Friday, March 27, 2009
Employees Who Take Proprietary Data May Violate the Federal Computer Fraud and Abuse Act
We recently published an article discussing the federal Computer Fraud and Abuse Act in the Potomac Techwire. It focused on the developing law surrounding whether a departing employee who takes proprietary electronic data has violated the Act by accessing his employer's computer to remove the data once he has begun plans to resign and join another company. There is a split among courts regarding whether that employee was "authorized" to access the computer or "exceeded his authorized access" when he did so. For those courts which have found that the access was unlawful, this Act becomes a big stick because it creates federal jurisdiction in cases that, most often, may only be brought in state courts. To review the entire article, see the link: http://www.williamsmullen.com/employees-who-take-proprietary-data-may-violate-the-federal-computer-fraud-and-abuse-act-03-11-2009/
Tuesday, March 10, 2009
LLC Members Do Not Owe Fiduciary Duties to Each Other, Virginia Supreme Court Rules
Last Spring, we profiled two Circuit Court decisions in Virginia that addressed whether members of Virginia Limited Liability Companies owed fiduciary duties to each other. See March 30, 2008 post, click here. The cases had held that: (1) members and managers of LLCs did not owe fiduciary duties to members, but only to the entity itself; and (2) a member could not sue a manager directly for breach of fiduciary duty, but could only maintain the suit in a derivative capacity. The cases were significant because the Virginia Supreme Court had not addressed the issues.
This week the Supreme Court issued an opinion in one of those cases, Remora Investments, LLC v. Orr. Click here. The opinion affirmed the decision of the Fairfax Circuit Court sustaining the defendant’s demurrer and dismissing the case.
The Supreme Court initially focused on the statutory basis for duties owed by members of an LLC. It noted that neither the Limited Liability Company Act nor the Virginia Stock Corporation Act imposed fiduciary duties “between members of an LLC, between members and managers of an LLC, between stockholders of a corporation, or between individual shareholders and officers and directors.” General partnership law in Virginia, on the other hand, specifically provides that partners owe the duties of loyalty and care both to the partnership and to other partners. Moreover, the court reaffirmed that, in the corporate context, the fiduciary duty owed by officers and directors is owed to shareholders as a class and not individually.
The court also examined the Operating Agreement for the LLC and found that it did not establish any fiduciary duties between the members or between the members and a manager. It specifically held, however, that such duties may be included in Operating Agreements if the members so desire and, thus, arise by contract.
For these reasons the court concluded that as a member of the LLC, Orr lacked standing to pursue a direct claim against the LLC’s manager.
Now that the Supreme Court has spoken on the issue, those forming LLCs would be wise to discuss whether such duties between the members or the members and manager of the LLC should be addressed in the Operating Agreement.
This week the Supreme Court issued an opinion in one of those cases, Remora Investments, LLC v. Orr. Click here. The opinion affirmed the decision of the Fairfax Circuit Court sustaining the defendant’s demurrer and dismissing the case.
The Supreme Court initially focused on the statutory basis for duties owed by members of an LLC. It noted that neither the Limited Liability Company Act nor the Virginia Stock Corporation Act imposed fiduciary duties “between members of an LLC, between members and managers of an LLC, between stockholders of a corporation, or between individual shareholders and officers and directors.” General partnership law in Virginia, on the other hand, specifically provides that partners owe the duties of loyalty and care both to the partnership and to other partners. Moreover, the court reaffirmed that, in the corporate context, the fiduciary duty owed by officers and directors is owed to shareholders as a class and not individually.
The court also examined the Operating Agreement for the LLC and found that it did not establish any fiduciary duties between the members or between the members and a manager. It specifically held, however, that such duties may be included in Operating Agreements if the members so desire and, thus, arise by contract.
For these reasons the court concluded that as a member of the LLC, Orr lacked standing to pursue a direct claim against the LLC’s manager.
Now that the Supreme Court has spoken on the issue, those forming LLCs would be wise to discuss whether such duties between the members or the members and manager of the LLC should be addressed in the Operating Agreement.
Monday, March 2, 2009
Overreaching by Partners During Partnership Dissolution Can Be Costly
Sometimes cases serve as cautionary tales of how NOT to do business. A partnership divorce out of Fairfax County, Greenfeld v. Stitely,et al., 2007 Va. Cir. LEXIS 7 (January 5, 2007) is just such a case. It involved three partners in an accounting firm, Stitely, Karstetter & Greenfeld, LLP (“SK&G”) formed in 2002.
In 2003, the partners purchased two condominium units including the one from which the firm operated. Each of the three partners guaranteed the mortgages. Before agreeing to the purchase, Greenfeld sought and received assurances from his partners that they were satisfied with the operation of their accounting partnership.
Several months later, however, on April 18, 2004, Stitley and Karstetter informed Greenfeld that they were withdrawing from the partnership and intended to dissolve it. They presented Greenfeld with a one-sided separation agreement that offered no payment for Greenfeld’s one-third interest in the partnership, refused to refund his capital contribution and allowed Stitley and Karstetter to continue servicing all of the firm’s clients. Greenfeld rejected their proposal. The following day they formed Stitley and Karstetter, PLLC (“S&K”).
Things went downhill from there. Even though Stitley and Karstetter had signed a notice withdrawing from the partnership, they never relinquished control over SK&G’s assets or employees. In addition, they: (1) terminated Greenfeld’s access to the firm’s computer network; (2) issued an eviction notice to Greenfeld; (3) locked him out of his office and refused to release to him any personal property from his office; (4) notified a software manufacturer, for whom Greenfeld had been an authorized reseller, that S&K would be taking over the account; (5) announced that S&K would be hiring all of SK&G’s employees: (6) appropriated SK&G’s computer software; (7) began using all of SK&G’s physical assets and property to benefit S&K, without compensation; (8) collected SK&G’s receivables and deposited the proceeds into S&K’s account; and (9) rebilled SK&G clients for SK&G work as S&K and then deposited those receipts into S&K accounts.
With respect to the condominiums, Stitley and Karstetter: (1) entered into a lease with S&K for the condominiums, without notice or consultation with Greenfeld, for about 56% of the rent that SK&G had been paying for the same space; (2) paid rent and condo fees, in advance, out of SK&G’s account after S&K had taken over the office space; and (3) then issued a capital call to SK&G partners seeking $1000 each per month to make up the shortfall caused by the reduction in rent paid by S&K for the condominium space.
Finally, Stitley and Karstetter notified Greenfeld that partners would receive no more distributions from SK&G, but thereafter paid themselves $45,000 and also paid SK&G employees months after they had become employed by S&K.
Not surprisingly, Greenfeld sued his former partners and S&K. His complaint alleged: statutory business conspiracy, common law conspiracy, breach of the partnership agreement, breach of fiduciary duty, intentional interference with contractual relations, tortious interference with prospective economic advantage, fraud, violation of the Uniform Trade Secrets Act, conversion, and violation of the Virginia Computer Crimes Act. In addition, he asked the court to compel his former partners to purchase his partnership interest.
The trial took three days, after which, Judge Jane Roush issued a written opinion in Greenfeld’s favor. In particular, she found that the actions set out above satisfied the elements of conversion, breach of the partnership agreement and breach of their fiduciary duties owed to Greenfeld under the Uniform Partnership Act. These then supported her finding that the defendants were guilty of common law conspiracy and that they conspired to injure Greenfeld in his business, thus violating Sections 18.2-499 and 500 of the Virginia Code. While the judge found evidence of interference with contract and prospective economic advantage as well as misappropriation of trade secrets which she used to support the conspiracy finding, she did not hold that the evidence was sufficient for Greenfeld to recover on those theories.
In calculating damages, the court found that the value of the accounting partnership (SK&G) as of the date that the defendants took control of the assets was $1,017,000. Therefore, Greenfeld’s one-third interest was worth $339,000. The court reduced this amount by the amount of Greenfeld’s unpaid loan to SK&G, leaving a net balance of $233,066. Next the judge valued the condominiums as of the date of trial at $1,365,000, which, when reduced by the value of the unpaid mortgage, resulted in a net value of $691,089. Greenfeld’s share was worth $230,363. For purposes of the statutory conspiracy, common law conspiracy, and breach of fiduciary duty counts the court added these sums together. That total, $463,429, was then trebled under Sections 18.2-499 and 500, and that amount, $1,390,287, was enhanced by prejudgment interest from the date the defendants seized control of the assets of SK&G. Finally, the judge awarded attorneys fees and costs. All totaled, the damages awarded exceeded $1,600,000, a significant penalty for such overreaching behavior.
In 2003, the partners purchased two condominium units including the one from which the firm operated. Each of the three partners guaranteed the mortgages. Before agreeing to the purchase, Greenfeld sought and received assurances from his partners that they were satisfied with the operation of their accounting partnership.
Several months later, however, on April 18, 2004, Stitley and Karstetter informed Greenfeld that they were withdrawing from the partnership and intended to dissolve it. They presented Greenfeld with a one-sided separation agreement that offered no payment for Greenfeld’s one-third interest in the partnership, refused to refund his capital contribution and allowed Stitley and Karstetter to continue servicing all of the firm’s clients. Greenfeld rejected their proposal. The following day they formed Stitley and Karstetter, PLLC (“S&K”).
Things went downhill from there. Even though Stitley and Karstetter had signed a notice withdrawing from the partnership, they never relinquished control over SK&G’s assets or employees. In addition, they: (1) terminated Greenfeld’s access to the firm’s computer network; (2) issued an eviction notice to Greenfeld; (3) locked him out of his office and refused to release to him any personal property from his office; (4) notified a software manufacturer, for whom Greenfeld had been an authorized reseller, that S&K would be taking over the account; (5) announced that S&K would be hiring all of SK&G’s employees: (6) appropriated SK&G’s computer software; (7) began using all of SK&G’s physical assets and property to benefit S&K, without compensation; (8) collected SK&G’s receivables and deposited the proceeds into S&K’s account; and (9) rebilled SK&G clients for SK&G work as S&K and then deposited those receipts into S&K accounts.
With respect to the condominiums, Stitley and Karstetter: (1) entered into a lease with S&K for the condominiums, without notice or consultation with Greenfeld, for about 56% of the rent that SK&G had been paying for the same space; (2) paid rent and condo fees, in advance, out of SK&G’s account after S&K had taken over the office space; and (3) then issued a capital call to SK&G partners seeking $1000 each per month to make up the shortfall caused by the reduction in rent paid by S&K for the condominium space.
Finally, Stitley and Karstetter notified Greenfeld that partners would receive no more distributions from SK&G, but thereafter paid themselves $45,000 and also paid SK&G employees months after they had become employed by S&K.
Not surprisingly, Greenfeld sued his former partners and S&K. His complaint alleged: statutory business conspiracy, common law conspiracy, breach of the partnership agreement, breach of fiduciary duty, intentional interference with contractual relations, tortious interference with prospective economic advantage, fraud, violation of the Uniform Trade Secrets Act, conversion, and violation of the Virginia Computer Crimes Act. In addition, he asked the court to compel his former partners to purchase his partnership interest.
The trial took three days, after which, Judge Jane Roush issued a written opinion in Greenfeld’s favor. In particular, she found that the actions set out above satisfied the elements of conversion, breach of the partnership agreement and breach of their fiduciary duties owed to Greenfeld under the Uniform Partnership Act. These then supported her finding that the defendants were guilty of common law conspiracy and that they conspired to injure Greenfeld in his business, thus violating Sections 18.2-499 and 500 of the Virginia Code. While the judge found evidence of interference with contract and prospective economic advantage as well as misappropriation of trade secrets which she used to support the conspiracy finding, she did not hold that the evidence was sufficient for Greenfeld to recover on those theories.
In calculating damages, the court found that the value of the accounting partnership (SK&G) as of the date that the defendants took control of the assets was $1,017,000. Therefore, Greenfeld’s one-third interest was worth $339,000. The court reduced this amount by the amount of Greenfeld’s unpaid loan to SK&G, leaving a net balance of $233,066. Next the judge valued the condominiums as of the date of trial at $1,365,000, which, when reduced by the value of the unpaid mortgage, resulted in a net value of $691,089. Greenfeld’s share was worth $230,363. For purposes of the statutory conspiracy, common law conspiracy, and breach of fiduciary duty counts the court added these sums together. That total, $463,429, was then trebled under Sections 18.2-499 and 500, and that amount, $1,390,287, was enhanced by prejudgment interest from the date the defendants seized control of the assets of SK&G. Finally, the judge awarded attorneys fees and costs. All totaled, the damages awarded exceeded $1,600,000, a significant penalty for such overreaching behavior.
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