Wednesday, January 18, 2006, 1/18/2006 10:50:00 AM

Employment Contract's Attorney's Fee Provision - No Damage But Big Fees

By Todd
The Supreme Court of Virginia just considered an interesting question - can a party to an employment agreement allowing attorney's fees in litigation "relating to" the employment agreement be awarded substantial attorney's fees if the jury awards them NO DAMAGES after finding the other party only technically breached the agreement? In the case of Ulloa v. QSP, Inc., --- S.E.2d ----, 2006 WL 69203 (Va.), Virginia's high court held yes. This case should send some shivers down the spines of employees who don't read their employment agreements closely.

Mr. Ulloa was apparently a successful salesperson for QSP. He was subject to an employment agreement with QSP that contained restrictive covenants including 12-month confidentiality covenants, non-solicitation covenants, and non-compete covenants. After his employment terminated, QSP alleged he violated the restrictive covenants by leaking confidential customer information to his new employer and also targeted those customers with solicitations prohibited by the agreement. The agreement also provided for attorney-fee shifting to Ulloa "by reason of any action relating to this Agreement." Yikes! After significant litigation that appears to have generated huge attorney's fees, the parties submitted their issues to the jury, one of which was "did Ulloa breach the employment agreement?" QSP had other claims that were not breach of contract claims, including a misappropriation of trade secrets claim and a business conspiracy claim. The jury found that Mr. Ulloa HAD breached his employment agreement's restrictive covenants but found as well that QSP was not damaged by these breaches. Regardless, QSP asked the court to award it it's attorney's fees - of $691,099.15! In a move that surely left Mr. Ulloa gasping, the trial court granted them to QSP and Mr. Ulloa took an appeal.

When the Supreme Court of Virginia got ahold of the case it was asked to review the propriety of the award of almost $700,000 against Mr. Ulloa. This court split the baby in its decision but it is clear that QSP got the better half of the baby - the court held that QSP was entitled to its attorney's fees from Mr. Ulloa that related to the breach of contract claims, regardless of the jury's determination that QSP wasn't damaged. The court also noted, however, that not all of the $691,099.15 related to the breach of contract claims and that some must have went toward proving the misappropriation of trade secrets claim and the business conspiracy claims. Thus, the court kicked the case back down to the trial court to determine what amount of those fees actually went to work done to prosecute the breach of contract action.

This must be a major-league blow to Mr. Ulloa and his attorneys. They wanted to argue "hey, this isn't fair, they didn't even prevail" but that was not the standard set by the agreement to trigger attorney's fees shifting to Mr. Ulloa. The agreement provided that if Mr. Ulloa "breached the agreement" then he would be responsible for QSP's attorney's fees "in any action relating to the agreement." As you can see, the agreement didn't say QSP had to win damages - and it only implies that QSP actually had to prove that Mr. Ulloa breached the agreement.

THE LESSON? Employees really have to scour these attorney's fee shifting provisions and review them with counsel. We'd bet Mr. Ulloa had no idea he was on the hook for these fees. We'd also bet he would've gladly traded the couple thousand dollars in attorney review and advice costs at the negotiation stage of that agreement for his ultimate predicament - having to pay $700,000 to his former employer's attorneys and maybe just as much to his own. We have no idea whether this decision will bankrupt Mr. Ulloa but those numbers are not chump change for even the highest of the high paid operators. An ounce of prevention was surely worth a pound of cure.


Anonymous Anonymous said...

If people pay ~$3000 to have an attorney review each document they sign, they will soon have $700,000 of legal bills and they may never sign a document because the attorney will advise them not to sign it. Mr. Attorney, will you please re-negotiate my credit card agreement with Citibank for $3000?

5:28 PM, February 24, 2008  

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