Virginia Court Rules That It Can't Dissolve An Unregistered Foreign Limited Partnership
In a case of first impression, a Norfolk, Virginia Circuit Court held that it could not order the dissolution of a limited partnership formed in another state.
In the matter of Valone v. Valone, the issue before the Court was whether a Virginia court could dissolve a limited partnership (“LP”) that was formed under Georgia law, but listed Norfolk, Virginia as the LP’s primary place of business on annual filings. Based on the evidence before the Court, there was no indication that the LP’s partners or assets were connected with Georgia.
Without the benefit of any legal precedent in Virginia, the Court relied on Virginia’s Revised Uniform Limited Partnership Act (RULPA) to support its ruling. Noting that the RULPA provides that the “circuit court of the locality in which the registered office is located may decree dissolution of a limited partnership,” the Court opined that the General Assembly did not intend for a Virginia court to dissolve an LP that did not have a registered office in Virginia.
I wholeheartedly agree with the Court’s decision. Under Virginia law, it takes more than simply listing a Virginia address on an annual filing to claim a Virginia City or County as a principal place of business. To transact business in Virginia, a foreign LP (i.e., an LP that is not formed in Virginia), must: 1) file an Application for a Certificate of Registration to Transact Business in Virginia with the State Corporation Commission; 2) pay the requisite filing fee; and, 3) pay an annual registration fee.
This case highlights an important consideration for all foreign businesses in Virginia (regardless of whether the business is a corporation, a limited liability company, or an LP) -- if a foreign business wants to avail itself of the protections and rights afforded to a Virginia business, then it must be properly registered to transact business in Virginia.
Supreme Court Decision Lifts Ban on Political Spending by Corporations in Candidate Elections
The U.S. Supreme Court overruled two precedents about the First Amendment rights of corporations by a 5-to-4 decision handed down yesterday in Citizens United v. FEC. Under previous Supreme Court precedent, corporations were barred from spending freely to support or oppose candidates. This decision has changed the law for corporate fundraising and will dramatically transform campaigning for president and Congress in the future.
Under the new decision, the government may not ban political spending by corporations in candidate elections. The decision does not specifically address unions; however, the lift of the ban of corporate political spending will also apply to them. The majority also struck down part of the Bipartisan Campaign Reform Act, also known as the 2002 McCain-Feingold campaign finance law, that banned corporations and unions for paying for political ads.
Not all restrictions for corporate political spending in candidate elections were lifted. Some of the limits that remain are: corporations cannot provide money directly to federal candidates or national party committees and nonprofit groups that advocate for political candidates must still comply with disclosure requirements.
Virginia Circuit Court Applies New, Tougher Preliminary Injunction Standard
The Richmond City Circuit Court appears to be one of the first Virginia state courts to adopt the tougher preliminary injunction standard set forth by the U.S. Supreme Court in Winter v. Natural Resources Defense Council, Inc. In the case of Strong Foundation Youth Initiative, LLC v. Robert Ashford, Jr., the Virginia Circuit Court considered its preliminary injunction ruling under the new Winters test concluding that the plaintiff in this matter satisfied all four prongs for an injunction –
- likelihood of success on the merits;
- likelihood that plaintiff will suffer irreparable harm in the absence of preliminary relief;
- the balance of equities tips in plaintiffs’ favor; and
- the injunction is in the public interest.
As we noted in a post last month on Virginia Business Law Update, the Fourth Circuit previously adopted the Winters test emphasizing that a preliminary injunction was an “extraordinary” remedy. In doing so, the Fourth Circuit overturned the Blackwelder standard which had been relied upon for over 30 years. Under Blackwelder, a preliminary injunction could be entered if the plaintiff made a strong showing of irreparable harm but had merely shown “serious questions” in the case, as opposed to likelihood of success. Thus, it provided some flexible interplay between the various factors considered at an injunction hearing. Flexibility which Winters has eliminated.
In light of this recent Virginia decision, businesses and their attorneys seeking preliminary injunctions in Virginia state courts should be now prepared to show the Judge that they satisfy every factor of the preliminary injunction test at the injunction hearing - rather than accentuating the facts supporting certain prongs.
Virginia Business Litigation Claims: Part 1 - Misappropriation of Trade Secrets
As noted last week, this blog is running a six-part series on Virginia business litigation claims. This week, the featured Virginia business litigation claim is misappropriation of trade secrets.
In light of the mobility of employees in today’s workforce, businesses face the arduous task of protecting their confidential and proprietary information. In Northern Virginia, through which technology companies of all sizes adorn the Dulles Technology Corridor, the issue of employee theft of trade secrets is one that routinely crosses an attorney's desk. Fortunately for Virginia businesses, the Virginia Uniform Trade Secrets Act provides an avenue of recourse to avenge an employee’s theft of a company’s trade secrets.
What is a “trade secret” under Virginia Law?
Although most people associate the term “trade secret” with technology or intellectual property, a trade secret can be as simple as a company’s customer list, pricing data, or marketing strategy. (The Trade Secrets Act provides that a trade secret can be a “formula, pattern, compilation, program, device, method, technique, or process.”) Under Virginia law, the determination as to whether a company’s information constitutes a trade secret is not based on the type of information at issue. The key is whether the information derives independent economic value (actual or potential) from being unknown and not readily available to someone who can obtain economic value from the use or disclosure of the information. Additionally, the company must take reasonable efforts to maintain the secrecy of the information.
A classic example of a trade secret is the formula for Coca-Cola. The formula has economic value because it is unknown and not available (i.e., if the formula were known, then anyone could make and sell Coca-Cola). And, Coca-Cola takes reasonable steps to keep its prized formula a secret. (According to urban legend, two executives know half of the formula but no one in the company knows the entire formula.)
What does it take to succeed on a trade secrets claim in Virginia?
To succeed on a trade secrets claim in Virginia, a company must not only prove in court that its information is, in fact, a trade secret, the company must also show that its trade secret was misappropriated. Generally, under the Trade Secrets Act, a misappropriation can occur through the acquisition, disclosure or use of a trade secret.
What damages are available for misappropriation of a trade secret?
If misappropriation of a trade secret is proven, the company can get an injunction to prevent its trade secret from being used or disclosed. Additionally, the company can recover damages for the actual loss caused by the misappropriation or for the unjust enrichment caused by the misappropriation. If the company can prove that the misappropriation was willful and malicious, it can also receive punitive damages (up to twice the amount of damages for actual loss and unjust enrichment).
It is important to note that misappropriation of trade secrets cases are often brought not only against the former employee who took the trade secrets but also against the company who hired the employee and may have benefited from use of the trade secret. The addition of a company defendant typically ensures a deep pocket from which a judgment can be collected.
Stay tuned for Part 2 of the Virginia business litigation claims series, which will focus on breach of non-compete agreements.
Minority Shareholder Bound to Contract Venue Provision It Didn't Sign
Marc Ward posted an interesting article on his blog at the year's end involving a recent piercing the corporate veil decision in a U.S. District Court in Georgia. The issue did not involve liability, but the venue of the dispute. The Court decided in Rayonier Wood Products, LLC v. ScanWare, Inc. that although the shareholder was not a signatory to the contract at issue, it was still bound by the terms of the contract, including the choice of law provision limiting venue to the Georgia court. As a result, the Finnish company shareholder was forced to litigate the dispute in Georgia. We recently discussed forum selection clauses on Virginia Business Law Update, and noted the advantages to Virginia businesses of litigating in their home state. This case is another example of the importance of such a provision when dealing with foreign business partners.
Virginia Business Litigation Claims
As a Virginia attorney with a mix of business and litigation clients, I am often engaged by businesses to assess the viability of litigation claims. The first step in that assessment is ensuring that the client understands what it would have to establish in order to succeed in a court of law. Whether a business seeks to pursue litigation or has just received notice that it has been sued, it is important that it understand the nature of the claims. With that in mind, this blog will feature a post each week (over the next six weeks) on a different Virginia business litigation claim.
Part 1: Misappropriation of Trade Secrets (under the Virginia Trade Secrets Act)
Part 2: Breach of Covenant Not to Compete
Part 3: Breach of Fiduciary Duty
Part 4: Tortious Interference with a Contract
Part 5: Conspiracy to Injure a Business (under the Virginia conspiracy statute)
Part 6: Employer Liability for Employees’ Actions
Stay tuned! Part 1 of this blog’s Virginia Business Litigation Claims series will start next week!
U.S. Supreme Court Hears Arguments on Whether Debt Collector's Legal Error is a Defense against Culpability
The U.S. Supreme Court heard arguments yesterday on an important matter that will have a tremendous effect on the debt collection process. In Jerman v. Carlisle, the Court considered whether a debt collector’s legal error qualifies for the bona fide error defense under the Fair Debt Collection Practices Act (FDCPA). Under the FDCPA, debt collectors must, as part of their initial contact, provide consumers with certain prescribed notices.
In this case, the creditor issued a notice which it believed was in compliance with the Act. Unfortunately for the creditor, its collection notice requiring the person to contest the debt “in writing” violated the law. Under the FDCPA, both the Federal Trade Commission and consumers subjected to collection abuses may bring civil suits against debt collectors for violations of the Act, and subject creditors to damages. The law proscribes some exemptions for debt collectors - debt collectors can avoid liability if the act was done in conformity with any advisory opinion of the Federal Trade Commission or if the violation was not intentional and resulted in a bona fide error notwithstanding the maintenance of procedures reasonably adapted to avoid such error. The question in this case is whether this creditor’s misunderstanding of the law (i.e., requiring a writing to dispute the debt) fell within the bona fide error defense.
The homeowner successfully obtained the dismissal of the foreclosure lawsuit against her because her debt had already been fully paid. Thereafter, she pursued an action challenging the debt collection practices of the creditor under the FDCPA. She lost her case in both the trial court and appellate court based upon the creditor’s bona fide error defense, and appealed to the U.S. Supreme Court.
Ruling in favor of the homeowner here would result in monetary losses for some such good-faith debt collectors who accidentally violate the Act. But, as Justice Ginsburg noted during oral argument in this matter, there is no "Federal statute that makes mistake of law a defense." As we all know, rarely is ignorance of the law a defense to civil liability or criminal penalties.
If the U.S. Supreme Court rules against the creditor in this case, debt collectors who are unsure about the interpretation of the law will be forced to request and receive an advisory opinion from the Federal Trade Commission prior to any collection notice to receive protection from liability. There have only been seven instances of such requests and only four answered in the past decade. I have similar questions on this issue as Chief Justice Roberts posited during oral argument – why is the number of advisory opinions so small? Does receiving an advisory opinion take an unreasonable amount of time? Is this practical for debt collectors?
New Home for Supreme Court of Virginia Rules
The Rules of the Supreme Court of Virginia have a new online address. Whereas they were previously maintained on the General Assembly's legislative information system's website, they are now hosted on the site for Virginia's judicial system and are available in .pdf format. Happy downloading!
Proposed Federal Law Will End Transparent Incorporation Practices
From the National Law Journal comes a report on the Incorporation Transparency and Law Enforcement Assistance Act, a proposed bill that is currently pending before the United States Senate Committee on Homeland Security and Governmental Affairs. The bi-partisan bill (S.569), which was introduced by Sens. Carl Levin (Michigan), Charles Grassley (Iowa), and Claire McCaskill (Missouri), would require states to collect and maintain information on the “beneficial owners” of corporations and limited liability companies in furtherance of preventing terrorism and money laundering.
If this legislation passes, each applicant seeking to form a corporation or an LLC would have to disclose, during the formation process, the names and addresses of its beneficial owners. Corporations and LLCs already in existence would have to provide this information in its annual filing or, if no annual filing is required, each time a change is made in the beneficial ownership of the company. Under the bill, the term “beneficial owner” is ambiguously defined as
an individual who has a level of control over, or entitlement to, the funds or assets of a corporation or limited liability company that, as a practical matter, enables the individual, directly or indirectly, to control, manage, or direct the corporation or limited liability company.
States would be required to maintain beneficial ownership information for a 5-year period and would have to provide such information upon receiving a subpoena or summons from a state agency, federal agency, or congressional committee. If a corporation or LLC provides false beneficial ownership information, it may face civil or criminal penalties.
The proposed law would have a tremendous impact on businesses in states, such as Virginia, where little, if any, information about the identity of a company’s ownership is required. (For instance, an applicant for an LLC in Virginia does not have to disclose any ownership information upon formation.) States and businesses alike will bare a potentially onerous administrative burden in their respective efforts to comply with the law. The bill’s sponsors aver that such a burden is a small price to pay for information that will help law enforcement detect, prevent, and punish terrorism and money laundering.
Although I am certainly in favor of eradicating terrorism and other forms of criminal activity, I have a number of issues with the proposed legislation. As an attorney with small business clients, I can think of several non-criminal examples where privacy is of paramount significance to business owners – particularly those businesses that are formed to invest in legitimate projects.
Additionally, as is often the case with legislation of this nature, the ultimate burden will fall on the very companies that are least likely to break the law. While the vast majority of corporations and LLCs are expending time and resources to understand the definition of a “beneficial owner” so as to avoid the imposition of a penalty, those with illicit intent will simply exploit other business structures for criminal gain.
Currently, the Incorporation Transparency and Law Enforcement Assistance Act is in the beginning stages of the legislative process. Given the attention that it is already receiving, it will be interesting to see whether it will garner the requisite support to become a law.
Small Business Marketing for Federal Procurement Opportunities
In planning your marketing plan for the New Year, you may wish to consider the many federal procurement opportunities ready to be seized. How do you find such opportunities? There are many sources for obtaining information on federal procurements, but I wanted to highlight a few of particular interest. A blog by Onvia, a company that helps businesses locate sales opportunities and information, provides good articles on small business opportunities with the federal procurement scorecard and finding government prime contractors for government subcontracting. The U.S. Chamber of Commerce Small Business Nation also has a Government Contracting Toolkit available online, which provides 10 steps to successful bids.
Implementing a systematic strategy for obtaining government contracts can produce substantial revenue results in just one year. An example of whirlwind growth in the government contracts arena is Dovel Technologies Inc., a woman owned small business headquartered in McLean, VA, which was selected as 2009 Contractor of the Year (under $25 million in revenue) by the Greater Washington Government Contract Awards. Dovel provides a broad array of information technology services and solutions, and about 95 percent of its revenue is from government contracts with the bulk of its work in subcontracting. Its upward spiral only noticeably began in April 2008. Congratulations to Dovel - what a difference a year can make!
Is Tax Relief On The Way For Virginia Businesses?
Heidi Meinzer, of Bean, Kinney & Korman, P.C., has a terrific summary of three business tax relief measures that are on the Virginia General Assembly's docket for the upcoming session. Although the proposed tax credits (HB 2, HB 47, and HB 57) are not substantial, Virginia businesses will certainly appreciate any relief to mitigate the worst economic downturn in the Commonwealth since the 1930s.
The 2010 Virginia General Assembly session convenes on January 13, 2010.
Perfunctory Due Diligence Foils Buyer's Fraud Claim over Company Purchase
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In reading the Virginia Lawyers Weekly Important Decisions of 2009, a Norfolk District Court case stood out as a reminder of the importance of a thorough due diligence examination by buyers in acquisitions of small and medium sized businesses and allocating risks in the purchase agreement. The buyer in the Norfolk case was an accountant and performed his own due diligence before his purchase of a Chesapeake accounting firm. It is apparent from the reading of the decision, however, that the buyer did not discover all material information necessary to fully understand the target company before signing on the dotted line. Such due diligence failure and the absence of risk-shifting provisions in the purchase agreement cost him a substantial sum in the end.
The accountant in White v. Nicholas L. Potocska P.C. claimed that the Seller made misrepresentations during the negotiation of the deal which resulted in the loss of one of the firm’s largest clients after closing. Unfortunately for the buyer, his fraud claims against the Seller did not even survive to reach a jury. The Judge summarily dismissed the Buyer’s claims against the Seller based upon the accountant’s curtailment of his due diligence investigation prior to the discovery of material facts. The Court opined that the failure of the buyer to uncover certain items did not suggest fraud by the seller.
This case highlights the risks inherent in the due diligence process. In Virginia, the buyer is responsible for “every piece of paper” available to him in due diligence – even the needle in the haystack. It is interesting to note that the accountant in this case was described as “one of the most diligent prospective buyers” by a business broker who worked with him. Perhaps the issues in this case had less to do with the accountant's "thoroughness" and more to do with the proper allocation of risks in the acquisition transaction documents. As we often see, sometimes it isn’t practical or cost efficient to discover all potential issues in a limited amount of time.
So, how can a buyer reduce risk in an acquisition absent a lengthy, exhaustive due diligence investigation? The purchase agreement can be crafted to shift certain due diligence risks to the seller, and make clear that all parties are relying on the seller’s statements. Moreover, if client retention is a part of the purchase price to be paid to the seller, the parties can incorporate an earn-out into the purchase price formula based upon company’s revenue after the closing.
LLC Formation in Virginia: Six Steps To Forming a Limited Liability Company
With the beginning of a new year upon us, now is an excellent time to form a limited liability company (LLC). Although the LLC formation process may appear daunting, it is not. You can form a Virginia LLC by following these six steps:
1. Choose an LLC Name
The first step in forming an LLC is to choose a business name. Under Virginia law, your business name must contain the words "limited company" or "limited liability company" or an acceptable abbreviation ("L.C.," "LC," "L.L.C.," or "LLC"). After you select a business name, you must make sure that it is “distinguishable” from other names on file with the Virginia State Corporation Commission (SCC).
2. Prepare and File Articles of Organization
The next step is to prepare Articles of Organization, which sets forth: the name of your LLC, the name and address of an agent for service of process (the “registered agent” and the “registered office”), and the primary address for your business. Once completed, you must file the Articles of Organization with the SCC along with a $100 filing fee. It typically takes 2-3 weeks for the SCC to approve your Articles of Organization and to issue a Certificate of Organization.
3. Adopt an Operating Agreement
Although Virginia law does not require an LLC to adopt an operating agreement, I highly recommend that you do so for your business. An operating agreement is the functional equivalent of a corporation’s by-laws: it sets forth how your LLC will be governed and operated (e.g., management decisions, allocation of profits and losses, voting rights and procedures, “buy-sell” provisions, etc.). (Because of the importance and potential complexity of an operating agreement, you should retain an attorney to assist you.)
4. Obtain Required Licenses
Depending on the type of business you are forming, you may be required to obtain federal, state, or local licenses. The best way to determine what licenses or permits you may need for your LLC is to contact the clerk’s office in the city or county in which you plan to operate your business.
5. Get an Employer Identification Number
If you are forming an LLC with more than one person or if you intend to have employees upon formation, you need to apply to the IRS for an Employer Identification Number (also referred to as a Federal Tax Identification Number). Although you can apply for an Employer Identification Number online, I recommend that you first speak with a tax professional to understand any potential tax repercussions.
6. Open a Bank Account
The last step is to open a bank account. As the primary purpose of an LLC is to limit your personal liability for the financial obligations of your business, it is important to keep your business and personal finances separate.
By following these six steps, you will have your LLC up and running in just a couple of weeks. As you will want to do it right the first time, you should contact an attorney if you have any questions and avoid online incorporation services.
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