Protorae Law
Mike Holm | LeClairRyan | UBP Team

Unfair Business Practices



This blog focuses on unfair business and trade practices such as business conspiracy, breach of fiduciary duty, misappropriation of trade secrets and other proprietary information, fraud, tortious interference with contracts and other unfair business practices that are not neatly defined. Since we are located in Tysons Corner, Virginia, many of the cases discussed will come from Virginia, Maryland and the District of Columbia courts. We hope the reader finds this blog instructive.

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Tuesday, January 1, 2008

What is an Unfair Business Practice?

There are no set guidelines explaining everything that could constitute an unfair business practice. Certainly, people agree that some actions, such as fraud, qualify. But, agreeing that an abstract term like "fraud" is wrong is markedly different than agreeing that a set of actions or words equal fraud. Peoples' opinions are often shaped by "whose ox is being gored." Thus, what to some may be considered a corporate raid, others may call a strategic acquisition (particularly, the acquirer). Even wikipedia offers only a brief description of unfair business practices. http://en.wikipedia.org/wiki/Unfair_business_practices.

Courts and legislators have tried to define the boundaries where healthy competition crosses the line to become unfair. One of the more powerful weapons against unfair practices are business conspiracy statutes. For instance, Virginia’s law, § 18.2-499 (http://leg1.state.va.us/cgi-bin/legp504.exe?000+cod+18.2-499), makes it illegal for two or more persons to "combine, associate, agree, mutually undertake or concert together for the purpose of . . . willfully and maliciously injuring another in his reputation, trade, business or profession by any means whatever . . . ." An party injured by such conduct can file a civil action and may "recover three-fold the damages by him sustained, and the costs of suit, including a reasonable fee to plaintiff's counsel . . . ." Virginia Code § 18.2-500 (http://leg1.state.va.us/cgi-bin/legp504.exe?000+cod+18.2-500).

But, quoting the above language hardly tells the reader what is meant by it. What if two people agree to advertise a new widget business with the expressed purpose of taking customers away from the one local widget maker? Does the answer change if the new company hired 20% of the existing company’s specially trained employees? Or, 50%? What if those hired employees brought with them some widget designs used by the existing company? Or, what if those borrowed designs were discussed but rejected by the existing company? And, does the answer change depending on whether the employees had noncompete or other contractual limitations. It is these questions and the many gray lines presented in them that cause courts to struggle to define a business conspiracy and other unfair business practices. To define the contours of unfair competition, Maryland courts have virtually reached back to the Golden Rule, stating "The legal principles which are controlling here are simply the principles of old-fashioned honesty. One man may not reap where another has sown, nor gather where another has strewn." http://www.courts.state.md.us/opinions/cosa/1999/1576s98.pdf.

Compare two Virginia Supreme Court cases Feddeman and Co. v. Langan Associates (http://www.courts.state.va.us/opinions/opnscvtx/1991996.txt) and Peace v. Conway, 246 Va. 278, 435 S.E.2d 133 (1993) (unavailable via internet). In Conway, two employees simultaneous left their employer to establish a competing business. After leaving, they contacted over a hundred of their former employer's customers. They identified those customers solely from their memories. Neither of them had signed a noncompete or nonsolicit agreement with their former employer. The court found that the former employees did not employ improper methods in obtaining their former employer’s customers.

In Feddeman, the plaintiff accounting firm sued its former directors and employees, and a competitor. The court found that the defendants were liable under Virginia’s conspiracy statute for coordinating a mass resignation of the plaintiff’s employees (25 out of 31) and the solicitation of all its customers, 50% of whom transferred their business to the competitor defendant. While the court agreed that employees have a right to make plans to compete with their employer, that right is not absolute. The court focused on the employee and director defendants’ formulation of plan to resign en masse if the plaintiff firm did not accept their buy-out proposal, their statements to other employees informing them of the resignation plan and offering them the option to work for the competitor.

Ironically, the Virginia Supreme Court reversed the trial judge in both cases: ruling in Feddeman that the trial court improperly set aside the jury verdict awarding the plaintiff damages; and ruling in Peace that the trial court’s erred in awarding damages to the plaintiff because there was no legal wrongdoing. Thus, even judges disagree as what constitutes an unlawful business practice. This makes it especially difficult for companies looking to aggressively expand to find a safe harbor.

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