Virginia Business Litigation Lawyer Blog

Fraud is a word that is thrown around a lot in everyday life. When pundits discuss the latest political or Wall Street scandal, the discussion often turns to the bad actors' "fraudulent" behavior. In ordinary, non-legal parlance, the word fraud can mean anything from merely bad intent to criminal behavior. Outside the courtroom, accusing someone of fraud is generally synonymous with calling that person a cheat or a swindler. Sometimes this casual definition of fraud will overlap with the legal definition, but more often it does not. The law does not consider every act of dishonesty to amount to actionable fraud. You may be owed compensation, however, if you have truly been defrauded in a legal sense.

Actionable fraud requires more than just broken promises or a breach of contract. The law looks more harshly upon fraud. It is considered a tort, for which punitive damages are available. (Punitive damages are not recoverable in actions for breach of contract). Because a successful fraud claim will usually result in a higher damages award than an ordinary contract claim, lawyers often try to convert a contract claim into a fraud claim through artful drafting of their client's complaint. Under Virginia law, a party alleging fraud must prove by clear and convincing evidence (1) a false representation, (2) of a present, material fact, (3) made intentionally and knowingly, (4) with intent to mislead, (5) reasonable reliance by the party misled, and (6) resulting damage to him. (See Thompson v. Bacon, 245 Va. 107, 111 (1993)). Let's take a closer look at these elements.

1. False Representation. This is the essence of a fraud claim. The defendant must have misrepresented the truth. If somebody steals your wallet but does not communicate with you, you have not been "defrauded" and cannot maintain a fraud action against that person. (You would have other remedies you could pursue, but the correct legal theory would not be fraud because no misrepresentation was made).

2. Present, Material Fact. The defendant must have made a misrepresentation about a present fact. A fact is present only if it could have been definitively determined at the time the misrepresentation was made. It is not a promise that something will or will not happen in the future. For example, if a car salesman promises a car will resell in 10 years for at least half of its new value, it is not a fraudulent statement even if it proves untrue. This is because, at the time the statement was made, its falsity could not be known. If, however, that same salesman promises that the car has anti-lock brakes when it, in fact, does not, then the statement can form the basis for fraud.

The misrepresented fact must also be material in some respect. For example, when a fraudulent statement is made in connection with a commercial transaction, materiality means that the fact must go to the essence of the deal itself (the thing being bargained for), and it must be of such importance that the deal hinges upon its being true. Going back to the car sale, the lie about the anti-lock brakes is material because it concerns the car, the thing the parties are bargaining for, and, because anti-lock brakes are an important safety device, if the car did not have them it is likely that a sale would not be made. If, however, the car salesman had lied by stating that he, like the potential buyer, was a former Boy Scout, then the misrepresentation would not be deemed material because the deal concerned the sale of a car and the lie had nothing whatsoever to do with the car.

3, 4. Intent. A fraud case arises when a defendant intentionally lies about something and does so for a reason. While a separate tort of "negligent misrepresentation" exists, the tort of fraud does not supply a cause of action against someone who mistakenly misrepresents a fact. The bad actor must have intentionally misrepresented the truth, with the further intent of inducing you to rely on the statement to your detriment.

5. Reasonable Reliance. You cannot sue someone for fraud, even if that person lied to you, if you didn't take any action in reliance on the statement. For example, if you don't believe the false statement, then you haven't really been defrauded. If you do believe the misrepresentation and rely on it, then your reliance must be reasonable. The law will only grant relief to those who act prudently and with ordinary care for their own well being. If common sense dictates that a quick phone call or Google search could verify the defendant's statement, but you decide unwisely to simple accept the person's statement as true without independent verification, a court may deny you any recovery. In the used-car scenario, your fraud claim against the salesman would likely be defeated if a prominently displayed sticker on the car read "NO ANTI-LOCK BRAKES" and you chose to ignore it.

6. Damages. Finally, the plaintiff must have suffered damages as a result of the false statement. The law strongly believes in the "no harm, no foul" concept.

The above criteria are the essential elements of a civil action for fraud. There is much more to it than is commonly understood. If you or your business have been wronged by another but your fact pattern does not fit within the legal definition of fraud, not all hope is lost. There are several paths to recovery in Virginia's courts. Meet with a Virginia lawyer to learn whether you are entitled to monetary or non-monetary relief under the law.

The discovery process, the primary fact-finding tool available to litigants, has always been contentious. Parties are loathe to hand over potentially embarrassing or incriminating documents, and the costs involved can be staggering. The information age has only served to make things more complicated. As the Northern District of Illinois observed in the 2002 case of Byers v. Illinois State Police, "[m]any informal messages that were previously relayed by telephone or at the water cooler are now sent via e-mail." Now that so many casual conversations are documented in e-mail and are, therefore, potentially subject to discovery, the discovery costs in the typical case have skyrocketed . Two recent United States District Court Cases, one out of Minnesota, Kay Beer Distributing, Inc. v. Energy Brands, Inc., and the other out of Florida, Kilpatrick v. Breg, Inc., provide a window into just how daunting electronic discovery can be, how judges are adapting traditional discovery rules to deal with these new problems, and how parties can do their part to avoid potential problems.

Information is generally discoverable if it is non-privileged and either directly relevant to a party's claim or reasonably calculated to lead to the discovery of evidence that is directly relevant. In the Kay Beer case, Kay alleged that an oral contract gave it the exclusive right of distribution for Energy Brands' products. Energy Brands claimed that by its understanding of the agreement, Kay's distribution rights were limited. This was essentially a run-of-the-mill contract dispute. What made the case unique, however, was the plaintiff's demand that the defendant hand over five DVDs containing nearly 13 gigabytes (between 650,000 and 975,000 pages) of e-mails and other documents. Each of the documents had been identified as referencing "Kay Beer", "Kay Distributing", or simply "Kay" by a keyword search of Energy Brands' archives. Kay Beer argued that the documents might contain discoverable evidence showing that Energy Brands originally shared Kay's understanding of their agreement.

The court's approach to the discovery contest was to weigh Kay Beer's interest in obtaining the documents against the burden Energy Brands would experience in turning them over. The court found that just because a document references a party does not support the conclusion that it contains relevant evidence. It further reasoned that in contract litigation, the only relevant statements are those made between the representatives of the companies involved; statements made by lower-level employees not empowered to speak for the company are not relevant to the official understanding of the contract. The court concluded that Kay Beer's interest in the documents was relatively minor.

Turning to an examination of Energy Brands' burden, the court noted that before the documents could be produced, Energy Brands would have to review each one for privilege and relevancy. The company estimated that the time involved in examining 650,000 to 975,000 would cost $120,000. The court found the cost unduly burdensome, and after weighing this burden against the slim possibility that relevant evidence might be discovered, held that Kay was not entitled to the requested discovery.

Kilpatrick differed slightly in fact but was consistent in outcome. Kilpatrick, the plaintiff, claimed that the pain pump manufactured by the defendant, Breg, and used in his October, 2004 shoulder surgery gave him a condition called chondrolysis. Kilpatrick's suit alleged that Breg knew of the risk of chondrolysis but marketed the product regardless of the dangers and without warning. Just weeks before trial, Kilpatrick demanded the production of nearly 6 years' worth of Breg's archived, intra-office e-mails. In depositions, several Breg employees testified inaccurately that they learned of the risk of chondrolysis in March of 2006, when documents obtained by Kilpatrick indicated clearly that the risk was known as early as December of 2005. Kilpatrick theorized the misstatements were part of a cover-up and sought extensive discovery to substantiate the theory.

Performing a balancing test similar to that in Kay Beer, the court first looked to the likelihood that relevant evidence would be discovered in the requested e-mails. The court acknowledged that the inaccurate testimony did raise some suspicions, but noted there was no evidence in the record indicated Breg knew of the chondrolysis risk prior to December 2005. The court found the misstatements were likely honest mistakes, reasoning that the depositions occurred nearly three years after the events in question and that the deponents were only off by about three months in their statements.

The court then took into account the significant burden such extensive, last-minute discovery would place on Breg. It denied the requested discovery in light of this burden, but granted Kilpatrick a limited right to further explore the Breg employees' misstatements by allowing discovery into a sampling of the archived e-mails, at Kilpatrick's expense.

This balanced approach to electronic discovery shows that seemingly antiquated discovery rules are still applicable in this new age. While some flexibility is required, a little common sense can make a complicated scenario a little more manageable. That being understood, a party, when making discovery requests, would be wise to be mindful of the opposing party's position and attempt to curb any burden the request might impose. Such a measured approach can help tip the balancing test in your favor.

In Virginia, an action for trespass is no longer the only remedy a landowner has against a trespasser. A Norfolk judge recently held that a landowner may sue for rent even in the absence of an express or implied lease agreement. A duty to pay rent can arise under the doctrine known as quantum meruit.

In the case of City of Norfolk v. Muladhara, LLC, Norfolk managed several lots of prime commercial real estate on which the city collected rents. The Defendant, Muladhara, began conducting business on one of the lots without ever receiving permission from Norfolk. Upon discovering the trespasser, Norfolk informed Muladhara that the city managed the land and collected rent for its use. This conversation prompted the Defendant to pay the back rent the city claimed was due. However, Muladhara continued to occupy the space without any further payment.

The court held that Norfolk may base its claim for recovery on two distinct theories. First, the court found that the conversation between the city and Muladhara that led to the payment of back rent could form the basis of an implied contract. Judge Hall clearly laid out the three elements of an implied contract: offer, acceptance, and a meeting of the minds. Simply put, the city offered to overlook the previous trespass if Muladhara paid back rent, and Muladhara accepted the offer. Even though this agreement only covered Muladhara's past occupation of the parcel, the Defendant's payment of back rent constituted a meeting of the minds as to the rental value of the land. Should Muladhara continue to occupy the land, the meeting of the minds forms the content of the implied contract. The city, therefore, is allowed to sue for payment of rent due, and the amount will be determined by looking to the parties' prior agreement.

Implied contract is a fairly common vehicle for the collection of rent when no formal agreement exists. The court, however, added a new tool to the landowner's toolbox: quantum meruit, or quasi-contract. This differs from an implied contract in that a meeting of the minds (the basic terms of the contract) is not necessary. All that is required is that the city reasonably expected to be compensated for the use of its land, and that the trespasser, aware of the city's reasonable expectation, still made use of the land. Historically, quantum meruit only applied to a plaintiff's services or materials consumed by the defendant, not to a defendant's use of real property. But, as Judge Hall pointed out, the Virginia Supreme Court has defined quantum meruit to apply whenever a defendant "acquires property of another," and real property need not be excluded from this definition. Consequently, no established precedent prevents a plaintiff from pursuing the reasonable rental value of the property even if no agreement was ever reached concerning the value of the property.

The Virginia Electric and Power Company (VEPCO) and the Trans-Allegheny Interstate Line Company (TrAILCo) plan to build a 265-mile, 500-kilovolt transmission line between Loudoun County, Virginia, and Washington County, Pennsylvania. They claim that due to rapid growth in the Washington, DC metro area, energy consumption along the Potomac will likely continue to grow to levels unsupportable by the current infrastructure, and the anticipated blackouts and line failures would put them in violation of federal regulations. The State Corporation Commission approved the power line, and after a challenge by the Piedmont Environmental Council, the Supervisors of Fauquier County, Prince William County, and Culpeper County, and other interested groups, the Supreme Court upheld the construction permits.

In the case of Piedmont v. VEPCO, the court shed some light on the role of Virginia's State Corporation Commission in developing an effective and efficient system for energy production and distribution. First, before new lines of that size can be constructed, the North American Electric Reliability Corporation (NERC) must find that they are needed to avoid regulatory violations. Second, regardless of federal approval, because the proposed placement of the lines was in Virginia, approval must be obtained from the State Corporation Commission, to whom regulatory authority has been delegated by the Virginia legislature.

The plaintiffs argued, and the court acknowledged, that the federal approval process heavily favors new transmission line construction over other possible solutions such as demand-side regulation, new power generation, and conservation efforts. The Commission, on the other hand, is required by the Commonwealth to consider the viability of these other possible solutions. Therefore, the plaintiffs claimed, the Commission's reliance on the NERC's findings was flawed because the federal process is biased against alternative solutions. The plaintiffs demanded that the Commission independently investigate alternative solutions and require them to be incorporated into their interstate operations.

The Virginia Supreme Court, while agreeing with the plaintiffs in spirit, affirmed the SCC's approval. Justice Koontz noted that the Commission's duty to independently investigate all applications for new transmission line construction does not prevent the Commission from considering data that may be biased by a federal regulatory process that seeks different goals. Further, the Court held that even if alternative solutions were feasible, a state regulatory agency lacks the authority to require that action be taken on an interstate scale. Finally, the Court held that the Commission's role is not to dictate interstate policy but to determine if a proposal will serve the anticipated needs of Virginia residents. The Commission's decision was upheld because it critically reviewed all arguments and data, and its decision was reasonably based on the facts and current law.

The First Amendment protects a public employee from retaliation by his or her employer when the employee speaks out on a matter of public concern. But before discharged government employees go rushing into court to sue the government entity for which they worked, they would be well advised to take advantage of any and all internal grievance processes offered by the government. A recent case decided by Judge Samuel G. Wilson of the Western District of Virginia demonstrates the potential perils of skipping this important step.

In Stickley v. Sutherly, the court laid out current jurisprudence as it applies to a public employer's liability under 42 U.S.C. § 1983. (Section 1983 is a federal statute that creates liability for any local government or government officials who violate a person's clearly-established constitutional rights, such as freedom of speech). Stickley was a police lieutenant in Strasburg, Virginia. Sutherly, the chief of police, demoted Stickley and another officer for violations of department policy. Shortly thereafter, the Northern Virginia Daily (a local newspaper) published an article criticizing Sutherly's personnel practices. Prompted by the article, a member of Strasburg's Town Council asked Stickley about his demotion, and Stickley expressed his dissatisfaction about it. After the councilman confronted Sutherly about Stickley's demotion, Sutherly fired Stickley for insubordination.

Stickley, instead of pursuing the town's official grievance process, filed suit against Sutherly and the Town of Strasburg. Stickley argued that his firing was in retaliation for his exercise of his First Amendment right to speak freely about matters of public concern; namely, the personnel practices of the police department.

With regard to Stickley's complaint against the town of Strasburg, Judge Wilson explained that a municipality may be liable under Section 1983 if the violation of a constitutional right occurred as a direct result of official municipal policy or custom, but that qualified immunity would shield a municipality from such charges if a terminated employee fails to exhaust local appeal procedures available to him. Because Sutherly's decision could have been overturned through an internal appeal process, Sutherly was not a final policy-maker.

Ultimately, because no source of liability under § 1983 could be found against either Sutherly or the Town of Strasburg, the Court dismissed Stickley's suit. The lesson to be learned here is be sure to exhaust all avenues of redress provided by your employer before looking to the courts to protect your rights, especially if you work (or worked) for the government.