Opinion
Civil Action No. 3:00CV198
November 29, 2000
MEMORANDUM OPINION
This matter is before the Court for final judgment on all liability issues, the parties having agreed to a bifurcation of any damages determination because of what was perceived to be a complicated, expensive and perhaps unnecessary phase. The case was tried before the Court without a jury on September 11-13, 2000, by consent of the parties pursuant to 28 U.S.C. § 636 (c)(1). Federal jurisdiction is proper under 28 U.S.C. § 1332 (a)(1) because there is complete diversity of citizenship between the parties and the amount in controversy exceeds $75,000.00.
The Plaintiff, Fiberlink Communications Corporation (Fiberlink), initiated the matter by alleging six claims against John Patrick James Magarity (Magarity): (1) breach of contract (Count I); (2) misappropriation of trade secrets (Count II); (3) conversion (Count III); (4) fraud and misrepresentation (Count IV); (5) breach of fiduciary duty (Count V); and (6) a demand for declaratory judgment that Magarity is not entitled to any equity interest in Fiberlink (Count VI). Magarity answered and counterclaimed by asserting three claims: (1) breach of contract for recovery of a particular sum (approximately $13,000) due pursuant to a profit-sharing plan; (2) injunctive relief for delivery of 2 1/2% equity interest in Fiberlink pursuant to an employment agreement together with additional shares of stock related to an incentive program; and (3) declaratory judgment confirming that Magarity did not violate the subject employment contract.
In essence, the basic issues can be summarized in terms of: (1) whether Magarity was promised equity ownership interest in Fiberlink for joining the company as well as additional stock and profit-sharing as a result of an incentive plan for meeting various performance goals; (2) whether Magarity breached the terms of the employment arrangement or otherwise violated fiduciary duties owed Fiberlink by misappropriation of Fiberlink trade secrets and becoming associated with another business during his employment with Fiberlink; (3) whether Magarity diverted business away from Fiberlink in violation of his fiduciary duty while in its employ; (4) whether Magarity continued to use Fiberlink property, including his own efforts, to Fiberlink's detriment after he breached his fiduciary duty; and (5) whether any proven claim by either party is nevertheless time-barred by the applicable statute of limitations.
Having considered the evidence presented at trial and the arguments of counsel, the Court finds as follows by a preponderance of the evidence: (1) there was an enforceable oral contract of employment that provided for Magarity to immediately receive 2 1/2% of the total authorized shares of common stock of Fiberlink for joining it as well as additional shares and profit-sharing commissions pursuant to an incentive plan in return for his continuing loyal performance while employed with Fiberlink; (2) any action by Magarity for breach of the stock incentive plan accrued as of October 1995, whereas the breach of the original employment agreement involving the additional 2 1/2% of common stock of Fiberlink accrued as of the date of Magarity's termination on September 3, 1997; (3) any breach of the incentive plan for the award of a profit-sharing commission accrued as of July 10, 1998, when the single award in question became due to Magarity; (4) Magarity did not misappropriate Fiberlink's trade secrets, but he breached his fiduciary duties and responsibilities to Fiberlink as of May 23, 1997, when he became actively associated with another business entity; and (5) all Magarity's activities resulting in a diversion of existing or potential Fiberlink customers and use of Fiberlink property for unauthorized purposes or otherwise to its detriment after said date constitutes an unlawful conversion for which Fiberlink is entitled to compensation.
However, the Court further concludes that: (1) Magarity's claims for the 2 1/2% common stock ownership as well as any additional shares related to the stock incentive plan are time-barred by the applicable statute of limitations; (2) Magarity did not divert any existing or potential customers from Fiberlink before his termination; and (3) Fiberlink is therefore only entitled to the amount of compensation and related costs and expenses paid to Magarity or on his behalf for the period of May 23, 1997, to the date of his termination on September 3, 1997, offset by the amount of the single profit-sharing commission that is the subject of that counterclaim and the amount of any specific costs and expenses for the same period that are established to have been incurred solely for Fiberlink's benefit.
Facts
The facts are as found by the Court by a preponderance of the evidence as presented at trial. Transcript references are to each of the three days of trial, e.g., Day One is "Tr. I," etc.
Fiberlink was a retailer of telecommunication voice services to businesses, family and friends of its founder and principal, Paul Russell (Russell), in the 1994 timeframe when a former colleague, James Sheward (Sheward), approached him with a business proposal. (Tr. I at 36-37). Sheward's proposal was to transform Fiberlink into a reseller of various data and voice services, including frame relay voice technology. (Tr. I at 33-35, 37-39). Russell agreed and Fiberlink began its reformation and expansion thereafter.
A technology which provides customers with the economy of utilizing multiple telecommunication lines rather than an exclusive, more expensive dedicated circuit. (Tr. I at 33-34).
Part of the process involved the recruitment of additional personnel and Sheward, as CEO of the new endeavor, approached his life-long friend, Magarity, whose proven expertise was in sales: "Jake was high on my list for folks that I would love to have come work for us." (Tr. I at 41). Sheward understood, perhaps incorrectly, that Magarity was going to "take a pretty big hit" in compensation to join Fiberlink so that Sheward was motivated to offer Magarity additional incentives, including an ownership interest in the business as well as various profit-sharing benefits. (Tr. I at 42-43, 55). However, their final agreement was not reduced to writing and the core issue in the case therefore concerns determining its terms.
Presumably to attack Magarity's credibility, Fiberlink argued that Magarity lied to Sheward about his compensation level at the company he left to join Fiberlink (Technically Elite Concepts). The Court finds that even if true, the point is of no ultimate significance in resolving the core issues in the case because the Court finds that both Magarity and Sheward lacked credibility on various matters anyway. (Tr. I at 44-46; Tr. II at 330-332).
The final agreement was arrived at between Sheward and Magarity on an airplane trip in early 1994. (Tr. I at 49, 120-125, 134; Tr. II at 337-340, 397-398; Def.'s Ex. 1, 2). Although the evidence did not disclose precisely where the meeting of the minds occurred somewhere in midair, the evidence conclusively establishes that at least preliminary discussions took place in California where Sheward and Magarity were then living and that Magarity began working for Fiberlink in California in the Spring of 1994 and remained there working continuously for Fiberlink until 1996 when he moved his family to the Richmond, Virginia area (with the approval of Fiberlink) with the objective of establishing a Fiberlink profit center on the East Coast. (Tr. I at 82-83, 120-122; Tr. II at 189, 359, 409; Def.'s Ex. 2).
Magarity contacted a mutual friend of his and Sheward's, William Peterson, during the relocation process and ultimately agreed to sublease office space from Peterson's company, Integrated Office Solutions (IOS) in the Richmond area. (Tr. I at 83-84; Tr. II at 409-410). At the time, IOS was a reseller of IBM personal computers, including voice recognition systems and application writing. Id. IOS was not a competitor of Fiberlink. (Tr. I at 85-86; Tr. II at 259-260, 410-411). As part of the lease agreement, IOS provided Magarity with office space, computer networking, use of a receptionist, telephone service and an e-mail account. (Tr. II at 261, 360, 378). Magarity also sought to build business relationships for Fiberlink by accessing IOS customers through an informal agency agreement between Fiberlink and IOS. (Tr. I at 83-85; Tr. II at 261, 411). Sheward agreed to both the leasing and agency arrangement, although the evidence does not establish that Fiberlink ever received any business as a result of the relationship with IOS. (Tr. II at 190, 263-412). The evidence is also clear that Magarity actively pursued business objectives through his relationship with IOS which included making sales calls without clarifying his capacity as a Fiberlink representative, using an IOS business card that did not disclose his affiliation with Fiberlink, and using related IOS services such as its telephone and e-mail system without taking any steps to identify himself as a Fiberlink, not IOS employee. (Tr. II at 191-192, 195-196, 363-367, 416-417). It is also clear that as time went on Magarity assisted IOS in setting up a website and utilized business forms that were the same as those created and/or used by Fiberlink. (Tr. II 195, 266-67, 273, 275-276, 363, 416-17). Magarity also participated in customer contacts that ultimately resulted in business for IOS and he was reimbursed for miscellaneous expenses by IOS while he was still employed by Fiberlink. (Tr. II at 284-285).
A great deal of time was spent at trial to determine whether Magarity used the IOS e-mail system only because of the technology involved in subletting office space from IOS or whether it was another example of his "moonlighting" efforts with IOS. The Court concludes that the issue's only significance is to have ultimately given Sheward cause to confront Magarity when he finally found out about it, there being sufficient evidence otherwise of Magarity's breach of his fiduciary duties to Fiberlink.
Neither Sheward nor anyone else at Fiberlink were aware at the time of any of these activities by Magarity which he confirmed at trial by stating he did not feel it necessary to inform them. (Tr. II at 376-379, 390, 408-409; Tr. III at 45). It is also clear from the evidence that Magarity was becoming increasingly frustrated and disenchanted with his old friend Sheward and Fiberlink as he continued to press Sheward for some written confirmation of their original understanding concerning Magarity's 2 1/2% additional equity interest in Fiberlink (Tr. II at 390-391). At the same time, Magarity did not find it necessary to even broach the subject directly with Russell, although it appears from trial testimony that there was some type of outburst by Magarity and momentary confrontation with Sheward in Russell's presence concerning the issue at a manager's meeting in Florida in either the Fall of 1996 or early 1997. (Tr. I at 78-81; Tr. II at 353). That incident prompted Sheward to draft a letter to Magarity in which he attempted to clarify the situation to supposedly reassure Magarity of their understanding. (Tr. I at 77-82, Pl.'s Ex. 3A). However, Sheward never sent the letter to Magarity even after discussing it with Russell and obtaining Russell's signature. (Tr. I at 79-80). Sheward's explanation for not forwarding the letter simply lacks veracity. His position is especially suspect because the draft confirmed his supposed understanding that the 2 1/2% interest related only to those shares (one-half) held by him and Russell, not 2 1/2% of "the whole pie" and that the additional equity interest would only vest at some time in the future. (Tr. I at 138-39; Pl.'s Ex. 3A). A more believable reason why Sheward decided not to send the letter is that it did not reflect what he had discussed with Magarity and agreed upon after all.
Sheward testified at trial that he did not send the letter because "it probably would be taken the wrong way" and "I would create more turmoil then less by saying, hey, here you go." (Tr. I at 79). However, one can reasonably conclude that written confirmation would have eased tensions if the draft accurately reflected the understanding. (Tr. I at 79, 81-82). The Court had earlier expressed at trial more confidence than it has now in the conclusion that the draft letter at least reflected a heated conversation between Sheward and Magarity that would have served to put Magarity on notice of a breach of his understanding of the employment agreement concerning the 2 1/2% issue. On further reflection, the Court concludes that the evidence is lacking for such a conclusion to be drawn by inference or otherwise.
Within the same general timeframe in early 1997, Magarity loaned Peterson the sum of $30,000.00 and thereafter Magarity broached with him the possibility of converting the loan into an equity position in IOS when Peterson could not repay the short term obligation. (Tr. II at 264, 296). In addition, and most significantly for purposes of the analysis in this case, Magarity recruited a salesperson (Marquart) for IOS and signed a letter dated May 23, 1997, as "VP of Sales" of IOS which set forth the terms of Marquart's prospective employment with IOS. (Tr. II at 269-272; Pl.'s Ex. 28). The letter specified that the new employee would become a senior sales executive of IOS and was to report to Magarity without any mention of the latter's role with Fiberlink or any agency relationship between the companies. Id. Magarity's explanation at trial as to why he signed the letter and allowed himself to be described as having a formal relationship with IOS is as unpersuasive to the Court as Sheward's explanation of why he didn't send the earlier letter he had drafted to Magarity. (Tr. II at 371-376).
Magarity was involved in a number of sales contacts during the same general time period that either developed into business for IOS or which Fiberlink did not otherwise obtain. However, the Court concludes that Fiberlink did not get the business involved for various reasons that have nothing to do with its claim against Magarity; including its inability to service the arrangement in a competitive way (Hamilton Beach); Fiberlink's reluctance to get involved in a low volume arrangement (Comp USA); Magarity had little if anything to do with IOS getting the contract (Ted Lansing contract); IOS did not, in fact, get the contract (A J Technologies); the customer switched from Fiberlink to IOS after Magarity's termination from Fiberlink (Lloyd Group); and Fiberlink's inability to service a contract once it had been obtained (Target Marketing). Id. (Tr. II 279-286; Tr. III at 9-31, 56-67; Pl.'s Exs. 69-71; Compl. Counts I, III and V) The evidence is also lacking and thereby insufficient to conclude that any Fiberlink customers became confused or that its goodwill was objectively affected as a result of Magarity's actions so as to result in quantifiable damage to Fiberlink. At the same time, IOS became Fiberlink's direct competitor offering voice, data and frame relay services probably due to Magarity's urging while he remained employed by Fiberlink. (Tr. II at 259, 268-269, 370-371, 374-375).
In this limited regard, the court accepts Magarity's more detailed explanation of the circumstances in regard to all of the contracts that Fiberlink claims were diverted to IOS or someone else by Magarity.
The situation involving Magarity's questionable activities on behalf of IOS came to Sheward's attention when Sheward inadvertently learned that Magarity was using an IOS business card without any mention on it of his association with Fiberlink. The revelation motivated Sheward to look further into the situation and his investigation resulted in his becoming aware of many of the suspicious circumstances surrounding Magarity's association and involvement with IOS, including Magarity's use of the IOS e-mail address. On September 3, 1997, Sheward and Russell confronted Magarity in Washington, D.C. with their findings and terminated him after he denied all the accusations, including his indisputable use of the IOS business card. (Tr. II at 193-194, 199, 233-241, 392-394). Magarity was thereafter removed from the Board of Directors of Fiberlink as well and settlement discussions ensued that presumably would have addressed and resolved all issues, including those that are the subject of this litigation. (Tr. II at 241-242, 249-253; Pl.'s Ex. 103). Various drafts of settlement agreements were exchanged and several proposals were accordingly considered, including allowing Magarity to sell Fiberlink products on a temporary basis. However, nothing was consummated and Magarity formally began employment with IOS in January of 1998. (Tr. II at 309-310).
Analysis The Agreement
A11 of the claims in the Plaintiff's Complaint and the Defendant's Counterclaim seek mutually-exclusive relief such that a unified analysis is appropriate where the implementing Order distinguishes among the respective claims.
Although the final agreement between Sheward on behalf of Fiberlink and Magarity was not reduced to writing, various contemporaneous notes, subsequent written communications by Sheward to Magarity, and relevant trial testimony of Sheward, Russell and Magarity confirm various aspects of the original arrangement which the parties agree was an enforceable oral contract. Elconin v. Yalen, 208 Cal. 546, 549, 282 P. 791, 792 (1929). (Tr. I at 120-130, 134-137; Pl.'s Exs. 1, 8). However, the extent of the so-called "signing bonus" (the 2 1/2% issue) for Magarity is hotly contested, Sheward contending that it was to be 2 1/2% of half of the authorized shares and was contingent upon Magarity remaining a loyal team player until the company went public or was sold. (Tr. I at 49-51). On the other hand, Magarity asserts that there was no qualification to either the amount or his immediate ownership of 2 1/2% of all the authorized shares in Fiberlink. (Tr. II at 341-343, 347, 353-354, 398). of special interest to the Court in resolving the issue (and especially given the Court's general concern with the veracity of both Sheward and Magarity) is the handwritten "congratulatory letter" that Sheward admittedly sent to Magarity in April of 1995 on the occasion of Magarity having completed his first year with Fiberlink:
In addition your personal stake in Fiberlink continues to grow. At current valuations, we are worth approx. ($2.7 million minimum) on the open mkt. Considering an initial investment 12 mos ago of $1,000,000, this is great growth. You have 2 1/2% of common stock (for joining), + the "A" "B" shares representative of your investment. In addition at the end of June you will be eligible for as much as 3% or 3000 shares based on your performance.
The reference to "`A' `B' shares" concerns the additional personal investment by Magarity in preferred stock which is not in dispute.
(Def.'s Ex. 8) (emphasis added).
Simply put, the letter cannot be read or interpreted in any way other than to conclusively establish that Magarity was to receive 2 1/2% of the outstanding shares of Fiberlink common stock immediately in return for joining the company whether or not Fiberlink ever reached "the promised land." (Tr. I at 136-138). Furthermore, when Sheward was recruiting Magarity, they both made contemporaneous notes that contain reference to the 2 1/2% factor without qualification of either the amount or requirement for continued employment. (Def.'s Ex. 1). Sheward himself did not deny at trial that the reference in his own notes may have referred to the "whole pie" of authorized shares as opposed to only the one-half portion he now urges to have been the intent and understanding among Magarity, Russell and himself. (Tr. I at 129-130).
It would appear that Fiberlink is at least looking over into the promised land at present inasmuch as Sheward confirmed at trial that the company is currently valued at some 50 million dollars after only six years of corporate life. (Tr. I at 50-51).
The Court has no reason to doubt the veracity of Russell as to what he understood from Sheward were the essential details of any side deal with Magarity, but Russell was not the one who negotiated with Magarity and any subsequent conversation about the 2 1/2% issue between Russell and Magarity could easily have been understood by Russell to be consistent where the record is devoid of any reference to a clarification in Russell's presence of what was encompassed within the 2 1/2% amount.
Furthermore, even if there is some dispute as to whether the agreement was for 2 1/2% of all authorized shares or only those issued to Sheward and Russell, it does not matter in the final analysis because any claim by Magarity for any amount of stock pursuant to the original employment agreement is time-barred as discussed herein. Nevertheless, the Court finds that the deal was for an additional share of the "whole pie," especially where one can readily accept from his ardent position Magarity's testimony that he would settle for nothing less and where Sheward did not deny that his own handwritten notes could be so interpreted as is also reflected in the letter he wrote Magarity.
The Court specifically rejects Magarity's additional argument that a settlement document that was generated by Fiberlink after Magarity's termination (Pl.'s Ex. 101) can be considered as an admission of liability by Fiberlink on the issue and is not precluded by Fed.R.Evid. 408 because it was created and offered by Fiberlink, not Magarity, to attempt to settle Fiberlink's claims against Magarity (not vice versa). (Tr. II at 179-189). The Court concludes that the prohibition in the Rule is premised on the strong public policy to foster frank settlement discussions:`"[the] spectre of a subsequent use to prejudice a separate and discrete claim is a disincentive which Rule 408 seeks to prevent.'" Fiberglass Insulators. Inc. v. Dupuy, 856 F.2d 652, 654 (4th Cir. 1988) (citations omitted). In fact, the initial draft of the termination agreement drafted by Fiberlink did not contain any acknowledgment of the additional shares claimed by Magarity — another reason not to consider a subsequent settlement document containing a different position. (Tr. II at 250, 252-253; Def.'s Ex. 14). Fiberlink's objection to the admissibility of Plaintiff's Exhibit 101 for the purpose of it being considered as an admission against Fiberlink as urged by Magarity is therefore sustained.
Stock Incentive Plan
The "congratulatory letter," together with other correspondence and related trial testimony, confirms that the initial agreement also included the award of additional shares of Fiberlink common stock if certain performance goals were met by Magarity as a profit-center manager. (Tr. I at 61, 70-71, 134; Tr. II at 162-167, 400; Pl.'s Exs. 1C, 8, 10; Def.'s Exs. 6, 7). While Sheward maintained that the performance incentive was for stock options that would only vest at a subsequent time, various documents and related conversations pre-dating a letter he sent to several individuals "on or about" October 5, 1995, including Magarity, did not include any qualification regarding a vesting period or even mention of an "option." (Tr. I at 61-64; Tr. II at 162-170, 187; Pl.'s Ex. 1B; Def's Exs. 6, 7, 10, 11). Nevertheless, Magarity ultimately agreed at trial that he not only received the letter from Sheward in the early October 1995 timeframe but also that he understood it modified his original agreement by adding a vesting date of June 30, 1998. (Tr. II at 356-357, 419-423; Pl.'s Ex. 1C). Any cause of action he may have for a breach of the original employment agreement concerning the performance incentive program therefore occurred as of October 1995 and is now time-barred no matter which statute of limitations period from any of the possible jurisdictions is applied.
California's Statute of Limitations for breach of an oral contract is two years (Cal. Civ. Proc. Code § 339(1) (West 2000); Virginia's is three years (Va. Code Ann. § 8.01-246 (4); and Pennsylvania's (where Fiberlink was incorporated) is four years (Pa. Cons. Stat. § 5525(3) (1999) (Compl. para. I).
Profit Center Manager Commission
It is also clear from the evidence that Magarity's employment agreement with Fiberlink, either originally or as modified over time, provided for profit-sharing in the form of a commission for profit center managers on individual accounts. (Tr. Ill at 38-39, 41-42; Def.'s Exs. 6 and 7). The evidence further establishes that Magarity was entitled to such a commission (one-third of the net price) on one particular contract, Armstrong Systems, that was ultimately paid on July 10, 1998, for a contract obtained by Magarity's profit center while he was still employed with Fiberlink. (Tr. III at 40). Such a claim does not appear to be time-barred under what the Court concludes to be the applicable statute of limitations.Miscellaneous Claims
Fiberlink also claims that Magarity misappropriated various trade secrets of Fiberlink in conjunction with his breach of fiduciary duties; that he converted Fiberlink property for unauthorized purposes as of the point when he breached his fiduciary duty to Fiberlink; that he intentionally defrauded Fiberlink by his clandestine activities with IOS; and that he breached his fiduciary duty to Fiberlink of loyal and exclusive employment that resulted in quantifiable damage such as the diversion of business. (Compl. Counts II-V). The evidence does not support any of the claims with the exception of the conversion of Fiberlink property and breach of fiduciary duty owed Fiberlink by Magarity (including compensation paid to Magarity) as of the point in time (May 23, 1997) when the Court concludes the evidence is sufficient to establish that Magarity "crossed the line."
Both sides also seek declaratory judgment relief, Fiberlink specifically asserting that Magarity is not entitled to any relief because of the equitable doctrine of "unclean hands." However, the concept is more germane to equitable actions involving prospective injunctive relief as opposed to cases such as this seeking redress for what is more appropriately considered as a breach of contract action involving past actions. Age of Majority Educ. Corp. v. Preller. et al., 512 F.2d 1241, 1244-1245 (4th Cir. 1975) (applying Steffel v. Thompson, 415, U.S. 452, 469 (1974), in distinguishing among the equitable concepts of injunctive and declaratory relief in light of the Declaratory Judgment Act). The concept of "unclean hands" is inapplicable to this case in any event because both parties suffer from the condition as evident from the Court's assessment of their respective credibility.
Trade Secrets
The Virginia Uniform Trade Secrets Act defines a trade secret as:
information, including but not limited to, a formula, pattern, compilation, program, device, method, technique, or process, that: 1. Derive independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use, and
2. Is the subject of efforts that are reasonable under the circumstances to maintain secrecy.
While Fiberlink introduced evidence that Magarity used content derived from Fiberlink marketing, training and contract materials to create or help others create similar materials for IOS, the evidence falls short of establishing that such materials constituted trade secrets and that the use of standard business forms in some instances or the "downloading" and adaptation of other materials from the public domain of the internet on other occasions constituted acts of misappropriation. (Tr. II at 386-388). See Trandes Corp. v. Guy F. Atkinson, Co., 996 F.2d 655, 661 (4th Cir.), cert. denied, 510 U.S. 965 (1993). Although it may have been unimaginative for Magarity or anyone else to simply repackage Fiberlink's marketing material (which was readily available to a variety of persons and business entities and was hardly unique in form or content), such acts did not rise to the level of constituting the misappropriation of Fiberlink trade secrets.
Conversion
The conversion claim relates to Magarity's use of Fiberlink computers, stationery, telephones, promotional material, business forms, templates, other supplies and leased office space which Magarity used after he breached his fiduciary duty to Fiberlink or for which Fiberlink reimbursed IOS under their leasing arrangement. See Universal C.I.T. Credit Corp. v. Kaplan, 198 Va. 67, 75, 92 S.E.2d 359, 365 (1959). Clearly, Fiberlink is entitled to be compensated for the use of such Fiberlink property after the point when Magarity breached his fiduciary duty to Fiberlink and when it can be reasonably inferred that Magarity was not using such property for the benefit of Fiberlink. At the same time, any costs and expenses that are specifically attributed to the production of business for Fiberlink after that same point in time cannot be subject to relief by Fiberlink. The Court has already concluded that it cannot be determined that Fiberlink lost any business activity that it otherwise would have had past that point in time. Accordingly, Fiberlink is entitled at most to reimbursement for the compensation paid Magarity after May 23, 1997, less the amount of the profit center manager commission he was entitled to before that date (but which was not payable until later) as well as the amount of any specific costs and expenses (stationery, telephone charges, etc.) that were associated with his pursuing Fiberlink objectives after his breach. Breach of Fiduciary Duty
Such costs include those, for example, which may have been involved in communicating with Fiberlink (long distance telephone charges, etc.) which presumably would not have been for anyone else's benefit but Fiberlink. The Court feels it reasonable and therefore appropriate to permit Magarity to be credited for specific costs and expenses that can be attributed to any efforts he may have expended on behalf of Fiberlink after his breach of his fiduciary duty to Fiberlink as opposed to any apportionment of his income that is not susceptible to such delineation.
Controlling law is clear that Magarity owed a fiduciary duty to Fiberlink as an employee, officer, and director to act in its best interests. Avtec Systems. Inc. v. Peiffer, 21 F.3d 568, 575 (4th Cir. 1994) (quoting H-B Ltd. Partnership v. Wimmer, 220 Va. 176, 257 S.E.2d 770, 773 (1979) and Community Counseling Serv., Inc. v. Reilly, 317 F.2d 239, 244 (4th Cir. 1963)). The duty included not diverting business from it and not using its property, including his own efforts, for purposes other than for Fiberlink's benefit during the period of employment. Id.
Magarity was also vice president and a director of Fiberlink. (Tr. II at 358; Compl. para. 13).
Although, as previously discussed, the Court cannot conclude by a preponderance of the evidence that Fiberlink suffered lost or diverted business as a result of Magarity's actions that were undertaken in breach of his fiduciary duty, the Court draws the reasonable inference pursuant to Fiberlink's request for such additional relief as the Court deems appropriate that Fiberlink sustained damage in the amount of the compensation paid Magarity after the point when he breached his fiduciary duty to the company. The Court's conclusion is premised on the common sense notion that Magarity was not entitled to receive compensation from Fiberlink or use any of its property for unauthorized purposes once he chose to disavow it. Owen v. Shelton, 221 Va. 1051, 1055, 277 S.E.2d 189, 192 (1981).
Fraud
Fiberlink's allegations that Magarity intentionally and knowingly made a false representation of a material fact to Fiberlink with the specific intent to affirmatively mislead and that Fiberlink relied on the misrepresentation to its detriment which resulted in quantifiable damages falls short of the required evidentiary mark to grant the requested relief. See Universal C.I.T. Credit Corp. v. Kaplan, 198 Va. 75, 76, 92 S.E.2d 359, 365 (1959). Although the Court concludes by a preponderance of the evidence that Magarity breached his fiduciary obligations with Fiberlink as of the time of the Marquart letter (May 23, 1997), the evidence does not support a conclusion by the required higher standard of being clear and convincing that Magarity took specific affirmative steps before his termination to intentionally mislead Fiberlink and that such measures resulted in identifiable damage to Fiberlink. Winn v. Aleda Constr. Co., Inc., 227 Va. 304, 307, 315 S.E.2d 193, 195 (1984). Accord Colonial Ford Truck Sales. Inc. v. Schneider, 228 Va. 671, 677, 325 S.E.2d 91, 94 (1985) (citing Lloyd v. Smith, 150 Va. 132, 145, 147, 142 S.E. 363, 365-366 (1928), for the proposition that breach is not equal to fraud). The evidence reveals that although Magarity did not volunteer to Fiberlink any information such as his use of IOS business cards and he may have taken measures to insure that Fiberlink did not find out about his activities (such as the debatable use of the loS e-mail system), such acts were more of a passive nature that Fiberlink did not necessarily rely on to its detriment before Magarity's termination. Id.
Choice of Law
Ultimately, the most significant issue in this litigation is the choice of laws determination of which statute of limitations period applies to the assertion of the various claims and counterclaims. This Court must apply the choice of law principles of the forum state in a diversity case. See Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487 (1941). Virginia, as the forum state in this litigation, requires that the substantive law of the state in which a contract was made governs issues of construction and interpretation of the instrument, whether written or, as here, oral. See, e.g., Rahmani v. Resorts International Hotel, Inc., 20 F. Supp.2d 932 (E.D. Va. 1998) aff'd, 182 F.3d 909 (4th Cir. 1999) (holding that a contract is formed in the place where "the last act necessary to complete the contract" occurred).
The issue in this case concerning the so-called signing bonus is one of contractual interpretation and construction — not performance. The issue involves an interpretation of what the oral contract consisted of — it's nature and extent — it's construction. Even if the situation is viewed as one concerning a failure to perform — Fiberlink's failure to honor what the Court has found to be its obligation under the contract as formulated — persuasive, if not controlling authority still requires application of the law of the place of contracting (California) where it is not at all clear that the parties intended at its inception that the contract would be performed in Virginia. John Deere v. Wright Equipment Co., 2000 WL 1512872, at *1, 3 (W.D. Va. Oct. 3, 2000). At most, Virginia may be considered as one of several states in which the contract was intended to be performed, along with the rest of the nation if not world. If so, and it is not otherwise clear that the parties intended that any contractual dispute be resolved in a particular place of performance, the Court must still look to the law of the place of contracting. Roberts v. Aetna Casualty, 687 F. Supp. 239, 241-242 (W.D. Va. 1988). However, such reasoning does not apply to the claims involving Magarity's actions after he moved into Virginia because it is sufficiently clear that the parties intended at that juncture that performance runder the contract would occur in Virginia so as to permit the reasonable inference that the parties intended that any disputes concerning claims that arose as a result of actions undertaken in Virginia would be resolved under Virginia law. See Boginis v. Marriott Ownership Resorts, Inc., 855 F. Supp. 862, 866 (E.D. Va. 1994).
The contract was formed in California (see discussion of facts, supra) the principals were located in California at the time; Magarity lived and started working for the company in California; he remained there for approximately two years before moving to Virginia which was one of several possible relocation sites on the East Coast; and there was no specific mention of Virginia as a place of intended performance when the oral agreement of employment was made.
Different issues within the same case can be resolved in a choice of laws analysis pursuant to the laws of different forums. See Sun Oil Co. v. Wortman, 486 U.S. 717, 726 (1988) (revisiting and reaffirming the constitutionality of choice of law rules applying the statutes of limitations of states other than that of the lex fori).
At the same time, the Goodell v. Rehrig Int'l,. Inc. precedent, urged by Fiberlink, does not determine when the issue involving the 2 1/2% signing bonus accrued, based on the distinguishable facts and circumstances of this case. In Goodell, the district court found that the plaintiff's claim for similar relief accrued when he commenced work since to hold otherwise would allow the party to use undue delay and decide when the applicable statute of limitations would run. 683 F. Supp. at 1055. However, Magarity continuously raised the issue overtime with Sheward and the Court finds that he was continuously assured and reassured by Sheward that Magarity's interpretation of the original commitment concerning the 2 1/2% bonus would be honored. Moreover, Magarity continued to be employed with Fiberlink and it is unreasonable to conclude that he should have instituted formal action against his then-current employer, while he was being reassured as to the validity of his position, at least before the time when Fiberlink discovered his breach of his fiduciary duty which led directly and immediately to his termination. See Zukowski v. Dunton, 650 F.2d 30, 34-35 (4th Cir. 1981). At the same time, it is appropriate to fix the point for when the claim accrued as being when Magarity was on notice that Fiberlink was clearly adverse to him after his unsuccessful efforts up to that point, namely, the point of his termination.
683 F. Supp. 1051 (E.D. Va. 1988) (finding that a similar claim for an equity interest in a corporation accrued with the commencement of employment).
Fiberlink makes much of the fact that Goodell was affirmed by the Fourth Circuit after Zukowski. However, it was a summary affirmance without an opinion and therefore it is not clear that the Court had rejected its earlier holding in Zukowski.
Magarity argued that the claim could not have accrued before the common share stock certificates were printed and issued in July 1997, but there are other ways in which the obligation could have been memorialized and that timeframe is beyond the applicable statute of limitations period in any event as well. Magarity cannot rely either on any time period as may be measured by the settlement documents which are not admissible for the reasons discussed herein and the reference in financing disclosures from the July 2000 timeframe (Edison Ventures capitalization) are likewise unavailing where they obviously relate to disclosure of all known contingent liabilities, including Magarity's then known claim, whether it was so described or not. (Tr. II at 156, 215-216; Def.'s Ex. 39).
Conclusion
This case was filed on March 28, 2000. The applicable statute of limitations (California) for the enforcement of oral contracts is two years. Therefore, all claims that accrued before March 28, 1998, that depend on the construction and interpretation of the employment agreement are time-barred. Accordingly, the only claims that survive are those by Fiberlink for damages resulting from Magarity' s actions in the performance of the contract after he relocated to Virginia and breached his fiduciary duty as of May 23, 1997: The Plaintiff has sustained its burden of proof as to Counts III (conversion) and Count V (breach of fiduciary duty) and damages are to be determined on the basis of the compensation paid the Defendant Magarity from the date of his breach (May 23, 1997) to the date of his termination on September 3, 1997, as offset by the amount of the single profit-center manager commission (Armstrong Systems) to which Magarity is entitled and such specific expenses and related costs incurred by Magarity after May 23, 1997, which are attributable to having been for Fiberlink's benefit.An appropriate Order shall issue.
ORDER
This matter is before the Court for resolution of all issues regarding liability as asserted in the Complaint and Counterclaim. For the reasons set forth in the accompanying Memorandum Opinion, it is hereby
ORDERED that judgment is entered in favor of the Plaintiff, Fiberlink Communications, Corporation, on the claims asserted in Counts III (conversion) and V (breach of fiduciary duty) of its Complaint and in an amount to be determined in a separate damages phase consistent with the relevant directives of the Memorandum Opinion. In this latter regard, counsel are instructed to contact the Court forthwith for purposes of scheduling a status conference and further proceedings. It is further
ORDERED that judgment is entered in favor of the Defendant, John Patrick James Magarity, on his claim for a specific commission as identified in his unitary Counterclaim, the exact amount of which to be determined in conjunction with the determination of the amount of relief to be granted to the Plaintiff. It is further
ORDERED that all remaining claims as set forth in both the Complaint and Counterclaim are hereby DENTED for the reasons set forth in the Memorandum Opinion, including all requests for fees and costs.
It is so ORDERED.