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.