Opinion ID: 1024601
Heading Depth: 2
Heading Rank: 1

Heading: Phoenix’s Business

Text: Phoenix specializes in providing polybutylene (“PB”) replacement services. PB replacement represents a niche business within the plumbing industry that arose after it was discovered that PB pipes are defective and can leak. The market for PB replacement services is finite because once a house’s PB pipes have been replaced, there will never be further need for such services in that house. Phoenix developed and continues to maintain records of the names and addresses of its former customers in a proprietary database. Phoenix considers the addresses contained in the database to be valuable confidential information, because there are no public records identifying buildings that contain PB pipes. Houses with PB pipes, however, are often found on the same street or in the same neighborhoods as other houses with PB. As a result, a company that learns of the existence of PB pipes in one house can often accurately predict that nearby houses also contain PB. Phoenix has therefore developed a system of targeted direct mailing that uses the homes of former customers as “center points” given to direct mail vendors, who then send solicitations to all addresses within defined radii. (J.A. at 340.) B. Appellees’ Employment/Contracts with Phoenix Phoenix hired both Rodriguez and Koci as employees in 1995. Rodriguez performed drywall work, and Koci was a licensed master 3 plumber. During the course of their employment with Phoenix, both Rodriguez and Koci asked to be treated as independent contractors rather than employees, and Phoenix agreed. Koci entered into a written Subcontractor Agreement with Phoenix on February 25, 2000, and Rodriguez signed a nearly identical Subcontractor Agreement on March 23, 2000. The Subcontractor Agreements contained a provision entitled “Disclosure of Trade Secrets and Confidential and Proprietary Information,” which provides as follows: The Subcontractor shall not, during or at any time after termination of the subcontract, without prior written authorization of the Company, disclose to, or make use of, any trade secret or confidential or proprietary information of the Company or its affiliates. Trade Secrets and confidential or proprietary information include, but are not limited to: customer lists, price lists, insurance and other third party contracts, marketing and sales plans and concepts, identity of key customer or client personnel and their phone numbers, the identity and requirements of customers and clients, bidding and pricing information, personnel policies and procedures, compensation and fringe benefit programs and offer sales, business plans and methods, computer programs and copyrightable work (models, processes, designs, drawings, plans, prototypes, inventions, devices, parts, improvements and other physical and intellectual property), that were disclosed to the Subcontractor or known by the Subcontractor as a consequence of the subcontract and/or used by the Subcontractor to carry out its duties under this Agreement. . . . (J.A. at 25.)1 1 The Subcontractor Agreements also contained a provision entitled “Non-Solicitation and Covenant Not to Compete,” which formed the basis of some of Phoenix’s claims before the district court, but is not relevant on appeal. 4 While still working for Phoenix, Rodriguez and his thenroommate, Kenneth Cocolin began to discuss forming a new PB replacement business to compete with Phoenix.2 They recruited Koci to join their venture. In early June 2003, prior to terminating their subcontractor relationship with Phoenix, Rodriguez and Koci performed several PB replacement jobs in neighborhoods in which they had previously done PB replacement work for Phoenix. Also in June 2003, they took steps to organize their business, which they named “Atlantic Re-Plumbing.” (J.A. at 346.) On or about June 18, 2003, Rodriguez and Koci terminated their subcontractor agreements with Phoenix. C. Appellees’ Use of Information Gained from Their Employment with Phoenix Rodriguez and Koci initially marketed Atlantic’s services primarily through the distribution of fliers on the same streets and neighborhoods in which they had performed PB replacement work for Phoenix. In determining which areas to target, Rodriguez and Koci relied on their own memories; neither ever had access to Phoenix’s database of customer information.3 2 Cocolin and Rodriguez soon disagreed about the nature and scope of Cocolin’s duties, causing Cocolin to terminate his relationship with the business after approximately two months. 3 Phoenix did provide Rodriguez and Koci with “job worksheets” containing the address to which they were to report for each job they did for Phoenix, but neither Rodriguez nor Koci retained any of these job worksheets after forming Atlantic, and at no point did they use the job worksheets to compete with Phoenix. 5 Rodriguez and Koci eventually began to market Atlantic’s services through targeted direct mailing. They compiled mailing lists based on “center points,” which were generally locations at which they had performed PB replacement work for Phoenix. In addition to using their prior knowledge of PB replacement sites to market their services in competition with Phoenix, Rodriguez and Koci also used their knowledge of Phoenix’s pricing structure to gain a competitive advantage. Rodriguez had learned of Phoenix’s pricing structure for PB replacement services during his employment and subcontractor relationship with Phoenix. He used this knowledge in an attempt to offer Atlantic’s services at a lower rate than Phoenix’s. Rodriguez and Koci also relied on their memories of what Phoenix had paid them as subcontractors in determining what to pay Atlantic’s subcontractors and employees. Although Koci did come across a Phoenix “pay sheet” while moving Atlantic into a new office, neither he nor Rodriguez used or purposefully retained a Phoenix “pay sheet” for use in competition with Phoenix. D. Appellee’s Use of Phoenix’s 2002 Interior Re-Pipe Agreement In its PB replacement business, Phoenix uses a consumer contract known as the “2002 Interior Re-Pipe Agreement.” While Rodriguez and Koci worked with Phoenix, the 2002 Interior Re-Pipe Agreement was neither marked as copyrighted nor kept hidden from 6 independent contractors, and Rodriguez and Koci were not advised that it was confidential or protected by copyright. Rodriguez and Koci retained a copy of the 2002 Interior RePipe Agreement after terminating their Subcontractor Agreements with Phoenix. In or about June 2003, they retained an attorney to determine whether they could use the 2002 Interior Re-Pipe Agreement in their new business. The attorney advised Rodriguez and Koci that they were entitled to use the document, which was not subject to copyright protection. Nevertheless, Rodriguez and Koci requested that Pugh draft a new consumer contract for Atlantic’s use. Pugh drafted the new contract (hereinafter “the Infringing Contract”) by making minor revisions to the 2002 Interior Re-Pipe Agreement. Appellees first used the Infringing Contract on August 30, 2003. They then used the Infringing Contract intermittently until mid-to-late October 2005, at which point they began to use the Infringing Contract on virtually all of their PB replacement jobs. Prior to that time, Appellees had been using a form contract purchased from an office supply store to serve the same ends. The switch to the Infringing Contract reflected Rodriguez and Koci’s belief that “it looked more professional” than the form contract they had been using. (J.A. at 114.) Generally, execution of the written agreement with a customer was the final step before Atlantic began work. First, Atlantic 7 visited the potential work site, performed an estimate of the cost of its services, and quoted the proposed price to the customer. If a customer accepted the proposal, Atlantic scheduled a work date. Atlantic never sent the Infringing Contract to a customer until after the customer had accepted its proposal and scheduled a work date. In many cases, Atlantic did not send the Infringing Contract to the customer until the customer had paid a deposit equal to onethird of the estimated price. Appellees did not use the Infringing Contract to market Atlantic’s services. Rather, they obtained business through fliers, signs, and postcards, as well as through neighborhood referrals, the Long & Foster Home Service Connection, and their own website. Customers selected Atlantic for a variety of reasons, including experience and price. No customer ever told Rodriguez or Koci that he or she selected Atlantic based on the Infringing Contract. On several occasions, Appellees relied on the Infringing Contract to collect balances owed by customers. Specifically, Atlantic issued written correspondence citing specific provisions of the Infringing Contract to five customers: Oakley, Polk, Bennet, Quagliata, and Neal. Oakley remitted a sum fully satisfying the unpaid balance, accompanied by a note stating that he paid because he was pleased with Atlantic’s work. Polk failed to pay in full, and Atlantic spent approximately $1,500 in legal fees to collect 8 the $1,606 owed. Bennet did not respond to two attempts at collecting payment, and Atlantic eschewed further efforts to collect the $400 owed, concluding that it would have been more costly to enforce the contract than to collect the unpaid balance. Atlantic spent approximately $7,000 in legal fees to collect the balance of $3,618 owed by Quagliata. Atlantic also spent between $1,000 and $1,500 in legal fees trying to enforce the Infringing Contract against Neal, but failed to collect any of the funds he owed to Atlantic. On August 4, 2005, Phoenix registered the 2002 Interior RePipe Agreement with the United States Copyright Office. In September 2005, Appellees’ counsel informed Rodriguez and Koci that they were not entitled to use the Infringing Contract. Appellees then paid counsel $2,711 to draft a new contract. Nevertheless, Appellees continued to use the Infringing Contract consistently until December 12, 2005, and then intermittently until January 2006, when, after 626 total uses, they ceased using the Infringing Contract altogether. E. The Present Litigation On October 14, 2005, Phoenix filed a nine-count complaint against Appellees in the United States District Court for the Eastern District of Virginia, alleging: Copyright Infringement against Atlantic, Koci, and Rodriguez (Count I); Breach of Subcontractor Agreement against Koci and Rodriguez (Counts II-III); 9 Tortious Interference with Contract & Business Expectancy claims against Atlantic, Koci, and Rodriguez (Counts IV-VI); Violation of Virginia’s Business Conspiracy Statute against Atlantic, Koci, and Rodriguez (Count VII); Unfair Competition against Atlantic, Koci, and Rodriguez (Count VIII); and Common Law Conspiracy against Atlantic, Koci, and Rodriguez (Count IX).4 Appellants filed a Motion to Dismiss the complaint. On December 8, 2006, the district court denied the motion with respect to Counts I-VII and Count IX, but granted the motion with respect to Count VIII (unfair competition). Thereafter, the parties filed cross-motions for partial summary judgment. In addressing the motions, the district court found that as of August 5, 2005, the date the United States Copyright Office registered the 2002 Interior Re-Pipe Agreement as an original work authored by Phoenix, Phoenix possessed a valid, registered copyright. Accordingly, the district court granted summary judgment in favor of Phoenix on the issue of liability on Count I. It denied Appellees’ motion for partial summary judgment on the issue of damages for the copyright infringement, reserving the question for trial. The court also held that the covenant not to compete contained in the Subcontractor Agreements was invalid 4 Phoenix had previously filed a state court action against Appellants on August 27, 2003. Phoenix voluntarily nonsuited that action, however, in order to bring a copyright claim in federal court. 10 under Virginia law and therefore granted Appellees’ motion for partial summary judgment to the extent that it sought dismissal of the claims based on that provision. A three-day bench trial took place in July 2006. Thereafter, on October 25, 2006, the district court entered judgment in favor of Phoenix on the copyright claim (Count I), and in favor of Appellees on the remaining counts. The district court enjoined Appellees from further infringement of the copyrighted 2002 Interior Re-Pipe Agreement, but found that Appellees were not liable for any damages. Phoenix noted a timely appeal, and we have jurisdiction pursuant to 28 U.S.C.A. § 1291 (West 2006) (providing for appellate jurisdiction over “final decisions” of the district courts).