Opinion
Civil Action No. 3:05-CV-602.
January 22, 2008
MEMORANDUM OPINION
THIS MATTER is before the Court to decide motions for judgment and attorneys' fees by Western Insulation, L.P. ("Western"), Hal Moore, and Melanie Moore. For the reasons stated in this Memorandum Opinion, the Court will GRANT IN PART AND DENY IN PART Western's Motion for Judgment on the Pleadings, DENY Hal's Motion for Judgment as a Matter of Law, DENY Melanie's Motion for Entry of Judgment Under Rule 54(b), and DENY Hal and Melanie's Motions for Attorneys' Fees. The parties will be DIRECTED to brief the Court on the issue of Western's attorneys' fees.
I.
In March 2001, Hal sold Western Insulation, Inc. ("the Company") to Western for $41,990,000. In accordance with the terms of the sale, Hal and his wife, Melanie, who was the Company's Chief Financial Officer at the time of the sale, signed Confidentiality, Non-Competition, and Non-Solicitation Agreements ("Agreements"), promising to refrain from competing with the Company and soliciting or employing any of its employees until March 12, 2008, seven years after the sale. In 2005, however, Melanie helped Stephanie Schulkamp, who was formerly employed by the Company, to start a rival business, American Insulation, Inc. ("American"). Drawing on her husband's relationship with City National Bank, Melanie personally guaranteed a $1.4 million line of credit for Schulkamp. In exchange, Melanie received a security interest in American's assets, an option to purchase 90 percent of American for $9,000 (which she may exercise during a period that begins on March 13, 2008), the right to approve any purchases of more than $25,000 by American, and the right to monitor American's finances. Melanie also personally guaranteed a $1.0 million line of credit from City National Bank for David Barnes, who was also formerly employed by the Company, which he used to create another rival business, Empire Insulation, Inc. ("Empire"). Moreover, Melanie advised both Schulkamp and Barnes about running those businesses. In addition, in February 2005, Hal hired two people who were formerly employed by the Company, David Hsiao and Lydia Flores.
Hal also leased property and trucks to American and sold trucks to Empire, actions that the Fourth Circuit found were not prohibited by his Agreement. See Western Insulation, L.P. v. Moore, 242 F. App'x 112, 118 (4th Cir. 2007).
Consequently, Western filed suit. After a three-day trial, the Court concluded that the Moores breached their Agreements, awarding Western damages of $500,000 for those breaches and $443,659 for lost profits, as well as attorneys' fees of $361,660; but, the Court did not grant any injunctive relief to Western. See Western Insulation, L.P. v. Moore, No. 3:05-CV-602 (E.D. Va. Aug. 28, 2006) ("Western Insulation I"). Both parties appealed that judgment, and it was affirmed in part, reversed in part, and vacated in part. See Western Insulation, L.P. v. Moore, 242 F. App'x 112, 125 (4th Cir. 2007) ("Western Insulation II"). The Fourth Circuit:
(1) affirmed that Melanie's Agreement was enforceable, id. at 117-18;
(2) affirmed that the scope of the Agreements was reasonable, id. at 118 n. 4;
(3) ruled that Hal breached his Agreement only by hiring Hsiao and Flores, reversing the Court's ruling that Hal breached his Agreement in other ways, id. at 118-19;
(4) affirmed that Melanie breached her Agreement, id. at 119 n. 7;
(5) reversed the Court's award of damages to Western, finding that the evidence did not support any award of damages, id. at 119-124;
(6) reversed the Court's decision to deny injunctive relief to Western, without expressing any opinion about whether an injunction would be appropriate, id. at 124-125; and
(7) vacated the Court's award of attorneys' fees and costs to Western, without expressing any opinion about the merit of that award, id. at 125 n. 15.
The Fourth Circuit remanded the case to this Court to decide whether to grant injunctive relief to Western and for further proceedings. Id. at 125.
II.
Now, Western asks the Court to enjoin Melanie from (1) breaching her Agreement by providing any form of support to any of the Company's competitors or to Schulkamp or Barnes personally; (2) controlling or monitoring the finances of American or Empire; and (3) exercising the option agreement or the security agreement that she formed with American, entering an option agreement or a security agreement with Empire, or obtaining any other ownership interest arising from a loan guarantee in either of those companies. Western also asks the Court (4) to enjoin Hal from breaching his Agreement by, directly or indirectly, soliciting, hiring, or employing any person who was formerly employed by the Company, or soliciting work from any of the Company's customers. Finally, Western asks the Court (5) to toll the Moores' Agreements until March 12, 2009, extending them by two years, the period of time that the Moores allegedly breached their Agreements.
A.
An injunction is necessary, Western argues, because some of the jobs that were sought by the Company and American or Empire are pending, and Western will be harmed if the Moores continue to assist the Company's competitors. Western also argues that the Moores' conduct reduced the value of the Company's goodwill that Western purchased, a continuing injury. Finally, Western contends that enjoining Melanie from exercising her agreements with American would hold her to her sworn testimony that she helped Schulkamp start American out of friendship, not to make a profit.
In response, the Moores argue that the Fourth Circuit absolved them of liability for breaching their Agreements. That ruling, they contend, implies that they will not breach their Agreements in the future. The Moores also quote — with evident relish — this Court's remark that they "would be stuck on stupid" to do so. Thus, they argue, an injunction is not necessary.
In Western I, the Court did not grant any injunctive relief to Western because entities whose presence was necessary for the Court to fashion complete relief — e.g., banks and employees of American and Empire — were not parties to this suit. The Court also concluded that the public interest would not be served by invalidating "legitimate commercial contracts or employment agreements." Western Insulation I, slip op. at 21-22. But, the Fourth Circuit ruled that some of the injunctive relief requested by Western would not harm any entities that are not parties to this suit. See Western Insulation II, 242 F. App'x at 124. An injunction barring the Moores from breaching their Agreements in the future would not affect any of those entities; enjoining Melanie from exercising her option or security agreements with American, or entering into such agreements with Empire, would benefit entities that are not involved in this litigation; and, equitably tolling the Moores' Agreements would not harm any of those entities. Id. In light of the Fourth Circuit's ruling, the Court will enjoin Melanie from breaching her Agreement, but it will not enjoin Hal from doing so. And, the Court will extend the duration of Melanie's obligations under her Agreement.
B.
To obtain a permanent injunction, a party must show
(1) that it has suffered an irreparable injury;
(2) that remedies available at law, such as monetary damages, are inadequate to compensate for that injury;
(3) that, considering the balance of hardships between the plaintiff and defendant, a remedy in equity is warranted; and
(4) that the public interest would not be disserved by a permanent injunction.eBay, Inc. v. MercExchange, L.L.C., 126 S.Ct. 1837, 1839 (2006). Virginia law supplies a similar standard. See, e.g., Akers v. Mathieson Alkali Works, 144 S.E. 492, 494 (Va. 1928); see Safeway Inc. v. CESC Plaza Ltd. P'ship, 261 F. Supp. 2d 439, 469-70 (E.D. Va. 2003) (applying Virginia law to a claim for injunctive relief, but concluding that any differences between federal and Virginia law in that context did not matter). A party that satisfies its burden of proof is not entitled a permanent injunction, however, since a court may deny a request for injunctive relief at its discretion. eBay, 126 S.Ct. at 1839; accord Christopher Phelps Assocs., LLC v. Galloway, 492 F.3d 532, 543 (4th Cir. 2007).
A party may show that it has suffered an irreparable injury, one that cannot be compensated adequately by damages, by demonstrating a "possibility" that it will suffer a "permanent loss of customers to a competitor or the loss of goodwill."Multi-Channel TV Cable Co. v. Charlottesville Quality Cable Operating Co., 22 F.3d 546, 552 (4th Cir. 1994) (affirming a grant of a preliminary injunction). See Blackwelder Furniture Co. v. Seilig, 550 F.2d 189, 197 (4th Cir. 1977) (reversing a denial of a preliminary injunction) (ruling that harm to goodwill is "incalculable"); Scotts Co. v. United Indus. Corp., 315 F.3d 264, 284 (4th Cir. 2002) (noting that a permanent injunction may be an appropriate way to protect a party's reputation).
Goodwill is the difference between the price for which a company is purchased and the net value of its assets and liabilities. See Financial Accounting Standards Board, Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets, at 105 (2001), available at www.fasb.org/pdf/fas142.pdf ("Statement of Financial Accounting Standards No. 142"). See generally Black's Law Dictionary 694 (6th ed. 1990). Goodwill represents the intangible qualities that attract customers to a business. See Newark Morning Ledger Co. v. United States, 507 U.S. 546, 555 (1993) (describing goodwill as an expectation that a company's customers will continue to patronize it); Comm'r v. Seaboard Finance Co., 367 F.2d 646, 649 (9th Cir. 1966) (describing goodwill as "the probability that old customers will resort to the old place without contractual compulsion").
According to a venerable definition of "goodwill," it may be created by a company's position in its market, as well as by "necessity" or other "accidental circumstances." See Metro. Bank v. St. Louis Dispatch Co., 149 U.S. 436, 446 (1893) (quoting Story, J.). Goodwill may also be created by a company's personal relationships with its suppliers and customers. LaGuardia Assocs. v. Holiday Hospitality Franchising, Inc., 92 F. Supp. 2d 119, 125 (E.D.N.Y. 2000); see Metro. Bank, 149 U.S. at 446 (stating that goodwill may be generated by "ancient partialities").
Goodwill is valuable because it enables a purchaser of a company to step into the seller's shoes. See Baker v. Comm'r, 338 F.3d 789, 793 (7th Cir. 2003). However, "[u]nanticipated competition" is "more likely than not" to reduce the value of the goodwill of a company. Statement of Financial Accounting Standards No. 142, at 15; see also LaGuardia Assocs., 92 F. Supp. 2d at 125 (finding that a franchisor that "open[s] an outlet of its own" or grants a "new franchise" to another entity "exploit[s]" the goodwill created by a franchisee's efforts to establish a market for the franchisor's product). And, losing goodwill may reduce a company's profits in the future. See Toltec Fabrics, Inc. v. August, Inc., 29 F.3d 778, 780 (2d Cir. 1994).
1.
Melanie drew on her relationship with City National Bank, a supplier of capital, to help American obtain financing. Without Melanie's personal guarantee for a $1.4 million line of credit, Schulkamp could not have operated American.Western Insulation I, slip op. at 11. And, Melanie knew that Schulkamp intended to use that line of credit to operate a business that would compete with the Company. Id. Thus, Melanie helped to create a rival to the Company that would not have existed otherwise — a threat that Western reasonably did not foresee, given that Melanie promised to refrain from competing with the Company for seven years. Since unexpected competition is likely to reduce goodwill, Statement of Financial Accounting Standards No. 142, at 15, Melanie's conduct created at least a possibility of a loss of goodwill by the Company. Thus, Western has satisfied its burden of showing that it has been irreparably injured in a way that cannot be compensated adequately by damages. See Multi-Channel TV Cable Co., 22 F.3d at 552.
Next, the balance of hardships in this matter warrant issuing an injunction. Enjoining Melanie from participating in or helping American and Empire will help to prevent the Company's goodwill from eroding further. And, requiring Melanie to honor the terms of her Agreement does not unduly burden her. See JTH Tax, Inc. v. Lee, 514 F. Supp. 2d 818, 826 (E.D. Va. 2007). In fact, Melanie testified that she helped Stephanie Schulkamp obtain financing for American out of friendship, not a desire to make a profit. Thus, enjoining Melanie from enforcing any of the rights that Schulkamp granted her — thereby preventing her from profiting by any success that American may enjoy — will promote the purpose that motivated Melanie to lend her assistance.
Finally, the public interest would not be disserved by enjoining Melanie from supporting, participating in the operation of, or benefitting from the formation of American, Empire, or any other rival of the Company. The "key components" of an insulation business are its relationships with suppliers, customers, and employees. Western Insulation I, slip op. at 3. Thus, the price that Western paid for the Company reflects the relationships that the Company developed with participants in the San Diego insulation market, relationships that justified projections of income in the future, generating goodwill. Permitting Melanie to violate the terms of the Agreement that Western obtained to protect the value of its purchase — by drawing on her relationship with a supplier for the benefit of the company's competitors, thereby vitiating the Company's position in the San Diego market — would reduce the value of Western's purchase. Depriving Western of the bargain that it struck could make it more difficult for other companies whose value is based to a significant degree on goodwill to be sold for a fair price. Facilitating the efficient transfer of property serves the public interest. Thus, enjoining Melanie from participating in the operation of any of the Company's competitors does not disserve the public interest.
For those reasons, the Court finds that a permanent injunction against Melanie is warranted. But, a permanent injunction is an extraordinary type of relief that must be tailored carefully so that it does not burden the defendant any more than is necessary to provide complete relief for the plaintiff. Va. Soc'y for Human Life, Inc. v. Fed. Election Comm'n, 263 F.3d 379, 393 (4th Cir. 2001). Western seeks an injunction prohibiting Melanie from (1) providing any form of support to any of the Company's competitors or to Stephanie Schulkamp or David Barnes personally; (2) controlling or monitoring the finances of American or Empire; and (3) exercising the option agreement or the security agreement that she formed with American, entering an option agreement or a security agreement with Empire, and obtaining any other ownership interest in either of those companies arising from a loan guarantee. If Melanie uses her skills, experience, or relationships to help any of the Company's competitors in any way, the Company may lose additional goodwill. Thus, granting requests (1) and (2) is necessary to provide Western with complete relief. Moreover, if Melanie is able to exercise either of her agreements with American, giving her control over the business, the Company may be harmed in the future. Thus, granting request (3) is appropriate.
However, a permanent injunction that prohibits Melanie from competing with the Company indefinitely would burden her unduly. She agreed to refrain from competing with the Company until March 12, 2008. She breached her Agreement on March 5, 2005, when she obtained the right to purchase American, a breach that has continued to this day. Subsequently, she entered a security agreement with Schulkamp and guaranteed lines of credit for American for Empire. Thus, Melanie has breached her Agreement for a total of two years, ten months, and seventeen days — the period from March 5, 2005 to the date of this Memorandum Opinion. Accordingly, the Court will issue an injunction that will, in effect, extend her obligations under her Agreement for a period of that length.
2.
In contrast, Western has not been irreparably injured by Hal's breach of his Agreement. Western has not shown that Hsiao or Flores, the former employees of the Company that Hal hired, enjoyed relationships with suppliers, other employees, or customers of the Company that helped generate the goodwill that Western purchased. And, enjoining Hal from soliciting, hiring, or employing any other people who worked for the Company before it was sold would disserve the public interest, because an injunction of that type would affect all of the people who worked for the Company from March 2000 to March 2001, and none of them are parties to this suit. Thus, the Court will not enjoin Hal from soliciting, hiring, or employing any other people who worked for the Company, and it will not extend his obligations under his Agreement.
III.
Western also asks the Court to enter judgment in its favor and for nominal damages. The Moores contend, however, that they are entitled to judgment in their favor because (a) Western failed to prove that it was harmed by the Moores' conduct, and (b) Western should be judicially estopped from seeking nominal damages because it did not do so at trial, claiming only that it suffered actual damages.
A.
Under Virginia law, to prove a claim for breach of contract a party must show that (1) it was harmed (2) by the violation (3) of a legally enforceable obligation. Ulloa v. QSP, Inc., 624 S.E.2d 43, 48 (Va. 2006). Generally, proof of damages is an "essential" element of a claim for breach of contract. Hamlet v. Hayes, 641 S.E.2d 115, 117 (Va. 2007). But, parties to a contract may agree "to eliminate damages as a required element" of a claim for breach of the contract. Ulloa, 624 S.E.2d at 48; see generally Coady v. Strategic Res., Inc., 515 S.E.2d 273, 275 (Va. 1999) (emphasizing that "parties may contract as they choose [as] long as what they agree to is not forbidden by law or against public policy"). In Ulloa, the Virginia Supreme Court affirmed a jury's verdict that a person breached his agreement not to compete with his former employer, even though the jury found that the company did not suffer any damages. 624 S.E.2d at 48. Accordingly, if the Moores agreed that damages would not be an element of a claim against them for breach of their Agreements, Western is entitled to the entry of judgment in its favor even though it did not prove that it was harmed by the Moores' conduct.
Compare, e.g., Matthieu v. Piedmont Natural Gas Co., 152 S.E.2d 336, 339 (N.C. 1967) ("Where there is a breach of an agreement . . . the law infers some damage.").
Paragraph 5 of Hal's Agreement provides that a breach of his obligations under the Agreement "shall result in substantial injuries." Hal also agreed that Western "shall be entitled, in the event of an actual of threatened breach of th[e] Agreement, to seek remedies including, but not necessarily limited to (i) temporary or permanent injunctive relief; (ii) specific performance; (iii) monetary relief, to the extent that monetary relief may constitute an adequate remedy in whole or in part. . . ." Agreement ¶ 5. The language of Melanie's Agreement is identical. Western Insulation II, 242 F. App'x at 115.
Since the parties agreed that harm to Western "shall result" if either of the Moores breached their Agreements, the Court concludes that the parties intended to relieve Western of the burden of proving damages to establish a claim for breach of the Agreements. The fact that the parties stipulated that Western would be "entitled" to seek specified remedies in the event of a breach of the Agreements supports that conclusion. In general, a party that establishes every element of a cause of action is entitled to relief, regardless of whether a contract authorizes the party to do so. Thus, the statement that Western would be "entitled" to seek those remedies is superfluous unless it was intended to emphasize that Western would not have to prove that it suffered harm. While the parties could have stated explicitly that they intended to eliminate damages as an element of a claim by Western for breach of contract, it is difficult to appreciate why they would have drafted the Agreements as they did only to affirm the established principle that a party that proves a cause of action may seek a remedy.
Thus, since the parties agreed that Western would not have to prove that it suffered damages to establish a claim for breach of contract, the Fourth Circuit's ruling reversing this Court's award of damages — on the ground that Western did not quantify its injury adequately — does not entail that its claim for breach of contract failed. The fact that the Fourth Circuit's decision saved the Moores several hundred thousand dollars — a disappointing outcome for Western — does not mean that Western did not prove its case. Accordingly, since Western proved that Hal and Melanie breached their Agreements and obtained injunctive relief, as discussed above, the Court concludes that Western is entitled to judgment in its favor.
See Boggs v. Duncan, 121 S.E.2d 359, 363 (Va. 1961) (ruling that a party may recover damages for lost profits "only to the extent that the evidence affords a sufficient basis for estimating their amount . . . with reasonable certainty").
Thus, the Court shall deny the Moores' motions for judgment in their favor.
B.
The doctrine of judicial estoppel prohibits a party from defending inconsistent positions in the course of a suit or a series of proceedings. New Hampshire v. Maine, 532 U.S. 742, 749 (2001). The purpose of that doctrine is "to protect the integrity of the judicial process" by prohibiting "parties from deliberately changing positions according to the exigencies of the moment," especially when doing so would prejudice another party. Id. at 749-50 (citations omitted).The Supreme Court has not established "inflexible prerequisites or an exhaustive formula" for determining whether judicial estoppel is appropriate. Id. at 751. If (1) a party has defended positions that are clearly inconsistent, (2) a court accepted the party's earlier position — so that accepting its later position would create a "perception that either the first or the second court was misled," or (3) accepting the party's current position would give it an unfair advantage, judicial estoppel may be appropriate. Id. at 750-51. But, if a party defends a position without success, adopting an inconsistent position in a subsequent proceeding "poses little threat to judicial integrity," suggesting that the doctrine should not be applied.Id. at 750-51. Moreover, under Virginia law, judicial estoppel applies only to factual claims, not legal arguments. Peerless Ins. Co. v. County of Fairfax, 645 S.E.2d 478, 484 (Va. 2007).
Western's request for nominal damages is not clearly inconsistent with the position that it defended at trial, that it suffered actual damages. Given that the Court awarded awarded Western nearly $1 million in damages, a request for nominal damages then would have been superfluous — even frivolous. Now that the Fourth Circuit has ruled that the evidence does not support any award of actual damages, Western's request for nominal damages makes sense. Nor does Western's request create a serious risk of prejudice to Hal or Melanie: by definition, nominal damages do not impose a heavy burden. Moreover, Western asked for nominal damages only after the Fourth Circuit rejected its claim for actual damages; i.e., it did not adopt a new strategy after a court accepted its old one. Thus, granting nominal relief would not compromise the integrity of these proceedings, which is apparently the most important policy underlying this rule. Finally, even if there were tension between Western's positions, in a suit governed by Virginia law, a party may adopt different — even inconsistent — legal arguments, so Western's strategy is supported by law. Thus, Western's request will not be judicially estopped.
Under Virginia law, nominal damages are inferred from the breach of a valid contract. Orebaugh v. Antonious, 58 S.E.2d 873, 875 (Va. 1950); accord Bailey v. Potter, 2006 WL 1582410, at *4 (E.D. Va. June 5, 2006) (Cacheris, J.) (applying Orebaugh). While that principle does not relieve a party of the burden of proving that it suffered damages to establish its claim for breach of contract, Bailey, 2006 WL 1582410 at *4, parties may do so by contract, as discussed above. Moreover, even though Western failed to quantify the harm that it suffered to the degree necessary to support an award of actual damages, according to the Fourth Circuit, Western adduced evidence that it was harmed, making a showing sufficient to warrant an award of nominal damages. Thus, on the basis of the parties' stipulation that Western would not have to prove that it suffered damages to establish a claim for breach of contract, as well as the evidence presented by Western at trial, the Court finds that Western is entitled to nominal damages. Accordingly, the Court shall award Western $100 from each defendant.
IV.
Since Western prevailed in this suit, it is entitled to an award of attorneys' fees. In the United States, a party to a lawsuit is generally responsible for paying its own attorneys' fees, even if it successfully prosecutes (or defends) the suit.Travelers Cas. Sur. Co. of Am. v. Pac. Gas Elec. Co., 127 S.Ct. 1199, 1203 (2007). However, parties may agree otherwise.Id. Each of the Moores' Agreements provides that "the prevailing party in [an suit to enforce or interpret the Agreement] shall be entitled to reasonable attorneys' fees, costs[,] and necessary disbursements. . . ." Agreement ¶ 5.
In light of this conclusion, the Court shall deny the Moores' motions for attorneys' fees.
The Court awarded Western approximately $360,000 in attorneys' fees, an award vacated by the Fourth Circuit without any evaluation of its merits. See Western Insulation II, 242 F. App'x at 125 n. 15. In light of the fact that Western failed to defend its award of damages before the Fourth Circuit, but has argued successfully for injunctive relief, affecting the nature (if not the degree) of success that it achieved, reinstating the Court's original award of attorneys' fees would not be appropriate. Accordingly, the Court shall direct the parties to brief this issue so that the Court may award Western the attorneys' fees to which it is entitled, applying the twelve-factor test established by the Fourth Circuit. See Barber v. Kimbrell's, Inc., 577 F.2d 216, 226 n. 28 (4th Cir. 1978).
It shall be SO ORDERED.