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.

Thursday, January 31, 2008

Virginia Supreme Court Expands Availability of Punitive Damages in Corporate Raiding Cases

The Virginia Supreme Court in Banks v. Mario Industries of Virginia, Inc., 650 S.E.2d 687 (2007), http://www.courts.state.va.us/opinions/opnscvwp/1061348.pdf, threw a bone to companies which have lost employees to newly formed competitors by weakening the quantum of proof necessary to demonstrate "actual malice" that would support an award of punitive damages in such situations.

Mario Industries manufactures and sells lighting products in part to hotels, nursing homes and governmental entities. Troy Cook managed its contract sales division from 1995 to 2003. Bette Banks was Mario’s sales rep in Virginia, Maryland and DC and the Darnell Group was a sales organization that acted as Mario's sales rep in Illinois and Michigan during the time in question.

According to the opinion, Cook and another individual who had previously been employed by another Mario company formed Renaissance Contract Lighting and Furnishings, Inc. in March 2003. The business plan prepared for Renaissance contained Mario's confidential information regarding growth rates, sales totals, past projects, target price points for customers, profit margins, vendor lists, key accounts and suppliers, marketing plans and strategies, production costs, commissions, trade secrets and intellectual property. This information enabled Renaissance to become highly competitive with Mario.

The evidence also indicated that Cook spoke to at least three Mario employees while still employed by Mario about Renaissance. And, Cook used his computer at Mario to draft documents relating to the formation of Renaissance. From March, 2003 until he resigned in November 2003, Cook was employed both by Renaissance and Mario. During this time and after he resigned, Cook encouraged other Mario employees to send opportunities to Renaissance. Among those who did so were Banks and Darnell.

Mario brought several lawsuits against all of the above, which were consolidated for trial, under theories of tortious interference with business relations, common law and statutory conspiracy, breach of fiduciary duty, misappropriation of trade secrets and conversion. Mario prevailed at trial on all counts except business conspiracy. In addition to compensatory damages, the jury awarded $56,700 in punitive damages.

One of the most interesting and far reaching aspects of the opinion relates to the quantum of proof necessary to establish actual malice that would support an award of punitive damages. The jury was instructed that "actual malice" is "a sinister or corrupt motive such as hatred, personal spite, ill will, or a desire to injure the plaintiff." The Court held evidence that Cook had formed Renaissance while he was employed at Mario with the intention that it would compete with Mario was sufficient for the jury to conclude that Cook had the requisite malice to injure Mario. Thus, the award of punitive damages was allowed to stand.

This holding is significant because it blurs the line between "actual malice" necessary for the recovery of punitive damages and "legal malice" which is the standard required to prevail under the Virginia business conspiracy statute. As the Supreme Court noted in Advanced Marine Enterprises, Inc. v. PRC, Inc., 501 S.E.2d 148 (Va. 1998), http://www.courts.state.va.us/opinions/opnscvwp/1971950.doc, to prevail under the conspiracy statute, it is not necessary "to prove that a conspirator's primary and overriding purpose is to injure another in his trade or business. (citations omitted) Rather,... these statutes merely require proof of legal malice, that is proof that the defendant acted intentionally, purposefully and without lawful justification." "Without lawful justification" can include breach of fiduciary duty or assisting someone to do so. See Feddeman & Co. v. Langan Associates, 530 S.E.2d 668 (Va. 2000), http://www.courts.state.va.us/opinions/opnscvwp/1991996.doc .

On its face, it would seem that the evidence the Court found persuasive in Banks was more akin to that necessary to establish "legal malice". In many cases, an employee, in an effort to minimize risk, will form a competing company while still employed by the original employer. It now appears, however, that, if that new company is designed to compete with the former employer, such facts are sufficient to allow a jury to find "actual malice" that will support an award of punitive damages. In the context of a statutory business conspiracy suit, this provides a plaintiff with an extra arsenal. Given that punitive damages are available in such a case if there is a separate claim that will support such an award, and are not preempted by the trebling of damages provided in the statute, in the routine case punitive damages may now be a realistic threat.

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