On March 7, 2019, a group of six United States senators from both sides of the aisle submitted a letter to the Government Accountability Office (GAO) requesting a federal investigation into the use of non-compete agreements on the basis that their widening use in recent years raises concerns about their negative impact on both workers and the national economy.  Specifically, the letter asks the GAO to assess the following three questions:

  1. What is known about the prevalence of non-compete agreements in particular fields, including low-wage occupations?
  2. What is known about the effects of non-compete agreements on the workforce and the economy, including employment, wages and benefits, innovation, and entrepreneurship?
  3. What steps have selected states taken to limit the use of these agreements, and what is known about the effect these actions have had on employees and employers?

Continue Reading U.S. Senators Request Review of Non-Compete Agreements by the Government Accountability Office

Continuing our annual tradition, we present the top developments/headlines for 2017/2018 in trade secret, computer fraud, and non-compete law.

1. Notable Defend Trade Secrets Act Developments

Just two years after its enactment, the Defend Trade Secrets Act (“DTSA”) continues to be one of the most significant and closely followed developments in trade secret law. The statute provides for a federal civil cause of action for trade secret theft, protections for whistleblowers, and new remedies (e.g., ex parte seizure of property), that were not previously available under state trade secret laws. Continue Reading Top Developments/Headlines in Trade Secret, Computer Fraud, and Non-Compete Law in 2017/2018

shutterstock_272870042By Adam Vergne and Chuck Walters

Following a national trend, Montana and Virginia have become the nineteenth and twentieth states to enact laws restricting employer access to the social media accounts of applicants and employees.[1]

Virginia’s law, which takes effect on July 1, 2015, prohibits requesting (or requiring) the disclosure of usernames and/or passwords to an individual’s social media account.  In addition, the law prohibits any requirement to change privacy settings or add a manager to the “friend” or contact list associated with a particular social media account.  In addition to prohibiting the disclosure of usernames and passwords, under Montana’s new law, which took effect April 23, 2015, an employer is prohibited from requiring the disclosure of any information associated with a social media account or requesting an employee or applicant access a social media account in the presence of the employer.  As is common with such legislation, both statutes contain an anti-retaliation provision that prohibits an employer from taking any adverse actions against individual that exercise his or her rights under the law.

Notably, these statutes apply only to personal social media accounts meaning accounts opened on behalf or at the request of the employer are not protected. Employers are also still free to view information contained in personal social media accounts that is publically available.  Virginia’s law also includes an exception that permits employers to request login information if the employer has a “reasonable belief” the account is “relevant” to a “formal investigation or related proceeding” concerning the violation of a federal, state, or local law.

As the legal landscape associated with social media accounts continues to evolve, employers should review their policies and procedures to ensure compliance with all relevant statutory provisions.

[1] In 2012, Maryland became the first state to enact social media privacy legislation.  Since that time, Arkansas, California, Colorado, Illinois, Louisiana, Michigan, Nevada, New Hampshire, New Jersey, New Mexico, Oklahoma, Oregon, Rhode Island, Tennessee, Utah, Washington, and Wisconsin have enacted similar legislation.

Excited about the prospect of a talented new hire and think that her non-compete doesn’t affect you? Think again. Under Virginia law, a future employer, who is aware of a prospective employee’s non-compete agreement, risks legal liability for tortious interference of contract and, through that, business conspiracy.

In DePuy Synthes Sales, Inc. v. Jones,  2014 WL 1165852 (E.D. Va. Mar. 21, 2014) (adopting magistrate’s report and recommendation in 2013 WL 8118533 (E.D. Va. Nov. 5, 2013)), the Eastern District of Virginia recently applied Virginia law to deny a motion to dismiss claims of tortious interference of contract and statutory business conspiracy on the grounds that the future employer knew of the existence of the non-compete agreement and nonetheless proceeded to hire two salespersons in a capacity that would require them to violate their non-compete agreements. 

Case Background

DePuy Synthes Sales, Inc. (“DePuy”) employed two salespersons, Michael Jones and Jacob Schools, to market DePuy’s line of orthopaedic medical devices to doctors.  Both men left DePuy and began working with Sky Surgical, Inc. (“Sky Surgical”), a competitor, in violation of their non-compete agreements. DePuy filed a complaint alleging, in part, Sky Surgical’s tortious interference with Jones and Schools’ non-compete agreements and statutory civil conspiracy under Virginia Code Sections 18.2-499 and 500.

Tort of Tortious Interference

The court denied Sky Surgical’s motion to dismiss this claim.  Under Virginia Law, to state a claim for tortious interference, DePuy only had to plead four elements: (1) existence of a valid contractual relationship or business expectancy; (2) knowledge of the relationship on the part of the interferor; (3) intentional interference inducing or causing a breach or termination of the relationship; and (4) damage to the party whose relationship was disrupted. 

The critical issue here was whether the contract was terminable at will.  If a contract is terminable at will, Virginia also requires that the interference be accomplished by “improper methods,” like bribery or fraud. However, whether a contract is terminable at will is not always clear cut.  In another case, the Virginia Supreme Court has explained that the extent of permissible third party interference increases as the degree of enforceability of a business relationship decreases.  Here, the court looked to the non-compete agreement, not the customer relationships with doctors (which were admittedly at will) to determine whether improper methods must be plead.  Because the non-compete agreements were not terminable at will, DePuy was not required to plead “improper methods.” 

Business Conspiracy

Under Virginia Code Section 18.2-499 and 500, injured parties can recover treble damages for conspiratorial conduct performed for the purpose of “willfully and maliciously injuring another in his reputation, trade, business or profession by any means whatever.”  The conduct of the conspirators must be considered unlawful. In a recent case, Dunlap v. Cottman Transmissions Systems, LLC, 754 S.E.2d 313 (2014), the Supreme Court of Virginia resolved a long-standing ambiguity, holding even though breach of contract is not sufficient to constitute an “unlawful act,” tortious interference with contract and tortious interference with business expectancy do each constitute the requisite “unlawful act” to proceed on a statutory business conspiracy claim.  Therefore, by adequately pleading tortious interference with contract, DePuy was also able to plead statutory business conspiracy against Sky Surgical.

Takeaway

No matter how excited an employer may be about a prospective hire, when non-compete agreements come into play, an employer must carefully analyze the applicable terms of the non-compete and seek the advice of legal counsel before extending the offer.  Likewise, a former employer may have two possible causes of action against the employer that pilfered its employees.

A recent Supreme Court of Virginia decision will make it more difficult to challenge non-compete restrictions through early pleading challenges.

In Assurance Data, Inc. v. Malyevac, the Supreme Court of Virginia reversed the Circuit Court of Fairfax County, which sustained a demurrer, and, in doing so, determined the enforceability of certain restraints on competition contained in an employment agreement on the pleadings. In remanding the action back to the lower court, the Supreme Court of Virginia held that any finding regarding the enforceability of the agreement must be made on the facts, and certainly not at the demurrer stage.

Background:

Plaintiff Assurance Data, Inc. (“ADI”) is a company which provides information technology consulting and design services.  It retained defendant John Malyevac to sell its computer products and services to its customers and required Malyevac to execute an employment agreement containing various restraints on competition. Pursuant to the employment agreement, upon termination of his employment with ADI, Malyevac was prohibited from selling products also sold by ADI for six months, disclosing confidential information, and soliciting ADI customers. In particular, the non-solicitation provision provided Maylevac would not solicit any ADI customers “[e]xcept for the sole benefit of [ADI] . . . for a period of twelve (12) after the date of termination.”

A few months after Malyevac entered into the agreement, he resigned. Shortly thereafter, ADI filed a complaint alleging that Malyevac had violated a number of the provisions contained in the employment agreement.

Demurrer and Appeal:

Malyevac filed a demurrer claiming that the agreement’s non-compete and non-solicitation clauses were overbroad and thus unenforceable. He pointed to the “twelve” contained in the non-solicitation clause, arguing that it was unenforceable because no increment of time, i.e. days, weeks, months, or years, was specificed. The Circuit Court of Fairfax County sustained the demurrer finding that, as a matter of law, the non-compete and non-solicitation provisions were unenforceable.

The Supreme Court of Virginia reversed, finding that the lower court erred in sustaining the demurrer. It explained that the only purpose of a demurrer is to determine whether a party has stated a cause of action upon which relief can be granted. A demurrer should never be used to determine whether the restraints on competition are actually enforceable. The Supreme Court observed that, in sustaining the demurrer, the lower court improperly deprived ADI of the opportunity to present evidence to meet its burden of showing that the contract’s restraints on competition were reasonable.

Takeaway:

In reversing the lower court, the Virginia Supreme Court reaffirmed a long line of cases which requires that an agreement that restrains competition be evaluated on its own merits and determined on its own facts. This ruling is helpful for employers seeking to enforce non-compete provisions in that it preserves the opportunity for the employer to present evidence regarding the enforceability of its non-compete agreements. Nevertheless, an employer must be prepared to meet its burden of showing that a non-compete is enforceable because it (i) restrains a former employee no more than is necessary to protect a legitimate business interest; (ii) is not unduly harsh or oppressive in curtailing an employee’s ability to earn a livelihood; and (iii) is reasonable in light of sound public policy.

The United States District Court for the Eastern District of Virginia recently denied a motion to dismiss a counterclaim for violation of Virginia’s Uniform Trade Secrets Act (“VUTSA”), holding that the counterclaim sufficiently alleged trade secret misappropriation based on improper acquisition of a trade secret, even in the absence of allegations of use or disclosure.

Factual allegations:

Plaintiff Jacqueline Marsteller was a Senior Vice President and Account Executive employed by defendant Electronic Consulting Services, Inc. (“ECS”).  On November 3, 2011 ECS informed Marsteller that she was being terminated and that her last day of employment would be December 31, 2011 in order that she would be eligible to receive a $95,000 bonus.  The bonus was indeed paid to Marsteller on December 30, 2011.  Marsteller began work for a competitor to ECS in December 2011.

Procedural history:

Almost a year and a half after Marsteller left ECS, she sued her former employer on grounds not identified in the court’s opinion.  ECS filed a six-count counterclaim alleging, among other things, that after Marsteller was notified she was being terminated, she misappropriated various trade secrets by transferring information to an external storage device as well as e-mailing information to her personal e-mail account in violation of VUTSA.

Motion to dismiss: 

Marsteller moved to dismiss the counterclaims, including the VUTSA claim on the grounds that ECS failed to allege that: (1) the alleged trade secrets derived independent economic value; and (2) Marsteller used the trade secret information. 

In ruling on the motion, the court explained that a claim for violation of VUTSA must allege that: (1) the information in question constitutes a trade secret, and (2) the defendant misappropriated it.

The court further explained  that to constitute a “trade secret” under VUTSA, information must: (1) derive independent economic value; (2) not be known or readily ascertainable by proper means; and (3) be subject to reasonable efforts to maintain its secrecy.   The court concluded that ECS validly pleaded the information allegedly taken by Marsteller was trade secret because it alleged that: (1) the information derives independent economic value because ECS spent time, effort and money developing the information and the information would allow a competitor to know ECS’s business development and bidding plans, target its contracts and access its unique format for summarizing contract opportunities; (2) the information is not readily ascertainable by proper means as it reflects ECS’s internal strategies and plans not publicly available; and (3) ECS took reasonable steps to protect the information by storing it on an internal password protected server.

With respect to “misappropriation,” the court stated that VUTSA recognizes two kinds: (1) improper acquisition of a trade secret; and (2) disclosure or use of a trade secret.  Improper acquisition means “acquisition of a trade secret by a person who knows or has reason to know that the trade secret was acquired by improper means.”   “Improper means” is defined under VUTSA as including “theft, bribery, misrepresentation, use of a computer or computer network without authority, breach of a duty or inducement of a breach of duty to maintain secrecy, or espionage through electronic or other means.”  The court also cited case law for the proposition that “[u]nder the VUTSA, improper acquisition of a trade secret, even in the absence of allegations of use or disclosure, is sufficient to state a claim.”  Systems 4, Inc. v. Landis & Gyr, Inc., 8 Fed. Appx. 196, 2000 (4th Cir. 2001) (improper means alone can give rise to misappropriation claim) (unpublished). 

In analyzing the counterclaim, the court concluded that ECS’s allegation that Marsteller transferred and retained ECS’s internal documents outside of the scope permitted by her employment, including transferring proprietary documents to an external storage device, sufficiently stated a claim for “misappropriation” through improper acquisition.

Alternative basis for ruling:

Interestingly, the court also noted (in what is arguably dicta) that ECS’s VUTSA claim contained “plausible allegations” that Marsteller also used certain misappropriated ECS information.  The court apparently reached this opinion based on ECS’s allegations that: (1) the ECS information in question was developed in order to obtain ISO certification; (2) ISO certification requires development and implementation of “business processes” required by ISO standards: (3) Marsteller began working for her new employer as the Vice President of Business Process Engineering in December 2011; and (4) Marsteller’s new employer obtained ISO certification in July 2012.

The court stated that these allegations raised a “reasonable inference” that Marsteller used ECS’s information and that it was “plausible, not just possible, that Marsteller used or disclosed” ECS information to benefit her new employer.

As a somewhat related side note, Virginia does not recognize the doctrine of inevitable disclosure.  Gov’t Tech. Servs. v. IntelliSys Tech. Corp., 1999 WL 1499548 (Va. Cir. Ct. Oct. 20, 1999).

Takeaway:

Having survived the motion to dismiss, it is unclear where ECS goes from here.  Given that ECS waited more than a year and a half after Marsteller’s departure (and her new employer’s ISO certification) to raise its allegations, ECS will likely have an uphill battle obtaining any injunctive relief.  The court will presumably also be unlikely to award damages if there is no evidence Marsteller used any of ECS’s information.    

What can employers do to avoid ending up in this situation?  There are a number of safeguards and procedures that companies should consider as part of “best practices” in preventing trade secret misappropriation: (1) emphasizing to workers the importance of protecting the company’s confidential, proprietary and trade secret information; (2) using non-disclosure and trade secret protection agreements to protect sensitive information; (3) continued education to remind workers regarding their obligations to protect company information; (4) employing reasonable protective measures to safeguard trade secrets; and (5) using exit interviews and certifications requiring departing workers to confirm they do not have any company trade secrets or confidential or proprietary information.

When misappropriation is suspected, it is essential not to delay to do a thorough factual and legal investigation before filing any misappropriation claim.  Such investigation should identify any evidence showing: (1) what specific trade secrets are at issue; (2) what reasonable measures were taken to maintain their secrecy; (3) how the departed employee was able to acquire the trade secrets; (4) any threat of misappropriation or damages arising from the misappropriation.  If it is suspected the trade secrets were transferred electronically, it is important that a forensic examination of relevant computers and/or other electronic devices be performed by experienced experts.  Be mindful that using in-house IT personnel may create evidence spoliation issues. 

Finally, if evidence of misappropriation is found, delaying legal action is likely to reduce the chances of obtaining injunctive relief to stop impermissible use of the misappropriated trade secrets, and thereby reduce your chances of preventing harm to your company.

On May 30, 2013, a federal judge in Virginia dismissed a tax consultant’s trade secrets misappropriation claim against its telecomm customers, ruling that the consultant’s alleged relationships with tax authorities, tax-law ‘accounting system,’ and its ability to negotiate property tax discounts do not constitute statutory trade secrets.  Cablecom Tax Services, Inc. v. Shenandoah Telecomms. Co. et al., No. 5:12-cv-69-MFU-JGW (W.D. Va. 5/30/13).

The court gave the consultant another chance to allege a misappropriation claim, but made clear that its already-pled trade secrets are not protectable.

Cablecom Tax Services, d/b/a Property Tax Accounting,[1] allegedly signed agreements with Shenandoah Valley telecomm companies (“Shentel”) under which Cablecom would prepare Shentel’s property and sales tax returns for the 2011 tax year.  Cablecom prepared those returns and obtained substantial tax discounts for Shentel, it alleged, but Shentel refused to pay.  In addition to alleging breach of contract, quantum meruit, and fraud claims, Cablecom alleged the following trade secrets that were protectable under the Virginia Uniform Trade Secrets Act:

Its ‘valuable relationships with taxing authorities,…accounting system uniquely suited to the telecommunications industry that is generally accepted by the various taxing authorities, and … knowledge, formulas and processes for the compilation and use of information provided and to be provided by [Cablecom’s] customers in reducing [their] ad valorem and sales tax liability.’

Tax officials, tax laws and regulations, and applying those laws and regs to customers’ financial data could not be trade secrets, the court held.  All those alleged secrets were public information, or ‘reasonably ascertainable’ by legitimate means.  Though the court noted that the application of tax laws to Shentel’s business may require some accounting expertise, and successfully negotiating tax discounts may necessitate familiarity with tax officials, it nevertheless found that such expertise and familiarity come ‘nowhere close’ to protectable trade secrets.

This case appears to be different from those social-networking cases we previously blogged on, including Twitter and MySpace cases, which indicate that an accountholder’s online friendships or relationships could constitute a protectable proprietary asset.  Those cases involve the private sector, where customer lists and relationships are among a business’s most valuable proprietary assets, and legally so.  This case, on the other hand, involves alleged public sector contacts.  Although not explicitly stated, the court may have premised its decision on the fact that private companies cannot legally monetize their relationships with the government.  Such could be tantamount to, or at least approach, improper political influence. 

We will check the court’s docket in the near future to determine the status of Cablecom’s re-attempted trade secrets claim, if any.


[1]There appears to be a significant issue over who is the real party in interest.  The court dismissed the amended complaint because it was unclear from the pertinent record whether ‘Property Tax Accounting’ was a proper assumed name of ‘Cablecom Tax Services, Inc.,’ and in turn, whether Cablecom was a properly organized and/or maintained corporate entity.  Like its currently dismissed trade secrets claim, plaintiff has 14 days to set the record straight on that issue.

By Michael Baniak

A Virginia federal court district court recently issued a significant decision awarding lost profits to an aggrieved employer for breach of fiduciary duty by a former employee. The Court found that the ex-employee was not able to deduct his services for the company as an expense against the damages award. Further, the Court found that the employer’s CFAA claim failed becuase there was not a sufficient showing of loss. Ritlabs, SRL v. Ritlabs, Inc., 2012 WL 6021328 (E.D. Va. 11/30/12).

Ritlabs SRL (“SRL”) sued its CEO and part owner Demcenko, for alleged self-dealing through another company he formed (co-defendant), Ritlabs, Inc. (“INC”). The host of counts included breach of fiduciary duty of loyalty, violation of the Computer Fraud and Abuse Act (CFAA), and tortious interference with contractual relations. In a nutshell, Demcenko, while still the director (essentially CEO) of SRL, allegedly formed a rival Internet technology and software company INC with his wife. He then entered into a license agreement between SRL and INC to exclusively sell SRL’s software in the US, with a non-exclusive worldwide. As the Court determined, Demcenko did not obtain approval from his SRL co-owners, nor advise them of his ownership interest in INC, or that he was cancelling a software distributorship agreement between SRL and another company, which he then entered into on behalf of INC.

Needless to say, his co-owners did not take kindly to Demcenko’s activities, and sued. Plaintiff ultimately moved for summary judgment as to all of its claims, which resulted in the Court’s grant of the same generally across the board, along with summary judgment against Defendants on all counterclaims. The Court imposed constructive trusts, issued restraining orders, and ordered an accounting and disgorgement proceeding. A bench trial ensued as to damages, and it is here that interesting tidbits reside.

The breach of fiduciary duty was the big-ticket item, based upon Demcenko’s diversion of corporate opportunities to himself (through INC). SRL went for INC’s gross revenue, without reduction for any expenses, as well as for some other smaller amounts. SRL also sought punitive damages in the way of costs and attorney’s fees.

Applying Virginia law, a plaintiff is entitled to what it would have received “but for” the breach of fiduciary duty, so as to “deny Defendants the fruits of their scheme.” Accordingly, the Court determined that damages should therefore be calculated on the basis that Demcenko was operating INC for the constructive benefit of SRL; ergo, SRL was entitled to only profits, not gross revenue. In what might be seen as a bit of chutzpah by some, the Defendants sought to deduct amounts received by Demcenko for his “services”. The Court was not buying it, however, and concluded that collecting a salary for breach of one’s duty of loyalty, and while he was still receiving a salary from SRL, was not appropriate as a deductible expense.

As for damages under the CFAA, the Court noted that civil liability, and responsibility for compensatory damages or other relief, requires a showing of CFAA qualifying “loss” aggregating at least $5000. 18 U.S.C. section 1030(g). The bar for loss is not terribly high, as any reasonable cost to the “victim,” including the cost of responding to the offense, damage assessment, restoration, revenue lost “or other consequential damages incurred because of interruption of service” will suffice. But here, the Court did not find the necessary nexus with damage incurred because of interruption of service for the bulk of what SRL was toting up on this count. That left an amount below $5000 total, which the Court noted was below the jurisdictional threshold, and divested the Court of jurisdiction. The previous judgment as to liability was thereby vacated for “lack of subject matter jurisdiction.”

As for costs and attorneys fees, the elimination of the CFAA count removed that as a basis for a fee award. And as for punitive damages, upon which SRL further predicated its costs and attorneys fees, “the Plaintiff did not include a prayer for punitive damages in its Complaint, and should not be considered now.” Nonetheless, the Court reviewed the evidence, and concluded that SRL did not meet its high burden for punitive damages. It was in this discussion that what might otherwise have seemed to be a fairly open and shut case revealed some nuances, such as his former partners having some favorable knowledge of Demcenko’s plans to open a US branch, and “that the affairs of SRL were at times accompanied by rather unorthodox self-driected transactions by each of the owners.”

We previously blogged in our 2011 year end review about a noteworthy trade secret misappropriation case where DuPont Co. successfully obtained a jury verdict of approximately $920 million in damages against rival Kolon Industries Inc. DuPont sued Kolon for the alleged theft of trade secrets regarding a proprietary fiber used to make “bulletproof” police and riot gear.

Yesterday, U.S. District Court Judge Robert Payne (E.D. Virginia) issued a 20-year worldwide permanent injunction against Kolon, which prohibits Kolon from producing and manufacturing its Heracron fibers that were found to use and incorporate DuPont’s trade secrets.

John Marsh at Trade Secret Litigator has an excellent discussion of this astonishing decision and explains how this decision may have tremendous implications throughout the U.S. and worldwide.

One of the major takeaways from this case is Judge Payne’s holding that the U.S. Supreme Court’s 2006 decision in eBay Inc. v. MercExchange, L.L.C.–which had a significant impact on patent cases because it eliminated the presumption of irreparable harm–does not apply to trade secret injunctions. In particular, Judge Payne found that eBay applied to federal statutes (e.g. patent, trademark, copyright), but not Virginia’s Uniform Trade Secrets Act.

In light of the recent proposed legislation for a federal trade secret statute, we wonder whether such a federal statute would change Judge Payne’s analysis and the applicability of eBay to trade secret injunctions.

The Virginia Supreme Court has complicated the valuation of lost goodwill damages in trade secrets matters in its June 7, 2012 decision in 21st Century Systems, Inc. v. Perot Systems Government Services, Inc., No. 110114. 

The matter arose from the departure of several employees from Perot Systems Government Services, Inc. (“Perot”), who subsequently joined a competitor company. Perot filed suit with multiple counts, including breach of fiduciary duty, breach of non-disclosure agreement, breach of non-competition and non-solicitation agreements, violation of Virginia’s business conspiracy act, and violation of Virginia’s Uniform Trade Secret Act. During trial, Perot provided evidence that several of the key employees had downloaded numerous Perot documents and accessed those files while working at the competitor. Defendants challenged the propriety of Perot’s damages expert, but the trial court denied the motion to strike, instead striking defendants’ counter expert for failure to adequately disclose his opinions prior to trial. The jury returned a verdict in favor of Perot on all claims, including $4 million in compensatory damages and $12 million in trebled damages, most of which was predicated upon lost goodwill damages. 

The key issue on appeal was the propriety of Perot’s damages expert’s valuation of Perot’s lost goodwill damages. Perot’s expert had sought to follow the methodology used and accepted by the Virginia Supreme Court in Advanced Marine Enters. V. PRC Inc., 256 Va. 106, 501 S.E.2d 148 (1998). Specifically, the expert sought to calculate the difference between the price the business would sell for and the value of its non-goodwill assets. He did so by using the actual sale figures and Dell’s valuation of Perot’s goodwill, as reported in SEC filings. The majority on the Supreme Court took issue with this approach, noting that because the expert had used actual sale figures, “Perot was required to demonstrate that its sale price to Dell reflected an actual loss of goodwill as a result of the [misconduct].” The employees had departed in the summer of 2009, and the sale to Dell was completed in November 2009, but Perot introduced at trial no evidence regarding the diminution in value of Perot’s fair market value or identifiable assets during this time frame. To the contrary, the majority noted that Dell had paid a premium for Perot, and there was no evidence at trial that Dell discounted Perot as a result of the employee departures. As a result, the Court concluded that Perot had not, as a matter of law, demonstrated that it actually lost any goodwill.

The majority distinguished Advanced Marine, in which the plaintiff company lost employees to a competitor and was sold before the trial court decided the case. The record indicated that the price for the sale of the company did not change after the departure of the relevant employees. The expert in Advanced Marine did not look to the actual sales data, however, to determine the lost goodwill damages. Instead, the expert examined the sales of two comparable businesses, subtracted the value of each “comparable company’s” assets from its sales price to determine the goodwill associated with each comparable sale, and then apportioned this estimated goodwill figure among the number of employees. This derived figure was then applied to the departed employees of Advanced Marine. The Virginia Supreme Court approved of this methodology, noting that the departed group of employees had “goodwill value for purposes of maintaining the customer relationships necessary for contract retention.” No similar testimony was provided in the instant case, noted the majority.

Two justices dissented from the majority opinion. The dissents argued that the majority was applying a higher standard of proof to Perot than the Court had applied in Advanced Marine. The dissent noted that lost goodwill valuations are inherently difficult, but the methodology used by Perot’s expert was sensible and consistent with Advanced Marine.       

It is difficult to make sense of the methodology accepted by the Virginia Supreme Court in Advanced Marine but rejected in 21st Century. In the former, the sales price did not reflect a lost valuation, but the Court accepted the analytically derived damages figures on the presumption, supported by testimony, that there would be future lost goodwill. In 21st Century, the actual sales data also did not reflect lost value, but the Court required that it do so to sustain a lost goodwill valuation. Parties claiming lost goodwill damages should thus be cautious in relying upon actual data, rather than analytically derived data, unless the actual data demonstrate the lost goodwill. Further, 21st Century cautions that there needs to be testimony regarding the existence of the lost goodwill, e.g., that departed employees will harm the relationships necessary to retain customers.