Is a Contract Signed with a Fake Trade Name Legal in Virginia?

Under Virginia law, is a contract signed with a fictitious trade name legal, valid, and enforceable?

The answer is probably yes. A contract signed with a fictitious trade name is valid and not void, so long as the trade name has been properly registered with the state.

I. If the Trade Name is Registered, the Contract is Likely Valid

No Virginia court has directly addressed whether a contract is void as a matter of law because it was signed with a fictitious trade name. However, Virginia appears to recognize that such contracts are valid for the purposes of a breach of contract claim if the trade name has otherwise been filed with the state and available for inspection by the contracting party. See Jacobson v. Southern Biscuit Co., 198 Va. 813, 818 (1957) (holding a cause of action could proceed on a contract signed by a company in its trade name even though the wrong corporation was initially served).

The majority of states hold that a contract with a fictitious trade name is valid, so long as the trade name itself had been registered in the state where the contract was executed. See, e.g., Aberdeen Oil Co. v. Goucher, 362 S.W.2d 20, 22 (Ar. 1962) (“one is bound by whatever he uses as a substitute for his name”); In re Adoption of Long, 56 So. 2d 450 (Fl. 1952) (“[o]ne may adopt a name different from his true one, and his contracts under the assumed name will be binding if unaffected by fraud”); National Cash Register Co. v. Sikes, 94 S.E.2d 782 (Ga. 1956) (“the fact that the retention-title contract was signed in a trade name by the owner of such business does not in any wise invalidate the contract”).

A Georgia case recently applied the majority rule in the context of a non-compete contract between two doctors.

In Darugar v. Hodges, a physician practice group sought to enforce a non- competition clause in an employment agreement that it had signed under its fictitious trade name . 221 Ga. App. 227 (1996). The Georgia Court of Appeals held that the contract was valid, even though it had been signed in the name of a fictitious trade name. Id. “Although trade names are not legal entities, a contract which is otherwise enforceable will not be invalidated merely because it was entered into under a trade name, so long as the underlying entity involved in the agreement is legally capable of contracting.” Id.see American Express &c. Co. v. Berlye, 202 Ga. App. 358, 359 (1991)); see also OCGA 10-1-491 (failure to register a trade name does not invalidate an otherwise acceptable contract). The Georgia court held that even though the employment contract was otherwise valid, the court invalidated the non-competition clause as unreasonable and over broad. Id.

Even if the trade name used to sign an employment contract is validly registered, an employee can always challenge the non-compete clause on other grounds.

II. If the Trade Name is Unregistered, the Contract May Be Invalid

Here is how one company challenged the validity of a contract that had been signed by an unregistered trade name.

The United States District Court for the Western District of Virginia held in a bankruptcy case that a corporate officer who signed a sales contract with an unregistered fictitious trade name on behalf of an undisclosed corporation could not escape personal liability under the agreement. In re Vinales, 268 B.R. 749 (W.D.Va. 2001). The court stated that two cases cited by the petitioner in challenging the contract, Lachmann v. Houston Chronicle Publishing Co., 375 S.W.2d 783 (Tex.Civ.App. 1964) and Hoskins Chevrolet, Inc. v. Hochberg, 691 N.E.2d 28 (Ill. 1998), “would be embraced by Virginia courts.” Id. at 755.

In Hoskins, the corporate officer of an auto repair business signed purchasing contracts under an unregistered fictitious trade name, “Diamond Auto Construction,” without disclosing the parent corporation, “Diamond Auto & Repair, Inc.” 691 N.E.2d at 29 (Ill. 1998). Illinois state law, similar to Virginia Code § 59.1-69, requires that any assumed name be clearly disclosed. See 805 ILCS 5/4.15(b)(2). The court held that the use of an unregistered fictitious name in a contract did not create a separate legal entity, nor did it fairly inform creditors of the existence of the parent corporation. 691 N.E.2d at 30 (Ill. 1998). Accordingly, the court determined that the corporate officer was personally liable for the contracts he entered into on behalf of “Diamond Auto Construction” and the contract could not be enforced by or against the parent corporation. Id.

In Lachmann, the Houston Chronicle Publishing Co. sued Lachmann for an unpaid balance on a written contract for print advertisements. 375 S.W.2d at 784 (Tex.Civ.App. 1964). Lachmann signed the contract as “Company: Artcraft Mattress Company and House of Unpainted Furniture, By: Arno Lachmann,” which were fictitious trade names for the Household Manufacturing Company, Inc., a parent corporation that was not identified in the contract. Id. The court held that “[i]t is the duty of the agent, if he would avoid personal liability on a contract entered into by him on behalf of the principal, to disclose not only the fact that he is acting in a representative capacity, but also the identity of his principal.” Id. at 785. Therefore, the court held that Lachmann made himself personally liable by contracting in his own name and the contract could not be enforced by or against the parent corporation. Id.

The court held that the use of an unregistered trade name is not sufficient identification of a principal and only the agent can sue or be sued on the contract. In re Vinales, 268 B.R. 749 (W.D.Va. 2001) (citing 150 A.L.R. 1303 (majority position is that the use of a trade name is not sufficient disclosure of the identity of the principal and of the fact of agency)).

III. Virginia Trade Name Registration Requirements

As stated above, a contract with an undisclosed parent corporation must be signed with a trade name that is registered to be valid.

Virginia has enacted a series of registration requirements for companies that use a fictitious trade name. Every company that conducts business with a trade name must file a certificate that identifies it. VA. CODE § 59.1-69. No company may sue or be sued for any cause of action arising under its trade name unless and until it has satisfied the registration requirement. VA. CODE § 59.1-76. The mere failure to comply with the terms of Virginia Code § 59.1-69 does not render a cause of action illegal; it merely suspends the right to maintain it until the entity has complied with the law. See Tate v. Atlanta Oak Flooring Co., 179 Va. 365 (1942); Bryant Elec. Co. v. Joe Rainero Tile Co., 84 F.R.D. 120, 123 (W.D.Va.1979) (“The purpose of this section is to prevent fraud and to compel an individual or a corporation to disclose the name of the real owner of the business, in order that the person or corporation may sue in or be sued by the proper name.”).

Bottom Line: If you signed a non-compete contract with your employer, you should take a look at who signed the contract. Was is a valid business entity? Or a trade name? If the employer used a trade name, and that trade name is not properly registered, then you may have a defense to invalidate the non-compete – and avoid enforcement.