Your Virginia company has been damaged by unfair business activities of another individual or business that is located outside of Virginia. You file a multi-count suit in federal court alleging both breach of contract and tort causes of action based upon diversity of citizenship. The defendant moves to dismiss the suit on the basis that the court lacks personal jurisdiction over the nonresident defendant for some, if not all of the counts. What test does the court employ in resolving that motion?
Under the Constitution, a court may exercise personal jurisdiction over an out of state defendant in two situations: (1) where the defandant has "systematic and continuous" contacts with the forum state; or (2) where the contacts with the forum state "give rise to the liabilities sued on." International Shoe v. State of Washington , 326 U.S. 310,317,320 (1945). The first situation is referred to as "general jurisdiction," It is a hard test to meet and generally requires significant contacts over a period of several years. Most cases proceed based upon the second situation that is referred to as "specific jurisdiction."
A threshold question where "specific jurisdiction" is alleged, is whether, once a plaintiff proves minimum contacts with the forum state related to one cause of action, he may add other claims to the suit that do not arise out of those contacts? For example, assume that the parties negotiated and executed a contract in Virginia and the plaintiff sues in Virginia for breach of that contract. But in addition to that count, the plaintiff adds tort counts that are based upon actions that took place in the state where the defendant is located. The plaintiff asserts that the effects of those actions were felt in Virginia. Can all of the claims constitutionally proceed in Virginia where the action was filed? The Fourth Circuit Court of Appeals has never directly addressed these issues. Recently, a district court in the Eastern District of Virginia did.
In Gatekeper. Inc. v. Stratech Systems, Ltd., 2010 U.S. Dist. LEXIS 56625 (June 9, 2010), click here, the district court found that "specific jurisdiction" requires proof that the defendant's contacts with the forum state give rise to each claim alleged in the complaint. Thus, using the example above, it is the plaintiff's burden to demonstrate that each tort claim is supported by the requisite minimum contacts with Virginia. That there werd sufficient contacts to support the breach of contract claim is not enough to save the tort claims. According to the court, if the plaintiff cannot meet that requirement, the unsupported claims must be dismissed for lack of personal jurisdiction. Moreover, that the effects of the bad acts were felt in Virginia, while relevant, is not dispositive.
This is an important decision, not only in the Eastern District of Virginia, but throughout the Fourth Circuit, given that it is a matter of first impression in this Circuit.
Tuesday, July 6, 2010
Thursday, June 17, 2010
Breach of Contract Will Not Support Statutory Business Conspiracy Claim in Virginia
In an important new case, the Supreme Court of Virginia has clearly held that breach of contract will not support a claim of statutory business conspiracy under Sections 18.2-499 and 500 of the Code of Virginia. The case, Station #2, LLC v. Lynch, (Virginia, June 10, 2010), click here, involved a claim that Lynch and others had conspired to deny Station #2 the ability to soundproof a portion of leased space above a restaurant it operated in Norfolk, Virginia. As a result of the dispute, the City of Norfolk ordered the restaurant to cease all live musical performances, and ultimately the restaurant failed.
In its Complaint, Station #2 argued that the breach of Lynch's agreement to allow the soundproofing satisfied the unlawful act or unlawful purpose requirement of Sections 18.2-499 and 500. The Supreme Court disagreed.
The Court held that: "[W]e presently are of opinion that a conspiracy merely to breach a contract that does not involve an independent duty arising outside the contract is insufficient to establish a civil claim under Code Section 18.2-500." It added: "To permit a mere breach of contract to constitute an 'unlawful act' for the purposes of the conspiracy statute would be inconsistent with the diligence we have exercised to prevent 'turning every breach of contract into an actionable claim for fraud,'" quoting Dunn Constr. Co. v. Cloney, 682 S.E.2d 943, 946 (Va. 2009); Augusta Mut. Ins. Co. v. Mason , 645 S.E.2d 290, 295 (Va. 2007); Richmond Metro Auth. v. McDevitt Street Bovis, Inc., 507 S.E.2d 344, 348 (Va. 1998). According to the Court, to support a statutory conspiracy claim, the duty must arise from a statute or independently by common law.
In its Complaint, Station #2 argued that the breach of Lynch's agreement to allow the soundproofing satisfied the unlawful act or unlawful purpose requirement of Sections 18.2-499 and 500. The Supreme Court disagreed.
The Court held that: "[W]e presently are of opinion that a conspiracy merely to breach a contract that does not involve an independent duty arising outside the contract is insufficient to establish a civil claim under Code Section 18.2-500." It added: "To permit a mere breach of contract to constitute an 'unlawful act' for the purposes of the conspiracy statute would be inconsistent with the diligence we have exercised to prevent 'turning every breach of contract into an actionable claim for fraud,'" quoting Dunn Constr. Co. v. Cloney, 682 S.E.2d 943, 946 (Va. 2009); Augusta Mut. Ins. Co. v. Mason , 645 S.E.2d 290, 295 (Va. 2007); Richmond Metro Auth. v. McDevitt Street Bovis, Inc., 507 S.E.2d 344, 348 (Va. 1998). According to the Court, to support a statutory conspiracy claim, the duty must arise from a statute or independently by common law.
Monday, May 3, 2010
The Protocol: The Financial Services Industry Potentially Changes the Common Law By Contract
This blog has discussed the concepts of employee fiduciary duties, proprietary and trade secret information and corporate raids in many contexts. But what if an entire industry or major players within that industry negotiate a method for handling: (1) how employees leave their employers; (2) what types of information they can take with them; and (3) whether “corporate raids” are acceptable? Are such agreements enforceable between the parties to such an agreement? And what about companies in that industry that are not parties to the agreement?
That scenario presented itself to my firm several weeks ago in a litigation matter when a large financial services company filed a law suit, claiming that our clients, two of the plaintiff’s former financial advisors and their newly formed company, misappropriated the plaintiff company’s trade secrets. The plaintiff also asserted that the former employees violated their fiduciary duties owed to the plaintiff company. What is important is not the result of this particular case—we as blog authors do not talk about our specific cases anyway—but the financial services industry’s attempt to shift the common and statutory law by contract.
The shift is designed by the over thirty financial services companies that are signatories to the “Protocol for Broker Recruiting”. The Protocol provides that: “If departing [brokers] and the new firm follow this Protocol, neither the departing [advisor] nor the firm that he or she joins would have any monetary or other liability to the firm that the [advisor] left by reason of the [advisor] taking the information identified below or the solicitation of the clients serviced by the [advisor] at his or her prior firm, provided, however, that this Protocol does not bar or otherwise affect the ability of the prior firm to bring an action against the new firm for “raiding.” The signatories to this Protocol agree to implement and adhere to it in good faith.”
The Protocol then describes what a departing advisor may copy when the advisor changes jobs: “[w]hen [advisors] move from one firm to another and both firms are signatories to this Protocol they may take only the following account information, client name, address, phone number, email address, and account title of the clients that they serviced while at the firm (“the Client Information”) and are prohibited from taking any of her documents or shall include a copy of the Client Information that the [advisor] is taking with him or her.”
The Protocol does not demand perfection from departing advisors. Rather, it offers advisors a safe harbor, provided that they operated in good faith and “substantially complied with the requirement that only Client Information related to clients he or she serviced while at the firm be taken by him or her.”
The Protocol’s impact upon trade secret law is potentially significant because companies will often claim that client account information constitutes trade secrets. But many courts consider the “crucial characteristic of a trade secret [to be] secrecy . . . .” Microstrategy Inc. v. Li, 268 Va. 249, 262 (Va. 2004) (internal citations omitted). Thus, if companies agree that the certain account information may be copied by a departing advisor—provided that the Protocol is followed and the departing advisor goes to another Protocol signatory firm—it becomes difficult to later contend that the account information constitutes a trade secret if either of the prerequisites are not followed.
Similar questions may be raised regarding how the Protocol may affect an advisor’s common law fiduciary duties to the advisors employer or other unfair business practices tort claims.
There is also the question of how much impact being a signatory of the Protocol should have on a court’s decision. The Protocol only requires a party to be a signatory to receive the benefits when recruiting an advisor. Of course, it also subjects itself to the added risk of allowing departing advisors to take more information than might otherwise be allowed. But, a small company might elect to become a signatory immediately before recruiting advisors to shield their efforts from liability, without facing a practical threat of losing its own advisers. And there is no restriction limiting when a company can sign the Protocol or how long a company must remain a signatory. This is the system that the signatories elected, however, so a court might not have much sympathy to a complaining signatory company in that circumstance.
Some courts have used the Protocol as a reason not to grant an injunction, holding that when a financial services company “permits its financial advisors to leave for 38 other financial institutions and solicit their former clients with Client Information they took from [the company], it cannot credibly contend that the harm that will result if . . . [defendants are] allowed to do the same at a 39th firm is so substantial and so irreparable. . .” as to require an injunction. Smith Barney Div. of Citigroup Global Markets, Inc. v. Griffin, 23 Mass. L. Rep. 457; 2008 WL 325269 at *5 (Mass. Super. 2008). The court further held that “[b]y setting up such a procedure for departing brokers to take client lists, [the financial services firm] tacitly accepts that such an occurrence does not cause irreparable harm.’” Id.; quoting Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Brennan, et al., 2007 U.S. Dist. LEXIS 34501 at *7 (N.D. Ohio 2007) (finding that in the case where client contact information is transferred to non-Protocol firms, mere agreement to the Protocol constitutes tacit acceptance that transfers of client contact information do not cause irreparable harm).
It will be interesting to see whether and how courts in the Washington DC area treat the Protocol when faced with one of the myriad issues associated with competing companies, departing employees and the removal of otherwise confidential information.
That scenario presented itself to my firm several weeks ago in a litigation matter when a large financial services company filed a law suit, claiming that our clients, two of the plaintiff’s former financial advisors and their newly formed company, misappropriated the plaintiff company’s trade secrets. The plaintiff also asserted that the former employees violated their fiduciary duties owed to the plaintiff company. What is important is not the result of this particular case—we as blog authors do not talk about our specific cases anyway—but the financial services industry’s attempt to shift the common and statutory law by contract.
The shift is designed by the over thirty financial services companies that are signatories to the “Protocol for Broker Recruiting”. The Protocol provides that: “If departing [brokers] and the new firm follow this Protocol, neither the departing [advisor] nor the firm that he or she joins would have any monetary or other liability to the firm that the [advisor] left by reason of the [advisor] taking the information identified below or the solicitation of the clients serviced by the [advisor] at his or her prior firm, provided, however, that this Protocol does not bar or otherwise affect the ability of the prior firm to bring an action against the new firm for “raiding.” The signatories to this Protocol agree to implement and adhere to it in good faith.”
The Protocol then describes what a departing advisor may copy when the advisor changes jobs: “[w]hen [advisors] move from one firm to another and both firms are signatories to this Protocol they may take only the following account information, client name, address, phone number, email address, and account title of the clients that they serviced while at the firm (“the Client Information”) and are prohibited from taking any of her documents or shall include a copy of the Client Information that the [advisor] is taking with him or her.”
The Protocol does not demand perfection from departing advisors. Rather, it offers advisors a safe harbor, provided that they operated in good faith and “substantially complied with the requirement that only Client Information related to clients he or she serviced while at the firm be taken by him or her.”
The Protocol’s impact upon trade secret law is potentially significant because companies will often claim that client account information constitutes trade secrets. But many courts consider the “crucial characteristic of a trade secret [to be] secrecy . . . .” Microstrategy Inc. v. Li, 268 Va. 249, 262 (Va. 2004) (internal citations omitted). Thus, if companies agree that the certain account information may be copied by a departing advisor—provided that the Protocol is followed and the departing advisor goes to another Protocol signatory firm—it becomes difficult to later contend that the account information constitutes a trade secret if either of the prerequisites are not followed.
Similar questions may be raised regarding how the Protocol may affect an advisor’s common law fiduciary duties to the advisors employer or other unfair business practices tort claims.
There is also the question of how much impact being a signatory of the Protocol should have on a court’s decision. The Protocol only requires a party to be a signatory to receive the benefits when recruiting an advisor. Of course, it also subjects itself to the added risk of allowing departing advisors to take more information than might otherwise be allowed. But, a small company might elect to become a signatory immediately before recruiting advisors to shield their efforts from liability, without facing a practical threat of losing its own advisers. And there is no restriction limiting when a company can sign the Protocol or how long a company must remain a signatory. This is the system that the signatories elected, however, so a court might not have much sympathy to a complaining signatory company in that circumstance.
Some courts have used the Protocol as a reason not to grant an injunction, holding that when a financial services company “permits its financial advisors to leave for 38 other financial institutions and solicit their former clients with Client Information they took from [the company], it cannot credibly contend that the harm that will result if . . . [defendants are] allowed to do the same at a 39th firm is so substantial and so irreparable. . .” as to require an injunction. Smith Barney Div. of Citigroup Global Markets, Inc. v. Griffin, 23 Mass. L. Rep. 457; 2008 WL 325269 at *5 (Mass. Super. 2008). The court further held that “[b]y setting up such a procedure for departing brokers to take client lists, [the financial services firm] tacitly accepts that such an occurrence does not cause irreparable harm.’” Id.; quoting Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Brennan, et al., 2007 U.S. Dist. LEXIS 34501 at *7 (N.D. Ohio 2007) (finding that in the case where client contact information is transferred to non-Protocol firms, mere agreement to the Protocol constitutes tacit acceptance that transfers of client contact information do not cause irreparable harm).
It will be interesting to see whether and how courts in the Washington DC area treat the Protocol when faced with one of the myriad issues associated with competing companies, departing employees and the removal of otherwise confidential information.
Subscribe to:
Posts (Atom)
