Present: Carrico, C.J., Lacy, Keenan, Koontz, Kinser, and
Lemons, JJ.
CALVERT W. SIMMONS
v. Record No. 000785 OPINION BY JUSTICE DONALD W. LEMONS
April 20, 2001
MARGARET C. MILLER, ET AL.
FROM THE CIRCUIT COURT OF FAIRFAX COUNTY
Robert W. Wooldridge, Jr., Judge
In this appeal, we consider whether Virginia law permits
a minority shareholder in a closely held corporation to assert
individual claims, distinct from derivative claims, on behalf
of a corporation against a corporate officer or director for
breach of fiduciary duty. We also consider the trial court’s
ruling that there was insufficient evidence to sustain a claim
of statutory conspiracy pursuant to Code §§ 18.2-499 and -500
and its ruling that there was insufficient evidence of
proximate causation between the harm to the corporation and
certain alleged legal malpractice of corporate counsel.
Additionally, we consider cross-error assigned to the trial
court’s refusal to set aside the jury’s verdict on a
derivative claim for breach of fiduciary duty and conversion.
Finally, we examine the trial court’s refusal to strike the
jury’s verdict concerning a breach of an employment agreement
on the ground that the restrictive covenant in the agreement
was unnecessary to protect the employer, unduly restrictive of
the employee’s rights, and contrary to public policy.
I. Facts
Recitation of detailed facts is necessary to analysis of
this unique case. Margaret C. Miller (“Miller”) was the sole
officer, director, and shareholder of Las Palmas Tobacco, Ltd.
(“Las Palmas”), a Virginia corporation that had exclusive
rights to import and distribute Profesor Sila brand cigars on
the “east coast of the United States of America.” On June 26,
1996, Miller and Calvert W. Simmons (“Simmons”) entered into a
Stock Subscription Agreement giving Simmons a 30% ownership
interest in Las Palmas in exchange for $100 and Simmons’
guarantee of a $100,000 letter of credit issued for the
benefit of Las Palmas. According to the agreement, Simmons
was required to “cause Virginia Commerce Bank to expeditiously
issue an irrevocable Letter of Credit for the benefit of Las
Palmas to [Profesor Sila] Cigar Factor[y] in Las Palmas, Spain
for the sum of $100,000. . . . The Letter of Credit shall be
utilized by Las Palmas to purchase product from [Professor
Sila] on terms.” Additionally, in a Shareholders’ Agreement,
Miller and Simmons agreed that “at a future date, they w[ould]
fix a value for their shares and enter into a Cross-Purchase
Agreement.”
Miller testified that in early December, 1996, she
presented Simmons with a cross-purchase agreement and later,
in January, 1997, Miller and Maria M. Kear (“Kear”), an
2
attorney licensed to practice in Virginia, went to Simmons’
office to “negotiate the terms of the cross-purchase
agreement.” Kear testified that she represented Miller at
this meeting and that she told Simmons that she was not
representing Las Palmas. Simmons testified that he felt that
Kear was being “very adversarial in the discussions” and asked
her to leave the meeting. Upon Kear’s departure, Simmons and
Miller were unable to agree on the valuation of Las Palmas.
On January 15, 1997, Miller sent a letter to Simmons that
included an offer of $13,290.59 to buy his 30% share of Las
Palmas. Simmons responded with a letter dated January 23,
1997 in which he stated that he did not wish to sell his
shares for $13,290.59 because he felt they were “worth
considerably more than that.”
On September 29, 1997, Simmons sent Miller a letter in
which, pursuant to Code § 13.1-771, he demanded inspection of
the accounting records of Las Palmas. The Las Palmas
financial records were prepared and maintained by Jeanne M.
Webb (“Webb”), an independent contractor. Simmons stated in
his letter:
In spite of my numerous phone calls, you have
failed and refused to communicate with me since
April 1, 1997. Currently, I do not have any
idea how Las Palmas is faring. In addition, it
has come to my attention that Las Palmas may
have transferred assets to another entity
without any consideration whatsoever.
3
In a letter dated October 3, 1997, Miller denied that Simmons
had the right to inspect the financial records and denied that
Las Palmas had transferred assets to another entity.
After being denied access to the Las Palmas financial
records, Simmons requested that his lawyer, Gary W. Lonergan
(“Lonergan”), obtain an explanation from Kear. In October of
1997, Lonergan called Kear to request the financial records.
Kear denied that Las Palmas’ assets had been transferred to
another entity. Kear testified that:
Lonergan . . . told me that . . . Mr. Simmons
had been told that Las Palmas Tobacco Limited
has been shut down and the assets had been
moved to another company. He asked me what I
knew about that. And I told him I didn’t know
anything about it. And he said well, that’s
what we’ve been told and I’m trying to get
financial records, and I told him I would call
Miss Miller and ask if the company had been
closed down. And I did that and I called him
back and I told him Miss Miller said the
company had not been closed down.
Miller told Kear that the financial documents Lonergan
requested were with Anatole G. Richman (“Richman”), who was
performing an evaluation of the company. When Kear called
Richman, he told her that he was not finished with the
evaluation because Webb had not completed her work with the
financial records.
Lonergan wrote Kear on October 23, 1997 indicating that
Simmons had been told by the bookkeeper that “[s]he has no
4
financial records [and] Las Palmas has been ‘wrapped up.’ ”
The letter also stated:
I believe that an explanation is in order.
Furthermore, there is no doubt that Mr. Simmons
is entitled to see the financial records of Las
Palmas: either Maggie Miller has them or Anatole
C. Richmond [sic] has them. Mr. Simmons and I
would like to see them by the close of business
on Friday, October 31, 1997.
Five days later Kear responded in a letter:
[P]lease be advised that I disagree “that an
explanation is in order.”
As I advised you on October 14, 1997, when
the financial records and the corollary
business evaluation are complete, I will have
them delivered to you; I have not wavered from
my position. Mr. Richman’s assistant advised
me yesterday that they are not finished with
the evaluation and Maggie Miller advised me
yesterday that Jeanne Webb has not completed
the financial records. Therefore there is
nothing for you to review at this time. I do,
however, hope to have these documents within
the next two (2) weeks.
On January 27, 1998, Lonergan again sent Kear a letter
requesting access to the financial records. Lonergan
testified that within a day or two of sending the letter, he
received a financial report prepared by Richman and dated
January 28, 1998. The report concerned the “value of Las
Palmas . . . as of February 10, 1997 [and] . . . is based on
the assumption that the Company has ceased operations and is
not a going concern.”
5
Miller testified that on February 9, 1997, Las Palmas
ceased doing business. According to Miller, Las Palmas
terminated its business because its supplier, Profesor Sila,
refused to ship any more cigars. Miller testified that Dr.
Nader Bayzid (“Dr. Bayzid”), the owner of Profesor Sila,
complained that an acceptable letter of credit had not been
received. Thereafter, Dr. Bayzid wrote her indicating that he
was not going to ship further products and that he intended to
start a new company in the United States.
Kear and Miller were friends who first met in 1985. Each
is godmother to one of the other’s children and Miller
previously had been employed as a clerical assistant in Kear’s
law office. Furthermore, Kear’s office was in the same
building as the office of Las Palmas and Kear visited Miller
there.
Kear admitted that she prepared and signed the articles
of incorporation for Las Palmas and was reimbursed for the
incorporation fee by Las Palmas. However, Kear stated that
other than the articles of incorporation and a collection
matter in February of 1998, she never did any work for Las
Palmas. Kear further testified that, in the summer of 1996,
Miller told her that there was an additional person (Simmons)
involved in ownership of Las Palmas and that her new partner
6
said that the attorney for the company had to be someone he
selected.
Kear also testified that sometime after January 10, 1997,
Miller asked her to file articles of organization for Las
Palmas Tobacco International, L.L.C. (“International”). On
February 6, 1997, Kear mailed the articles of organization to
the State Corporation Commission and, on February 10, 1997,
the SCC issued a certificate of organization for “Las Palmas
Tobacco International, L.L.C.” An unsigned “Limited Liability
Company Operating Agreement” listing Miller and Profesor Sila
as equal owners was maintained in Kear’s files. Kear was the
initial registered agent and organizer of the corporation.
According to Kear, Miller told her:
[S]he was going to use the international
company to import a lower brand cigar that was
being made in the Dominican [Republic and]
. . . they would sell the cheap ones and it was
going to be international business . . . they
were going to have their high end domestic
sales with Limited [meaning Las Palmas Tobacco,
Ltd.] and their low end international with
International [meaning Las Palmas Tobacco
International, L.L.C.].
Kear admitted that she never asked why Las Palmas could not
serve this purpose, nor did she ever inquire why Simmons did
not have an ownership interest in International.
7
Kear also admitted that she edited a letter Miller
drafted to Simmons in late February of 1997. Among other
edits, the following language was removed by Kear:
You have made it extremely clear by holding out
for some fairy-tale return on your no-risk, no
liability, completely passive role in Las
Palmas Tobacco that you do not place any value
on the business relationships that I have
forged with my supplier nor my role as sole
employee of this entity. I wonder what might
happen if I resign from this concern, liquidate
the corporation and seek other opportunities.
Karim Bayzid testified that when he came to work for
International in January of 1997, he saw the nameplate for Las
Palmas on the door of the office. Additionally, checks
payable to Karim Bayzid were written on the account of Las
Palmas. Webb testified that she was not aware of any
adjustments on the books of Las Palmas that reflected payments
received from International for use of the office space,
furniture, or equipment. Miller’s testimony revealed that Las
Palmas’ sole supplier of cigars became the sole supplier for
International and that International sold cigars to some of
the customers who had previously purchased from Las Palmas.
II. Proceedings Below
This appeal arises out of a lawsuit filed by Simmons
against Miller and Kear. In a sixteen count motion for
8
judgment, 1 Simmons alleged that Miller and Kear secretly and
wrongfully replaced Las Palmas with a different corporation,
International.
In addition to Miller and Kear, Simmons named Karim O.
Bayzid, Dr. Nader Bayzid, Profesor Sila Cigars, and Profesor
Sila, L.C., as defendants 2 in various counts of the motion for
judgment. None of these additional defendants except Karim
Bayzid responded to the motion for judgment and default
judgment was entered as to them. The trial court granted
Karim Bayzid’s motion to strike on all counts against him and
no matters on appeal involve him. Consequently, the appellees
in this case are only Miller and Kear.
Simmons asserted individual claims against Miller and
Kear as follows:
Count 1: Conspiracy to Injure Simmons in his Trade,
Business or Profession, Code §§ 18.2-499 and 18.2-500, against
Miller and Kear.
Count 2: Breach of Fiduciary Duty against Miller only.
1
A derivative action is an action in equity and may not
be brought on the law side of the court. However, since
neither party nor the trial court recognized this deficiency,
any objection is now waived. Rule 5:25. Code § 8.01-270
provides in part that, “[n]o case shall be dismissed simply
because it was brought on the wrong side of the court.”
2
Karim Bayzid is employed by International. Dr. Bayzid,
Karim Bayzid’s father, is the owner and operator of Profesor
Sila, L.C., which supplied cigars to Las Palmas and
International.
9
Count 3: Conspiracy to Induce Breach of Fiduciary Duty
against Miller and Kear.
Count 4: Fraud and Deceit against Miller and Kear.
Count 5: Conspiracy to Commit Fraud against Miller and
Kear.
Simmons asserted derivative claims on behalf of Las
Palmas against Miller and Kear as follows:
Count 6: Breach of the Employment Agreement against
Miller only.
Count 7: Tortious Interference with the Employment
Agreement against Kear only.
Count 8: Conspiracy to Induce Breach of the Employment
Agreement against Miller and Kear.
Count 9: Tortious Interference with Las Palmas’
Contracts and Business Relations with its Customers and
Distributors against Miller only.
Count 10: Conspiracy to Interfere with Las Palmas’
Contracts and Business Relations with its Customers and
Distributors against Miller and Kear.
Count 11: Tortious Interference with Las Palmas’
Contracts and Business Relationship with Profesor Sila Cigars
against Miller only.
Count 12: Unlawful Conversion against Miller only.
10
Count 13: Conspiracy to Injure Las Palmas, Code §§ 18.2-
499 and 18.2-500, against Miller and Kear.
Count 14: Breach of Fiduciary Duty against Miller only.
Count 15: Conspiracy to Induce Breach of Fiduciary Duty
against Miller and Kear.
Count 16: Legal Malpractice against Kear only.
At the conclusion of plaintiff’s case in chief, Miller’s
and Kear’s motions to strike were granted as to Counts 4, 5,
7, and 8. The jury returned a verdict against Miller on
Counts 1, 2, 3, 6, 9, 10, 11, 12, 13, 14, and 15. The jury
returned a verdict against Kear on Counts 1, 13, and 16.
After post-trial motions, the court struck the jury’s verdict
against Miller on Counts 1, 2, 3, 9, 10, 11, 13, and 15 and
struck the jury’s verdict against Kear on Counts 1, 13, and
16. In addition to default judgments entered against Dr.
Bayzid, Profesor Sila Cigars, and Profesor Sila, L.C., the
trial court’s final order dismissed claims against Kear and
Karim Bayzid and granted judgment to Simmons in his derivative
capacity on behalf of Las Palmas against Miller only.
III. Issues On Appeal
The issues on appeal have been considerably narrowed from
those presented at trial. Simmons contends that the trial
court erred in granting Miller’s motion to strike his
individual claim for breach of fiduciary duty and Kear’s and
11
Miller’s motions to strike his individual claim for statutory
conspiracy. Simmons asserts that a minority shareholder in a
closely held corporation may maintain an individual claim for
these causes of action. In addition, Simmons argues that the
trial court erred in granting Kear’s and Miller’s motions to
strike his derivative claim of statutory conspiracy because he
contends that he presented sufficient evidence that they
conspired to injure Las Palmas in violation of Code §§ 18.2-
499 and -500. Finally, Simmons contends that the trial court
erred in granting Kear’s motion to strike his derivative claim
of legal malpractice because he presented sufficient evidence
that Kear’s negligence proximately caused injury to Las
Palmas.
Kear assigns no cross-error and urges this Court to
affirm the rulings of the trial court. Miller assigns three
cross-errors. First, Miller contends that the trial court
erred in failing to strike Simmons’ derivative claim of breach
of fiduciary duty on the ground that there was insufficient
evidence to support that claim. Miller also claims that the
trial court erred in denying her motion to strike the breach
of the employment agreement claim on the ground that the non-
compete clause was contrary to public policy, unnecessary to
protect the employer, and unduly restrictive of the employee’s
rights. Finally, Miller argues that the trial court erred in
12
failing to strike the conversion claim because the evidence
was insufficient to support that claim.
IV. Standard of Review
We review the trial court’s decision to grant or deny the
motions to strike the evidence and set aside the jury’s
verdict in accordance with well-established principles.
Where the trial court has set aside a jury
verdict, that verdict is not entitled to the
same weight as a verdict which has been
approved by the trial court. Nevertheless,
this Court will accord the party who received
the verdict the benefit of all substantial
conflict in the evidence, as well as all
reasonable inferences that could be drawn
therefrom. However, if a jury necessarily has
reached its conclusions based on speculation
and conjecture, the plaintiff’s case fails.
O’Brien v. Everfast, Inc., 254 Va. 326, 330 491 S.E.2d 712,
714 (1997) (citations and internal quotation marks omitted).
V. Analysis
A. Breach of Fiduciary Duty
Simmons maintains that a shareholder in a closely held
corporation is not confined to a derivative action on behalf
of the corporation to redress claims against a corporate
officer or director for breach of fiduciary duty to the
corporation. Rather, Simmons contends that the shareholder
may sue individually and representatively, and if “double
recovery” results, the claimant shareholder should be
permitted to elect between remedies. The jury returned
13
verdicts in favor of Simmons individually (Count 2) in the
amount of $10,000, and in his derivative capacity (Count 14)
in the amount of $10,000, against Miller for breach of
fiduciary duties. Noting that upholding both verdicts “would
constitute a penalty, not compensation,” the trial court
struck the jury verdict on the individual claim, finding “that
in Virginia, claims like those Simmons brought in this case
are cognizable as derivative, not individual, actions.”
A derivative action is an equitable proceeding in which a
shareholder asserts, on behalf of the corporation, a claim
that belongs to the corporation rather than the shareholder.
Rales v. Blasband, 634 A.2d 927, 932 (Del. 1993). Derivative
suits play an “important role in protecting shareholders of
corporations from the designing schemes and wiles of insiders
who are willing to betray their company’s interests in order
to enrich themselves.” Surowitz v. Hilton Hotels Corp., 383
U.S. 363, 371 (1966). See also Brown v. Bedford City Land &
Improvement Co., 91 Va. 31, 38, 20 S.E. 968, 970 (1895).
The overwhelming majority rule is that an action for
injuries to a corporation cannot be maintained by a
shareholder on an individual basis and must be brought
derivatively. See Crocker v. Fed. Deposit Ins. Corp., 826
F.2d 347, 349 (5th Cir. 1987); Cowin v. Bresler, 741 F.2d 410,
414 (D.C. Cir. 1984); Lewis v. Chiles, 719 F.2d 1044, 1049
14
(9th Cir. 1983); Lewis v. S. L. & E., Inc., 629 F.2d 764, 768
n. 10 (2nd Cir. 1980); Brown v. Presbyterian Ministers Fund,
484 F.2d 998, 1005 (3rd Cir. 1973); Fifty States Management
Corp. v. Niagara Permanent Savings & Loan Ass’n, 58 A.D.2d
177, 179 (N.Y. App. Div. 1977); Landstrom v. Shaver, 561
N.W.2d 1, 12 (S.D. 1997); Rose v. Schantz, 201 N.W.2d 593, 598
(Wis. 1972).
The reasons underlying the general rule are
that 1) it prevents a multiplicity of lawsuits
by shareholders; 2) it protects corporate
creditors by putting the proceeds of the
recovery back in the corporation; 3) it
protects the interests of all shareholders by
increasing the value of their shares, instead
of allowing a recovery by one shareholder to
prejudice the rights of others not a party to
the suit; and 4) it adequately compensates the
injured shareholder by increasing the value of
his shares.
Thomas v. Dickson, 301 S.E.2d 49, 51 (Ga. 1983).
As one leading commentator has noted:
A shareholder ordinarily cannot, as an
individual as distinguished from a
representative of the corporation, sue
directors or other corporate officers for
mismanagement, negligence or the like, on a
cause of action which belongs to the
corporation. The remedial rights of minority
shareholders with respect to wrongs committed
against the corporation by the officers and
directors in the management of corporate
affairs are derivative rights and any action
taken by the shareholders to redress such
wrongs must be for the benefit of the
corporation.
15
12B William M. Fletcher, Cyclopedia of the law of Private
Corporations § 5924, at 497-99 (perm. ed. 2000 rev. vol.)
(citations and footnotes omitted). See also, 1 F. Hodge
O’Neal, Close Corporations § 1.02 (1971, updated 1994).
Recognizing the general rule, Simmons, nonetheless, urges
the adoption of a closely held corporation exception
permitting maintenance of an individual claim for breach of
fiduciary duties under limited circumstances. In Coastal
Pharmaceutical Co. v. Goldman, 213 Va. 831, 837, 195 S.E.2d
848, 853 (1973), this Court noted:
[W]e are aware of the several definitions of a
“close corporation” written by various scholars
on and off the bench, [but] . . . [w]e fear the
most precise definition may be imperfect to
every occasion, and we find it unnecessary to
choose among the scholars or to write a hard
and fast definition of our own.
While it is also unnecessary in this case to write such a
definition because the parties agree that Las Palmas is a
closely held corporation, we note that this corporation has a
small number of shareholders with no active trading market for
their shares, and substantial majority stockholder
participation in the management, direction, and operations of
the corporation. See, e.g., Donahue v. Rodd Electrotype Co.
328 N.E.2d 505, 511 (Mass. 1975); see Masinter v. WEBCO Co.,
262 S.E.2d 433, 435 (W.Va. 1980).
16
A number of states permit an individual claim under the
following principle advocated by the American Law Institute:
In the case of a closely held corporation
[§ 1.06], the court in its discretion may treat
an action raising derivative claims as a direct
action, exempt it from those restrictions and
defenses applicable only to derivative actions,
and order an individual recovery, if it finds
that to do so will not (i) unfairly expose the
corporation or the defendants to a multiplicity
of actions, (ii) materially prejudice the
interests of creditors of the corporation, or
(iii) interfere with a fair distribution of the
recovery among all interested persons.
2 American Law Institute, Principles of Corporate Governance:
Analysis and Recommendations § 7.01(d), pg. 17.
The rationale for the proposed exception appears to be
based upon concerns that derivative claims inure to the
benefit of all shareholders, including, in some cases, those
who have engaged in wrongdoing. Additionally, several courts
have suggested that closely held corporations, in some cases,
function more like a partnership than a corporate entity. See
Galbreath v. Scott, 433 So.2d 454, 457 (Ala. 1983); Barth v.
Barth, 659 N.E.2d 559, 562 (Ind. 1995); Donahue, 328 N.E.2d at
512; Meiselman v. Meiselman, 289, 307 S.E.2d 551, 557 (N.C.
1983).
Despite gaining some judicial acceptance over the past
decade, the closely held corporation exception is not the
majority rule and has been subject to criticism. Delaware,
17
for example, has yet to embrace the concept of a direct
shareholder action in a closely held corporation. In Bagdon
v. Bridgestone/Firestone, Inc., 916 F.2d 379, 384 (7th Cir.
1990), the Seventh Circuit noted that under Delaware law a
claim that a majority shareholder established a competing
business should have been brought as a derivative suit rather
than a direct one. The Court noted that, “[c]ommercial rules
should be predictable; this objective is best served by
treating corporations as what they are, allowing the investors
and other participants to vary the rules by contract if they
think deviations are warranted.” Id.
We decline to adopt a closely held corporation exception
to the rule requiring that suits for breach of fiduciary duty
against officers and directors must be brought derivatively on
behalf of the corporation and not as individual shareholder
claims. Adherence to the general rule without this proposed
exception prevents multiplicity of lawsuits by shareholders.
A recovery by the corporation protects all shareholders as
well as creditors. Finally, as expressed in Bagdon,
consistent application of commercial rules promotes
predictability. If shareholders and the corporation desire to
vary commercial rules by contract, they are free to do so.
Accordingly, the trial court did not err in striking the
jury’s verdict on Count 2.
18
Although striking the jury’s verdict on Simmons’
individual claim for breach of fiduciary duty, the trial court
denied Miller’s motion to strike the jury’s verdict on
Simmons’ derivative claim for breach of fiduciary duty.
Miller asserts that she was entitled to the benefit of the
statutory business judgment rule 3 codified at Code § 13.1-690,
which provides:
A. A director shall discharge his duties
as a director, including his duties as a
member of a committee, in accordance with his
good faith business judgment of the best
interests of the corporation.
B. Unless he has knowledge or
information concerning the matter in question
that makes reliance unwarranted, a director
is entitled to rely on information, opinions,
reports or statements, including financial
statements and other financial data, if
prepared or presented by:
1. One or more officers or employees of the
corporation whom the director believes, in good
3
Miller was sued in her capacity as “a director, officer
and majority shareholder.” By its express terms Code § 13.1-
690 applies to directors only. As one commentator has noted,
“[t]he General Assembly elected not to enact a statutory
standard of conduct for officers. See Revised Model Act
§ 8.42. As a result, development of the standard of conduct
for officers will be left to the courts.” Allen C. Goolsby,
Virginia Corporation Law and Practice § 9.7, n.62. However,
in this case, the jury instruction on the business judgment
rule was given without objection and made no distinction
between Miller’s various roles. It became the law of the
case. See Rice v. Charles, 260 Va. 157, 169, 532 S.E.2d 318,
325 (2000). Additionally, on appeal, Simmons does not argue
any theory of liability based upon Miller’s status as majority
shareholder.
19
faith, to be reliable and competent in the
matters presented;
2. Legal counsel, public accountants, or
other persons as to matters the director
believes, in good faith, are within the person’s
professional or expert competence; or
3. A committee of the board of directors of
which he is not a member if the director
believes, in good faith, that the committee
merits confidence.
C. A director is not liable for any action
taken as a director, or any failure to take any
action, if he performed the duties of his office
in compliance with this section.
D. A person alleging a violation of this
section has the burden of proving the violation.
Code § 13.1-690 applies to the “discharge [of] duties as
a director,” and makes no distinction between duties of care
and loyalty. We recognized in Willard v. Moneta Building
Supply, Inc., 258 Va. 140, 151, 515 S.E.2d 277, 284 (1999)
that “Code § 13.1-690(A) does not abrogate the common law
duties of a director.” However, the protection of § 13.1-
690(C) applies only to acts “taken as a director, or any
failure to take any action,” and is confined to the exercise
of business judgment on behalf of the corporation. When the
acts in question do not meet these criteria, Code § 13.1-690
does not apply.
The acts cited by Simmons as constituting Miller’s breach
of duty to Las Palmas include: “secretly organizing Las Palmas
20
International/Profesor Sila.” Clearly, the organization of
International, a competitor, was not a corporate act of Las
Palmas. In taking this action, Miller was not exercising
business judgment on behalf of Las Palmas. Although
implicating a common law duty of loyalty, this act does not
fall within the scope of Code § 13.1-690. Miller was not
entitled to protection under the statutory business judgment
rule.
The evidence viewed in the light most favorable to
Simmons amply supports the jury’s verdict that Miller breached
her duty of loyalty to Las Palmas. Accordingly, the trial
court did not err in refusing to set aside the jury’s verdict
on Simmons’ derivative claim for breach of fiduciary duty
against Miller.
B. Statutory Conspiracy under Code §§ 18.2-499 and -500.
The trial court set aside the jury’s verdict on Simmons’
individual claim of statutory conspiracy under Code §§ 18.2-
499 and -500, adopting the same reasoning that led to denial
of an individual claim for breach of fiduciary duty, namely
that a derivative action is the sole means of redress for
injury to the corporation. The trial court set aside the
jury’s verdict on Simmons’ derivative claim of statutory
conspiracy because the evidence was insufficient to support
the verdict. We need not reach the question concerning
21
maintenance of an individual claim for statutory conspiracy
because we agree with the trial court that the evidence was
insufficient to support the verdict, whether brought
individually or derivatively. 4
The trial judge did not indicate in his opinion letter
what deficiency in the evidence resulted in granting the
motion to strike the jury verdict. Code § 18.2-500 provides
civil damages for violation of Code § 18.2-499. In pertinent
part, Code § 18.2-499 permits such liability where “[a]ny two
or more persons . . . combine, associate, agree, mutually
undertake or concert together for the purpose of (i) willfully
and maliciously injuring another in his reputation, trade,
business or profession by any means whatever.” In order to
sustain a claim for statutory conspiracy under Code §§ 18.2-
499 and -500, the plaintiff must prove by clear and convincing
evidence that the conspirators acted with legal malice, that
is, proof that the defendant acted intentionally,
purposefully, and without lawful justification. See Feddeman
& Co. v. Langan Assoc., 260 Va. 35, 44, 530 S.E.2d 668, 673
(2000); Tazewell Oil Co. v. United Virginia Bank, 243 Va. 94,
4
On appeal, Simmons’ allegations of statutory conspiracy,
whether individual or derivative, involve only conduct of
Miller and Kear. Neither Miller nor Kear argues that an
attorney-client relationship existed between them, making it
legally impossible for them to be found liable for statutory
conspiracy; consequently, we do not reach that issue.
22
108, 413 S.E.2d 611, 619 (1992). Code §§ 18.2-499 and -500 do
not require a plaintiff to prove that a conspirator’s primary
and overriding purpose is to injure another in his trade or
business. Advanced Marine Enterprises v. PRC Inc., 256 Va.
106, 117, 501 S.E.2d 148, 154 (1998); Commercial Business
Systems, Inc. v. BellSouth Services, Inc., 249 Va. 39, 47, 453
S.E.2d 261, 267 (1995).
Clearly, the evidence is sufficient as to Miller to
satisfy the requirement of showing that she acted
intentionally, purposefully, and without lawful justification.
But under Code §§ 18.2-499 and -500, it is also necessary to
prove that Kear combined, associated, agreed, mutually
undertook, or concerted together with Miller in such conduct.
Reviewing the evidence in the light most favorable to
Simmons, the allegations concerning Kear’s conduct include:
a. Kear and Miller were friends and godmothers to each
other’s children;
b. Kear’s office was in the same building as the office
of Las Palmas;
c. Kear provided a draft cross-purchase agreement to
Miller and later edited the document;
d. Kear attended a contentious meeting between Miller
and Simmons;
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e. Kear signed and filed Articles of Organization for
International and listed herself as organizer and registered
agent;
f. Kear maintained an unsigned “Limited Liability
Company Agreement for Las Palmas Tobacco International,
L.L.C.” in her files, listing Miller and Profesor Sila as
equal owners; and
g. Kear edited a letter drafted by Miller to Simmons
concerning valuation of Las Palmas.
Notably absent from the proof is any indication that Kear
knew of Miller’s conduct concerning the assets of Las Palmas.
In his brief, Simmons declares that Kear “never inquired about
the purpose of the new company.” Simmons acknowledges that
Miller told Kear that International had a different market
than Las Palmas, namely, “Canada and the Pacific Rim,” and
that one of the purposes for creation of International was to
facilitate a visa into the United States for Karim Bayzid.
Simmons then complains that “Kear never inquired why Las
Palmas Tobacco, Ltd. could not accomplish either objective.”
In these respects, Simmons proves too much and reinforces
Kear’s claim of lack of evidence to support a statutory
conspiracy. Upon review of the facts of this case in the
light most favorable to Simmons, we hold that the trial judge
did not err in striking the derivative claim for statutory
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conspiracy because the evidence was insufficient to support
the claim. Because the individual claim for statutory
conspiracy depended upon identical proof, the trial judge did
not err in also striking that claim.
C. Legal Malpractice
The jury returned a verdict against Kear on Simmons’
derivative claim of legal malpractice; however, the trial
court granted Kear’s motion to strike the jury verdict because
the evidence was insufficient as a matter of law. It is
axiomatic that in claims of legal malpractice the plaintiff
bears the burden of proof that the attorney’s negligence
proximately caused the client’s loss. Hazel & Thomas, P.C. v.
Yavari, 251 Va. 162, 166, 465 S.E.2d 812, 815 (1996). “[I]f
the evidence is such that reasonable minds could not differ as
to the outcome, the issue of proximate cause should be decided
by the court, not the jury.” Gregory v. Hawkins, 251 Va. 471,
476, 468 S.E.2d 898, 893 (1996) (citations and internal
quotation marks omitted). In the present case, the trial
court observed, “it was not the formation of International
that caused Simmons[’] harm, but rather International’s
activities.” As recited in our discussion of the statutory
conspiracy claims, the lack of proof of Kear’s knowledge of or
participation in the conversion of Las Palmas’ assets is
significant. Although the standard of proof for a legal
25
malpractice claim is by a preponderance of the evidence, we
hold that the trial judge did not err in striking the jury’s
verdict because the evidence was insufficient as a matter of
law.
D. Breach of Employment Agreement —
The Non-competition Clause
The jury rendered a verdict against Miller in favor of
Simmons in his derivative capacity for breach of the non-
competition clause in Miller’s employment agreement with Las
Palmas. Miller assigns cross-error to the trial court’s
denial of her motion to strike the jury’s verdict. The clause
in controversy provides:
For a period of three (3) years after this
termination or expiration of the Agreement,
Employee shall not directly or indirectly, own,
manage, control, be employed by, participate
in, or be connected in any manner with
ownership, management, operation, or control of
any business similar to the type of business
conducted by Employer at the time this
Agreement terminates.
In Advanced Marine Enterprises, 256 Va. at 118, 501
S.E.2d at 155, we stated:
To determine whether a non-competition
agreement may be enforced, a chancellor must
consider the following criteria:
(1) Is the restraint, from the standpoint of
the employer, reasonable in the sense that it
is no greater than necessary to protect the
employer in some legitimate business interest?
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(2) From the standpoint of the employee, is the
restraint reasonable in the sense that it is
not unduly harsh and oppressive in curtailing
his legitimate efforts to earn a livelihood?
(3) Is the restraint reasonable from the
standpoint of a sound public policy?
The employer bears the burden of proving that the restraint is
reasonable under the facts of the case. Blue Ridge Anesthesia
v. Gidick, 239 Va. 369, 371-72, 389 S.E.2d 467, 468-69 (1990).
Because restrictive covenants restrain trade, non-competition
clauses are strictly construed against the employer. Grant v.
Carotek, Inc., 737 F.2d 410, 412 (4th Cir. 1984). Whether a
restrictive covenant is enforceable is a question of law to be
determined by the court. See Orkin Exterminating Co. v.
Walker, 307 S.E.2d 914, 916 (Ga. 1983). The analysis of the
three interrelated factors cited in Advanced Marine requires
consideration of the restriction in terms of function,
geographic scope, and duration.
Las Palmas imported one particular brand of cigars grown
and manufactured in the Canary Islands. However, under the
terms of the non-competition clause, the restricted function
encompasses “any business similar to the type of business
conducted by [Las Palmas].” The restricted function is
considerably broader than Las Palmas’ business activity.
The non-competition clause is without geographical
limitation. Under its terms, Miller is prohibited from
27
engaging in the business of importing cigars anywhere in the
world. By contrast, Las Palmas had exclusive rights to import
and distribute Profesor Sila cigars for the “east coast of the
United States of America.” Finally, the three-year
restriction upon competition in this agreement is a lengthy
duration.
In determining the reasonableness and enforceability of
restrictive covenants, trial courts must not consider
function, geographical scope, and duration as three separate
and distinct issues. Rather, these limitations must be
considered together. We have previously found restrictive
covenants lasting as long as three years to be reasonable
under the circumstances of the particular case. See Blue
Ridge Anesthesia, 239 Va. at 374, 389 S.E.2d at 470; Roanoke
Eng’g Sales Co. v. Rosenbaum, 223 Va. 548, 556, 290 S.E.2d
882, 887 (1982). However, in this case, upon consideration of
the lengthy duration of the restriction, the expansion of
restricted functions, and the lack of any geographical
limitation, we hold that the restrictive covenant was greater
than necessary to protect the legitimate business interests of
Las Palmas, and unduly harsh and oppressive in curtailing
Miller’s legitimate efforts to pursue her livelihood. As an
unnecessary and unreasonable restraint of trade, the non-
competition clause is offensive to the public policy of the
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Commonwealth and is not enforceable. The trial court erred in
refusing to set aside the jury’s verdict against Miller for
breach of the non-competition clause in her employment
agreement with Las Palmas.
E. Conversion
The jury rendered a verdict against Miller in favor of
Simmons in his derivative capacity for conversion of Las
Palmas’ assets. Miller assigns cross-error to the trial
court’s denial of her motion to strike the jury’s verdict. A
person is liable for conversion for the wrongful exercise or
assumption of authority over another’s goods, depriving the
owner of their possession, or any act of dominion wrongfully
exerted over property in denial of, or inconsistent with, the
owner’s rights. See Hartzell Fan, Inc. v. Waco, Inc., 256 Va.
294, 300, 505 S.E.2d 196, 201 (1998); Bader v. Central
Fidelity Bank, 245 Va. 286, 289, 427 S.E.2d 184, 186 (1993).
Viewed in the light most favorable to Simmons, there is
ample evidence to support the jury’s verdict on the claim of
conversion. Simmons presented evidence that Miller deprived
Las Palmas of the use and value of its property, including the
lease of office space, furniture, equipment, cash, and
customer lists. The trial court did not err in denying
Miller’s motion to strike the jury’s verdict.
VI. Conclusion
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With the exception of the trial court’s failure to set
aside the jury’s verdict against Miller for breach of the non-
competition clause of the employment agreement, we will affirm
the judgment of the trial court. We will reverse the judgment
in favor of Simmons on Count 6 of the motion for judgment.
Affirmed in part,
reversed in part,
and final judgment.
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