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Darton Environmental, Inc. v. FJUVO Collections, LLC

United States District Court, W.D. Virginia, Lynchburg Division

August 1, 2018

Darton Environmental, Inc., Plaintiff,
v.
FJUVO Collections, LLC, ET AL., Defendants.

          MEMORANDUM OPINION

          NORMAN K. MOON UNITED STATES DISTRICT JUDGE

         Plaintiff Darton Environmental refines cooking oil and sells it to biofuel companies. Three of the Defendants, Andy Chen, Daniel Zheng, and Adam Zheng, visited Plaintiff on behalf of Defendant FJUVO Collections. Like Plaintiff, Defendant FJUVO Collections collects, refines, and sells cooking oil. At this visit, Plaintiff and Defendant FJUVO entered into a contract whereby Defendant FJUVO would be allowed to inspect Plaintiff's refining facility “solely for the purpose of evaluating a potential business relationship” in exchange for providing Plaintiff with truckloads of oil. Defendant FJUVO delivered Plaintiff the oil. However, Plaintiff alleges Defendant FJUVO and two spinoff companies, Defendants TG Recycle Oil and Green Oil Recycle, used its proprietary technology for their own ends. Plaintiff alleges that this violated Virginia tort law, contract law, and trade secret law.[1] While the majority of these claims must be dismissed, the trade secret claims are adequately pled. Defendants' motion to dismiss will be granted only in part.

         I. LEGAL STANDARD

         A motion to dismiss pursuant to Fed.R.Civ.P. 12(b)(6) tests the legal sufficiency of a complaint to determine whether a plaintiff has properly stated a claim. “To survive a motion to dismiss, Plaintiffs' factual allegations, taken as true, must ‘state a claim to relief that is plausible on its face.'” Hall v. DIRECTV, LLC, 846 F.3d 757, 765 (4th Cir. 2017) (quoting Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009)). “When ruling on a motion to dismiss, courts must accept as true all of the factual allegations contained in the complaint and draw all reasonable inferences in favor of the plaintiff.” Id. However, a court need not “accept the legal conclusions drawn from the facts” or “accept as true unwarranted inferences, unreasonable conclusions, or arguments.” Simmons v. United Mortg. & Loan Inv., LLC, 634 F.3d 754, 768 (4th Cir. 2011). Finally, “a court may consider documents attached to the complaint or the motion to dismiss so long as they are integral to the complaint and authentic.” Kensington Volunteer Fire Dep't, Inc. v. Montgomery Cty., Md., 684 F.3d 462, 467 (4th Cir. 2012).

         II. FACTS AS ALLEGED

         A. The parties

         Plaintiff Darton Environmental “is a corporation engaged in the business of collecting and refining used cooking oil and selling it to biofuel companies.” (Dkt. 50 at ¶9).

         Defendant FJUVO Collections “has historically been primarily engaged in collecting, refining and selling used cooking oil.” (Id. at ¶10). Defendants Andy Chen, Daniel Zheng, and Adam Zheng have each served as agents of FJUVO. (Id. at ¶¶10, 17-18).

         Defendant Andy Chen is also the principal of Defendant TG Recycle Oil. (Id. at ¶11). Like Plaintiff and Defendant FJUVO, Defendant TG Recycle Oil is “engaged in collecting, refining and selling used cooking oil.” (Id.). It “is a spin-off company of FJUVO.” (Id.).

         Defendant Daniel Zheng also serves as the principal of Defendant Green Oil Recycle, Inc. (Id. at ¶12). Defendant Green Oil Recycle is “engaged in collecting, refining and selling used cooking oil.” (Id.).

         B. Prior business dealings

         Before this dispute, FJUVO “collected and supplied [Darton] with used cooking oil for [Darton]'s refining operation.” (Dkt. 50 at ¶13). Darton “refines the cooking oil through a process called ‘heat and settle' involving superheated water, which separates waste material from the oil.” (Id. at ¶9). This process was “significantly less labor-intensive and less costly” than the refining method FJUVO had previously used. (Id. at ¶15).

         C. Negotiations and the agreements

         FJUVO began negotiating with Darton for use of its technology in 2015. (Dkt. 50 at ¶16). Andy Chen, Daniel Zheng, and Adam Zheng negotiated on behalf of FJUVO. (Id. at ¶17). Daryl Hubbard negotiated on behalf of Darton. (Id. at ¶18). The parties agreed to allow FJUVO to inspect Darton's refining facility “solely for the purpose of evaluating a potential business relationship” in exchange for “six truckloads of oil per month for eighteen months.” (Id. at ¶¶24-25). Each truckload contained at least 45, 000 pounds. (Dkt. 7-1). Darton would pay “one cent below the IL Jacobsen market price” for the oil, and could re-sell it for two cents over the market price. (Dkt. 50 at ¶25). On October 21, 2015, the parties entered into the “buy and sell” agreement, memorializing these terms. (Id. at ¶29; dkt. 7-1). That same day, the parties also executed non-compete and confidentiality agreements. (Dkt. 50 at ¶32; dkt. 7-1; dkt. 7-2). These agreements made clear that FJUVO was to “use the Confidential Information only for the purpose of evaluating potential business and investment relationships with [Darton].” (Dkt. 7-2). The agreements were signed for FJUVO by Andy Chen and for Darton by Daryl Hubbard. (Dkt. 50 at ¶43).

         D. FJUVO begins using Darton technology and selling refined oil

         Darton then “allowed Chen and Daniel and Adam Zheng to examine the proprietary equipment at the Darton refinery. Daniel Zheng also took photographs of the equipment.” (Dkt. 50 at ¶44). Afterwards, “FJUVO quickly set up its own refinery in Hammond, Indiana, and later converted its old centrifuge refinery in Murfreesboro, Tennessee to a ‘heat and settle' facility using the Darton technology, and began selling refined oil therefrom.” (Id. at ¶47). Defendants Andy Chen and TG Recycle Oil used the Darton technology in Defendant TG Recycle Oil's refinery in Highland, Indiana. (Id. at ¶48). Likewise, Defendants Daniel Zheng and Green Oil Recycle used the Darton technology at their refinery in Highland, Indiana. (Id. at ¶49). Defendants began selling this refined oil to other buyers. (Id. at ¶¶52, 54).

         III. DISCUSSION

         Plaintiff's seven counts include claims for breach of contract, conversion, tortious interference with business expectancy, Virginia statutory business conspiracy, common law conspiracy, and violations of the Virginia Uniform Trade Secrets Act.[2] The Court takes them one at a time.

         A. Count I: Breach of Contract

         Plaintiff alleges Defendant FJUVO breached the contract the parties signed. Plaintiff concedes this claim is only against Defendant FJUVO. Plaintiff also concedes the “buy and sell” agreement was completed, and so the breach of contract claim turns on alleged breaches of the non-compete and confidentiality agreements.[3] “[T]he threshold question is whether [these agreements are] enforceable.” Home Paramount Pest Control Companies, Inc. v. Shaffer, 282 Va. 412, 420 (2011).

         The Court starts with the non-compete agreement. (Dkt. 7-3). Under Virginia law, the non-compete agreement faces an uphill climb: “Covenants not to compete are restraints on trade and accordingly are not favored.” Motion Control Sys., Inc. v. East, 262 Va. 33, 37, 546 S.E.2d 424, 425 (2001). Accordingly, non-compete agreements are to be “strictly construed.” Alston Studios, Inc. v. Lloyd V. Gress & Assocs., 492 F.2d 279, 285 (4th Cir. 1974) (applying Virginia law). In evaluating the enforceability of non-compete agreements, Virginia courts ask whether the agreement is (1) “narrowly drawn” to protect a legitimate business interest, (2) “not unduly burdensome” on the contracting party's “ability to earn a living, ” and (3) “not against public policy.” Preferred Sys. Sols., Inc. v. GP Consulting, LLC, 284 Va. 382, 392-93 (2012); see also Double Diamond Properties, LLC v. BP Prod. N. Am., Inc., 277 Fed.Appx. 312, 317 (4th Cir. 2008) (“A court must ‘consider (1) whether or not the agreement in question is reasonable as between the parties; and (2) if so, whether or not the agreement is injurious to the public interest by reason of its effect upon trade and, therefore, void.'” (quoting Klaff v. Pratt, 117 Va. 739 (1915)). Additionally, courts are to consider the “function, geographical scope, and duration” of the agreement. Simmons v. Miller, 261 Va. 561, 581 (2001). Finally, “when the non-compete clause is ambiguous and susceptible to two or more differing interpretations, at least one of which is functionally overbroad, the clause is unenforceable.” Nortec Commc'ns, Inc. v. Lee-Llacer, 548 F.Supp.2d 226, 230 (E.D. Va. 2008) (citation omitted).[4]

         The non-compete agreement's primary problem is that it is overbroad, and the Court concludes it is unenforceable as an unreasonable restraint of trade. The agreement states that FJUVO “shall not, in any manner, represent, provide services or engage in any aspects of business that would be deemed similar in nature to the business of Darton . . . .” (Dkt. 7-3). It continues by preventing FJUVO from “directly or indirectly engag[ing] in any business that would be considered similar in nature to with [sic] Darton Environmental, Inc, its subsidiaries, and any current or former clients and/or customers.” (Id.). Under the agreement, FJUVO also may not “solicit any client, customer, officer, staff or employee for the benefit of [itself] or a third party that is or may be engaged in a similar business.” (Id.).

         This language is both ambiguous and overbroad. Its terms prevent FJUVO from engaging in “business that would be deemed similar in nature to the business of Darton.” But Plaintiffs allege FJUVO “has historically been primarily engaged in collecting, refining and selling used cooking oil.” (Dkt. 50 at ¶10). And so FJUVO's practice is almost identical and certainly “similar in nature to the business of Darton.” These terms would force FJUVO to stop the work it had historically been engaged, a result that was both unanticipated by the parties and unreasonable. Plaintiff, in its opposition to the motion to dismiss, admits that reading this language by itself “would lead to an absurd result.” (Dkt. 63 at 16). But its attempt to limit the terms to a “rational reading” that only protects “its specific method of ‘heat and settle' refining” relies on limitations found nowhere in the agreement. (Id.). Parties cannot write facially overbroad non-compete agreements and then seek to tailor them after the fact.

         The agreement's terms would likewise prevent FJUVO's ongoing solicitation of its own clients because it may not “solicit any client . . . engaged in a similar business.” (Dkt. 7-3). This language is problematic because it goes far beyond Darton's proprietary technology and instead limits conduct that is “similar” to its general business. See Klaff v. Pratt, 86 S.E. 74, 78 (Va. 1915) (“The agreement restraining trade must be incidental to and in support of the contract or sale by which the one in whose favor it runs acquired some interest in the business he seeks to protect.”) Again, any limitation on this broad language is only created by Plaintiff ex post; it is nowhere to be found in the agreement.

         Finally, the agreement is missing traditional geographic and temporal limitations. Similar contracts containing no geographic scope have long been found unenforceable. See Alston Studios, Inc. v. Lloyd V. Gress & Assocs., 492 F.2d 279, 283 (4th Cir. 1974) (“[B]ecause of its limitless geographic application . . ., we hold the provision unenforceable and void.”). The non-compete purports to be in effect for ten years. (Dkt. 7-3). Plaintiff points to no contracts of this length that have been upheld.

         Plaintiff responds by noting that the Supreme Court of Virginia has said “[t]he possession of trade secrets and confidential information is an important consideration in testing the reasonableness of a restriction on competition.” Meissel v. Finley, 198 Va. 577, 583 (1956). While this is undoubtedly true, the non-compete here goes significantly beyond the underlying trade secrets at issue. It would instead prevent FJUVO from engaging in its day-to-day business, a result that Plaintiff acknowledges is absurd. The agreement is overbroad, even if it aims at protecting legitimate interests.

         Plaintiff's recourse to Consol. Indus. Roofing v. Williams, 17 Va.Cir. 341 (Roanoke Cir. Ct. 1989), is likewise unavailing. This thirty-year-old circuit court case simply stands for the unobjectionable proposition that non-compete agreements must be read holistically. While the Court does look at the whole agreement, the limiting terms Plaintiff seeks to introduce now are found nowhere on the face of the document. And unlike the agreement upheld in that case, which restricted ...


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