A Carluzzo Rochkind & Smith note: Following is an article by Virginia Lawyers Weekly. We did not handle this case, but it brings up important points your contract lawyer should be familiar with. For more than 20 years our contract lawyers in Manassas have helped clients with such matters in Prince William County, Fairfax County, Woodbridge, and throughout Northern Virginia. If you have any questions or would like to schedule an appointment, please contact our law firm at (703) 361-0776.
Contract: Court defers ruling on restrictive covenant
By Virginia Lawyers Weekly – 4/22/2024
Where a company sued for violating a restrictive covenant in a purchase agreement argued the covenant was overbroad and thus unenforceable, the court deferred ruling on the motion to dismiss. The party seeking to enforce the covenant must have an opportunity to present evidence that the covenant is justified.
Background
Eagle Paper International Inc. and Jacob Geron (its founder and principal) sued Continental Paper Grading Company, or CPG, and William D. Barrow (its CEO). Plaintiffs allege that in April 2009, CPG purchased a 50 percent ownership interest in the Eagle Companies and Harrow became a member of Eagle’s board of directors.
The complaint alleges that, starting in 2019, Harrow directed CPG to export paper to multiple international companies, including some of Eagle’s business partners, in violation of the restrictive covenant barring CPG’s participation in the import-export paper market.
The complaint alleges one count of breach of contract against CPG, one count of breach of fiduciary duty against Harrow, one count of unjust enrichment against both defendants and one count of declaratory judgment and permanent injunction against both defendants. Both defendants have filed motions to dismiss and a joint motion to strike the jury demand.
Breach of contract
CPG argues the breach of contract claim must be dismissed because the restrictive covenant that CPG allegedly violated is overbroad and unenforceable. When one party challenges a restrictive covenant as overbroad and unenforceable, the party seeking to enforce the covenant bears the burden of showing that the restriction is justified.
A problem arises when the party seeking to enforce the covenant faces a motion to dismiss without first having an opportunity to present evidence that the covenant is justified. Therefore, the court will not decide at this juncture whether the restrictive covenant is enforceable, as further factual developments through the discovery process are necessary.
Fiduciary duty
Plaintiffs allege that Harrow breached his fiduciary duty to Eagle, as a member of its board of directors, when he directed CPG to compete against Eagle in the import-export paper market. The parties agree that only Eagle, not Geron, brings this claim against Harrow.
Harrow first argues that the economic loss rule bars this claim. Harrow argues this duty comes solely from the parties’ agreement, not the common law, because “the allegations in the Complaint only allege the importation and exportation of non-wastepaper products in violation of the Agreement.” Although Harrow’s alleged conduct may violate a duty imposed by the import-export restrictive covenant, that same conduct could also violate an independent common law duty.
Harrow next avers that the complaint does not contain sufficient facts alleging that he breached his fiduciary duty to Eagle. The court disagrees. As a member of Eagle’s board of directors, Harrow owed a fiduciary duty to Eagle of good faith and loyalty, to not put himself in a position where his personal interests as CEO of CPG clash with Eagle’s interests and to not divert business opportunities from Eagle to CPG. The complaint alleges that Harrow breached this duty, and that “[o]n information and belief, CPG has diverted no less than $4 million from Eagle.”
Harrow also urges that “Plaintiffs fail to plausibly allege facts to support any inference that punitive damages are warranted here.” The court disagrees. The complaint’s specific allegations of competition suggest behavior that is more culpable than “commercial hardball.”
Unjust enrichment
Under Virginia law, a plaintiff cannot recover on claims of both breach of contract and unjust enrichment if both claims “cover[] the same subject matter.” Here, however, because CPG argues that the restrictive covenant is overly broad and unenforceable, defendants’ argument for dismissing the unjust enrichment claim is premature.
Defendants’ argument also overlooks that, at this stage of litigation, a party may plead inconsistent claims of unjust enrichment and breach of contract. The court also finds that the complaint states a claim of unjust enrichment against CPG and Harrow.
Jury demand
The purchase agreement contains a jury waiver clause. Even though it did not name Geron, it covers his claims. Further, none of Geron’s causes of action would exist without the relationship between Eagle and CPG. Additionally, Geron relies on the purchase agreement to support his breach of contract and unjust enrichment claims. As a party to that agreement, he consented to the waiver’s application to Eagle and its claims. For these reasons, the court finds that the jury waiver also covers Geron’s claims against defendants. The court therefore grants defendants’ motion to strike.
Harrow’s motion to dismiss granted in part, denied in part. CPG’s motion to dismiss denied. Joint motion to strike granted.
Eagle Paper International Inc. v. Continental Paper Grading Company, Case No. 2:23-cv-512, March 27, 2024. EDVA at Norfolk (Smith). VLW 024-3-194. 26 pp.
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