Business Torts: Business Conspiracy & Trade Secrets

Business Torts: Business Conspiracy & Trade Secrets

Sep 1, 2009

On January 14, 2009, The Honorable Glen E. Conrad of the U.S. District Court for the Western District of Virginia handed down his opinion in All Business Solutions, Inc. v. Nationsline, Inc.

While not a final decision on the merits, Judge Conrad’s opinion contains a clear statement of the standards for enforcement of claims for statutory business conspiracy and misappropriation of trade secrets, as well as a non-binding but illuminating assessment of the enforceability of contractually-agreed upon limitations of liability.

In 2005, ABS contracted (among other things) to sell Direct Inbound Dialing numbers (“DIDs”) on behalf of NationsLine, a telecommunications consultant. ABS sold DIDs to Prestige Business Solutions (“PBS”), who, in turn, transferred them to USA Locksmith (“USA”). Access to the DIDs afforded direct customer access to USA. All parties profited from this arrangement.

The second amended complaint alleged that in October 2007, NationsLine entered into a separate contract with A Certified Locksmith, a competitor of USA, whereby A Certified was given access to the same DIDs. ABS further alleges that when PBS learned of A Certified’s competition, they decided to destroy them. Ultimately, according to the complaint, PBS decided to destroy ABS as well.

In November 2008, NationsLine suddenly and unexpectedly terminated its contract with ABS and accused ABS of diverting DIDs that had been reserved for A Certified to USA. NationsLine threatened to take legal action against ABS unless ABS abandoned its claim for commissions. As a result, ABS sued NationsLine and PBS, alleging conspiracy to deprive ABS of its earned commissions and misappropriation of trade secrets.

In evaluating the sufficiency of PBS’s pleadings, the court restated the required elements for these torts.

Claims for business conspiracy under 18.2-500 require proof of a “concerted effort” by two or more parties, legal malice, and causally related injury. “Legal malice” refers to conduct that is intentional, purposeful, willful or malicious. A successful pleading must contain more than mere conclusory allegations and the factual content of the pleadings must support these conclusions.

In order to state a claim under the Virginia Trade Secrets Act, a claimant must allege sufficient facts to establish that the information at issue constituted a trade secret and that the defendant misappropriated it.

More specifically, a trade secret refers to “information” (broadly defined) that derives independent economic value, actual or potential, from not being generally known or readily ascertainable and is subject to reasonable efforts to protect its secrecy. “Misappropriation” refers generally to acquisition of a trade secret by someone who does not have a right to the information and knows or should know it, or disclosure or use of a trade secret by someone who improperly acquired it. The court concluded that the plaintiff’s complaint did not contain sufficient factual allegations to substantiate this claim.

The court then considered the enforceability of language contained in the parties’ contract limiting NationLine’s contractual liability to claims for commissions. The parties agreed that the contract stated: “In no event shall NationsLine be liable for special, indirect, incidental, punitive or consequential damages, including loss of profits arising through the relationship or the conduct of business contemplated herein.” NationsLine argued that limitation was a negotiated contract term and was enforceable as written. ABS essentially acknowledged the enforceability of the provision but argued that “statutory and common law duties may exist independently of agreed-upon contractual duties.”

In refusing to enforce the limitation on liability appearing in the contract, the court took another approach, finding that Virginia public policy does not permit the parties to a contract to negotiate away liability for intentional, conspiratorial misconduct.

Nothing in the court’s opinion suggests that negotiated limitations on liability are per se unenforceable, since the court’s reasoning would not apply to all liability claims. However the court’s statement that the parties may not agree to exempt a party from liability for “future intentional misconduct” appears in accord with Virginia law.