The Virginia Business Litigation Blog

June 4, 2011

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

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.

May 16, 2011

Computer Fraud and Abuse Act Claim Supportable Without Cash Loss

by Lee E. Berlik

What kind of expense amounts to a “loss” under the Computer Fraud and Abuse Act (CFAA), and did a Virginia litigation-support company incur the required minimum of $5,000 in losses when it investigated an alleged breach of its computer systems, retaining the services of both an attorney and a computer forensics company to aid with the investigation? That was the issue recently before Judge T.S. Ellis III of the Eastern District of Virginia, who held that the investigative activities could support a CFAA claim, even if the expenses were not paid in cash.

The issue was particularly important to the plaintiff, Animators at Law, a graphics and technology litigation support company, because of the 13 claims it brought against two former employees and a competitor, all but the CFAA claim were based on state law, meaning that without it, there would be no basis for federal-court jurisdiction.

The CFAA provides for a civil action against anyone who intentionally gains access to a computer without authorization and obtains information from it. The CFAA has a minimum jurisdictional requirement of $5,000 in losses. Animators at Law claimed that its former employees conspired with a competitor to leave Animators’ employment and join the competitor, taking with them confidential and proprietary information about Animators’ services, projects, and clients.

May 7, 2011

ADA Plaintiff Perpetrates Fraud on Court, Sees Claim Stricken

by Lee E. Berlik

In a memorandum opinion dated April 27, 2011, United States District Judge T.S. Ellis, who sits in the Alexandria Division of the Eastern District of Virginia, taught plaintiff Stephanie Holmes that it was not a good idea to change her story multiple times during her deposition. Finding that she had “perpetrated a fraud on the court,” Judge Ellis affirmed the magistrate judge’s recommendation to strike Holmes’s claim for compensatory damages for pain and suffering.

Holmes, who had worked as a stocker at a Wal-mart in Alexandria, Virginia, for four years, filed a complaint with the Equal Employment Opportunity Commission (EEOC), alleging that Walmart had failed to make reasonable accommodations for her hearing impairment. She alleged that Walmart had refused to provide her with an interpreter and with comprehensive notes of meetings and instructions, all of which she needed to perform her job properly. She sought compensation for pecuniary losses, an injunction, punitive damages, and back pay.

The EEOC filed suit on Holmes’s behalf. During Holmes’s deposition in 2010, Walmart’s attorneys asked her about whether she had received any treatment from a mental health provider for emotional distress caused by her employment at Walmart. First, she said, “I don’t need therapy, and I don’t see doctors.” Then she said she saw a therapist just once in 2007. She later changed her story again and said she saw one doctor three times a week from March 2004 through February 2005. Finally, at the end of her deposition, she acknowledged that she had received therapy for anxiety and depression in a 13-year period from 1994 to 2007 and that some of the treatment related to her work at Walmart.

May 2, 2011

First Amendment Protects Right to Express Love of Boobies

by Lee E. Berlik

A Pennsylvania school district violated two female middle school students’ First Amendment rights when it punished them for attending school while wearing breast cancer awareness bracelets that bore the slogan “I (heart) Boobies! KEEP A BREAST.” That was the ruling of U.S. District Judge Mary McLaughlin of the Eastern District of Pennsylvania on April 12, 2011, in a high-profile case that pitted free-speech rights and public-health efforts against the need to enforce discipline and promote order in public schools. Judge McLaughlin granted a temporary injunction enjoining the school from enforcing its “no bracelet” policy.

The United States Supreme Court had previously held that students don’t shed their First Amendment protections at the schoolhouse door, but it had also ruled that educators have the right to ban lewdness and to preserve a learning environment. The school district’s lawyers argued that the “boobies” bracelets were lewd and vulgar, and that even if they weren’t, they should be banned because they substantially disrupted the work and discipline of the school. At the injunction hearing, school principals testified that they viewed the term “boobies” as “an impermissible double entendre about sexual attraction to breasts.” The court disagreed, reasoning that the statements needed to be examined in context.

The bracelets are distributed nationwide by the Keep A Breast Foundation, a nonprofit that promotes awareness of breast cancer by women under 30. The girls, Brianna Hawk and Kayla Martinez, testified that they did not intend to express a sexual message by wearing the bracelets to school. Both of their mothers gave them permission to wear the bracelets, and they did so on the school’s designated breast cancer awareness day.

April 25, 2011

Trademark Fight Ensues Over Lou’s Red Shoes

by Lee E. Berlik

A new line of women’s footwear now being sold by Yves Saint-Laurent has high-end French shoe designer Christian Louboutin seeing red. Louboutin’s companies, asserting that a new line of red Yves Saint-Laurent shoes violates their U.S. trademark, recently filed a trademark infringement suit in federal court in Manhattan against YSL. The lawsuit raises the interesting question: can a color be trademarked?

Louboutin’s trademark lawyers explain that the issue isn’t about ownership of a color so much as whether a shoe designer can have a proprietary interest in the use of distinctive red soles. According to the complaint, Louboutin first thought of the idea of painting the outer soles of his shoes red in 1992. Ever since then–for nearly two decades–every shoe in his collection has had that distinctive stylistic feature.

“Louboutin Footwear is instantly recognizable as a result of Plaintiffs’ trademark red outsole,” the complaint declares. “The location of the bright color on the outsole of a woman’s pump is said to provide an alluring ‘flash of red’ when a woman walks down the street, or on the red carpet of a special event.” The complaint provides a long list of celebrities who have worn the shoes and even includes two photos of the Carrie Bradshaw character on Sex and the City, played by Sarah Jessica Parker, wearing the shoes with the “alluring flash of red.”

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.

April 4, 2011

Apple Trademark Lawyers Seek Sole Rights to “Apps”

by Lee E. Berlik

Apple Inc. has done very well with its App Store, a service that permits users to download programs of every type for use on their iPhones, iPods, iPads, and computers. With more than 350,000 software offerings, it’s by far the largest place online for people to get hold of the programs they want for their Apple devices. Apple’s trademark lawyers are now seeking to protect and enforce a trademark in the name “App Store,” a phrase they claim exclusive rights to, by filing a lawsuit in federal court against Amazon.com. It claims Amazon’s “Appstore” is infringing upon Apple’s trademark. Amazon’s activities, Apple alleges, are causing irreparable harm to Apple, and Apple is trying to get an injunction and damages from Amazon.

The case raises a lot of interesting issues. First, is the term “app store” even subject to trademark protection? Generic terms like “grocery store” and “shoe store” generally cannot be trademarked because they merely identify the product or service being offered. If an “app store” is merely a store that sells “apps,” which is usually viewed as a shorthand term for computer applications or software, the courts may treat the term no differently than it would a proposed trademark for a “shoe store.” In that case, Apple’s efforts would fail.

On the other hand, Apple will no doubt contend that it has used the term “app store” exclusively since 2008 and has advertised it extensively – and thus that the term has acquired a “secondary meaning” under trademark law. That means that when consumers think of an “app store,” they think of Apple’s highly popular service. So if Amazon uses the term, the argument runs, consumers will come to the incorrect conclusion that Amazon’s “app store” is identical with the Apple service, and Apple’s business will be harmed.

March 16, 2011

Summary Judgment Granted in Breach of Contract Action

by Lee E. Berlik

A U.S. district judge in Virginia has ruled that a restaurant chain operator is liable for breach of contract and is obligated to pay a franchise consulting company for sales and marketing services that the consultant performed for the chain under the contract between the two companies. Rejecting the contract defenses of lack of standing, fraudulent inducement, lack of specificity, lack of mutuality, and unconscionability, U.S. District Judge T.S. Ellis, III, of the Eastern District of Virginia, granted summary judgment in favor of the consultant.

The case arose from a 2008 contract between Freshii Development, LLC, which owns a chain of healthy fast-food restaurants, and Fransmart, LLC, an Alexandria, Va.-based company that agreed, in exchange for a percentage of franchise fees and revenues, to help Freshii expand by finding appropriate franchisees for its restaurants. In early 2010, Fransmart restructured its business and set up a new company to which it assigned its contracts and transferred its assets and liabilities. Freshii then stopped paying Fransmart under the contract, and Fransmart sued for breach. Freshii asserted five defenses to the lawsuit, all of which Judge Ellis rejected.

Freshii first argued that Fransmart lacked standing because the 2008 agreement was a personal services contract and therefore not assignable to a separate entity (such as the “new Fransmart”) without Freshii’s consent. Judge Ellis rejected this defense, noting that many aspects of the agreement led to the conclusion that it was not a personal services contract. For example, the agreement was between two corporate entities, it was for a duration of ten years, and it did not identify any individual as being material to performance. In any event, the judge wrote, it was not necessary to reach that issue because the contract contained a “successors and assigns” clause, stating that “the provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and to their successors and assigns.” This language, the court found, demonstrated that the parties intended the agreement to be assignable to a successor entity like the new Fransmart.

March 7, 2011

How IronClad Is Your Non-Compete Agreement?

by Lee E. Berlik

In Virginia, employers who wish to restrict their employees from competing with them in a new job need to write restrictive covenants tightly and narrowly and should define all the key terms in their noncompete and nonsolicitation agreements carefully – or the courts will not enforce the covenants and former employees will be free to disregard the restrictions. That’s one of the messages of a ruling handed down recently by Judge Frederick B. Lowe of the Virginia Beach Circuit Court in a case involving a nurse practitioner who left a medical group to set up her own competing practice.

Ameanthea Blanco was a family nurse practitioner employed by Patient First Richmond Medical Group, LLC, which provided primary and urgent care to patients. She signed an employment agreement in January 2010 that contained non-competition and non-solicitation provisions. In August 2010, she resigned from Patient First, and a little over a month later, she opened her own practice nearby. Patient First sued Blanco for an injunction to enforce the non-competition and non-solicitation provisions, but the circuit judge declined to issue an injunction, finding the relevant portions of the agreement to be unenforceable.

The noncompete agreement barred Blanco, for two years after she left the company, from performing medical services of the type that she performed at Patient First in the previous 12 months, anywhere within a seven-mile radius of any Patient First center at which she “regularly provided medical services.” She was restricted from doing so as an “agent, officer, director, member, partner, shareholder, independent contractor, owner or employee,” and the prohibition applied if she did so “directly or indirectly.”

February 25, 2011

DreamWorks Accused of Copying Kung Fu Panda Concept

by Lee E. Berlik

Boston-area illustrator Jayme Gordon has filed a copyright infringement lawsuit in federal court in Massachusetts, alleging that DreamWorks stole his idea. The intellectual property lawyers who filed the complaint against DreamWorks point out a number of striking similarities between DreamWorks’ chubby, fighting panda and a panda drawn and copyrighted years ago by the plaintiff. The attorneys write that DreamWorks’ “Kung Fu Panda” and “Secrets of the Furious Five,” a short animated direct-to-video film, both “feature characters, character depictions, character personality traits, illustrations, expression, settings, story elements, plot and sequences of events that are unlawful copies and derivatives of the copyrightable elements embodied in Gordon’s Kung Fu Panda Power Work.”

To prove copyright infringement, it’s not enough to merely show that two works are very similar. The plaintiff will need to show not only substantial similarity between the copyrighted work and the alleged infringing work, but that DreamWorks, the alleged infringer, had access to the plaintiff’s copyrighted material. In this case, Mr. Gordon specifies exactly who at DreamWorks he believes had access to his panda illustrations at the time that Kung Fu Panda was being developed, and how they may have gotten into those executives’ hands.

Kung Fu Panda, released in 2008, features an overweight, food-loving panda named Po (voiced by Jack Black) who is trained in the martial arts by a small red panda named Master Shifu (voiced by Dustin Hoffman). The film grossed more than $630 million worldwide, and a sequel is coming out in May. Mr. Gordon claims that he first came up with the idea of a rotund Kung-Fu-fighting giant panda named Kidd who loves to eat Chinese food and who learns the martial arts from a small red panda named Redd. His copyright attorneys write in the complaint that Gordon had a collaborator create sketches of these characters in the 1990s and that around the same time, he put the sketches on clothing that he sold in the Boston area. Gordon also alleges that he sent a portfolio of his work featuring these characters and others to several studios, including DreamWorks, but received a letter of rejection in 1999.

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