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Author Archives: James B. Kinsel

  1. Unfair Business Practices – Lying to Induce Franchise Agreement Can Result in Broad Protection for the Deceived

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    A recent case (Bans Pasta LLC v. Mirko Franchising LLC) began when franchisees claimed they were misled and induced into buying a franchise after being shown inaccurate financial documents which the franchisors claimed was a depiction of what they could expect to make in the business. As it turns out, the franchise did not do well financially. Plaintiffs filed a lawsuit, claiming they were improperly misled into buying the franchise. They attempted to rescind the agreement and sue for the alleged misrepresentations. When a court rescinds a contract it puts the contracting parties back into the same position as if they had never entered into a contract. In addition, the deceived party can sue for any damages caused by the misrepresentation.

    An interesting issue arose as to whether Plaintiffs properly rescinded the franchise agreement, and if they had, whether the merger clause contained in the agreement was applicable to Plaintiffs’ claims of pre-contract misrepresentation, making those claims fail. The court decided that the Plaintiffs showed sufficient facts to plausibly show they rescinded the contract, and so Defendants’ motion to dismiss the misrepresentations claims was denied. The court further stated the discovery would be needed to decide whether Plaintiffs actually rescinded the contract. If in fact they had, the court decided that the merger clause contained within the contract that was rescinded would not apply and Plaintiffs could go forward with their misrepresentation claims.

    The Franchise Agreement contained a number of important provisions, including a merger clause and a disclaimer clause. The merger clause stated “the written agreement supersedes all prior oral and written understandings and agreement between the parties” and that “[a]ny oral representations or modifications concerning this Agreement shall be of no force of effect unless . . . in writing.” Op. at 6 (quoting agreement). The disclaimer clause stated that “[t]he Franchisor expressly disclaims the making of, and Franchise Owner acknowledges that it has not received any warranty or guarantee, express or implied, as to the potential volume, profits or success of the business . . . .” Op. at 7.

    This case (detailed below) shows that even when parties agree to a merger clause stating that no prior representation or warranties were given, a party can still sue and possibly recover as a result of misrepresentations that were given prior to signing the contract, in the event the party rescinds the contract making the merger clause inapplicable.

    Bans Pasta LLC v. Mirko Franchising LLC

    Mirko Franschising, LLC (“Mirko”) sells Italian restaurant franchises. Mirko Di Giacomantonio (“Giacomantonio”) is the CEO of Mirko and Archie Crenshaw is a manager of Mirko.

    Bans Pasta is an LLC that purchased and operates a Mirko Franchise. Randy Sowden and Michael Boggins are the principals of Bans Pasta (“Principals”).

    The Principals claimed they relied heavily on representations made by Giacomantonio and Crenshaw regarding the financial viability of the Mirko franchise when deciding whether to go into the business. One such misrepresentation was an excel spreadsheet consisting of financial assumptions to use as a basis for making financial projections. Giacomantonio told the Principals that it showed the average performance of a franchise. Crenshaw also provided the Principals with year-end financial statements of a Mirko franchise in Georgia. The Principals noticed unusual line items on the statements, and Crenshaw told them that certain expenses were included to reduce the franchise’s income tax obligations—that the actual value of the franchise was higher than shown on the statements. Crenshaw sent another document that, unknown to the Principals, inflated the franchise’s net profit and misrepresented figures related to the franchise’s gross revenue, food costs, and labor costs.

    Giacomantonio assured the Principals that their franchise would net an annual profit of $100,000. The parties then entered into a franchise agreement.

    After the Principals’ Bans Pasta location had been open for a few years and had not made as much money as anticipated, Mirko’s head executive chef visited the location. During his visit, he gave the Principals the new pricing and cost schedule and admitted to the Principals that the numbers presented in the previously-provided financial spreadsheets were incorrect as far as operating costs and stated that the Mirko model is “broken—we know it is broken.” Op. at 4 (internal citations omitted). Through this conversation, the Principals learned that Giacomantonio and Crenshaw had provided false and misleading representations to induce them to buy a franchise.

    Bans Pasta sued claiming, inter alia, tort claims including fraud in the inducement, constructive fraud, and negligent misrepresentation (“the Misrepresentation Claims”), and sought to rescind the franchise agreement. The Principals claimed that the financial documents inaccurately conveyed the strength of existing Mirko franchises in order to convince the principals to buy one. Defendants responded by filing a motion to dismiss.

    Plaintiffs argued that the merger clause in the franchise agreement did not bar its claims because of its rescission of the contract. They cited cases stating that a merger clause does not preclude a Plaintiffs’ reliance on prior oral and verbal representations where a Plaintiff elects to rescind a contract and sue in tort for fraud.

    The court cited Georgia cases (per a choice of law provision) which stated that when a party affirms a contract, as opposed to rescinding it, and that contract contains a merger clause, that party cannot argue it relied upon representations other than those contained in the contract. “By contrast, where a party rescinds the contract, the merger clause is inapplicable and would not bar fraudulent inducement claims.” Op. at 17 (internal citations omitted).

    So the issue then was whether Plaintiff properly rescinded the contract.

    The court decided that Plaintiffs had showed sufficient facts to plausibly show they rescinded the contract. Plaintiffs claimed that as soon as they found out from the chef about the misrepresentations of Giacomantonio and Crenshaw, they “promptly notified Defendants of their unlawful conduct in an attempt to void and/or rescind the franchise relationship.” Op. at 19 (quoting Plaintiff’s Complaint). The court concluded that discovery was then necessary to determine whether Plaintiff actually rescinded the contract. If it is found that they did, then the merger clause contained in the contract will be held inapplicable and Plaintiffs will be allowed to go forward with their claims.

    Click here for the full opinion – Bans Pasta LLC v. Mirko Franchising LLC

  2. Beware of Social Media’s Bite: Recent Legal Effects of Online Reviews

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    By its nature, business law is always playing catch-up to business reality. Few areas of law reflect the gap between every day events and court opinions as the area of social media. Social media gives everyone the power of the Bully Pulpit, to use President Theodore Roosevelt’s phrase about the presidency.

    For businesses, social media can be a scary place because any disgruntled customer, current or former employee, or competitor can post reviews or comments that can damage the company’s brand name. Businesses have to decide how best to respond to this negative publicity. The choices can vary from ignoring the comment, replying to the negative comment on the same social media platform or issuing a press release or formal statement. If the negative posting occurs on the business’s own social media page, such as a Facebook page, then the business may be able to delete prior comments and block future ones. In addition, a business may invite a bigger outcry in deleting a negative post than addressing the substance of the post and let the public decide.

    Businesses should be reminded that social media is not confined by Newton’s Third Law of Motion that every action has an equal and opposition reaction. Rather, negative social media reviews can invite unequal and overreaction. Thus, they are more akin to the definition of “revolution” provided by Tommy Lee Jones’s character in Under Seige that a “revolution gets its name by always coming back around in your face.” A negative review is oftentimes omnipresent on the internet, permanently staining the reviewed business.

    The difficulty of choosing how best to respond is compounded by the fact that the social media world demands a business to respond almost immediately. Delaying too long can eviscerate even the best response. Further, if legal action results from the original post, each response will invite legal scrutiny.

    A negative post can invite a business to take legal action against the person who posted the review. Our firm has been involved in several matters relating to negative reviews. One lesson from our aggregate experience, however, is that there is no one solution that appropriately addresses all negative reviews. A business facing a major social media problem should strongly consider obtaining legal advice to determine how best to respond.

    Determining the identity of a reviewer, however, can sometimes be problematic because the reviewer is anonymous or shielded by a username. Some review sites encourage such anonymity because they want reviewers to feel comfortable in posting reviews. This collision between the interests of the reviewers and the businesses being reviewed was played out in a recent Virginia Court of Appeals case regarding Yelp.com. The court ordered Yelp to provide IP addresses of anonymous reviewers and the decision has prompted much discussion in the legal arena.

    The case arose when Hadeed Carpet Cleaning, Inc. (“Hadeed”) sued Yelp claiming that some negative reviewers of Hadeed were never actually customers of Hadeed and the reviews were thus illegal defamatory statements. Hadeed sent a subpoena to Yelp requesting the identity of specific reviewers.

    When an online post is made, Yelp records the Internet Protocol (“IP”) address from which each posting is made. Users are usually allowed to post reviews anonymously, but in this case Yelp was ordered to provide IP addresses associated with negative reviews.

    The court noted that while anonymous speech is protected by the First Amendment (Op. at 5, citing Buckley v. American Constitutional Law Found., 525 U.S. 182, 197-99 (1999)), defamatory speech is not afforded Constitutional protection. Op. at 7 (quoting Chaves v. Johnson, 230 Va. 112, 121-22 (1985)).

    Virginia Code § 8.01-407.1 details the test in Virginia for uncovering the identity of an anonymous internet communicator. As part of this test, the constitutional right to speak anonymously is balanced against Hadeed’s right to protect its reputation. Op. at 19. The Virginia Court of Appeals declined to hold the Virginia Code section unconstitutional.

    Despite Yelp’s policy that users don’t have to reveal their identities before posting online reviews, the Court of Appeals ordered Yelp to provide the identity of the reviewers. The social media site’s policy did not withstand a court order.

    Although user identities can be exposed, content perhaps remains protected under the Stored Communications Act. Facebook, for example, relies on that Act in its policy for civil subpoenas (click here) which states that Facebook will provide basic subscriber information, but not content such as messages, Timeline posts, or photos because “the Stored Communications Act, 18 U.S.C. § 2701 et seq., prohibits Facebook from disclosing the contents of an account to any non-governmental entity . . . .”

    The Virginia Code highlighted in the Hadeed case only deals with the information that relates to the identity of posters. Content of communications is a different question. But, the identity of the poster is often the most sought after information. The content of posts themselves is usually public and the cause of defamation lawsuits in the first place. It’s the identity of the reviewer that is usually important. This is because it is not illegal for the reviewer to give an opinion, so long as it is based on facts – meaning they had to have been an actual customer of the business. If they were never a customer and they give a negative review, their review can be held to be illegal defamation.

    Defamation lawsuits over online negative reviews are increasing. This week in Fairfax County, a trial is being held in the case of Dietz Development, LLC, et al. v. Jane Perez where the plaintiffs cite loss of work opportunities caused by a negative review (click here to read the Complaint). Plaintiffs are asking for $750,000 in connection with the allegedly false negative review which they claim greatly damaged the business’s reputation.

    The takeaway from this recent activity is that businesses should develop an action plan for how they might respond to various potential negative social media comments. And, in serious situations, they should consider seeking legal advice about their response options.

  3. LinkedIn Accounts: Is the Information Stored Within Owned by the Employee or Employer?

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    An interesting question regarding LinkedIn contact information arose recently in a High Court decision out of England. The matter involved whether email addresses stored in LinkedIn groups formed for the company’s benefit, which were maintained by employees, were the sole property of the company and not to be used or taken by employees upon leaving the company.

    Three individuals, David Gamage, Susan Wright, and Steve Crawley, worked at Whitmar Publications Limited (“Whitmar”) until they quit in January 2013. Apparently, the defendants had set up a new company called Earth Island and had been competing with Whitmar before they quit their jobs at Whitmar.

    Whitmar sued the individuals for breach of contract and breach of fiduciary duty, among other claims. Whitmar asked the court for an injunction prohibiting the defendants from using or disclosing Whitmar’s confidential information the defendants had acquired during their employment with Whitmar. The court granted an injunction in favor of Whitmar.

    Mr. Gamage, as a sales manager, had direct contact with Whitmar customers during his employment. Ms. Wright was Whitmar’s most senior employee and held the title of Managing Editor. Mr. Crawley was a production editor.

    The case involved the subject of whether certain LinkedIn contacts were company property. The court noted that Ms. Wright, as part of her employment duties, dealt with the LinkedIn groups at Whitmar. The groups operated for Whitmar’s benefit and to promote Whitmar’s business. It was discovered that after leaving Whitmar, the defendants used Whitmar’s LinkedIn groups to compile email addresses for a large number of individuals. To these email addresses the defendants sent an invitation for an event that was held to promote the defendants’ newly-formed company, Earth Island.

    Whitmar also argued that Ms. Wright refused to provide Whitmar with the LinkedIn username and password for four LinkedIn groups managed by Ms. Wright during her employment with Whitmar. Ms. Wright claimed that the groups were her personal groups and not the property of Whitmar.

    While the group granted the Plaintiff’s requested injunction pending trial, the court was vague as to whether the LinkedIn contacts belonged to solely the employee or employer. Client contact information is often an important company asset that deserves protection. As a result, businesses should make sure to maintain unrestricted administrative access and password information to social media sites such as Facebook and LinkedIn to prevent the cutting off of access by employees. Companies would be smart to also identify through employment agreements and policies who owns specific information relating to social media.

    Click here for the opinion.

  4. Law Firm Sues its Former Lawyers, Will the Tort Claims Survive?

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    Unfair business practices claims, such as breach of fiduciary duty, business conspiracies and tortious interference, have not usually been asserted by law firms against their prior attorneys or the law firms where their prior attorneys subsequently go to work. Among the several possible reasons for this rarity is that there are Ethical Rules governing the attorney-client relationship that limit the amount of protections that a law firm can enact compared to other business types to protect against clients leaving to work with the departing person. Thus, for example, Virginia attorneys cannot be a party to a noncompete agreement, agreeing not to compete against their prior employer.

    There is an open legal question then about how fidicuiary and other common law duties will be applied to attorneys. A recent lawsuit filed in Richmond may help answer this question.

    This past October, a law firm filed tort claims against two lawyers who previously worked at the firm. The complaint alleges that the two lawyers conspired together to lure current and prospective clients to their new firm, away from the plaintiff’s firm, while they were still employed by the plaintiff. The complaint also claims the defendants used resources of the plaintiff firm, such as cell phones and computers, to contact plaintiff’s clients and carry out their deceptive plan.

    Plaintiff also alleges defendants used their position in the firm to access client information. A text message from one defendant to another allegedly states “now that you or [sic] in the inner circle can you get that ss that shows who file what (like other lawyers)?”

    Importantly, the complaint states that although defendants were attorney of record for many clients they had limited contact with the clients and were not the primary attorneys on the case. Thus, if defendants try to argue that they were simply taking their own clients with them when they left, the court may question this explanation.

    It will be interesting to see how the Richmond Circuit Court treats this case. Especially given the general principle that clients should be free to choose whatever lawyer they want. One question is whether the defendants will be able to get the case dismissed without a trial or whether the court will allow the case to go to trial.

    Read the complaint and answer.

  5. Court Extends Attorney-Client Privilege to Include Former Board Member

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    The attorney-client privilege protects the privacy of communications between an attorney and his client.  Most courts agree that the attorney-client privilege between a lawyer and a client that is a corporation extends to more than just the owners of the corporation.  The privilege is generally also applied to higher-up individuals, such as top level managers and Chief Financial Officers.  However, a U.S. District Court went even further and extended the privilege to a former board member of a corporation in a recent case out of Norfolk, Virginia.  

    The question before the court was whether the attorney client privilege covered email communications from an attorney to his corporate client, Digital Vending Services International, Inc. (“DVSI”), after those email communications were forwarded by DVSI’s principals to a former board member of DVSI, General Clarence McKnight (“McKnight”). 

    In the Fourth Circuit, “the attorney-client privilege applies not only to the upward flow of information from a client or client’s representative to counsel, but also can apply to the downward flow of legal advice from counsel to client in limited circumstances,” Op. at 8, if the communications “‘reveal confidential client communications’”  Op. at 8 (quoting U.S. v. (Under Seal), 748 F.2d 871, 874 (1984), or “‘reveal the motive of the client in seeking representation, litigation strategy or the specific nature of the services provided.’”  Op. at 8 (quoting Chaudhry v. Gallerizzo, 174 F.3d 394, 402 (1999)).  The issue before the court was whether the attorney-client privilege was waived when DVSI forwarded the emails to McKnight. 

    The court ruled that the attorney-client privilege applied because McKnight had a “need to know” the information communicated.   

    According to Plaintiff, McKnight was formerly on DVSI’s Board of Directors, but resigned before the lawsuit commenced in order to join CLIN’s Board of Directors and thus avoid a conflict of interest.  CLIN Inc. is a corporation and one of the members of DVSI.  CLIN Inc. was also DVSI’s corporate predecessor. 

    Plaintiff claimed that “McKnight was a sort of ‘ex-officio’ member of the Board [of DVSI] and a person whose institutional knowledge was valuable to the Board of Directors and whose advice was sought often.”  Op. at 7.  Plaintiff asserted that McKnight remained an advisor in an unofficial capacity, but was not a currently employee or board member.  McKnight testified at his deposition, however, that he was “‘not privy to all the . . . management of the directors and so forth”’ and referred to himself as a “‘figurehead.’”  Op. at 7 (quoting McKnight Deposition testimony). 

    The court stated that “[i]n its research, [it] found no cases on point to answer the question of whether attorney-client privilege was waived when communications from an attorney, rendering legal advice, were conveyed to the client and the client then conveyed that information to both current members of the Board of Directors and to a former member of the company’s Board of Directors.”  Op. at 7. 

    Relying on Eighth Circuit cases, the court stated that the attorney-client privilege is not waived in the corporate context when confidential communications from counsel are “restricted to those who need to know.”  Op. at 14.

    Thus, the question before the court was whether McKnight had a “need to know” the information in the attorneys’ communications with DVSI.  To determine whether a “need to know” existed, the court used the Eighth Circuit’s “functional equivalent” test which has been used in the Fourth Circuit, although not formally adopted.  The test asks whether McKnight was the “functional equivalent” of a member of the board of directors.  The question then is whether that person’s “‘involvement in the subject of the litigation makes him precisely the sort of person with whom a lawyer would wish to confer confidentially in order to understand [the client’s] reasons for seeking representation.’”  Op. at 14 (quoting In re Bieter Co., 16 F.3d 929, 940 (8th Cir. 1994)). 

    The court recognized that Boards of Directors need to know an attorney’s advice to the corporation since it must make strategic decisions for the corporation.  The court found that McKnight was a trusted advisor with an on-going role with DVSI’s Board of Directors and had been involved with DVSI since the start of the corporation.  He remained involved in DVSI after he left to sit on CLIN Inc.’s Board.  He was part of the strategy conference calls with the corporation and attorneys regarding the litigation at hand.  All of these factors made him an individual with a “need to know” the attorney-client privilege information.  Since he was included in the Board’s discussions as if he was still a member of DVSI’s Board, and he was the functional equivalent of a Board member, his deposition testimony that he was not privy to the management of the directors and the fact that he wasn’t paid by DVSI were insufficient facts to support waiver of the attorney-client privilege.  Therefore, the privilege was extended to include communications with McKnight. 

    It is important to note that the court closely considered the factual circumstance of McKnight’s involvement.  Determining who is qualified as someone who has a “need to know” will depend on the specific facts of a case.  While this case expands the range of individuals that a corporation can involve in making litigation decisions, corporations should tread cautiously because the consequences of otherwise privileged communications getting disclosed to a litigation adversary can be severe.

  6. Confused Roles Can Lead to Legal Liability in Joint Efforts

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    When two companies combine their efforts to accomplish a task, there can be confusion purposefully or incidentally created, as to which employees are acting on behalf of which company.  And that confusion can lead to legal problems.

    When companies enter into a contract, they owe duties to one another as are set out in the contract.  If one of the companies fails to perform under the contract, the damaged company may recover money for damages as a result of the breached duties.  An individual employed by the company that breached the contract is not ordinarily personally responsible because they are not a party to the contract.  To hold the individual liable, they need a personal connection to the contract.

    One such legal problem that a court recently addressed was whether additional duties, not set out in the contract between the companies, arose during the performance of the contract.  Sometimes fiduciary duties can develop when an individual is involved in the performance of a contract due to a relationship between that individual and the damaged company.  A fiduciary duty is a duty that arises out of a certain relationship, such as a company officer to the company.  If a court finds that these other duties existed, it may hold individuals liable if they breach those duties.  Whether or not those separate duties existed depends on a number of factors.  The U.S. District Court for the Eastern District of Virginia articulated these factors in Fort Sill Apache Industries v. Mott, et al.

    Fort Sill Apache Industries (“FSAI”) is a government contractor specializing in construction projects.  FSAI had a Navy contract that it was about to lose.  FSAI engaged TSI, a company in the business of providing consulting services to government contractors, to assist it with saving the Navy contract, acquiring new contracts, and manage FSAI’s finances.

    Defendant Deborah Mott was a principal and employee of TSI.  Mott was involved in performing the duties TSI owed under the contract.  Specifically, she provided financial and payroll functions to FSAI.  FSAI opened an operating bank account to handle necessary performance bonds for one of its contracts and appointed Mott as one of the signatories on the account.  This gave her power to receive and transfer funds, write checks, establish payroll accounts, receive banking information, and manage all funds in the account.

    When TSI canceled the contract, FSAI sued TSI for claims arising out of misconduct on the contract and damages for failure to perform its duties thereunder.  FSAI also attempted to hold Mott personally liable, claiming that she was essentially a party to the contract due to her personal relationship with FSAI.  After considering numerous factors, the court found that Mott was not personally liable on the contract.

    Specifically, the court considered the employment relationship between FSAI and Mott.  Mott argued that all of her work was performed pursuant to contractual agreements between the two companies and so the claims brought against her personally can only be brought against TSI.  The court agreed with Mott.  The court found that Mott performed financial and payroll functions to FSAI as a result of the contract between FSAI and Mott’s employer, TSI.  Therefore, she was not an employee of FSAI.  The court held that although Mott did perform some duties that would normally only be entrusted to a CFO, FSAI could have hired Mott directly to be an officer but chose not to.  Other facts that persuaded the court that Mott should not be held liable for damages in her individual capacity were that FSAI didn’t pay Mott directly; Mott sent all work-related emails from only her TSI email address; and Mott never had an FSAI email address.  Additionally, according to testimony from the former President of FSAI, Mott understood that when she held herself out as CFO for FSAI during certain business processes, it was “‘strictly for federal contracting and nothing else’ and had ‘no connection to being an officer of [FSAI].’”  Op. at 12 (quoting a trial transcript).  These facts show that FSAI knew its relationship with Mott existed solely because of the contract between FSAI and TSI, and Mott was not otherwise personally connected in any way to FSAI.  Therefore, any tort claim arising out of misconduct under the contract had to be brought against TSI, not Mott, the court held.

    Furthermore, FSAI argued that Mott personally breached duties that were independent of the duties TSI owed under the contract: fiduciary duties due to her access to the operating account and role as CFO.  The court stated that common law duties, such as duties owed by one partner of a company to another, are independent from duties that may arise under a partnership agreement (or other contract).  Op. at 23 (citing Three Rivers Landing of Gulfport, LP v. Three Rivers Landing, LLC, HG, 2012 WL 1598130, at  ⃰4).  However, the court found that those types of common law duties did not exist in this case.  The court found that Mott was given access to FSAI’s operating account in order to perform the duties necessary under the agreement between TSI and FSAI.  FSAI’s internal documents show it understood that Mott was an agent of TSI and acting as such as she performed CFO duties.  Therefore, no independent duties were owed to plaintiff by Mott.

    Whether or not a person can be held individually liable for damages outside of a contract can depend on whether they owed duties independent of the contract.  If the court finds the individual was acting solely as an agent of the breaching company, only the breaching company will be held liable for damages.  To avoid liability, individuals should use only the email address provided by their employer company, ensure they are paid directly by their employer company, and not hold otherwise themselves out to the public as an employee of the other company.  The company who employs the individual should be clear with the contracting company as to the status of the employees to avoid any confusion from the start.

  7. Court Orders Defendants to Stop Using Company Trade Secrets and Limits Defendants’ Business Activities in Market

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    In cases involving unfair business practices, money damages may not be the best, or only, remedy to pursue.  In situations where an ex-employee is using and disseminating company trade secrets, a more important strategy may be to ask the court to order the defendant to stop his activities.  An order of this nature is called an injunction.  However, the exact order requested by plaintiff may be limited by the court, as occurred in a recent Virginia case, even when a complaint goes completely unanswered by the defendant.  Courts may craft an injunction to make it more reminiscent of the harm involved in the particular case, as the U.S. district court did in Autopartsource v. Bruton et al. 

    Autopartsource, LLC, which is in the business of manufacturing and distributing aftermarket automobile parts, sued its former employee, Stephen C. Bruton (“Bruton”) and Bruton’s new company, BBH Source Group, LLC (“BBH”).  It claimed that defendants stole its trade secrets and tortiously interfered with its business contracts and business expectancy.  Autopartsource sought damages over $1 million, punitive damages of $350,000, attorneys’ fees of $59,404.72, and asked the court to issue injunctions, which would order BBH to stop producing products and to stop using Autopartsource’s trade secrets.  BBH did not respond to Autopartsource’s complaint.

    Although overall victory of the claims was awarded to Autopartsource, the amount of money and injunctive relief requested was limited by the court.

    The court held a hearing, requiring Autopartsource to show why it was entitled to the relief sought.  The court found the following facts in Autopartsource’s complaint to be true: Bruton worked for Autopartsource as its Director of Product Development.  He had knowledge of Autopartsource’s most valuable trade secrets and confidential information, including industry contracts, customer information, pricing, costs, vendor information, and produce development data, due to his position in product development and his role in helping to develop those trade secrets.  Autopartsource sent Bruton to China to develop business, and assigned one of its contractors, Lili Huang, to work directly with Bruton.  In August 2011, Bruton and Huang secretly formed BBH with the intent to use Autopartsource’s goodwill, business opportunities, trade secrets, and company resources to generate business for BBH.  BBH was stealing deals right from under Autopartsource, including deals Autopartsource was specifically targeting. After Huang admitted their wrongdoings to Autopartsource in 2012, Autopartsource terminated Bruton.

    The court found that Bruton used his position as Director of Product Development to acquire confidential and proprietary information.  This information was determined by the court to constitute trade secrets.  For a trade secret claim to be successful, it is important to show how the company attempted to keep the information a secret.  The court recognized Autopartsource’s attempts to protect its claimed trade secret information by implementing a company-wide confidentiality policy which governed all employees.

    The court also found that Bruton knew the information was a trade secret, because just after being fired, Bruton secretly deleted Autopartsource’s trade secrets off of the laptop.  The court found that Bruton took those acts in order to hide the fact that he stole the information which was then used by his new company, BBH, with knowledge that the information was improperly taken.  This amounted to a violation of Virginia’s trade secrets act, the court decided.

    In addition, Huang and Bruton knew that Huang was not permitted to work for Autopartsource’s competitors, due to an employment contract in place.  But BBH nevertheless hired Huang, which the court held amounted to tortious interference.

    Upon finding BBH guilty of the claims in the complaint, the court then had to decide whether the relief asked for in the complaint was appropriate.

    The court awarded Autopartsource the full $616,237.35 requested as unjust enrichment for the time and resources Autopartsource expended on developing the trade secrets that BBH stole, which included the time Bruton spent working on the trade secret development.  The court awarded the approximately $50,000 requested as payment for Huang’s salary while she was employed with BBH.

    As to punitive damages, the court emphasized the fact that Autopartsource offered no evidence about BBH’s ability to pay.  While the court found that Bruton’s deleting of trade secrets from Autopartsource’s computer “is precisely the sort of ‘most egregious conduct’ that justifies an award of punitive damages under Virginia law,” with not much to go off of in terms of BBH’s available funds, the court only awarded $75,000 in punitive damages, instead of the $350,000 requested.  Op. at 17 (quoting Owens-Corning Fiberglas Corp. v. Watson, 413 S.E.2d 630 (Va. 1992).

    In addition to a request for money, Autopartsource requested injunctions from the court.  The court found that a permanent injunction prohibiting BBH from using Autopartsource’s trade secrets was completely appropriate.  However, as to the second injunction requested by Autopartsource which asked for a broad order requiring BBH to stop competing at all as a distributor of aftermarket automotive parts, the court was less generous.  The court decided that this request went too far and instead ordered that BBH could not source those products that Autopartsource sourced in China during Bruton’s tenure with the company.  This allowed BBH to still source products that Autopartsource does not deal in.  And instead of the limitation applying to all markets worldwide, the court limited the injunction to apply only to the U.S. and Chinese markets, since those are the only markets where Autopartsource has a presence.  Lastly, while Autopartsource requested that the injunction last 7 years, the court decided that a 3-year injunction was more appropriate.

    As shown, even when a default judgment is granted, and the facts presented by Plaintiff are considered to be true, the court will still ensure that the damages and other relief requested are fair and not disproportionate to the harm.

  8. Waiting Until the Discovery Phase to Add Additional Defendants Can Be a Wise Strategy When Crucial Facts Have Yet to be Uncovered

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    A business conspiracy claim may allow a plaintiff to rope in additional defendants who may not have done every unlawful act themselves, but due to that defendant conspiring with others, he may be held accountable for actions taken by the other defendants.  A recent case, however, shows that this is not always the case, especially when there are insufficient facts to connect the defendant to the start of a conspiracy.  In Alliance Technology Group, LLC v. Achieve 1, LLC, crucial facts relating that defendant to the beginning of the conspiracy were either not known initially or were left out of the complaint by the plaintiff.  Either way, without these facts, the defendant was able to slip himself free from the litigation by filing a motion to dismiss the claims against him.  This case shows that in some circumstances, it may be a better strategy to initially exclude naming some of the people doing the bad acts as defendants in the complaint at least in certain courts, and add them as defendants later once more facts pertinent to them are uncovered during the discovery phase.  This reduces the chance of the court kicking out defendants due to lack of facts connecting them in the beginning.

    This case also reinforces the importance of telling the whole story by providing all crucial facts known to connect each defendant to each claim made in the complaint, or else some claims may not make it to trial.  Stating a generally summary of facts in the complaint that apply only to certain defendants and not others may be insufficient, causing certain claims to be kicked out by a motion to dismiss, as was the case here.

    In deciding the motion to dismiss, the U.S. District Court for the Eastern District of Virginia determined that some claims against Defendant William Ralston did not survive because there were not enough facts to tie Ralston to those claims.  In general, Plaintiff’s attempt to attribute the actions to the multiple “Defendants” generally was frowned upon by the court, especially since many of the allegations that Plaintiff described in the complaint occurred before Ralston was in the picture.

    Ralston worked for Alliance for one month, before a coworker named Michael Thomas quit Alliance and began working at his own competing company, Achieve 1.  Ralston eventually left Alliance to work at Achieve 1.  Plaintiff Alliance sued Ralston, Michael Thomas, Achieve 1, and others who left Alliance to work at Achieve 1.  Alliance failed to state in the complaint the date of Ralston’s resignation, and provided only two connecting facts relating to Ralston: He was hired by Alliance weeks before Michael Thomas’s resignation and he now works for Achieve 1.

    Plaintiff attempted to rope in additional defendants, such as Ralston, by using facts pertaining only to other particular defendants, but this approach was not entirely successful.  Ralston filed a motion to dismiss the claims against him.  While the complaint provided sufficient background facts relating to most of the Defendants, facts specific to Ralston were missing.  The temporal gap between most of the facts stated in the complaint and Ralston’s involvement, including his becoming an employee at Alliance, was the main reason Ralston was successful on his motion to dismiss many of the claims.

    Specifically, the breach of fiduciary duty and misappropriation of trade secrets claims were found to be sufficiently pled, because Plaintiff provided these facts: Ralston had a duty to Plaintiff as an employee, Plaintiff lost business (showing damage), and Ralston’s new employer was using confidential information and trade secrets learned at Alliance.  Although there was no claim of breach specific to Ralston, the court decided that “it can be reasonably inferred that he now uses the same confidential information and trade secrets learned at Alliance. . . .”  Op. at 9.   “His knowledge of the trade secrets,” which Ralston acknowledged his access to during his employment with Alliance, “coupled with his alleged use of them (or even knowledge of others use) at Achieve 1, is sufficient to raise a reasonable inference of misappropriation . . . ,” and aiding and abetting breach of fiduciary duty, the court found.  Id.

    However, as to the conversion claim, the court held that too much time had passed between the hiring of Ralston at Alliance, and the beginning of the alleged conspiracy five months earlier.  Therefore, the court found that it was implausible that Ralston was engaged in the conversion, because “the property in question was converted to Achieve 1’s use before Ralston appeared on the scene . . .”  Op. at 14.  “The temporal gap highlights the fact that Ralston was not so similarly situated to his co-workers that it is reasonable to include him in a broad definition of ‘Former Employee Defendants’ with respect to this claim – thereby sweeping him into a series of tortious activities that occurred before he was even involved.”  Op. at 14-15.  Importantly, there were no specific facts alleged on this count that applied directly to Ralston, only facts that were stated to apply to the multiple defendants.

    Additionally, Alliance tried to allege that Ralston interfered with another defendant, Pierce’s, employment contract.  But no facts were provided showing that Ralston was at all familiar with Peirce’s employment contract.  It was not alleged that Ralston committed any intentional act designed to interfere with this contract.  Just because Ralston was employed by Alliance and then Achieve 1, it does not automatically follow that Ralston would know the terms in Peirce’s employment contract, the court noted.  Facts must be provided to show this to be true.  “While knowledge and intent may be alleged generally, it must still be accompanied by allegations of fact giving rise to a reasonable inference of knowledge or intent.”  Op. at 16 (citing Ashcroft v. Iqbal, 556 U.S. 662, 686 (2009)).  However, the court found that it was reasonable to infer that Ralston had knowledge of Alliance’s customer contracts, even though he may not have known about Pierce’s employment contract.  Therefore, the tortious inference claim as to prospective business relationships survived against Ralston, due to his position as an “Account Executive” with Alliance.

    The court found the common law conspiracy claim against Ralston failed as well because the complaint stated that the Defendants acted in concert around five months before Ralston joined Alliance.  “While it may be ‘conceivable’ that Ralston joined the already-formed conspiracy when he was hired in March 2012, there are no facts alleged to raise such an inference ‘above the speculative level.’”  Op. at 18 (citing Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007)).

  9. Written Demands by Shareholders Prior To Filing Derivative Actions Must Meet Certain Requirements, a Recent Case Explained

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    Virginia Code § 13.1-672.1(B)(1) contains a written demand requirement before a shareholder is able to file a derivative action on behalf of a corporation.  Under Virginia law, a shareholder has no standing to maintain a derivative suit unless he first makes a written demand that the corporation bring suit in its own right.

    In a recent case, the defendants, who are shareholders of a closely-held Virginia corporation along with the Plaintiff, claimed that Plaintiff did not meet the written demand requirement.  In the written opinion, the court laid out the specific requirements of a demand.

    In this case, the corporation was in the business of developing and managing restaurants.  In January 2008, Plaintiff claimed the defendants refused to provide him with any information concerning the corporation and essentially kept him out of the loop regarding the corporation.  Plaintiff also alleged that the defendants independently without his involvement opened another restaurant.

    Plaintiff hired an attorney to send a letter to defendants, demanding access to the company’s financial records, to which a shareholder is permitted access.  When no response was received, he sent a follow-up letter giving the defendants notice pursuant to Virginia Code § 13.1-774 that Plaintiff, as a shareholder owning more than 5% of the corporation, was entitled to the corporation’s financial records.

    This case presented a question of first impression: what components must a document have before it can be deemed to satisfy Virginia’s written demand requirement?

    The court recognized that the form of the demand is not specified in the statute except to require that it be in writing.  However, after analyzing several North Carolina cases, which evaluated a statue almost identical to the Virginia statute, the court determined certain overarching principals:

    First, the purpose of the statutory demand requirement is to put the corporation on notice of a shareholder’s objection to an alleged wrong to give the corporation an opportunity to fix it.  Second, a plaintiff cannot bring a derivative action seeking redress of wrongs not addressed in his written demand.  Third, a written demand need not discuss any specific legal theory nor every salient fact ultimately asserted in a plaintiff’s complaint, so long as the contents of the written demand are sufficiently clear and particular to put the corporation reasonably on notice as to the substance of the plaintiff’s objections and allow the corporation to address them. See Op at 5.

    The Court will thus consider (I) whether the document at issue identifies an alleged wrong, (2) whether the document demands action on the part of the corporation or its officers to redress the

    alleged wrong, (3) whether the demands in the document are clear and particular enough to have put the corporation reasonably on notice as to the substance of the alleged wrong and allow the

    corporation to assess its rights and obligations with regard to the alleged wrong, and (4) whether the alleged wrong and the claims asserted in the plaintiffs complaint are sufficiently connected.  Op. at 6.

    In the instant case, plaintiff’s two letters provided several alleged wrongs, including failure to provide plaintiff with Schedule K-1’s and federal income tax returns, failure to file tax returns, and breach of fiduciary duty associated with failure to allow plaintiff access to the corporation’s financial records without court intervention.  Plaintiff did not merely inquire about these failures; he clearly and particularly demanded that they be redressed.  The court found this sufficient to put the corporation on notice about the substance the alleged wrongs and give the corporation the opportunity to remedy the situation.

    Thus, the court held that plaintiff’s letters constituted “written demands” within the meaning of Virginia Code § 13. 1-672. I (B)(1), and any wrong addressed therein may properly form the basis of a derivative action.

    Plaintiff’s complaint, however, also included a claim that defendant usurped corporate opportunities by opening the additional restaurant.  The written demands failed to include mention of usurpation of corporate opportunities.  Therefore, the court found that Plaintiff did not sufficiently demand redress of this claim and so he was not permitted to seek redress of any alleged usurpation.

    As a result of this case, shareholders wishing to bring derivative suits must ensure that their written demands prior to bringing the derivative action:

    (1) identify an alleged wrong,

    (2) demand action on the part of the corporation or its officers to redress the alleged wrong,

    (3) clearly put the corporation on notice as to the substance of the alleged wrong and allow the corporation to assess its rights and obligations with regard to the alleged wrong, and

    (4) ensure that the alleged wrong and the claims asserted in the plaintiffs complaint are sufficiently connected.