, Judge Gary A. Hicks of the Circuit Court of Henrico County wrote that piercing the veil and permitting a plaintiff to recover from the personal assets of a shareholder is “an extraordinary remedy that is infrequently granted.” The judge pointed out that there are generally sound legal and economic reasons for granting immunity to shareholders. However, the judge noted, exceptions do exist. In this case, the judge wrote, the evidence was “sufficient to pierce the corporate veil as to Erik Butler.” The court found that Butler failed to adhere to corporate formalities (such as conducting annual meetings and maintaining separate books for the corporation), and that when Advance entered into the contract with ACE, Advance was “grossly undercapitalized.” It had only between $10,000 and $15,000 in the bank, and owed back taxes both to the IRS and to Virginia authorities. Under these circumstances, Judge Hicks wrote, it would be a “profound injustice” not to permit ACE to go after Erik Butler’s personal assets to satisfy the default judgment.

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