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.