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.
Friday, March 7, 2008
Tuesday, March 4, 2008
Finding the Electronic Smoking Gun in Unfair Business Practices Cases
Unfair business practices, corporate raiding, breach of fiduciary duty and business conspiracy cases all have much in common. Usually there are one or more disloyal employees and often an aggressive competitor. The fact patterns follow a number of predictable scenarios. For example, a disloyal employee who wants to be marketable to a competitor may misappropriate proprietary information that he then provides to a new employer to earn instant goodwill. Or, if a conspiracy is present it may involve one or more employees who desire to start a competing company because they believe they can make more money than they are currently being paid or who have been approached by a competitor who wants to hire a group of key employees from the competitor firm. In such cases because they are either risk averse or are experiencing pressure from the competitor to bring work with them, the employees pilfer proprietary data from their employer that might be useful to the new company in creating efficiencies or expediting revenue. The end result is the same: loss of key employees, clients and profits.
For the plaintiff’s lawyer representing the victim employer, electronic data may be the source of the most important evidence in the case. So where do you look?
First, start with the client’s IT system. But, before any search methods are employed, engage a forensics expert to make a bit map image of the server or any hard drives that might contain relevant evidence. In addition, take the last set of full backup tapes, if they exist, out of rotation. That way, no discoverable electronic data should be lost that could later serve as a basis for a spoliation (unlawful destruction) motion.
Then, examine the renegade employees’ emails, user files and electronic faxes. Most jurisdictions do not protect employees’ communications using work computers from review by their employer. From this information, you may find evidence that supports your claim against the departed employees, but it may also reveal evidence of concerted action by other individuals who are still employed by your client.
Once a lawsuit is filed, serve comprehensive document requests that require the production of documents from the individual defendant’s personal computers and PDAs in electronic form. It is important to negotiate a protocol for the form of production with opposing counsel in advance or seek approval of one from the court. Make certain that the metadata for all documents and emails is produced. It will provide details of when documents were created, modified, last accessed and by whom. Again, emails may hold the key to the identities of others who may be involved. Cell phone records are another fertile ground for evidence of complicity.
Twenty first century litigation is almost wholly dependent upon electronic evidence. If you are still chasing the paper, you will likely miss 90% of potentially relevant evidence. Working closely with a competent forensic expert will help you identify other potential sources of electronic data that can assist in evaluating your case early, before costs escalate and can possibly enable you to find that smoking gun that will lead to an early settlement of the litigation.
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.
Friday, February 22, 2008
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.
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.
Tuesday, February 19, 2008
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.
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.
Thursday, February 14, 2008
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.
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.
Tuesday, February 5, 2008
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.
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.
Friday, February 1, 2008
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.
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.
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