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.




  • James (Jim) B. Kinsel
    Jim Kinsel is a trial attorney who focuses on business litigation and unfair business practice claims, including business conspiracies, trade secret misappropriation, fiduciary duty breaches and other business torts.



  • W. Michael (Mike) Holm
    Mike Holm is a senior trial lawyer who has represented numerous business entities in bet-the-company and other unfair business practices cases.




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Sunday, March 30, 2008

Members of Virginia LLC's May Not Owe Fiduciary Duties to Each Other

According to two recent decisions from Circuit Courts in Virginia, members of Virginia Limited Liability Companies do not owe any common law or statutory fiduciary duties to each other. Instead, they only owe duties to the LLC as an entity.

In WAKA, LLC v. Humphrey, 73 Va. Cir. 310 (2007) one of the LLC's members sued the other members individually for, inter alia, breach of fiduciary duty. The other members moved to dismiss the claim. The court, therefore, had to determine whether managers, members and member-managers of Virginia LLCs owed fiduciary duties to each other. The LLC's Articles of Organization and Operating Agreement were silent as to the issue. Turning to the Virginia Code, the court found it silent as well. But when the court compared the provisions of the Virginia LLC Act with those of the Partnership Act, it found distinct differences. Most significantly, the Partnership Act contains express provisions relating to fiduciary duties owed to the partnership and other partners. The LLC Act does not. In addition, the LLC Act permits members to transact business with the LLC in the same way as non-members, compared to the Partnership Act which prohibits a partner from dealing with the partnership where the partner's interest is adverse to that of the entity.

Based upon these distinctions, the court held that the absence of statutory language creating fiduciary duties in the LLC context was intentional. Thus, members of an LLC do not owe fiduciary duties to each other, even if one is a member-manager. The only duties are owed by the member-manager to the LLC as an entity. To create such fiduciary duties, however, the LLC Act permits the members to include such provisions in the articles of organization or the operating agreement.

In the second case, Remora Investments, LLC v Orr, 2007 Va. Cir. LEXIS 198, the court considered whether an LLC member could bring a direct action against the manager of that LLC for breach of fiduciary duty. In its analysis, the court reviewed prior decisions of the Virginia Supreme Court which held that a member of an LLC owed a fiduciary duty to the LLC itself, Flippo v. CSC Assocs., http://www.courts.state.va.us/opinions/opnscvwp/1002183.pdf (2001), and that a minority shareholder in a closely held corporation could not bring an action against corporate officers or directors for breach of fiduciary duty in an individual, as opposed to derivative capacity. Simmons v. Miller, http://www.courts.state.va.us/opinions/opnscvwp/1000785.pdf (2001). The court also relied upon WAKA, LLC v. Humphrey, supra.

Noting that the LLC in Remora was manager-managed as opposed to member-managed, the court found that the Virginia Code did not differentiate among managers and member-managers with regard to duties owed to the LLC. And, the Operating Agreement did not provide that any fiduciary duties were owed by the manager to the members themselves. Accordingly, the court concluded that a claim for breach of fiduciary duty could only be maintained against another member or manager of an LLC in a derivative capacity.

These cases are cautionary tales for those in business who do not appreciate all of the distinctions between LLCs and partnerships. It is not unusual for disputes to arise between partners or members of LLCs. Those disputes sometimes result in unfair business practice type claims being asserted against other partners/members. In the absence of careful drafting of the organizational documents, however, in the LLC context, members may find the fiduciary duties they expect to protect them, non-existent.

Monday, March 24, 2008

Court Denies Congressman Jefferson's Motion to Dismiss His Indictment

This is an unfair business practices blog: not one that focuses on criminal matters. But, sometimes the intersection of unfair business practices and criminal conduct is so pronounced that criminal cases warrant mention. Such was the case in our prior blog entry discussing the criminal prosecution of a spammer. See
http://unfairbusinesspractices.blogspot.com/2008/03/spammer-to-slammer-unfair-business-of.html#links.

To read our view of what constitutes an unfair business practice see http://unfairbusinesspractices.blogspot.com/2007/12/what-is-unfair-business-practice_31.html#links.

So too is the relevance of the criminal prosecution of Congressman William J. Jefferson (D-LA) integral to this blog's purpose. The attached opinion analyzes the Congressman's argument that the indictment alleging his participation in several bribery schemes was invalid because the Grand Jury proceeding offended the U.S. Constitution's Speech and Debate Clause, protecting the Congressman's legislative activities. See http://www.williamsmullen.com/files/upload/20March2008_Clayton_vaed_uscourts_govp.pdf.

"The indictment alleges that beginning in or about January 2001, [Congressman Jefferson] used his office to advance the business interests of various individuals and corporations in return for money and other things of value paid either directly to defendant or via 'nominee companies,' that is, companies ostensibly controlled by one of defendant’s family members but in fact controlled by defendant himself. More specifically, the indictment alleges seven bribery schemes . . . ."

For example, "the indictment alleges that defendant solicited bribes from Vernon Jackson, president of iGate, Incorporated (iGate), a Louisville, Kentucky-based telecommunications firm, to promote iGate's telecommunications technology in certain African countries. In return for payments of money and iGate shares to the ANJ Group, L.L.C. (ANJ), a Louisiana limited liability company ostensibly controlled and managed by defendant's spouse, Andrea Jefferson, defendant allegedly sent letters on official letterhead, conducted official travel, and met with foreign government officials to promote the use of iGate’s technology."

For another of the bribery schemes, the "indictment alleges that defendant solicited bribes from Netlink Digital Television (Netlink), a Nigerian corporation that was pursuing a telecommunications venture in Nigeria and elsewhere in Africa. In return for a share of revenue, stocks, and fees from Netlink, defendant allegedly performed various official acts including meeting with Nigerian government officials to promote Netlink's business."

It is important to emphasis that Congressman Jefferson has only been accused of the crimes – not convicted. He has defended himself, in part, by claiming that the indictment should be dismissed because the "indictment was returned on the basis of information privileged by the Speech or Debate Clause, U.S. Const. Art I, § 6, cl. 1."

As the Court explained: "The Constitution's Speech or Debate Clause has a distinguished pedigree, and the principle it embodies has roots that long predate the Constitution. It states, with elegant simplicity, that:

'[F]or any Speech or Debate in either House, [Members of Congress] shall not
be questioned in any other Place.'

By its plain terms, the Clause confers absolute immunity on Members of Congress for their legislative activities. The importance of this immunity is manifest. As Justice Joseph Story recognized in his famous Commentaries on the Constitution, this is a 'great and vital privilege . . . without which all other [congressional] privileges would be comparatively unimportant, or ineffectual.' Similarly, the Supreme Court later noted that the purpose of the Speech or Debate Clause, and of similar clauses that then appeared in every state’s constitution, is 'to support the rights of the people, by enabling their representatives to execute the functions of their office without fear of prosecutions, civil or criminal.'"

Moreover, "It is also worth nothing that the Speech or Debate Clause protects Members of Congress 'not only from the consequences of litigation's results but also from the burden of defending themselves' regarding their legislative activities."

But, "the privilege applies only to those activities integral to a Member's legislative function, i.e. activities that are integral to the Member's participation in the drafting, consideration, debate, and passage or defeat of legislation. And because the scope of the Speech or Debate Clause is limited to legislative activities, it follows that the privilege does not extend to a Member's nonlegislative actions."

"Because the Clause's protection does not extend beyond the legislative sphere, it follows that the Clause does not confer immunity on a Member for the Member's criminal conduct, including conspiracy, solicitation of bribes, wire fraud, violations of the Foreign Corrupt Practices Act, money laundering, obstruction of justice, or racketeering."

After reviewing the transcript of the Grand Jury proceedings, the Court concluded that the proceeding did not violate the Speech and Debate Clause and a dismissal of the indictment was not required.

In Washington, D.C., the forces of big money and powerful politics constantly intersect. And, it is important that these cross-currents are legally navigated by business persons and politicians alike.

Wednesday, March 19, 2008

Spammer to the Slammer -- Unfair Business of Spamming Results in Jail Sentence

This post was based on the Virginia Supreme Court's opinion rendered February 29, 2008. That opinion was subsequently withdrawn and a new opinion was issued on September 12, 2008. The post below was edited to remove the link to the old opinion because that link was changed. Otherwise, the post is unchanged. Click here for our post discussing the subsequently issued Jaynes opinion: http://unfairbusinesspractices.blogspot.com/2008/10/virginia-supreme-court-overturns.html.

The conviction of a spammer was upheld by the Virginia Supreme Court in an opinion published on February 29, 2008. The case is styled Jaynes v. Commonwealth. This case is an example of unfair business practices that are so nefarious as to invite criminal prosecution.

Criminal liability was based on Virginia Code Ann. Sec. 18.2-152.3:1 which provides:

A. Any person who: 1. Uses a computer or computer network with the intent to
falsify or forge electronic mail transmission information or other routing
information in any manner in connection with the transmission of unsolicited
bulk electronic mail through or into the computer network of an electronic mail
service provider or its subscribers . . . is guilty of a Class 1 misdemeanor.

B. A person is guilty of a Class 6 felony if he commits a violation of subsection A
and: 1. The volume of UBE transmitted exceeded 10,000 attempted recipients in
any 24-hour period, 100,000 attempted recipients in any 30-day time period, or
one million attempted recipients in any one-year time period. . .

An interesting aspect of the case was the Court holding that Virginia has jurisdiction to criminally prosecute the spammer who was located in North Carolina, but sent the spam emails through AOL servers located in Virginia. The Court held, in part, that jurisdiction was proper because '[b]y selecting AOL subscribers as his e-mail recipients, Jaynes knew and intended that his e-mails would utilize AOL servers because he clearly intended to send to users whose e-mails ended in '@aol.com.' The evidence established that the AOL servers are located in Virginia, and that the location of AOL's servers was information easily accessible to the general public.

The Court rejected the spammer's claim that he had standing to assert a First Amendment defense to argue that the statute was unconstitutionally overbroad on behalf of an "unknown individual’s potentially protected speech." Opinion at 12. Similarly, it rejected the spammer’s argument that the statute was void for vagueness. The Opinion invited three dissenting Justices, who disagreed with the Court’s standing analysis.

The court did not address how this unfair business practice might be treated for any civil claims that may be filed.

The scope of the spammer's activity and the number of emails in his possession were extraordinary, and it is worth reading extended excerpts from the Court's factual summary.

"From his home in Raleigh, North Carolina, Jaynes used several computers, routers and servers to send over 10,000 e-mails within a 24-hour period to subscribers of America Online, Inc. (AOL) on each of three separate occasions. On July 16, 2003, Jaynes sent 12,197 pieces of unsolicited e-mail with falsified routing and transmission information onto AOL's proprietary network. On July 19, 2003, he sent 24,172, and on July 26, 2003, he sent 19,104. None of the recipients of the e-mails had requested any communication from Jaynes. He intentionally falsified the header information and sender domain names before transmitting the e-mails to the recipients, causing the Internet Protocol (IP) addresses to convey false information to every recipient about Jaynes’ identity as the sender. However, investigators used a sophisticated database search to identify Jaynes as the sender of the e-mails."

"During trial, evidence demonstrated that Jaynes knew that all of the more than 50,000 recipients of his unsolicited e-mails were subscribers to AOL, in part, because the e-mail addresses of all recipients ended in ' @aol.com ' and came from discs stolen from AOL. Jaynes' e-mails advertised one of three products: (1) a FedEx refund claims product, (2) a 'Penny Stock Picker,' and (3) a 'History Eraser' product. To purchase one of these products, potential buyers would click on a hyperlink within the e-mail, which redirected them outside the e-mail, where they could consummate the purchase. Jaynes operated his enterprise through several companies which were not registered to do business in North Carolina, and evidence was introduced as to billing and payment activities for these companies, including evidence that registration fees were paid to AOL with credit cards held by fictitious account holders."

"While executing a search of Jaynes' home, police discovered a cache of compact discs (CDs) containing over 176 million full e-mail addresses and 1.3 billion e-mail user names. The search also led to the confiscation of a storage disc which contained AOL e-mail address information and other personal and private account information for millions of AOL subscribers. Police also discovered multiple storage discs which contained 107 million AOL e-mail addresses. Richard Rubenstein, manager of technical security investigations at AOL, testified that the discs recovered at Jaynes’ home "contained proprietary information" of 'pretty near all' AOL account customers. The AOL user information had been stolen from AOL by a former employee and was in Jaynes' possession."

"AOL, which houses all of its e-mail servers in Virginia, was directly affected by Jaynes' spam e-mail attack. Brian Sullivan, the senior technical director for mail operations at AOL, testified that bulk e-mail 'tends to create a lot of confusion' for AOL customers and that AOL receives '7 to 10 million complaints per day' regarding spam e-mails. Sullivan also described the impact of spam e-mails, explaining that '[i]f someone’s mailbox is full because they got a truckload of spam and there’s no more room, a message coming from Grandma is returned back to the sender. We can’t take it at that point.'"

"Jaynes' enterprises were apparently quite successful. Although not introduced as evidence during the guilt stage of the trial, counsel for the Commonwealth informed the Court following the jury verdict against Jaynes and during the discussion of bond for Jaynes that Jaynes' '[p]ersonal financing statement list[s] assets at $17 million and a net worth of $24 million,' and his income from all of his businesses exceeded $1 million in 2001, 2002 and 2003."

Wednesday, March 12, 2008

Three Bad Acts Do Not a Conspiracy Make

The U.S. District Court for the Western District of Virginia, in Schlegel v. Bank of America, rejected a Virginia business conspiracy claim because "but for" allegations are insufficient to prove a conspiracy. In Schlegel, the plaintiff alleged that one of Bank of America's senior vice presidents, Charles H. Hill Ewald ("Ewald"), wrongfully allowed a former director, Christopher C. Grieb ("Grieb"), of a closely-held corporation, Piedmont Building & Development Corporation ("Piedmont"), to withdraw money from the corporate accounts and deposit the funds into Grieb's personal account. See http://www.vawd.uscourts.gov/OPINIONS/MOON/3.07CV00022SCHLEGELV.BANKOFAMERICA(GRANTINGDMTD).PDF

When informed of the improper withdrawal, Bank of America froze Grieb's personal account. About four months later, Hill contacted Piedmont's former corporate attorney, Ralph Eugene Maine, Jr. ("Maine"), who was also Grieb's personal attorney, to inquire about the propriety of the withdrawal.

Schlegel brought a Virginia statutory business conspiracy claim against Bank of America, alleging that Ewald's request from Maine was unlawful, the bank acted improperly, and Maine acted unlawfully in responding to Ewald's request. The court granted Bank of America's motion to dismiss, finding that Schlegel failed to allege a concerted action between the bank, bank officials, and Maine.

The court first set forth the meaning of "concerted action" as contained in Sec. 18.2-499, requiring proof that someone "'combined, associated, agreed, mutually undertook, or concerted together' with someone else in the injurious conduct." "This means that a plaintiff must prove that the defendants combined together to effect a preconceived plan and unity of design and purpose."

The court dismissed the conspiracy claim because the plaintiff "essentially bases his conclusion that there must have been a conspiracy on a 'but for' argument: 'Ewald would have been unable to continue the freeze of funds had Maine not provided him with the information he did, and Maine individually has no way of effecting bank policy in his client's (Grieb's) favor. Thus it became a mutual undertaking because it had to, neither alone able to achieve the result desired, which they did when their efforts were combined.'" "In other words, plaintiff argues that but for Ewald's actions and Maine's actions, he would not have been injured."

In rejecting the plaintiff's argument, the court reasoned: "But to read a 'but for' test of 'conspiracy' and 'concerted action' into Virginia's civil conspiracy statute would mean that two people acting independently would be civilly liable any time their independent acts resulted in a harm to a person's reputation, trade, business or profession, regardless of whether the two people actually came to an agreement (whether explicit or implicit) regarding the purpose of their actions. Such a reading would be far too expansive."

"[P]laintiff here has merely alleged that Ewald independently acted improperly, Maine independently acted improperly, and the Bank officials independently acted improperly, all to plaintiff's detriment. Ergo, he says, those three must have acted in concert. Plaintiff simply has not alleged any facts that would allow the court to infer that Maine and the Bank acted together. His claim must therefore be dismissed."

This opinion reinforces the point that not every collection of bad acts give rise to a business conspiracy claim. And, courts closely examine the allegations to determine whether to even allow plaintiff discovery to investigate the facts.

For a discussion of the elements of a Virginia statutory business conspiracy claim see http://unfairbusinesspractices.blogspot.com/2008/01/elements-of-business-conspiracy.html#links

Friday, March 7, 2008

Court Grants-in-part and Denies-in-part Injunction Request Based on Licensing Agreement

In an easy-to-read and short opinion, the trial judge in TCC Sports, LLC v. Sports Group, Ltd., Case No. 47397 in the Circuit Court of Loudon County, Virginia, granted in part the injunction petition filed by TCC Sports, as the publisher of Game Day magazine, against Sports Group, Ltd., the publisher of Inside Sport magazine based on the licensing agreement between the two companies. See http://www.williamsmullen.com/files/upload/TCCSportsOpinion.pdf .

The Court granted the injunction based on the non-competition provision that provided that: "[d]uring the Term of the Agreement and for a period of two (2) years after termination thereof for any reason, or for no reason at all, Licensee shall not, without the express written consent of the Licensor, individually or on behalf of any other person, corporation, firm or other entity, solicit or encourage any employee, agent or contractor or Licensor or its affiliates, solicit the business of any client, customer or other licensee of Licensor or solicit or encourage any client, customer, licensee or vendor to terminate his, her or its relationship or affiliation with the Company." Opinion at 3.

The court applied the four factor test for determining whether to grant an injunction as set forth in Blackwelder Furniture Co. v. Seilig Mfg. Co., 550 F.2d 189 (4th Cir. 1977), which weighs: (1) the likelihood of irreputable harm to the plaintiff in the event the preliminary injunction is denied; (2) the likelihood of harm to the defendant if the request is granted; (3) the likelihood the petitioner will succeed on the merits; and (4) the public interest.

In applying Blackwelder test, the Court determined that "the hardships weigh in favor of granting relief to the petitioners." Therefore, "a lesser showing of success on the merits is required." And, as to the likelihood of success on the merits, the Court found "a causal reading of the publications would suggest clients, customers or other licensors of 'Game Day' magazine might reasonably expect to be confused with a contact from 'Inside Sport' magazine." It thus entered the requested injunction. An argument can be made, however, that the scope of the noncompetition clause is overly broad because it purports to be binding on "'. . . Licensee, and its affiliates, officers, shareholders, owners, members, directors, agents and employees . . .'"

The Court denied the injunctive relief request as to a much broader provision in the licensing agreement, which sought to prevent Sports Group during the period specified from publishing the Inside Sport magazine. That provision limited the Sports Group's ability to compete with TCC Sports "in the Commonwealth of Virginia or in any other state of the United States or in any country in the world where licensor engages in business, or proposes to engage in business on the date of the termination of the agreement." As the Court pointed out, granting the injunction would put Sports Group out of business. The Court was not prepared to do so when the relative harm/benefit analysis was "in equipoise," and there was a "scant record" as to whether the petitioners were likely to succeed at trial.

The court’s ruling is clearly aimed at separating TCC Sports justifiable pre-trial interests (e.g. not having its clients solicited by Sports Group) from those interests that may be difficult to prove at trial, such as preventing all of Sports Group’s officers, shareholders, and employees, etc. from establishing an arguably competitive magazine.

Tuesday, March 4, 2008

Finding the Electronic Smoking Gun in Unfair Business Practices Cases

Unfair business practices, corporate raiding, breach of fiduciary duty and business conspiracy cases all have much in common. Usually there are one or more disloyal employees and often an aggressive competitor. The fact patterns follow a number of predictable scenarios. For example, a disloyal employee who wants to be marketable to a competitor may misappropriate proprietary information that he then provides to a new employer to earn instant goodwill. Or, if a conspiracy is present it may involve one or more employees who desire to start a competing company because they believe they can make more money than they are currently being paid or who have been approached by a competitor who wants to hire a group of key employees from the competitor firm. In such cases because they are either risk averse or are experiencing pressure from the competitor to bring work with them, the employees pilfer proprietary data from their employer that might be useful to the new company in creating efficiencies or expediting revenue. The end result is the same: loss of key employees, clients and profits.

For the plaintiff’s lawyer representing the victim employer, electronic data may be the source of the most important evidence in the case. So where do you look?

First, start with the client’s IT system. But, before any search methods are employed, engage a forensics expert to make a bit map image of the server or any hard drives that might contain relevant evidence. In addition, take the last set of full backup tapes, if they exist, out of rotation. That way, no discoverable electronic data should be lost that could later serve as a basis for a spoliation (unlawful destruction) motion.

Then, examine the renegade employees’ emails, user files and electronic faxes. Most jurisdictions do not protect employees’ communications using work computers from review by their employer. From this information, you may find evidence that supports your claim against the departed employees, but it may also reveal evidence of concerted action by other individuals who are still employed by your client.

Once a lawsuit is filed, serve comprehensive document requests that require the production of documents from the individual defendant’s personal computers and PDAs in electronic form. It is important to negotiate a protocol for the form of production with opposing counsel in advance or seek approval of one from the court. Make certain that the metadata for all documents and emails is produced. It will provide details of when documents were created, modified, last accessed and by whom. Again, emails may hold the key to the identities of others who may be involved. Cell phone records are another fertile ground for evidence of complicity.

Twenty first century litigation is almost wholly dependent upon electronic evidence. If you are still chasing the paper, you will likely miss 90% of potentially relevant evidence. Working closely with a competent forensic expert will help you identify other potential sources of electronic data that can assist in evaluating your case early, before costs escalate and can possibly enable you to find that smoking gun that will lead to an early settlement of the litigation.