Virginia Business Litigation Lawyer Blog

Noncompete Agreements: Getting Them to Stick

Tue, 31 Aug 2010 11:35:17 -0500

Non-competition and non-solicitation clauses found in employment agreements often do not provide employers with the protection the employers assume they are getting. Virginia courts will refuse to enforce such "noncompetes" if they are written in vague terms or if they are broader than necessary to meet the employer's legitimate business interests. As restraints on trade, restrictive covenants are disfavored by the courts. Consequently, any ambiguities in the contract will be construed in the employee's favor. Fairfax Circuit Court Judge Michael F. Devine recently illustrated these principles in Daston Corp. v. MiCore Solutions, Inc., in which he upheld a nonsolicitation clause but struck down a noncompete agreement as unenforceable.

The case was brought by Daston Corporation, an information technology company that provides, among other things, a range of services based on Google Apps software, against two former employees who went to work for MiCore Solutions, a business offering similar services. Both employees had signed identical employment agreements with Daston containing both a noncompete clause and a nonsolicitation clause. The employees sought to dismiss Daston's claims, arguing that the employment agreement's restrictions were unenforceable. Judge Devine agreed in part and disagreed in part.

The court began its analysis by noting that, in Virginia, non-competition agreements will be enforced only "if the contract is narrowly drawn to protect the employer's legitimate business interest, is not unduly burdensome on the employee's ability to earn a living, and is not against public policy."

The non-solicitation clause in question provided that, for a period of two years after the termination of employment, "Employee will not, directly or indirectly, solicit, invite or by any way, manner or means, attempt to induce any of Daston's Customers to do business with a Competitor." The court upheld the clause as enforceable, finding that the plain language is no broader than necessary to meet Daston's legitimate interest and because it only applied to solicitations for services in direct competition with Daston's services, or services developed by Daston with the employee's assistance. The court observed that the non-solicitation clause did not unduly burden the employee's ability to earn a living in his chosen field because it allowed the employee to solicit customers to provide them with services that do not directly compete with Daston's services. The court rejected arguments that the language was impermissibly vague.

The noncompete, however, was deemed overbroad and unenforceable. The relevant language provided that, for one year after the termination of employment, "Employee will not...provide Services to any Client to which Employee...provided substantially similar or related Services during Employee's employment was Daston." The court found the phrase "substantially similar or related" to be both vague and overbroad in the sense that it appeared to restrict more than was necessary to protect Daston's legitimate business interests. Therefore, the court struck the clause and severed it from the rest of the employment agreement (as permitted by the contract's severability clause).

There are no guarantees when drafting noncompete agreements. As expressly noted by Judge Devine, language deemed enforceable in one case may be found overbroad and unenforceable in a different factual context. Each case will be decided on its unique facts. Still, there are certain considerations to keep in mind. First, do not make the noncompete broader than it really needs to be, either in terms of duration, geography, or scope. If the noncompete is overly broad, most Virginia judges will strike the clause in its entirety. They are not going to blue-pencil it to conform it to Virginia law. Similarly, ensure the language is not unduly burdensome on the employee's ability to earn a living in his chosen field. The language should focus on restricting activities that directly compete with the employer's services. Finally, write in plain English that is easy to understand. If the noncompete does not fairly apprise the employee of the prohibitions on his conduct, the clause will be stricken as impermissibly vague.

Protect Your Trademark in Virginia Through the ACPA

Mon, 09 Aug 2010 06:52:44 -0500

Lawyers around the country have come to learn of the Eastern District of Virginia's legendary "rocket docket." With divisions located in Alexandria, Norfolk, Richmond, and Newport News, Virginia's federal court is known as the most efficient in the country for handling intellectual property cases and complex business litigation. Also known for being friendly to business, trademark owners around the country often look for ways to establish venue in Virginia instead of a location closer to home where cases move at a slower pace. In the context of protecting trademark rights, one such opportunity can be found in the Anticybersquatting Consumer Protection Act.

The ACPA provides for a cause of action against those who register or use a domain name confusingly similar to, or dilutive of, the trademark of another. Enacted in 1999, the ACPA was designed to address the practice of "cybersquatting," which generally involves the practice of registering a domain name containing somebody else's name or trademark with the intention of either profiting from the resulting confusion or of selling the domain name to the less-Internet-savvy trademark owner. You could sue the individual in the jurisdiction of his residence, but what if that person lives in the District of Minnesota, one of the slowest federal courts in the country? Or what if the registrant took steps to shield his identity when registering the domain name and you can't determine whom to sue?

One option available to you is to sue the domain name itself. And because VeriSign--the world's largest registry and operator of the .com and .net top-level domains--is located in Dulles, Virginia, which falls within the jurisdiction of the Eastern District of Virginia, there is a good chance you can bring that action in the Rocket Docket, regardless of where the actual registrant resides.

MetroPark, a fashion clothing store incorporated in Delaware and based in Los Angeles, successfully utilized this procedure in recent weeks and obtained a judgment against metropark.net in Virginia's highly efficient federal court. MetroPark's online store is located at metroparkusa.com. On October 2, 2009, a registrant registered metropark.net and, shortly thereafter, put up a website at that domain advertising clothing and accessories substantially identical to and in direct competition with the goods and services offered by MetroPark.

MetroPark identified the individual as someone with a history of cybersquatting, and who is the current registrant of multiple domain names that mimic famous trademarks of third-parties, such as bankofamericaa.com, dicksportinggood.com, abcnewschicago.com, and officedeppotcom.com. Rather than sue the individual directly, MetroPark sued the domain name itself. The court recognized the validity of this procedure, writing "Pursuant to the Lanham Act, '[t]he owner of a mark may file an in rem civil action against a domain name in the judicial district in which the domain name registrar, domain name registry, or other domain name authority that registered or assigned the domain name is located'" provided that the domain name is violative of the trademark provisions of the Lanham Act.

The Court found that metropark.net was being used in a way likely to cause confusion or mistake, as Internet users looking for MetroPark's site might come across metropark.net and, if they did, would likely to be deceived into believing that the site is affiliated with MetroPark. The ACPA is designed to remedy this very situation. Therefore, the magistrate judge recommended (and the district judge ordered) that VeriSign, the operator of the registry of the metropark.net domain name, transfer the domain name from the current registrar, Moniker Online Services, to a domain registrar of MetroPark's choosing, and that such registrar thereafter register the domain name in MetroPark's name.

Virginia Architects Entitled to Copyright Protection

Sat, 19 Jun 2010 13:47:24 -0500

Architectural drawings are not entitled to a great deal of protection under the United States copyright laws, but to the extent a drawing contains a creative, original combination or arrangement of spaces and design elements, the work will be entitled to some level of copyright protection against acts of infringement.

In a recent Virginia case, Commonwealth Architects sued Rule Joy Trammell + Rubio, LLC ("Rule Joy") in the Eastern District of Virginia, claiming that Rule Joy infringed its copyright in certain architectural drawings by scanning them to PDF format. Rule Joy moved for summary judgment, taking the position that Commonwealth Architects did own any valid copyright in the architectural drawings and that, even if it did, Rule Joy did not copy any protected elements of the drawings. Judge Henry E. Hudson, relying primarily on Intervest Constr., Inc. v. Canterbury Estate Homes, Inc., 554 F.3d 914 (11th Cir. 2008), held that Commonwealth Architects owned "a thin, but valid, copyright" in its architectural drawings, and denied Rule Joy's motion.

Under the Copyright Act, protected works of authorship include, among other things, "architectural works" under 17 U.S.C. § 102(a)(8). Architectural works are defined as "the design of a building as embodied in any tangible medium of expression, including a building, architectural plans or drawings. The work includes the overall form as well as the arrangement and composition of spaces and elements in the design, but does not include individual standard features," such as common windows or doors or standard space configurations. The court noted that while individual standard features are not copyrightable, an architect's original combination or arrangement of such elements involves a degree of creativity and may very well be copyrightable. Still, the court compared the copyright protection affordable to architectural works to "compilations" and described the level of protection as "necessarily thin."

The court treated the architectural drawings at issue as "derivative works" because they adapted and transformed preexisting hotel drawings into into a "new" design that added apartment living and retail space while retaining the look and feel of the original. Derivative works, like architectural works in general, receive only thin protection in that only the original material contributed by the new author receives copyright protection.

This thin level of protection, however, was sufficient to enable Commonwealth Architects to survive summary judgment, as a reasonable jury could find that Rule Joy's scanning of the drawings to PDF constituted infringement of copyright. The court noted that while much of the drawings may be undeserving of protection, Rule Joy failed to demonstrate, as a matter of law, that every single design choice was unprotectable. "Commonwealth's drawings contain protected expression, albeit thin and constrained," the court held.

Pay-When-Paid Clauses Enforceable in Virginia

Fri, 04 Jun 2010 09:14:04 -0500

Virginia, unlike some other states, adheres to a policy favoring freedom to contract. Virginia law treats most businesses and individuals as presumptively capable of negotiating in their own best interests, and when a deal is reached and a contract is signed, courts rarely interfere with the result, however unfair that result may seem to outside parties.

In construction contracts, for example, it is common to find a "pay when paid" clause, stating that a subcontractor's right to any payments from the general contractor is expressly conditioned on the general contractor's first receiving payment from the owner. Some states go out of their way to protect subcontractors from the potential harsh consequences such a provision can cause. Virginia courts, however, will assume that the subcontractor was sophisticated enough to know what it was signing and will enforce contracts as written.

The freedom to contract includes the freedom to negotiate pay-when-paid clauses, and Virginia courts will enforce such clauses provided they are clear and unambiguous. In Universal Concrete Products v. Turner Construction, Universal, a subcontractor, entered into a written agreement with Turner, the general contractor, to install pre-cast concrete on the Granby Tower project in Norfolk, Virginia. When the real estate market collapsed, the owner became unable to finance the construction. Universal, however, substantially completed all of its work on the project, and naturally asked Turner to pay for its services. Turner refused to pay Universal because Turner had not been paid by the owner and the parties' subcontract contained a pay-when-paid clause.

The specific clause in question provided that the "obligation of Turner to make a payment under this Agreement, whether a progress or final payment, or for extras or change orders or delays to the Work, is subject to the express condition precedent of payment therefor by the Owner." While that language seems pretty clear, Universal argued that it was ambiguous in light of language in the contract between Turner and the owner, which provided that the owner would reimburse Turner for "payments made by the Construction Manager to Subcontractors in accordance with the requirements of the subcontracts," suggesting perhaps that Turner would pay Universal before being paid by the owner. The Eastern District of Virginia disagreed, and so did the Fourth Circuit.

The Fourth Circuit affirmed the district court's conclusion that the clause in the Turner-owner contract related only to the amount of the reimbursement, not to when those amounts would be paid. This language did not render the pay-when-paid clause ambiguous (and thus unenforceable) because it did not make its meaning "of doubtful import" or make it capable "of being understood in more than one way." The pay-when-paid clause was clear and unambiguous, so the subcontractor was not entitled to demand payment for its work until the contractor received payment from the owner.

Proving Loss Under the Computer Fraud and Abuse Act

Mon, 24 May 2010 10:19:25 -0500

Too often, disgruntled departing employees will abuse their employer's computer system on their way out, snooping into coworkers' email accounts, erasing important files, downloading trade secrets or other confidential commercial information, or intentionally infecting computers with viruses. In recent years, the Computer Fraud and Abuse Act (CFAA) has become an important weapon in an employer's arsenal for combating such computer crimes. Civil remedies are available under the CFAA for damage to any "protected computer," which includes any "computer used in interstate or foreign commerce or communication." However, a Virginia court recently clarified that the CFAA will not provide a remedy absent an actual "loss" as defined by the statute.

In Global Policy Partners, LLC, v. Yessin, a plaintiff brought claims against her husband and business partner under the CFAA and the Stored Communications Act (SCA), claiming that he had accessed her work email account in order to review her confidential communications with her divorce lawyer. The court rejected the husband's initial attempts to dismiss the case on the ground that his access to his wife's email was authorized in that he was a co-manager of the couple's business. The court reasoned that because there was no legitimate business reason for the snooping, the access was unauthorized. At the summary judgment stage, however, the court granted summary judgment in his favor because the wife did not introduce sufficient evidence to show she had incurred a $5,000 "loss."

To prevail on a claim brought under the CFAA, a plaintiff must demonstrate that the alleged violation "caused ... loss ... aggregating at least $5,000 in value." 18 U.S.C. Section 1030(c)(4)(A)(i). The CFAA specifically defines four categories of potential loss: "[i] the cost of responding to an offense, [ii] [costs of] conducting a damage assessment, and [iii] [costs of] restoring the data, program, system, or information to its condition prior to the offense, and [iv] any revenue lost, cost incurred, or other consequential damages incurred because of the interruption of service." 18 U.S.C. § 1030(e)(11). According to the Fourth Circuit Court of Appeals, this list "plainly contemplates ... costs incurred as part of the response to a CFAA violation, including the investigation of an offense." A.V. ex rel. Vanderhye v. iParadigms, LLC, 562 F.3d 630, 646 (4th Cir. 2009).

Just because an unauthorized person reads an e-mail, however, does not necessarily mean that he is liable under the CFAA. In order to recover damages under the CFAA, a plaintiff must establish three main facts: (1) A violation of the plaintiff's computer system; (2) costs incurred by the plaintiff due to the violation, and (3) those costs must aggregate to $5,000 or more. 18 U.S.C. § 1030. The court indicated that it would view critically a plaintiff's post hoc claims that a violation "caused" costs to be incurred simply because money was spent subsequent to the violations. Furthermore, 18 U.S.C. § 1030(e)(11) only compensates for "reasonable" costs, so a plaintiff must establish, not only that the defendant's violation caused the plaintiff to suffer costs but that those costs were a reasonably foreseeable result of the violation. The court held that even if a defendant breaks into a plaintiff's computer system and reads email without authority, that would not give the plaintiff a blank check to perform system updates that were not reasonably necessary to restore and re-secure the system.

If a victim of computer fraud can establish a loss, however, the CFAA offers a potentially powerful deterrent in the form of a federal cause of action.

Real Estate Fraud Litigation Proceeds Against Juno Loudoun and Ritz Carlton

Mon, 19 Apr 2010 09:10:48 -0500

When a couple of home buyers in Loudoun County filed a lawsuit against Ritz-Carlton and a Loudoun developer, they chose Loudoun County Circuit Court as the forum. The immediate response of the defendants' lawyers was to remove the case to federal court, where summary judgment is much easier to obtain than in Virginia state court. The home buyers, likely worried about having their case dismissed at an early stage by a federal judge, sought to remand the case back to Loudoun County, pointing to a forum-selection clause which provided: "In connection with any litigation between Buyer and Seller arising out of this Agreement...[t]he sole venue for any litigation shall be Loudoun County, Virginia." The court refused to send the case back to state court. All of that procedural maneuvering meant very little in the end, however, as the court recently denied the defendants' motion for summary judgment and allowed the case to go forward.

In Nahigian v. Ritz-Carlton, LLC, the home buyers (the Nahigians) claim the defendants fraudulently induced them into buying property by making multiple misrepresentations about the nature and extent of the involvement of the prestigious Ritz-Carlton company in the management of the property and its adjoining private golf course. The Nahigians allege they were duped into buying an expensive property at Creighton Farms near Leesburg by various statements by sales agents referring to the development as a "Ritz-Carlton community" and part of the "Ritz-Carlton Life." As it turned out, they allege, Ritz-Carlton was merely a temporary manager of the golf club and never had any long-term commitment to the neighborhood. In March of 2009, Ritz-Carlton announced they were pulling out of the development.

The Nahigians sued for fraud and related claims, and the defendants moved for dismissal, arguing that the plaintiffs had failed to plead fraud with sufficient particularity, and that they failed to allege all the requisite elements of a fraud claim. The court disagreed and denied the motions to dismiss.

The court laid out the basic elements of fraud as: "(1) a false representation, (2) of a material fact, (3) made intentionally and knowingly, (4) with intent to mislead, (5) reliance by the party misled, and (6) resulting damage to the party misled." Under Federal Rule of Civil Procedure 9(b), each element of fraud must be plead with the required degree of specificity identifying "at a minimum...the time, place, and contents of the false representations, as well as the identity of the person making the misrepresentation."

The plaintiffs had alleged only that the misrepresentations were made by "Juno/Ritz representatives." However, the court found that Rule 9(b)'s specificity requirement does not require that the full name of the person making the statement be identified. The court found the allegations of the Complaint sufficient because the defendants had been made amply aware of the "particular circumstances for which they will have to prepare a defense." The court also rejected the defendants' argument that the reliance element was lacking because the contract specifically disclaimed reliance on outside statements. The court reasoned that the terms of a contract fraudulently induced cannot preclude a Plaintiff from bringing suit for that fraud.

Enjoin Wrongful Foreclosure Before It Is Too Late

Sun, 28 Mar 2010 08:24:46 -0500

Those considering retaining a Virginia law firm to help stave off a wrongful foreclosure should keep this useful fact in mind: your lawyer's job will be a lot easier if you take legal action before the bank forecloses on your property. Seek legal advice when you begin to fall behind on your mortgage or when workout negotiations seem to be faltering. Don't wait until the trustee enforces the deed of trust and kicks you out of the house before going to an attorney, on the assumption that your smart lawyer will be able to "undo" an unfair foreclosure. In the vast majority of cases, Virginia courts will not set the foreclosure aside.

This reality is aptly illustrated by a recent case out of the United States District Court for the Eastern District of Virginia, Horvath v. Bank of New York, (E.D. Va. Jan. 29, 2010). The plaintiff, John Horvath, found himself unable to keep up with his mortgage payments--an unfortunate predicament all too common these days--and the defendants foreclosed on his house. Mr. Horvath admitted he had fallen behind on his mortgage, but asserted a number of different legal theories revolving around the argument that Bank of New York and other companies with an interest in his mortgage acted improperly and did not adhere to the law when servicing his mortgage, foreclosing on his house, and eventually evicting him. The court shot each argument down, one by one, and dismissed the case for failure to state a legally cognizable claim.

The first count was for a declaratory judgment declaring the foreclosure "void." The court ruled that declaratory relief would serve "no useful purpose" since the foreclosure sale had already taken place. The court noted that declaratory judgments are reserved for "forward looking actions."

Next, Mr. Horvath argued that the trustee committed a breach of fiduciary duty when he foreclosed on the property without conducting "reasonable due diligence." The court was not persuaded by that angle either, pointing out that Virginia law does not recognize a duty of due diligence by a trustee on a deed of trust. The duties of the trustee are limited to those specified in the deed of trust.

The next count was one to "quiet title" on the ground that the defendants had no valid interest in the property. The basis for the allegation was that Mr. Horvath's original lenders had sold and assigned the promissory notes to other parties, resulting in splitting the deed of trust from the note and rendering the deed of trust unenforceable. The court flatly rejected this argument as wrong under Virginia law. The deed of trust was not affected by the assignment of the note.

Mr. Horvath also argued that the foreclosure violated the Fair Debt Collection Practices Act and that certain defendants committed fraud by misrepresenting their authority to conduct a foreclosure. These theories were also summarily dismissed because the Complaint failed to allege sufficient facts to make the claims plausible under Virginia law.

When wrongful foreclosure is being threatened (such as when, for example, the bank miscalculates the interest due or acts in violation of a forbearance agreement), the time to talk to an attorney is as soon as the threat is made apparent, not after the foreclosure sale has taken place.

Virginia Court Permits "Discriminatory Discipline" Claim to Go Forward

Mon, 15 Mar 2010 06:40:16 -0500

To survive the early stages of litigation in federal court, you need to ensure your complaint not only alleges facts that, if proven true, would support a legal cause of action, but that present a plausible claim for relief. While you are far more likely to win your case at trial if you are represented by an attorney, one of the few situations in which your task may be easier without a lawyer is surviving an initial motion to dismiss. This is because the United States Supreme Court has held expressly that a "pro se" plaintiff (i.e., a litigant not represented by a lawyer) must be held to less stringent standards than those who have legal representation and are more familiar with the rules of formal pleadings.

Michael Bogan is representing himself in a Title VII employment-discrimination action against The Roomstore in Richmond, Virginia. Judge Henry E. Hudson recently denied The Roomstore's motion to dismiss for failure to state a claim, finding that Mr. Bogan alleged "scant but marginally sufficient" factual allegations to support a claim for discriminatory discipline, an employment practice prohibited by federal employment laws. Had an attorney drafted the complaint, the result might have been different.

Mr. Bogan, an African-American, alleges that his Caucasian supervisor at The Roomstore demanded that he undergo a drug test even though a similarly situated white employee was not required to submit to the test. He claimed the white employee was involved in illegal activity and had missed several days of work. The complaint alleges that The Roomstore terminated his employment for refusing to submit to the test.

Mr. Bogan did not identify which form of employment discrimination he was relying on, so the court gave him the benefit of the doubt and analyzed his claim under the two most likely theories, disparate treatment and discriminatory discipline.

To properly state a claim for disparate treatment, a plaintiff must allege facts demonstrating that: (1) he is a member of a protected class; (2) he has satisfactory job performance; (3) he was subjected to adverse employment action; and (4) similarly situated employees outside his class received more favorable treatment. Mr. Bogan failed to sufficiently plead this theory because he had not pled any facts to support that his job performance was satisfactory.

However, Judge Hudson found that Mr. Bogan did sufficiently plead discriminatory discipline. For that theory, it is necessary to allege: (1) he is a member of a protected class; (2) his prohibited conduct was comparably serious to misconduct by employees outside the protected class; and (3) the disciplinary measures taken against him were more harsh than those enforced against other employees. The facts alleged in the complaint were found to present a plausible claim that The Roomstore is liable if it engaged in the alleged conduct.

TubcuT Manufacturer Claims Trademark Infringement

Mon, 01 Mar 2010 05:04:43 -0500

Access Designs, Inc., a company that manufactures TubcuT®, a product that alters regular bathtubs to convert them into walk-in showers, has filed a trademark-infringement suit against The BathWorks Company in federal district court in Charlottesville, Virginia. According to the allegations of the Complaint, two former representatives of Access Designs, Greg and Ellen Murphy, formed BathWorks in Rhode Island and began selling a product similar to TubcuT® and marketing it under the name "Tubcut" or "Tubcuts", creating a likelihood of confusion in the marketplace with respect to the origin of the customized bathtubs.

The suit is based on the provisions of the Lanham Act that govern trademark infringement and unfair competition, 15 U.S.C. §§ 1114 and 1125(a). To win on both allegations, Access Designs must prove three things: (1) that its mark is valid, (2) that The BathWorks Company's use of the mark is unauthorized, and (3) that BathWorks' use of the mark is likely to cause customers to be confused.

Access Designs has a little bit of a head start in that TubcuT® is registered with the Patent and Trademark Office, as registered marks carry a presumption of validity. The key issue in the case is likely to be whether BathWorks is using a mark that is likely to cause confusion among consumers as to the source of the parties' respective products. To determine the likelihood of consumer confusion, courts generally consider factors such as (1) the strength of plaintiff's mark; (2) the relatedness or "proximity" of the parties' goods or services; (3) similarity of the parties' marks; (4) evidence of actual confusion; (5) marketing channels used; (6) the degree of care likely to be exercised by purchasers; (7) the defendant's intent in selecting the mark; and (8) the likelihood of expansion of product lines.

Whether or not Access Designs can prove its allegations at trial remains to be seen.

UCC Protects Bank from Breach of Contract Allegations

Mon, 15 Feb 2010 06:56:58 -0500

Even in Virginia, which recently placed first in a ranking of the "Best States for Business" by Forbes.com, businesses often fail. Particularly in small companies, relationships among the owners sour and partnership disputes arise. Here in Fairfax County, where my practice is located, it is not uncommon for disgruntled partners to attempt to withdraw large sums from corporate bank accounts prior to dissolution or to attempt to block other owners' access to the company's accounts. Banks need to be careful not to get caught in the crossfire by inadvertently facilitating a wrongful cash grab by one of the business owners. Fortunately, as illustrated by a recent decision by Fairfax Judge Bellows, Virginia's adoption of the Uniform Commercial Code provides some valuable protection to banks.

Khan v. Alliance Bank (Fairfax Circuit Court, Dec. 22, 2009) involved a dispute between two owners of Advantage Title and Escrow, LLC, Khan and Kazmi. Both were authorized signatories on the company's account held with Alliance Bank. After the two had a falling out, Kazmi instructed the bank to remove Khan as a signatory. A few days later, Khan wrote a $35,000 check against Advantage Title's account in exchange for a cashier's check for that amount. Upon learning of the transaction, Kazmi sent an "Affidavit of Unauthorized Transaction" to Alliance Bank. This document alleged, under oath, that Khan obtained the cashier's check through fraud as Khan was (according to Kazmi) not authorized to withdraw funds from the company's account. In reliance on that affidavit, Alliance Bank canceled the cashier's check and credited $35,000 back to the Advantage account.

Normally, putting a stop-payment order on a check is not a big deal. But cashier's checks, which are governed by the UCC, are different. Unlike personal checks, cashier's checks carry a promise of the bank to the holder. For that reason Khan sued Alliance Bank, claiming that the promise was unconditional and that, by terminating payment, Alliance was liable to Khan for breach of contract and conversion.

The court disagreed and threw out the case. Under the applicable provisions of the UCC, a bank will only be liable for canceling a cashier's check if the bank acted "wrongfully." A bank is justified in refusing to honor a cashier's check if the bank "asserts a claim or defense of the bank that it has reasonable grounds to believe is available against the person entitled to enforce the instrument" or the bank "has a reasonable doubt whether the person demanding payment is the person entitled to enforce the instrument." See Va. Code § 8.3A-411(c).

In this case, Kazmi's affidavit gave Alliance Bank all the protection it needed. The affidavit (like all affidavits) was made under oath, and its allegations were reasonable on their face. Therefore, the court found, the sworn statement provided the bank with reasonable grounds to believe the check was procured by fraud, which is a defense to the negotiability of the check. Alliance Bank did not act "wrongfully" within the meaning of the UCC, so the court dismissed the case.

BMW Survives Tortious Interference Case

Mon, 01 Feb 2010 06:55:18 -0500

Business litigation often involves allegations that a competitor engaged in unfair competition or business tactics designed to injure the plaintiff's business. Such cases will only be successful, however, if the defendant business has crossed the line between legitimate competitive activity and tortious conduct. In a new Fourth Circuit opinion written by Judge Mark S. Davis of the Eastern District of Virginia, the court affirmed summary judgment in favor of BMW, explaining that not all aggressive competition will be deemed unfair or unlawful; a competitor pursuing its legitimate business interests will often be permitted to do so without incurring liability.

BCD, LLC v. BMW Mfg. Co. involved a dispute over a project to build a new school of engineering on the Clemson University campus. The plaintiff, Rosen (and the companies controlled by him) and BMW were each involved in different aspects of the construction project. Rosen had entered into a tentative agreement with Clemson in 2002, which outlined the responsibilities each would each have in the construction of a wind tunnel. The agreement was not binding, however, because there remained certain unresolved details, and the written agreement specifically allowed either party to withdraw from the project if they could not agree as to those unresolved details. The agreement was thus in the nature of an "agreement to agree" rather than a final, binding contract.

Clemson and BMW, on the other hand, had entered into a final agreement to which each party was bound, and BMW had received a $25 million grant from the state for the project. As preparation for the construction of the school was getting underway, Rosen declared that he wanted the new school to be built on land he owned, but BMW objected because it wanted to keep the state-funded school separate from the privately-funded wind tunnel. As time wore on, little to no progress was made on the construction of the wind tunnel, and Clemson and Rosen were still unable to come to an agreement on the unresolved details from the 2002 agreement. Finally, Rosen and Clemson signed a new agreement in 2003 that negated the 2002 agreement, resolved all of the details, and included a sale of Rosen's land to Clemson so the school could be built on land that was now publicly-owned. Rosen did not want to cede control over the property, and felt that BMW coerced Clemson into stalling on the wind tunnel project so BMW could exert control over Rosen's property. He thus sued BMW for tortious interference with a contract, intentional interference with prospective contractual relations, and civil conspiracy.

The court affirmed summary judgment for BMW on all counts. In doing so, the court explained the legal elements of each of Rosen's tort claims and explained clearly why the conduct complained of did not satisfy these requirements. (The case was decided under South Carolina law, which is substantially similar to Virginia law in this area).

Dealing first with the tortious interference allegation, the court laid out the elements as: "(1) the existence of the contract; (2) the other party's knowledge of the contract; (3) the other party's intentional procurement of a breach of the contract; (4) the absence of justification; and (5) resulting damage." The court rejected Rosen's claim because no enforceable contract existed between Rosen and Clemson at the time of the alleged interference. The court noted that because either party could opt out of the 2002 agreement, it was not a binding contract, and without a binding contract, there can be no tortious interference.

The court next tackled the claim of interference with prospective contractual relations. The elements for this tort are: "(1) intentionally interfer[ing] with the plaintiff's potential contractual relations; (2) for an improper purpose or by improper methods; (3) causing injury to the plaintiff." The court easily affirmed summary judgment on this count because Rosen had offered no evidence that BMW had utilized improper methods or had taken any action for an improper purpose. The court observed that BMW was merely attempting to further its own business interests by seeking understandably to exercise control over a project in which it was intimately involved. There was no evidence, for example, that BMW had used "violence, threats, bribery, fraud, misrepresentation, deceit, or duress" in the course of affecting Rosen's relationship with Clemson.

Regarding the conspiracy claim, the court set forth the elements as "(1) a combination of two or more persons, (2) for the purpose of injuring the plaintiff, (3) which causes the plaintiff special damage." The court found that Rosen had failed to meet his burden to produce evidence that BMW's actions were taken for the purpose of causing injury to Rosen. Rather, it appeared from the evidence that BMW was merely acting to protect the interests all competitors in a capitalistic economy share: to succeed in business, which often comes at the cost of the competitor.

The court affirmed judgment in BMW's favor, finding insufficient evidence to hold BMW liable on any of Rosen's business-tort theories. The court reasoned that to punish BMW for pursuing its legitimate business interests would be to indict our entire economic system.

Virginia Magistrate Judge Finds Reasonableness Paramount When Awarding Discovery Sanctions

Sat, 23 Jan 2010 17:14:35 -0500

As any experienced litigation attorney will tell you, the discovery process is where many cases are won and lost. Consequently, the process is often contentious and characterized by wild fishing expeditions, invasion of privacy, and abusive tactics. The Federal Rules of Civil Procedure, however, allow judges to sanction attorneys who cross the line between aggressive, zealous representation and outright discovery abuse. A recent decision out of the United States District Court for the Eastern District of Virginia lays out the guidelines for whether to punish such tactics by awarding attorneys' fees to the other side, and if so, how much to award.

In Rutherford Controls Int'l Corp. v. Alarm Controls Corp., both the plaintiffs ("Rutherford") and the defendants agreed to an extended deadline by which the defendants would produce all documents responsive to Rutherford's discovery requests. The day of the deadline came, and by the close of business, the plaintiffs had not received the promised documents. Rutherford promptly filed a motion to compel the required discovery. The defendants did produce some material prior to receiving notice of the motion to compel, but the production was minimal. The court heard arguments, and while it did not officially grant Rutherford's motion, the judge expressed serious dissatisfaction with the defendants' discovery responses (calling them "absolute nonsense") and commanded them to answer all of the requests more thoroughly and accurately. The defendants, without protest, complied with the judge's demands.

Rutherford proceeded to move for sanctions in the form of reimbursement of the $11,858.07 in attorneys' fees it incurred in connection with the motion. Rule 37(a)(5)(A) specifically permits the recovery of "reasonable expenses" incurred in moving to compel discovery, "including attorney's fees." The court quickly determined that an award of attorneys' fees was appropriate. Rutherford made a good faith attempt to obtain the discovery without court action, the defendants' inadequate response was not substantially justified, and there were no extenuating circumstances that would make an award of expenses unjust. The real question was whether it would be reasonable to award Rutherford the full amount of fees they incurred.

The court clarified that even where the attorneys' fees incurred are reasonable on their face, an analysis still must be performed to determine what amount would be reasonable to assess against the party whose discovery conduct necessitated the motion. The opinion recites all the key legal precedent for performing this analysis, ultimately identifying 22 separate, enumerated considerations. Attorneys will find the opinion a useful reference when moving for an award of fees.

In this particular case, while the court found the amount of the claimed fees to be reasonable (including the hourly billing rates of Rutherford's attorneys, which ranged from $410 to $510), the court nevertheless awarded only half of them as a discovery sanction, reasoning that an award of nearly $12,000 would not be appropriate where the majority of the late production involved material from third party sources for whom Rutherford could have issued subpoenas, and where the defendant ultimately prevailed in the litigation.

Terminated Employee May Pursue Tortious Interference Claim Against Former Supervisor

Thu, 14 Jan 2010 09:54:26 -0500

Virginia employment lawyers who represent plaintiffs are often looking for creative legal theories to help their clients receive justice. Employees seeking redress for perceived wrongful termination face a steep hurdle in the employment-at-will doctrine, under which a private employer, subject to certain exceptions, is free to discharge its employees at any time, for any reason or no reason at all, without incurring civil liability. While it is usually the corporate employer who gets cast in the role of defendant, plaintiffs' lawyers have occasionally tried to impose liability on the individual manager who terminated or discriminated against the employee, usually without much success. A recent decision from the Eastern District of Virginia's Richmond Division, however, opens the door to possible claims of "tortious interference" against the individual bad actor.

Williams v. Autozone Stores, Inc. is a sexual harassment case brought under Title VII of the Civil Rights Act of 1964, which prohibits harassment of employees where the conduct is sufficiently severe or pervasive to create a "hostile work environment," or where the harassing conduct results in a tangible change in an employee's employment status or benefits (such as getting fired). Williams, a former employee of Autozone, claimed that her manager, Willie Pugh, touched her inappropriately and made sexually-charged comments toward her. After asking Pugh to stop, Williams alleges that he wrote her up for nonexistent problems and that she was consequently transferred to a different store and eventually fired. Williams sued Autozone for alleged discrimination, but also sued Pugh himself on the theory that he tortiously interfered with her employment contract with Autozone. Autozone moved to dismiss the claim, arguing that Pugh was an agent of the company and that a company cannot interfere with its own contracts, but Judge Spencer allowed the claim to go forward.

Pugh pointed out that claims for tortious interference with contract require the existence of three separate parties: the two parties to the contract, and a third party who induces one of the two contracting parties to breach the agreement. As an employee of the company, he argued, he and Autozone were the same entity, negating the possibility of a third party. Pugh also pointed out that Williams acknowledged in her complaint that Pugh was an employee acting within the scope of his employment with Autozone.

Judge Spencer responded by noting that the plaintiff's admission in her pleadings that Pugh was an agent of Autozone did not preclude a finding that Pugh acted outside the scope of his employment. A party may plead inconsistent facts, the court held, provided they relate to different claims. Turning to the question of whether Pugh's actions were necessarily the actions of Autozone, the court found that a tortious interference claim could very well be viable even when the interfering party is an employee of one of the contracting parties. The employee would be acting as a third party if his actions were taken outside the scope of his employment, such as if they "arise wholly from some external, independent, and personal motive". If there is doubt as to whether an employee was acting within the scope of his employment, the court held, then the issue should be resolved by the jury, not decided by the judge prior to trial.

Virginia Government Contractor Accused of Business Conspiracy

Mon, 04 Jan 2010 06:21:41 -0500

Conducting business in Virginia can be a cutthroat affair. Our capitalist system demands that firms compete with each other in price, quality, and technology, and the most innovative company will often win the largest number of lucrative government contracts. Unfortunately, some contractors utilize unfair, unethical, or illegal methods in the name of competition. Virginia is one of several states that have enacted "business conspiracy" statutes designed to discourage and punish some of these practices. The statute is very popular with Virginia lawyers, due in no small part to its provisions allowing recovery of both treble damages and attorneys fees.

In Turbomin AB v. Base-X, Inc., a case pending in the federal court sitting in Lynchburg, the plaintiff (Turbomin) had a contract to perform services for Base-X, a government contractor located near Lexington. In winning this contract, Turbomin beat out another defendant in the case, Lindstrand Technologies Ltd. Eventually, however, Base-X terminated its contract with Turbomin and refused to pay the balance allegedly owed to Turbomin. Turbomin's officers suspected that disgruntled Lindstrand employees convinced Base-X employees to breach the contract. Invoking Virginia's business conspiracy statute, Turbomin alleges that Base-X and Lindstrand "conspired to interfere with a business reputation".

Judge Norman Moon, in granting the plaintiff's motion to add a business conspiracy count to its complaint, clarified the requirements of this Virginia law. In order to win this type of conspiracy claim, a plaintiff must prove three things: that the defendants (1) engaged in a concerted action, (2) with legal malice, (3) resulting in damages. Judge Moon explained that a "concerted action" is any association or agreement among the defendants to engage in the conduct that caused the plaintiff injury. Legal malice, the court held, requires showing "that the defendant acted intentionally, purposefully, and without lawful justification" to injure the plaintiff. Judge Moon also observed that while a plaintiff need not prove that the defendant's "primary and overriding purpose" in forming the conspiracy was to injure the plaintiff's reputation, trade, or business, such must be at least one of the purposes of the conspiracy.

The action that the defendants agree to do must be unlawful in and of itself for an actionable conspiracy to arise. In other words, just because two businesses agree to take a course of action that ultimately does not work out well for another party, does not necessarily mean they engaged in a conspiracy to interfere with the injured party's business reputation. In the Turbomin case, the unlawful act that the plaintiff accused the defendants of conspiring to commit was to breach the contract with Turbomin. Breach of contract is an unlawful purpose that may form the basis of a conspiracy claim, the court confirmed.

Finally, due to the defendants' conspiracy to commit an unlawful act, the plaintiff must suffer a measurable, economic loss. Simply put, the plaintiff must be able to quantify its damages in a dollar amount.

For businesses harmed by the anti-competitive acts of an unscrupulous tortfeasor, Virginia's business conspiracy statute provides a powerful tool that can be used to both recover damages and deter future competitors from engaging in such conduct. For more information about protecting your business from wrongdoers, consult an attorney.

Richmond-Based Distributor of Indian Music Sued for Infringement

Mon, 28 Dec 2009 05:43:53 -0500

The Internet has been a boon to business. It brought local economies into the global market, cut down on communications costs, and made accessible information that was once only available through painstaking research. That is not to say, however, that the technology has not had its drawbacks. Towards the end of the 1990's, peer-to-peer file sharing websites became a haven for piracy of software, music, and movies. At first, those perpetrating these crimes were only a small segment of society, but gradually the practice became more widely accepted and piracy became prevalent in nearly every demographic. Various industries took notice and scrambled to fight back. Many are familiar with the Recording Industry Association of America's (RIAA) resort to the courts to sue and force settlements with those who share music over the Internet. While the RIAA pioneered this strategy, many companies are now following suit by filing suit. One such case was filed recently by Saregama India, Ltd., the biggest recording company in India, in the United States District Court for the Eastern District of Virginia.

Saregama discovered that many of its songs, popular both in India and among the Indian population in the United States, are being made available as ringtones on a website called Dishant.com. Saregama alleges that Dishant.com and its owners, Dishant Shah and Meeta Shah, violated Saregama's copyrights because they never bought the rights to these songs nor received approval from Saregama to share the songs as ringtones. Further, Saregama claims that Dishant.com displayed Saregama logos next to the titles of the songs, which would be a trademark violation.

Under the Copyright Act, the right to distribute copies of copyrighted work, or to prepare derivative works based on the copyrighted work, belongs solely to the copyright owner. Under the Act, if Saregama can prove that the materials provided by Dishant.com are identical to or substantially identical to any property owned by Saregama, and that Dishant.com provided those materials without permission, then Saregama's burden will be met. The consequences for a copyright violation can be substantial. If Saregama prevails, it may be entitled to recover any profits Dishant.com made from the use of the songs (or statutory damages up to $150,000 if the infringement was willful), plus reimbursement of its attorneys' fees.

The trademark aspect of Saregama's suit is based on the Lanham Act, the primary source of federal trademark law in the United States. The use of another's trademark in connection with the sale of a product constitutes infringement if it is likely to cause consumer confusion as to the source of the product or as to the sponsorship or approval of the product. In deciding whether consumers are likely to be confused, courts will typically look to a number of factors, including: (1) the strength of the mark; (2) the proximity of the goods; (3) the similarity of the marks; (4) evidence of actual confusion; (5) the similarity of marketing channels used; (6) the degree of caution exercised by the typical purchaser; and (7) the defendant's intent. Trademark violations can be costly as well. Under 15 U.S.C. 1117(a), a successful plaintiff may be entitled to defendant's profits, damages sustained by the plaintiff, and reimbursement of the costs of the action (including reasonable attorneys' fees in "exceptional cases"). Damages may be trebled upon showing of bad faith.

If you own rights to a trademark or copyright that is being infringed by another, don't wait for an industry trade group to bring legal action on your behalf. Consult an intellectual property attorney and find out whether action is needed to protect your business assets.