The Virginia Business Litigation Blog

June 10, 2014

Virginia’s Economic Loss Rule

A plaintiff filing a lawsuit usually wants to demand as much money as possible, both for the intimidation value and because in Virginia state court, you cannot recover damages in an amount greater than what you asked for in the complaint, even if the jury awards it. Plaintiffs are thus often tempted to include demands for punitive damages, which can add as much as $350,000 to a recovery. (Punitives are capped at $350,000 in Virginia). Punitive damages, however, are not available in contract disputes. This creates a situation where the plaintiff’s attorney often tries to craft the complaint in such a way as to make it appear that the defendant not only breached a contract but committed one or more related torts as well, such as fraud, tortious interference with contract, or business conspiracy. Enter the “economic loss rule.”

Designed to maintain the distinctions between contract claims and tort claims, the economic loss rule provides that where the plaintiff is a party to a contract and has suffered only disappointed economic expectations, such as damages for inadequate value, the cost to repair a defective product, or lost profits (as opposed to damage to persons or property), his remedy sounds in contract and not tort. In other words, if the plaintiff did not receive the benefit that he bargained for, his losses will be deemed merely economic and he will not be permitted to recover on a tort theory. An exception would apply if the contract itself was fraudulently induced.
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June 2, 2014

Motions to Reconsider – A Primer

by Lee E. Berlik

Suppose you lose a motion you thought you would almost certainly win. “The court got it wrong,” you tell yourself, perhaps even sincerely. Do you file a follow-up motion asking the court to change its mind? Or do you file it away in the “grounds for appeal” category? Motions for reconsideration are disfavored in every jurisdiction and you’ve already lost once–so the odds are against you–but if the court made a clear mistake of law, it can make sense to inform the court of the mistake. The permissible grounds for seeking reconsideration depend on whether you’re in federal court or state court.

The Federal Rules of Civil Procedure do not expressly allow motions for reconsideration, but district courts generally treat them as being filed under Rule 59 or 60. Still, reconsideration of a judgment is considered an extraordinary remedy which will be granted only sparingly. Rule 60(b) allows for “relief from a final judgment, order, or proceeding” in certain circumstances. Those circumstances include mistake, excusable neglect, newly discovered evidence, fraud by an opposing party, and “any other reason that justifies relief.” That catch-all is not as broad as it sounds, however. The Fourth Circuit has held that Rule 60(b) “does not authorize a motion merely for reconsideration of a legal issue” and that Rule 60 cannot be used to make a motion simply asking the court to change its mind. In federal courts sitting in Virginia, motions for reconsideration cannot be granted where the moving party simply seeks to have the court rethink what it has already thought through–regardless of whether its decision is right or wrong.
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May 12, 2014

No Tortious Interference Claim Without Actual Interference

by Lee E. Berlik

One of your top executives puts in his notice that he is leaving to join your fiercest competitor. Fortunately, he signed a noncompete that restricts him from doing just that. Your lawyer sends him a letter reminding him of his contractual obligations to your company, of course, but also recommends that you put the new employer on notice of the noncompete and threaten a tortious interference action against the company should it proceed to hire your employee. After all, he advises, the company has deeper pockets than the executive, and if the competitor hires him with knowledge of his contractual obligations to his existing employer, they are automatically on the hook for tortious interference. Right? Wrong, says the Fourth Circuit.

Similar facts were presented in Discovery Communications, LLC v. Computer Sciences Corporation. Discovery had an employment agreement with its chief accounting officer, Thomas Colan, which required Colan to remain with Discovery for a specific term. Discovery alleged that Colan breached his agreement by quitting his job prior to the expiration of the term to go work for CSC. Discovery alleged that it put CSC on notice of the employment agreement after CSC offered Colan employment but before the effective date of Colan’s resignation. Discovery argued that CSC tortiously interfered with the contract by hiring Colan after being put on notice of the employment agreement. The district court held that was not enough, and the Fourth Circuit agreed, affirming the dismissal of the case.
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April 9, 2014

West Virginia Bank Wins Dismissal of Contract Claim for Lack of Personal Jurisdiction

by Lee E. Berlik

Virginia’s long-arm statute extends personal jurisdiction to the fullest extent permitted by due process. A Virginia court may exercise specific jurisdiction over a defendant when the defendant has sufficient minimum contracts with Virginia such that the maintenance of the suit does not offend traditional notions of fair play and substantial justice. To establish “minimum contacts,” a plaintiff must show that the defendant purposefully directed activities at Virginia residents and that the litigation results from alleged injuries arising out of those activities. A court may exercise general jurisdiction over a defendant whose activities in Virginia have been continuous and systematic. A court with general jurisdiction over a defendant may adjudicate claims entirely distinct from the defendant’s in-state activities. To survive a motion to dismiss for lack of personal jurisdiction under Federal Rule of Civil Procedure Rule 12(b)(2), a plaintiff must demonstrate personal jurisdiction by a preponderance of the evidence. In Hunt v. Calhoun County Bank, the United States District Court for the Eastern District of Virginia analyzed whether it could exercise personal jurisdiction over non-residents in a contract dispute.

James L. Bennett (“Bennett”) is the president and a board member of Calhoun County Bank (the “Bank”), a West Virginia corporation. In June 2007, William H.G. Hunt, Sr. (“Hunt”), a Virginia resident, entered a contract with the Bank in which the Bank agreed to sell Hunt royalty interests for $40,000. Hunt sued the Bank and Bennett for breach of contract and fraud alleging that he transferred $40,000 to an agent of the Bank but that the Bank refused to transfer the royalty interests. He asserts that he suffered over $180,000 in damages as a result of the Bank’s breach and he seeks specific performance or compensatory damages. Hunt also alleges that Bennett fraudulently misrepresented his intention to transfer the royalty interests. The Bank and Bennett moved to dismiss for lack of personal jurisdiction and also for failure to state a claim upon which relief can be granted.
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March 26, 2014

To Establish Personal Jurisdiction, Minimum Contacts Must Be With Forum State, Not Just its Resident

by Lee E. Berlik

Due Process is satisfied when a non-resident has sufficient minimum contacts with a state such that exercise of jurisdiction over him does not offend traditional notions of fair play and substantial justice. The minimum contacts analysis focuses on the relationship between the defendant, the forum and the litigation, and the defendant’s conduct must create a substantial connection with the forum state. The relationship must arise out of contacts that defendant himself creates with the forum state, and the contact must be with the forum state itself rather than merely with persons who reside there. The United States Supreme Court recently addressed these concepts in Walden v. Fiore.

Anthony Walden was working as a DEA agent at the Atlanta airport when, after using a drug-sniffing dog to perform a sniff test, he seized almost $97,000 in cash that Nevada residents Gina Fiore and Keith Gipson claimed to have won gambling in San Juan. Walden later helped draft an affidavit to establish probable cause. Fiore and Gipson sued Walden in Nevada alleging violation of their Fourth Amendment rights. Specifically, they asserted that Walden violated their rights by (1) seizing the cash without probable cause; (2) keeping the money after concluding it did not come from drug-related activity; (3) drafting and forwarding a probable cause affidavit to support a forfeiture action while knowing the affidavit contained false statements; (4) willfully seeking forfeiture while withholding exculpatory information; and (5) withholding that exculpatory information from the United States Attorney’s Office.
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March 24, 2014

To Enjoin Violation of Non-Compete, Must Prove Legitimate Business Interest

by Lee E. Berlik

To obtain a preliminary injunction in Virginia, a plaintiff must show (1) that he is likely to succeed on the merits; (2) that he is likely to suffer irreparable harm in the absence of preliminary relief; (3) that the balance of equities tips in his favor; and (4) that an injunction is in the public interest. Real Truth About Obama v. Federal Election Com’n, 575 F.3d 342 (4th Cir. 2009). To enjoin an ex-employee from violating his non-compete agreement, getting past the first element requires the plaintiff to persuade the court that the noncompete is no broader than necessary to protect a legitimate business interest. Courts will examine the function, scope, duration, and overall reasonableness of the restriction when making this determination. An opinion issued earlier this month in Fairfax County Circuit Court demonstrates what a high burden this can be for a plaintiff seeking to prevent its employees from working for a competitor.

Wings, LLC, provides commercial and residential vinyl, fabric, and leather repair services in Northern Virginia, the District of Columbia, Southern Maryland, and West Virginia. Wings’ customers consist primarily of auto dealerships and collision centers who hire Wings to repair car interiors on site. Wings hired two gentlemen as vinyl, velour and leather repair technicians and required them to sign agreements containing non-solicitation and non-competition provisions that prohibited them from working as technicians anywhere in Virginia, Maryland, West Virginia, and any other state in which Wings transacted business, for a period of two years following the termination of employment. (See pages 2 and 3 of the opinion for the full text of the noncompete provision).
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March 17, 2014

Business Conspiracy Can Be Based On Tortious Interference

by Lee E. Berlik

Last September, I noted the case of Dunlap v. Cottman Transmissions Systems, LLC, in which the Fourth Circuit certified two questions to the Virginia Supreme Court seeking clarification with respect to Virginia’s business conspiracy statute and the applicable statute of limitations for tortious interference claims. The Virginia Supreme Court has now answered those questions, holding that causes of action for tortious interference with contract and tortious interference business expectancy qualify as the requisite “unlawful act” to proceed on a business conspiracy claim under Va. Code §§ 18.2-499 and -500 because both claims are predicated on an independent common law duty arising outside of contract. The court also held that claims for tortious interference are governed by § 8.01-243(B)’s five-year statute of limitations because such claims involve injury to property rights.

James Dunlap sued Cottman Transmission Systems, LLC, and Todd Leff for tortious interference with contract, tortious interference with business expectancy, and business conspiracy in violation of Virginia Code § 18.2-499 and § 18.2-500. The claims arose from Dunlap’s franchise agreements with AAMCO Transmissions, Inc. When a new owner of AAMCO (who already owned a controlling interest in Cottman) sought to convert Cottman Franchises into AAMCO franchises, Dunlap’s franchises were closed, and Dunlap claimed that the closings were due to a conspiracy between Cottman and others.
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March 10, 2014

White House Crasher’s Tortious Interference Claim Reinstated on Appeal

by Lee E. Berlik

Readers may remember Tareq and Michaele Salahi from the national attention they gained in November 2009 when they crashed a White House state dinner in honor of India’s Prime Minister Manmohan Singh or from their run on the reality show “The Real Housewives of D.C.” The Salahis are no stranger to litigation, having gone through a messy divorce in 2012. Most recently, the Supreme Court of Virginia heard Mr. Salahi’s appeal from a decision of the Circuit Court of Warren County regarding claims against the couple’s former agent, DD Entertainment, LLC.

According to Mr. Salahi, he and his then wife had a verbal agreement to appear on reality T.V. shows, talk programs and other media outlets to promote their entertainment partnership, “The Salahis,” and they were to use the profits from the partnership for their mutual benefit. DD Entertainment acted as the Salahis’ agent and procured additional projects for them. Mr. Salahi alleged that DD Entertainment was aware of the couple’s business partnership and used improper means to interfere with the partnership by encouraging Mrs. Salahi to leave the enterprise and become the adulterous mistress of Journey guitarist Neal Schon in violation of Virginia’s adultery statute, Virginia Code § 18.2-365.
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March 3, 2014

Age Bias Not Enough to Prevail Under ADEA

by Lee E. Berlik

The Age Discrimination in Employment Act (“ADEA”) prohibits an employer from discriminating against an employee on the basis of age. To prevail on an ADEA claim, it is not enough to show that a supervisor was biased against older employees. A successful plaintiff needs to show that she suffered an unfavorable employment action that she would not have suffered but for age discrimination. All illustrated by the recent case of Lavina D. Jernagin v. John M. McHugh, even if a supervisor refers to an employee as an “old-timer” and a “dinosaur,” if age was not the “but for” cause of an unfavorable employment action, the plaintiff will be unable to recover.

Lavina Jernagin began civilian employment with the United States Army in 1997, working as a Logistics Management Specialist with the Army’s Directorate of Logistics (DOL). In 2003 and 2005, Ms. Jernagin received annual performance ratings of “outstanding” or “excellent.” In 2007, Sergeant Travania Fair and Pamela Kent became Ms. Jernagin’s first and second line supervisors. Sergeant Fair considered Ms. Jernagin’s performance below average. In July 2007, as part of a branch reorganization, Lawrence Lawson and Mary Costa became Ms. Jernagin’s first and second line supervisors. At trial, witnesses testified that Ms. Costa had made several derogatory age-related statements toward Ms. Jernagin and her coworkers.
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February 24, 2014

Subpoena for Production of Hard Drives Deemed Unreasonable in Maryland

by Lee E. Berlik

Small businesses often find themselves the target of defamatory online reviews left by anonymous reviewers. In most cases, a subpoena can be issued to the website owner or Internet Service Provider to reveal the poster’s identity (or at least the I.P. address from which the post was written). See, for example, Yelp v. Hadeed Carpet Cleaning, in which the Virginia Court of Appeals held that Yelp could be compelled to comply with such a subpoena. Any such subpoena, however, cannot subject the recipient to undue burden. As illustrated by the recent Maryland case of In re: Subpoena of Daniel Drasin, an overreaching subpoena that places an undue burden on the recipient will be quashed.

Advanced Career Technologies, Inc. (“ACT”) sued John Does 1-10 in a Colorado federal court based on allegedly defamatory comments posted anonymously on the “Random Convergence” blog. In an attempt to discover the identity of the John Does, ACT served a third party subpoena on the blog’s administrator, Daniel Drasin, commanding him to produce any hard drives, servers and any other devices he used to administer the blog, and data stored online via website or application. Drasin moved to quash the subpoena pursuant to Federal Rule of Civil Procedure 45(c)(3) asserting that it was unreasonable, imposed an undue burden and was not likely to lead to relevant evidence.
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