Virginia Petitions the U.S. Supreme Court to Reinstate Anti-Spam Law

Virginia's Attorney General is petitioning the U.S. Supreme Court to uphold the verdict against spammer, Jeremy Jaynes, and reverse the Virginia Supreme Court's decision rendering unconstitutional Virginia's anti-spam statute. Virginia's petition for a writ of certiorari to the U.S. Supreme Court, dated December 11, 2008, can be found here.

As we discussed in our prior posts, found here and here, Jaynes' was convicted of violating Virginia's anti-spam statute after sending millions of spam emails through AOL's computer servers. The Virginia Supreme Court declared the anti-spam statute unconstitutional after initially finding the statute constitutional. The statute was unconstitutional, the Court ultimately found, because it potentially chilled the right to anonymous speech.

It will interesting to see whether the U.S. Supreme Court hears this case since spamming is so prevalent. According to the petition, AOL servers received over one billion spam emails every day at the time of Jaynes' actions. But, Virginia is one of the few if any states that forbid any type of spam -- not just commercial spam. So if the U.S. Court reinstates the Virginia anti-spam law, other states may quickly broaden their anti-spam laws.

Breach of Fiduciary Duty -- Traps for the Unwary

Many unfair business practices cases, such as those involving conspiracies, arise out of claims that the defendants breached their fiduciary duties. So what does that mean? In Virginia, Maryland and the District of Columbia, officers, directors and employees (“Employee”) owe the company an undivided duty of loyalty. In other words, an Employee cannot allow his own self-interest to conflict with his duty to his employer. PM Services Co. v. Odoi Associates, Inc., 2006 U.S. Dist. LEXIS 655 (D.D.C. January 4, 2006); Adelman v. Conotti, 213 S.E.2d 774 (Va. 1975); Maryland Metals, Inc. v. Metzner, 382 A.2d 564 (Md. 1978). These duties are particularly significant in that they are based upon the common law and are applicable even in the absence of a written covenant not to compete.

Such claims often arise when an Employee makes plans to go to work for a competitor or form a competing company. They usually involve one of the following: (1) the departing Employee solicits other co-workers to join her at the new company; (2) the departing Employee solicits clients to follow her, thus guaranteeing immediate work and income; or (3) the Employee takes his employer’s confidential information without permission and uses it to benefit the new employer. Unless the Employee follows certain rules, such conduct may make him liable to the former employer for breach of the duty of loyalty or breach of fiduciary duty.

First, while an Employee may make plans to compete, he may not recruit his co-workers to join him while still employed if it leads to a mass resignation. Feddeman & Co. v. Langan Associates, 530 S.E.2d 668 (Va. 2000); Maryland Metals, supra; Riggs Investment Management Corp. v. Columbia Partners, LLC, 966 F. Supp. 1250 (D.D.C. 1997).

Second, the Employee may not solicit his employer’s customers to move their accounts to the new entity. Furash & Co. v. McClave, 130 F. Supp.2d 48 (D.D.C. 2001); PM Services, supra; Maryland Metals, supra; Feddeman, supra. Similarly, an individual, while still employed, may not divert to a competitor business opportunities presented to him if it is within the employer’s line of work, the employer can afford to take advantage of it and, after disclosure, the employer is interested in the opportunity. PM Services, supra.

Finally, the Employee may not use his employer’s confidential information to benefit the new employer or help it gain a competitive advantage. Furash & Co., supra; Riggs, supra; PM Services, supra; Maryland Metals, supra; Feddeman, supra. This preclusion continues after the Employee joins a new company. Bull v. Logetronics, Inc, 323 F. Supp. 115 (E.D.Va. 1971).

Of course, whether an Employee’s conduct rises to a level of breach of fiduciary duty is, in each case, very fact specific. These rules, however, seek to strike a balance between the need to protect vigorous competition and the strong policy that competition be conducted with honesty and fair dealing.

Government Contractor Hit with $10 Million in Punitive Damages for Discriminatory Contract Termination

In a government contractor dispute between prime and subcontractor companies, a jury empanelled in the U.S. District Court for Eastern District of Virginia found that the prime contractor racially discriminated against the subcontractor, tortiously interfered with the subcontractor's employee contracts, breached the parties' contracts and breached the implied duty of good faith and fair dealing. The jury awarded over $5 million in compensatory damages and $10 million in punitive damages against the prime contractor.

The Court's September 22, 2008 opinion sets forth the evidence which the jury considered and ultimately believed in reaching the verdict. That evidence, the Court found, was sufficient to uphold the verdict. The opinion can be found here.

The plaintiffs were two related companies, World Wide Network Services, LLC and its subsidiary World Wide Network Services International (hereinafter "WWNS"). WWNS was certified as an "8(a)" small disadvantaged company. WWNS was awarded a subcontract with Defendant DynCorp International, LLC ("DynCorp") to assist DynCorp with its contracts with the U.S. Department of State in Iraq and Afghanistan.

According to the Court, "in the fall of 2005 the relationship between DynCorp and WWNS began to cool." Opinion at 7. "WWNS employees began to observe displays of racial animus towards WWNS in the form of derogatory comments . . . , as well as deliberate exclusion from planning meetings, failing to respond to e-mail requests for information and assistance . . . and failing to renew/provide WWNS employees with the proper security badges WWNS’s employees were required to have in order to perform their work and to access remote work sites. Additionally, DynCorp’s evaluations of WWNS's performance turned critical." Id.

In examining the discrimination claim filed pursuant to Section 1981, the Court maintained the burden-shifting analysis used in Title VII discrimination claims. It found that WWNS was required to show that it: "(1) is a member of a minority group; (2) was qualified to perform the obligations set forth in the subcontracts; (3) despite its qualifications and performance, it was terminated; and (4) after its termination, DynCorp retained another company from an unprotected class." Op. at 18. DynCorp would then have to "produce evidence that the plaintiff was rejected, or someone else was preferred, for a legitimate nondiscriminatory reason." Id. If those burdens were met, WWNS would have to show that DynCorp’s proffered reason was "mere pretext and that race based discrimination was the real reason" for DynCorp's actions. Id.

As to the tortuous interference with contract claim, the Court rejected DynCorp's argument that the jury's verdict was unsupported as a matter of law. DynCorp argued it did not tortiously interfere with WWNS's employment contracts because there was "no evidence that DynCorp intentionally induced any former WWNS employee to fail to provide 15 days notice of termination of their employment agreements with WWNS . . . ." Op. at 22-23. The Court found that the jury's finding was supported by the evidence of DynCorp's meeting with WWNS's employees to notify them that the subcontract "would be terminated August 11, 2006, and that as of July 26, 2006, all WWNS employees should report to DynCorp . . . ." Op. at 23. And, after receiving a letter from WWNS's counsel, DynCorp "convened another meeting . . . at which DynCorp recanted its statements . . . and notified WWNS personnel that they continued to be considered WWNS employees and would no longer work in support of the [subcontract] after August 11, 2006." "Thereafter, DynCorp began to make employment offers to select WWNS employees in Iraq in order to prevent a ‘disruption of service.'" Id.

The Court also found that there was enough evidence to support the punitive damages award and the finding that DynCorp acted with malice:

"DynCorp’s malicious intent towards WWNS is illustrated in DynCorp's conduct during the time period leading up to and after it decided to terminate its relationship with WWNS. For example, WWNS introduced evidence at trial that [DynCorp] reached out to EDO Corporation [which was a competitor to WWNS] well before DynCorp notified WWNS of its decisions to terminate their contractual relationship. [DynCorp] hired EDO Corporation to evaluate WWNS's workmanship with the Codan Radios. [DynCorp] terminated EDO Corporation’s contract because assessments of the Codan Radio system had already been completed by another firm. However, [DynCorp] indicated in an e-mail to EDO Corporation that [it] would look for ways to work with EDO Corporation in the future. Less than one month later, and before notifying WWNS of the impending contract termination, Mr. Walsh contacted EDO Corporation and requested that the company begin planning to take over the Codan Radio network. Shortly thereafter, [DynCorp] and a representative from EDO Corporation met with [a] WWNS employee . . . . At the meeting [the WWNS employee] provided [DynCorp] and EDO Corporation with a list of WWNS employees he recommended DynCorp and EDO hire. [the WWNS employee] also provided resumes and confidential salary information to DynCorp via e-mail to DynCorp [a] employee . . . ." Op. at 57.

That conduct, the Court held, "demonstrates DynCorp"s intent to not only cease working with WWNS, but to destroy WWNS’s ability to continue to operate in Iraq and Afghanistan." Op. at 58.

The jury returned a verdict in favor of DynCorp for the following counts: tortious interference with prospective economic advantage, common law civil conspiracy, Virginia statutory conspiracy and a breach of contract counterclaim.

It is clear from the number of issues raised that the case was hotly contested. It is likely that the case will be appealed and the Fourth Circuit will revisit many of the District Court’s findings.

Virginia Court Limits Intra-corporate Immunity Doctrine As Defense to Conspiracy Claim

A recent decision of the United States District Court for the Eastern District of Virginia in an unfair business case sharply limited the use of the intra-corporate immunity doctrine as a defense to a conspiracy claim and refused to enforce contractual language limiting claims against officers and directors for breach of fiduciary duty. The case, The Flexible Benefits Council v. Feltman, et al., Civil Action No. 1:08-cv-371, pitted the FBC, a trade association, against Feltman, its former Executive Director, a new trade association Feltman established to directly compete with FBC, and the new trade association’s Pennsylvania-based attorney who was also its President and COO. The case involved claims for business conspiracy, breach of fiduciary duty, and interference with business, among others.

The plaintiff alleged that, while Executive Director, Feltman: (1) allowed FBC’s corporate charter in Washington, DC to lapse; (2) chartered the new trade association using the same name; (3) with the assistance of the new association’s attorney, Anthony Hawks, filed an application to register the mark “Employer’s Council on Flexible Compensation” (the FBC’s name prior to the lapse of its corporate charter) with the Patent and Trademark Office; (4) registered domain names using the acronym, “ecfc”; and (5) leased office space on the same street as plaintiff’s Washington offices with the same suite number. The FBC sued in Virginia, rather than in the District of Columbia.

The defendants sought to dismiss the case, challenging personal jurisdiction over Hawks, who was not licensed to practice law in Virginia, venue, and whether the Complaint stated a claim for relief. Several aspects of the opinion, denying the motion to dismiss, are significant to businesses and their owners, directors, officers and management. For full opinion, click here.


First, the defendants argued that the intra-corporate immunity doctrine barred the business conspiracy claim against them as they were all agents of the new trade association. Under that doctrine, because a corporation can only act through its agents, by law, it cannot conspire with those agents. This doctrine is frequently used by defendants as a bar to conspiracy claims.

In FBC, the court rejected that argument and noted that the intra-corporate immunity doctrine has a recognized exception: an employee or agent can conspire with the corporation where he or she has an “independent personal stake” in the outcome of the conspiracy. In FBC, the court found that both Feltman and Hawks were alleged to have had a personal stake in the success of the new co-defendant association, thereby satisfying the exception and allowing the case to proceed.

Second, the court rejected Feltman’s challenge to the breach of fiduciary duty claim. Feltman argued that he was exempt, under the terms of several Management Services Agreements by which he was retained by the FBC, from being sued for breach of fiduciary duty. The MSAs provided that “under no circumstances shall either party seek to hold liable the officers, directors, members, servants or agents of the other party in their personal and individual capacities on any claim or theory whatever arising under the performance, non-performance, breach, cancellation or termination of this agreement.” According to the court, however, such clauses are unenforceable “to the extent they [] limit a party’s liability for gross negligence, recklessness or intentional torts.” Moore v. Waller, 930 A.2d 176, 179 (D.C. 2006). In the FBC case, the allegations that Feltman had attempted to steal the FBC’s identity were intentional in nature, thus rendering those restrictive clauses inapplicable.

Finally, Hawks challenged whether the court had personal jurisdiction over him given that he had not physically been present in Virginia with relation to the alleged acts. Significantly, the court held that Hawks had “transacted business in Virginia” by virtue of his filing a trademark application with the Patent and Trademark Office located in Alexandria. It rejected the argument that such a filing was exempt from challenge because petitioning the federal government can not be used as a basis for personal jurisdiction. In doing so, the court found that the “government contacts” principle had been modified to allow jurisdiction over a non-resident defendant if there were sufficient allegations to make out a prima facie case that the agency proceedings had been used to perpetrate a fraud. Because it was alleged that Hawks had sworn under oath that no other firm had the right to use the trademark, even though he knew it had been used by FBC for over 20 years, the filing fell within the exception to the “government contacts” rule and was a sufficient basis for personal jurisdiction. The court also found that these acts satisfied the Constitution’s due process requirements.

This case is a cautionary tale, not only as to the reach of Virginia’s long arm statute, but as to the significant limits on the intra-corporate immunity doctrine and the enforceability of contractual clauses that are designed to limit claims for breach of fiduciary duty.

Virginia Supreme Court Overturns Virginia's Anti-Spamming Law

In a rare move, the Supreme Court of Virginia withdrew its prior opinion in Jaynes v. Commonwealth, issued on February 29, 2008, and effectively reversed itself in a new opinion issued on September 12, 2008. The new opinion can be found at http://www.courts.state.va.us/opinions/opnscvwp/1062388.pdf. In its new opinion, the Court found that Virginia’s anti-spamming law, Virginia Code section 18.2-152.3:1, was unconstitutional.

The Court's original 4-3 majority opinion, discussed in our prior blog entry, affirmed the criminal conviction of Jeremy Jaynes, who sent over 50,000 unsolicited email to AOL subscribers. Jaynes was found guilty in a jury trial and sentenced to nine years of imprisonment for violating Virginia Code section 18.2-152.3:1. See our prior blog post: http://unfairbusinesspractices.blogspot.com/2008/03/spammer-to-slammer-unfair-business-of.html. The withdrawn opinion can be found at this link: here.

The Court issued its new opinion after granting a petition for rehearing pursuant to Rule 5:39 of the Rules of Supreme Court of Virginia. That Rule provides that: "No petition for rehearing shall be allowed unless one of the justices who decided the case adversely to the applicant is of opinion that there is good cause for such rehearing."

The Court's new opinion declared that section 18.2-152.3:1 was unconstitutionally overbroad because it violated the U.S. Constitution's First Amendment protections. Section 18.2-152.3:1 provides that "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 . . . ."

The Court first explained the constitutional test: a successful First Amendment overbreath challenge "suffices to invalidate all enforcement of that law upon showing that the law punishes a substantial amount of protected free speech, judged in relation to the statute’s plainly legitimate sweep." Op. at 10 (internal quotes omitted).

The Court expressed its concern that the statute chilled the protected right of anonymous speech:

[B]ecause e-mail transmission protocol requires entry of an IP address and domain name for the sender, the only way such a speaker can publish an anonymous e-mail is to enter a false IP address or domain name. Therefore, . . . registered IP addresses and domain names discoverable through searchable data bases and registration documents necessarily result in a surrender of the speaker’s anonymity. The right to engage in anonymous speech, particularly anonymous political or religious speech, is an aspect of the freedom of speech protected by the First Amendment. By prohibiting false routing information in the dissemination of e-mails, Code [sec.] 18.2-152.3:1 infringes on that protected right.

Id. at 22 (internal quotations omitted). The Court also found that the statute was not narrowly drawn to further a compelling state interest. Id. at 23.

The Justices seemed to suggest that the Virginia legislature could redraft the statute to avoid constitutional infirmity: Sec. 18.2-152.3:1 "is not limited to instances of commercial or fraudulent transmission of e-mail, nor is it restricted to transmission of illegal or otherwise unprotected speech such as pornography or defamation speech. Therefore, . . . 18.2-152.3:1 is not narrowly tailored to protect the compelling interests advanced by the Commonwealth." Id. at 24.

Further, the statute "would prohibit all bulk e-mail containing anonymous political, religious, or other expressive speech. For example, were the Federalist Papers just being published today via e-mail, that transmission by Publius would violate the statute." Id. at 26.

The Court's concern about suppressing free speech tracked those expressed by the dissenting Justices to the Court's original opinion. In her dissenting opinion, Justice Elizabeth Lacy wrote that the "current use of the Internet as the marketplace for expressing political ideas, views and positions emphasizes the need for insuring that use of this medium not be chilled by the threat of criminal prosecution. Those persons wishing to use this medium should have the same ability to express their views anonymously as did Thomas Paine during the founding of our country." Jaynes v. Commonwealth, 275 Va. 341, 367-68 (2008).

The new opinion also addressed the Commonwealth of Virginia's argument that 18.2-152.3:1 was in the "form of trespass and thus not entitled to First Amendment protection," noting that section "does not prohibit the unauthorized use of privately owned e-mail servers." Op. at 19. In this context, the Court drew a distinction between civil cases between private parties where "the courts have held that the unauthorized use of the Internet service providers' property constituted common law trespass and that a First Amendment claim could not be raised against the owner of private property." Id. at 20. Thus, this decision is not an open invitation to spammers or other types of businesses to engage in unfair business practices by wrongfully using another company's servers or other computer equipment.

Same Blog but New Look

Mike Holm and I are pleased to join the law firm Williams Mullen. We have given the blog a new look to provide the reader with links to our new profiles and Williams Mullen's website resources. While the look is different, our focus on unfair business practices remains the same. Mike and I look forward to continuing this blog and we will add new content shortly. Thank you for your readership.

Virginia Business Conspiracy Claim Dismissed Because Alleged Injury was to Individual’s Employment Interests and Not to Business Interests

The U.S. District Court for the Eastern District of Virginia dismissed a Virginia statutory business conspiracy claim, holding that the plaintiff's alleged harm of losing his job is a "personal right as opposed to a business interest." And, damages to a person's "employment relation" are not actionable under Virginia Code sections 18.2-499 and 500.

In Mansfield v. Anesthesia Associates, Ltd., 2008 WL 1924029 (E.D.Va. 2008), published on April 28, 2008, the Court addressed a business conspiracy claim filed by Patrick Mansfield, M.D, who was a Board Certified anesthesiologist and an employee and shareholder of Anesthesia Associates, Ltd. Mansfield worked for Anesthesia Associates in Inova Alexandria Hospital ("Inova Hospital"). See http://www.williamsmullen.com/files/upload/ubp_blog060308.pdf .

On June 17, 2005, Mansfield was informed that an Inova Hospital employee had accused Mansfield of sexually harassment. On July 5, Mansfield met with the Chairman of Anesthesia Associates who handed Mansfield a letter from Inova Hospital that "claimed that [Mansfield] had been accused of sexual harassment by an employee of Inova, the charges had been investigated, and Inova had concluded that Plaintiff posed a threat to the safety and security of Inova staff." On the basis of this allegation, Anesthesia Associates eventually terminated Mansfield.

Subsequently, Mansfield filed his lawsuit against Anesthesia Associates and Inova Hospital in Virginia state court. The defendants removed the case to federal court. Mansfield alleged that "Defendants did purposely and maliciously interfere with the Plaintiff's Contract of Employment with Anesthesia Associates, Ltd and that the Plaintiff's loss of contract was the anticipated outcome, if not the expressed purpose of removing him from both the defendant Association and Inova Alexandria Hospital."

In examining Mansfield business conspiracy claim, the Court first repeated the standards for recovery: section "18.2-499 makes it a Class 1 misdemeanor to conspire to 'willfully and maliciously injur[e] another in his reputation, trade, business or profession by any means whatever.' To recover in an action for conspiracy to harm a business, a plaintiff must prove: (1) a combination of two or more persons for the purpose of willfully and maliciously injuring the plaintiff in his business; and (2) resulting damage to the plaintiff.” Citations omitted.

The Court then analyzed whether the statutes could provide any relief to Mansfield:

Federal courts in Virginia have consistently held that the statutes are designed to provide relief against 'conspiracies resulting in business-related damages' and that a cause of action exists 'only when malicious conduct is directed at one's business, not one's person.' Courts have characterized the 'employment relation' as 'a personal right as opposed to a business interest' and have consequently placed employment interests outside the reach of [sections 18.2-499 and -500]. Similarly, an individual's 'professional reputation and stock ownership in his own company' have been found to be employment interests that fall outside the scope of the statutes. [Citations omittted.]

The court also noted that the "Supreme Court of Virginia has also reached the conclusion that 'personal reputation' and 'interest in employment' are excluded from the scope of the statutes' coverage." Andrews v. Ring, 585 S.E.2d 780, 784 (Va. 2003).

The court rejected Mansfield argument that "his claim is not that he 'lost his job' but that 'he has lost the ability to pursue his profession,' and that injury to one's 'profession' is a recoverable injury under the statutes."

The Court also held that even if the statutes recognized the claimed injury, Mansfield conspiracy claim was deficient because his allegations were conclusory. Specifically, Mansfield failed to allege any agreement between Inova Hospital and Anesthesia Associates to injure him.

This case is a good illustration of the limits of the Virginia business conspiracy statutes because they are not designed to remedy every injury. Further, Courts are increasingly examining the factual allegations to ensure that an actual conspiracy has been plead.

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.

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.

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."

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

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.

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.

D.C. Circuit Bars Air Force From Disclosing Contractor’s Pricing Information in Response to FOIA Request

Whether pricing information furnished to the Government by a contractor is discoverable through a FOIA request was before the D.C. Circuit Court of Appeals recently. In Canadian Commercial Corp. v. Department of the Air Force,"http://pacer.cadc.uscourts.gov/docs/common/opinions/200801/06-5310a.pdf", the court held that such information is protected from disclosure under Exemption 4 of the Freedom of Information Act.

In 2003, an unsuccessful bidder filed a FOIA request with the Air Force seeking a copy of the contract awarded to CCC which contained line-item pricing information. CCC objected on the basis that the line-item rates constituted trade secrets. The Air Force rejected CCC's contention and issued a decision letter indicating its intention to release the information. CCC filed a "reverse" Freedom of Information suit seeking to prevent the Air Force from releasing the information. It prevailed at the district court level, but the Air Force appealed.

On appeal, the D.C. Circuit noted that Exemption 4 of FOIA protects from disclosure "matters that are … trade secrets and commercial or financial information obtained from a person and privileged or confidential." 5 U.S.C. § 552(b)(4). Commercial or financial information is "confidential" if it is obtained from a person involuntarily and its disclosure would either "impair the Government's ability to obtain necessary information in the future; or .. cause substantial harm to the competitive position of the person from whom the information was obtained." The court held that line-item pricing meets this test.

Federal Court Dismisses Unfair Business Practice Claims Despite "Perhaps Unsavory" Conduct

For a good illustration of the line between an unfair business practices and the "essence of competition in a free market society," see Frank Brunckhorst Co., L.L.C. v. Coastal Atlantic, Inc., 2008 WL 276409, *9 (E.D.Va. 2008), which was published on January 29, 2008 and can be found here http://www.williamsmullen.com/files/upload/CoastalAtlanticDecision.pdf. In Coastal Atlantic, the national distributor of Boar’s Head Provisions Co. meat and deli products, Frank Brunckhorst Co., L.L.C. ("Brunckhorst"), was sued by its regional distributor for the Tidewater, Virginia area, Coastal Atlantic, Inc. ("Coastal"). In its decision, the court addressed the subjects covered in our first blog entry: what is an unfair business practice? See http://unfairbusinesspractices.blogspot.com/2007/12/what-is-unfair-business-practice_31.html.

Coastal filed seemingly every unfair business practice claim against Brunckhorst for the latter party's decision to terminate their twenty-three year oral "at-will" contractual relationship allegedly based on Coastal's problems with product integrity. Even though an at-will contract "may be terminated by either party at any time, with or without cause," Coastal argued the termination was actionable because it had been assured at the outset that it would have exclusive distribution rights as long as it "(1) promoted the Boar’s Head brand and, (2) built brand identification." Id. at 3. Brunckhorst allegedly terminated Coastal despite Coastal’s alleged compliance with those terms.

Coastal further alleged that after it was terminated and began distributing a rival's brand's products, Brunckhorst "threatened certain retailers that, if they bought [the rival’s] products from Coastal, they would not be able to purchase Boar’s Head products . . . ." Id. at 8.

Coastal filed the following claims against Brunckhorst: actual and constructive fraud, tortious interference with contract and with business expectancy, business conspiracy, breach of contract, breach of the implied covenant of good faith and fair dealing, and unjust enrichment. The court dismissed each of these counts.

Underlying the Court's decision, was its conclusion that Brunckhorst was legally permitted to terminate its distributor relationship with Coastal. And, as our blog previously discussed, fraud or any other tort must arise out of a duty beyond one arising out of a contract duty. See http://unfairbusinesspractices.blogspot.com/2008/02/when-is-breach-of-contract-unfair.html. Illustrative of the court's reasoning, it found that Brunckhorst's alleged threat to retailers "fails to rise to the level of improper interference," although "perhaps unsavory" because "Brunckhorst’s tactics . . . were within its legal rights." And, "this is the essence of competition in a free market society." Id. at 8. Using the same logic, the Court dismissed Coastal's business conspiracy claim.

This case is another warning to litigants to pay careful attention to the nature of the improper/unlawful action when considering a tortious unfair business practice claim.

Maryland Court Finds No Duty to Mitigate Damages When An Enforceable Liquidated Damages Provision Exists

If you are a parent with a child in daycare, like me, or private school, you know all too well the difficult choice of selecting the perfect provider. Many providers require you to pay a substantial deposit to secure your child's place with only a short cancellation window. But, what happens if you cancel after the deadline passes? And, if the provider already is capacity-filled or can place another child in your child's stead, should the law allow the provider to keep your deposit?

That question was presented to the Court of Appeals of Maryland in Barrie School v. Andrew Patch, et al., 401 Md. 497, 933 A.2d 382 (2007), found at http://mdcourts.gov/opinions/coa/2007/12a06.pdf. There, the Court held that when a contract contains an enforceable liquidated damage, the non-breaching party has no obligation to mitigate his damages. As we mentioned in our prior blog entry, http://unfairbusinesspractices.blogspot.com/2008/02/when-is-breach-of-contract-unfair.html, parties should consider negotiating a liquidated damages provision to avoid having to prove complicated damage questions. Liquidated damages are defined as a "specific sum stipulated to and agreed upon by the parties at the time they entered into a contract, to be paid to compensate for injuries in the event of a breach of that contract." Id. at 507, 933 A.2d at 388.

Before addressing the duty to mitigate issue, the Court first examined the rules pertaining to liquidated damages. The Court embraced a three-part test to determine whether a contract clause constitutes a liquidated damages provision: "First, such a clause must provide in clear and unambiguous terms for a certain sum. Secondly, the liquidated damages must reasonably be compensation for the damages anticipated by the breach. Thirdly, liquidated damage clauses are by their nature mandatory binding agreements before the fact which may not be altered to correspond to actual damages determined after the fact." Id. at 509, 933 A.2d at 389 (internal citation omitted).

In addition, a liquidated damages provision may not be "grossly excessive and out of all proportion to the damages that might reasonably have been expected to result from such breach of the contract." Id. at 509, 933 A.2d at 389-90 (internal citations and quotations omitted). And, the Court adopoted the following analysis: "a liquidated damages provision will be held to vioate public policy, and hence will not be enforced, when it is intended to punish, or has the effect of punishing, a party for breaching the contract, or when there is a large disparity between the amount payable under the provision and the actual damages likely to be caused by a breach, so that it in effect seeks to coerce performance of the underlying agreement by penalizing nonperformance and making a breach prohibitively and unreasonably costly." Id. at 510, 933 A.2d at 390 (internal citations and quotations omitted).

The Court then used a two-part test to determine whether a liquidated damages provision should be treated as an enforceable penalty: "First, the clause must provide a fair estimate of potential damages at the time the parties entered into the contract." Id. at 510, 933 A.2d at 390. "Second, the damages must have been incapable of estimation, or very difficult to estimate, at the time of contracting." Id. Using that test, the Court held that the school's one-year tuition liquidated damage provision was "enforceable because [the damages] were neither grossly excessive nor out of proportion of those which might have been expected at the time of contracting." Id. at 512, 933 A.2d at 391.

After determining that the provision was enforceable, the Court held that the non-breaching party has no duty to mitigate its actual damages "[b]ecause mitigation of damages is [only] part of a post-breach calculation of actual damages...." Id. at 514-15, 933 A.2d at 392-93. And, such an analysis would "blunt" the purpose of having a liquidated damages provision. Id.

When is a Breach of Contract an Unfair Business Practice -- Virginia

Courts in many jurisdictions work hard to prevent parties from turning every breach of contract, no matter how egregious, into a tort claim. Plaintiffs often want to add tort claims because they may be able to recover additional compensatory damages that would not be available in a vanilla breach of contract situation. In addition, a tort claim may allow the plaintiff to recover exemplary or punitive damages, or a multiple of the compensatory damages, as well as attorneys' fees.

In Virginia, a party's conduct gives rise to both a contract and tort claim only in limited circumstances. In a recent case, the Virginia Supreme Court explained that to "recover in tort, the duty tortiously or negligently breached must be a common law duty, not one existing between the parties solely by virtue of the contract." Augusta Mut. Ins. Co. v. Mason, 645 S.E.2d 290, 293 (Va. 2007) (internal quotes omitted). http://www.courts.state.va.us/opinions/opnscvwp/1061339.pdf. A tort claim only occurs when there is a "violation of certain common law and statutory duties involving the safety of persons and property, which are imposed to protect the broad interests of society." Id. at 295, citing Filak v. George, 267 Va. 612, 618, 594 S.E.2d 610, 613 (2004). http://www.courts.state.va.us/opinions/opnscvwp/1031407.pdf.

On the other hand, a contract claim is the only method of redress "[i]f the cause of complaint be for an act of omission or non-feasance which, without proof of a contract to do what was left undone, would not give rise to any cause of action (because no duty apart from contract to do what is complained of exits) . . . ." Id., citing O’Connell v. Bean, 263 Va. 176, 181, 556 S.E.2d 741, 743 (2002). http://www.courts.state.va.us/opinions/opnscvwp/1002900.doc.

In Augusta, the issue was whether a fraud claim existed when an insurance agent allegedly made false statements in a prospective insurance report in order to convince the homeowner’s insurance company to insure the house. The Court dismissed the fraud claim because the insurance company "failed to identify the breach of any duty arising from a source other than its contractual relationship . . . ." Id. at 294. The court relied on its prior decision in Richmond Metropolitan Authority v. McDevitt Street Bovis, Inc., 507 S.E.2d 344, 256 Va. 553 (1998), http://www.courts.state.va.us/opinions/opnscvwp/1980081.doc, where it held that even the false representations of a construction company that it completed certain phased work to secure payments did not give rise to tort claim.

A different outcome may result, however, if the breaching party fraudulently induced the other party to enter into the contract. This is because "the promisor's intention-his state of mind-is a matter of fact. When he makes the promise, intending not to perform, his promise is a misrepresentation of present fact, and if made to induce the promisee to act to his detriment, is actionable as an actual fraud." Id., citing Colonial Ford Truck Sales, Inc. v. Schneider, 228 Va. 671, 325 S.E.2d 91 (1985) (link unavailable). In some cases, courts have found that a party's breach immediately after signing the contract to be indicative the party's intent to never perform the contract. See Flip Mortgage Corp. v. McElhone, 841 F.2d 531 (4th Cir. 1988) (link unavailable).

The lesson behind these cases is that contracting parties should carefully consider the available remedies if the contract is breached. These remedies could include negotiating a reasonable liquidated damages provision, whereby the breaching party would be liable for a specified amount of damages.

Use of Company Computer Waives Attorney-Client Privilege

Another significant aspect of the Virginia Supreme Court’s recent decision in Banks v. Mario Industries of Virginia, Inc., 650 S.E.2d 687 (2007), http://www.courts.state.va.us/opinions/opnscvwp/1061348.pdf, relates to its discussion of the expectation of privacy when employees use work computers and how that relates to the attorney-client privilege. In Banks, one of the defendants used his work computer to prepare a memorandum to his personal attorney relating to his plans to resign from Mario's employment and start a competing firm. Once he had completed the memorandum he printed it out to send to his attorney and then deleted it from his computer. During the litigation, Mario's forensic examiner was able to recover the document from the computer’s deleted files. It was offered into evidence at trial and admitted over objection.

On appeal, the defendant argued that the contents of the memorandum were protected by the attorney-client privilege. The Supreme Court disagreed. Noting that Mario's employee handbook authorized employees to use their company computers for personal business but provided that there was no expectation of privacy if they did so, the Court found that the attorney-client privilege had been waived.

The decision is bereft of any in-depth analysis of the potential ramifications of this decision, particularly in this electronic world. Those ramifications, however, may be far more significant than the Court intended by its holding.

The Court premised its holding on its opinion in Clagett v. Commonwealth, 472 S.E.2d 263 (Va. 1996). There a witness, after testifying, overheard a conversation between defense counsel discussing a factual misstatement she had made during her testimony. She relayed the conversation to the prosecutor who recalled her to the stand to correct the testimony. The defense objected in part asserting that the conversation overheard was protected by the attorney-client privilege. On appeal, the Court found no error in allowing the additional testimony. In doing so, it held that the privilege can be waived "where the communication takes place under circumstances such that persons outside the privilege can overhear what is said." Id. at 270. The Court, however, qualified that holding. "Nothing in the record indicates that Moore overheard the attorney’s conversation intentionally or surreptitiously." Id.

In Banks, the Court ignored the qualifier, relying only on the general principle. Yet, the forensic expert who recovered the memorandum did so by scrubbing the hard drive and recovering a deleted file. It certainly could be argued that the effort was intentional and, indeed, surreptitious, given that Cook plainly intended to eliminate the memorandum by deleting it after printing it out to send to his attorney. Under such circumstances, and particularly in the context of electronic files, the test to establish waiver should be more stringent than the whether it can be overheard or retrieved test used by the Court in Banks.

For now, however, this decision could be of significant benefit in litigation by employers against former employees for unfair business practices. By providing in an employee handbook, or other materials provided to employees when hired, that the use of company computers, while permitted, comes with no expectation of privacy, otherwise privileged documents recovered from the former employee’s work computer should be admissible into evidence at trial. (To maximize the strength of this argument, the notice regarding absence of privacy should be a document signed by the employee.) On the other hand, for employees who seek to establish their own competing business, this opinion is a cautionary tale.

Hopefully, the Court will have the occasion to revisit this ruling in subsequent cases and provide a more analytical framework for making determinations of privilege waiver with regard to electronic documents.

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.

Where is the Proof?

Yes, it is exciting to build a case using electronic documents, such as user-files (e.g. word processing programs) and electronically transmitted communications (e.g. e-mails). Few, if any, discovery issues in the last decade has spawned more opinions, articles and committee work than electronic discovery. The websites for The Sedona Conference and the Federal Judicial Center offer excellent starting points for the electronic discovery expert and novice alike. http://www.sedonaconference.com/; http://www.fjc.gov/public/home.nsf/autoframe?openform&url_l=/public/home.nsf/inavgeneral?openpage&url_r=/public/home.nsf/pages/196

But, somewhat surprisingly, there are far fewer cases and secondary sources discussing the standards for admitting electronic documents into evidence. The Court in Lorraine v. Markel American Ins. Co., 241 F.R.D. 534 (D.Md. 2007), recognized both the relative scarcity of court opinions addressing admissibility standards and the different approaches taken by those courts. See http://www.lexisnexis.com/applieddiscovery/lawlibrary/LorraineVMarkel_ESI_Opinion.pdf.

Lorraine drives home the point that parties cannot assume that a jury or trial judge will ever see the proverbial smoking gun e-mail or other electronic document. In state courts, in particular, litigants may not be able to cite any jurisdictional rules or cases that provide the judge with an admissibility test. In business conspiracy and other unfair business practices cases, this uncertainty can be particularly challenging. This is because e-mails and user-files oftentimes store the majority of a company’s communications and knowledge. Thus, litigants who are unprepared to meet the most exacting admissibility standards may find themselves unable to counter their opponent's evidence. This creates a powerful incentive for opposing parties to stipulate to a protocol governing the admissibility of electronic evidence to remove the uncertainty.

Counsel is well advised to focus on admissibility issues early in discovery. By doing so, counsel can establish the foundational requirements needed to authenticate electronic documents and overcome any hearsay objections. It also stimulates dialogue between counsel regarding whether counsel can stipulate early-on to certain evidentiary issues.

Don't Forget About Damages

The Virginia Business Conspiracy Statute, § 18.2-500, provides that the damages recoverable may include the business' lost profits. As the plaintiff in Saks Fifth Avenue, Inc. v. James, Ltd., 272 Va. 177, 630 S.E.2d 304 (2006) http://www.courts.state.va.us/opinions/opnscvwp/1051613.pdf learned the hard way, however, such a recovery is not simple.

James, Ltd., is a high-end retailer of men's clothing that operated a store at Tysons Corner, Virginia. Douglas Thompson had been the highest grossing salesman at that store. After 17 years, Thompson, an at-will employee, resigned and became employed by Saks Fifth Avenue also located at Tysons Corner. James sued, alleging that Thompson had taken his list of customers from James and used that information in a way that breached his fiduciary duty and interfered with James' relationships with those clients. James also alleged that Thompson and Saks had engaged in a conspiracy to injure James’ business.

After a bench trial, the court entered judgment against Saks and Thompson and awarded James $1,645,833 in damages, plus attorneys' fees and expenses.

On appeal to the Virginia Supreme Court, the defendants challenged the trial court’s award of damages arguing that James had failed to prove both causation and the amount of damages with reasonable certainty. The appellate court did not address the reasonable certainty issue because it reversed the judgment on the basis of lack of proof of causation.

The Supreme Court noted the long standing requirement in Virginia that a plaintiff prove two elements of a damages claim. First, there must be proof of a causal connection between the damages sought and the wrongful conduct. Second, the plaintiff must prove the amount of damages using both a factual foundation and accepted method for calculating damages.

As to the first element, proximate causation is required. The Court accepted the trial court’s findings that James had demonstrated that Thompson violated his fiduciary duty to James by taking and using confidential information to benefit Saks and that Saks was liable for essentially aiding and abetting Thompson’s conduct. The Court found, however, that James failed to connect its damages to that specific conduct. In particular, James’ expert witness failed to consider whether any of Thompson's clients actually shopped at Saks after Thompson became employed there, whether Thompson’s customers were regulars or "walk-in" types and any historic attrition levels. Instead, James’ expert merely assumed that all of Thompson’s customers would have remained loyal to James had Thompson not resigned. His calculation of lost profits was thus based on an assumption of what James' profits would have been had Thompson remained employed there. Under his analysis, James' damages would have been the same had Thompson merely retired.

Having found that James failed to demonstrate any causal connection between the defendants' conduct and its damages, the Supreme Court reversed and entered final judgment for the defendants. The case is significant as a reminder to litigants that proof of lost profits damages requires a factual basis that links the wrongful conduct at issue to the quantum of damages sought in the litigation.

The Rough-and-Tumble Business World

Laws are designed to control, but not displace, the competitive marketplace. Correspondingly, most loss economic opportunities do not provide the losing party with a legal remedy. Take, for example, the Virginia Supreme Court’s ruling in Williams v. Dominion Technology Partners, L.L.C. http://www.courts.state.va.us/opinions/opnscvtx/1020392.txt. Williams involved a three-tiered employee placement arrangement whereby Donald Williams was placed at Stihl, Inc. by his employer, Dominion Technology Partners, L.L.C., which paid Williams $80/hour and billed his services at $115/hour to a third company, ACSYS Information Technology, Inc. ACSYS, in turn, contracted directly with Stihl for Williams' services at a rate of $165/hour. While performing the contract, Williams discovered that his employer, Dominion, was making a profit of $35 per hour from his services. He then approached ACSYS about leaving Dominion and working directly for them on the Stihl contract for a pay raise, thereby eliminating Dominion's middle-man role. After Williams gave Dominion a 30-day notice, ACSYS hired him as its employee and kept him on the Stihl contract for a $35/hour raise.

Dominion sued Williams alleging a breach of fiduciary duty, interference with business relationships, and statutory business conspiracy. Interestingly, Dominion did not name ACSYS as defendant even though it alleged ACSYS was Williams co-conspirator. The case went to trial, and the jury returned a verdict against Williams on all three counts. The judge trebled the damages and awarded attorneys' fees under the Virginia business conspiracy statute, Virginia Code § 18.2-500 http://leg1.state.va.us/cgi-bin/legp504.exe?000+cod+18.2-500.

The Virginia Supreme Court reversed on all three counts. The court stated that the "dispositive question to be resolved on all three counts of liability is whether [Williams'] conduct . . . was sufficient to constitute a breach of Williams' fiduciary duty of loyalty to [his employer]." The court found that "Williams had the right to make the necessary arrangements to resign from his employment . . . in such a way as to take advantage of a higher level of compensation . . . so long as these arrangements were not disloyal or unfair to [his employer]."

Williams was not disloyal to his employer, according to the court, because he resigned in a manner to permit his employer to comply with its contractual obligations. In addition, the court stressed that Dominion, as the employer, could have readily protected itself if it had required Williams to sign a noncompete agreement preventing him from remaining at Stihl through another employer. As the court put it: "courts must be mindful that the fact that particular conduct of an employee caused harm to his employer does not establish that the conduct breached any duty to the employer. This is so because the law will not provide relief to every 'disgruntled employer in the rough-and-tumble world comprising the competitive marketplace,' especially where, through more prudent business practices, the harm complained of could easily have been avoided."

As in Peace v. Conway, 246 Va. 278, 435 S.E.2d 133 (1993) (unavailable via internet), discussed in our first blog entry, courts do not want to become backseat business managers and provide protections that could—and should—have been secured by the complaining party by contract before it sustained a loss. In areas where subcontracting is integral to the business landscape, such as the Washington D.C. metropolitan region, companies need to be especially vigilant to contractually protect their business opportunities.

Elements of a Business Conspiracy

In order to understand the breadth of the business conspiracy statute, it is helpful to focus on its elements. First, it requires a combination of parties who agree to act in concert. Second, there must be some unlawful act in furtherance of the conspiracy which may be satisfied by proof of either breach of fiduciary duty, interference with contract or business expectancy, conversion, some other business related tort, or other unlawful conduct.

In addition, there must be evidence that the conspirators’ purpose was to willfully and maliciously injure the plaintiff’s business interests. While this seems to require proof of actual malice, that is that the conspirators were motivated by personal spite or ill will, as is necessary to support a claim for punitive damages, such proof is not required. Instead, it only requires proof that the defendants acted intentionally, purposefully and without lawful justification, a concept known as legal malice. In other words it is not necessary to show that the conspirators’ primary and overriding purpose was to injure the plaintiff, but only that it be an anticipated outcome. Accordingly, proof of motive is not that significant a hurdle for a plaintiff. See Commercial Business Systems, Inc. v. BellSouth Services, Inc., 249 Va. 39, 453 S.E.2d 261 (1995) (unavailable via internet); Advanced Marine Enterprises, Inc. v. PRC, Inc. , 256 Va. 106, 501 S.E.2d 148 (1998) http://www.courts.state.va.us/opinions/opnscvwp/1971950.doc; Feddeman and Co. v. Langan Associates, 260 Va. 35, 530 S.E.2d 668 (2000) http://www.courts.state.va.us/opinions/opnscvtx/1991996.txt.

The business conspiracy statute does not apply to injury to one’s personal or employment interests, only business interests. Once injury has been shown, the statute allows a successful plaintiff to recover treble damages as well as costs and reasonable attorneys fees. It does not preclude the additional recovery of punitive damages if such damages are recoverable under other claims asserted in the case. See Advanced Marine.

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.