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Software Company Director Breached Loyalty Duty

Although defendant, director of a Moldavan LLC that sold software products in the U.S. and around the world, claimed he restructured the company and sought new distributor arrangements to benefit the company, an Alexandria U.S. District Court says the director breached a fiduciary duty of loyalty when he organized a separate corporation under Virginia law and took over a distributorship previously used by the LLC, and the court grants summary judgment to the LLC.

Plaintiff RitLabs SRL (SRL) is an Internet technology and software provider formed as an LLC in 1998 under the law of the Republic of Moldava, with its principal place of business in Chisinau, Moldova, and all 18 of its full-time employees located in Moldava. It has sold its products

throughout the world, including in the U.S. On July 14, 2008, defendant Serghei Demcenko, the equivalent CEO of SRL, incorporated RitLabs Inc. under Virginia law, with his wife as sole owners and shareholders of INC, with a purported exclusive license to sell SRL’s software products in the U.S. and a non-exclusive license to sell outside the U.S. In 2012, SRL sued Demcenko and INC (defendants), alleging claims for illegal cybersquatting, breach of a fiduciary duty of loyalty, false designation under the Lanham Act, violation of the Computer Fraud and Abuse Act, conversion, common-law unfair competition and tortious interference with prospective economic advantage and with contractual relations.

The parties agree that Moldavan law applies to the duties Demcenko owes to SRL in his capacity as director. Under Moldavan law on LLCs, when exercising his functions, the administrator shall show diligence and loyalty. The parties do not dispute that this duty imposes on Demcenko the same types of fiduciary duties and obligations owed by corporate officers and directors under American law. The court will apply generally accepted principles of corporate law in analyzing defendant’s conduct.

Based on the undisputed facts, there is no question that Demcenko breached his duty of loyalty to SRL in connection with his activities pertaining to INC. At the time he founded INC, SRL was already selling its software in the U.S., which defendant recognized as a major, if not the most important, market for SRL products; and defendant formed INC precisely for the purpose of exploiting the U.S. market for SRL software. Taking a personal stake in INC, he then engaged in a series of transactions that had the effect, if not the purpose, of personally benefiting himself thorough INC at the expense of SRL. He entered into the license agreement with INC to facilitate INC’s activities and cancelled SRL’s distribution agreement with a U.S.-based distributor, CIFNet. Then, acting on behalf of INC, he entered into virtually the same distribution agreement with CIFNet and other companies for the distribution of SRL software under the license agreement. The court will enter summary judgment in favor of SRL on this count.

The court also concludes, based on undisputed facts, that defendants Demcenko and INC tortiously interfered with both SRL’s existing contracts and prospective economic advantage by terminating at least one contract that inured only to the benefit of SRL, the CIFNet contract, and then entering into a distribution agreements with certain companies, including CIFNet, on behalf of INC, rather than SRL. The court finds plaintiff is entitled to summary judgment as to liability on these counts. Demcenko also violated the Anticybersquatting Consumer Protection Act and the Computer Fraud and Abuse Act.

With respect to SRL’s claims for conversion, false designation under the Lanham Act and common law unfair competition, the court enters summary judgment for defendants. Virginia law does not recognize a claim for conversion of intangible property that does not arise from and is not merged with a document.

The case will proceed to trial on damages.

RitLabs SRL v. RitLabs Inc. (Trenga) No. 1:12cv215, Aug. 9, 2012; USDC at Alexandria, Va. VLW 012-3-381, 17 pp.

VLW 012-3-381

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