Virginia Business Litigation Lawyer Blog

Too often, disgruntled departing employees will abuse their employer's computer system on their way out, snooping into coworkers' email accounts, erasing important files, downloading trade secrets or other confidential commercial information, or intentionally infecting computers with viruses. In recent years, the Computer Fraud and Abuse Act (CFAA) has become an important weapon in an employer's arsenal for combating such computer crimes. Civil remedies are available under the CFAA for damage to any "protected computer," which includes any "computer used in interstate or foreign commerce or communication." However, a Virginia court recently clarified that the CFAA will not provide a remedy absent an actual "loss" as defined by the statute.

In Global Policy Partners, LLC, v. Yessin, a plaintiff brought claims against her husband and business partner under the CFAA and the Stored Communications Act (SCA), claiming that he had accessed her work email account in order to review her confidential communications with her divorce lawyer. The court rejected the husband's initial attempts to dismiss the case on the ground that his access to his wife's email was authorized in that he was a co-manager of the couple's business. The court reasoned that because there was no legitimate business reason for the snooping, the access was unauthorized. At the summary judgment stage, however, the court granted summary judgment in his favor because the wife did not introduce sufficient evidence to show she had incurred a $5,000 "loss."

To prevail on a claim brought under the CFAA, a plaintiff must demonstrate that the alleged violation "caused ... loss ... aggregating at least $5,000 in value." 18 U.S.C. Section 1030(c)(4)(A)(i). The CFAA specifically defines four categories of potential loss: "[i] the cost of responding to an offense, [ii] [costs of] conducting a damage assessment, and [iii] [costs of] restoring the data, program, system, or information to its condition prior to the offense, and [iv] any revenue lost, cost incurred, or other consequential damages incurred because of the interruption of service." 18 U.S.C. § 1030(e)(11). According to the Fourth Circuit Court of Appeals, this list "plainly contemplates ... costs incurred as part of the response to a CFAA violation, including the investigation of an offense." A.V. ex rel. Vanderhye v. iParadigms, LLC, 562 F.3d 630, 646 (4th Cir. 2009).

Just because an unauthorized person reads an e-mail, however, does not necessarily mean that he is liable under the CFAA. In order to recover damages under the CFAA, a plaintiff must establish three main facts: (1) A violation of the plaintiff's computer system; (2) costs incurred by the plaintiff due to the violation, and (3) those costs must aggregate to $5,000 or more. 18 U.S.C. § 1030. The court indicated that it would view critically a plaintiff's post hoc claims that a violation "caused" costs to be incurred simply because money was spent subsequent to the violations. Furthermore, 18 U.S.C. § 1030(e)(11) only compensates for "reasonable" costs, so a plaintiff must establish, not only that the defendant's violation caused the plaintiff to suffer costs but that those costs were a reasonably foreseeable result of the violation. The court held that even if a defendant breaks into a plaintiff's computer system and reads email without authority, that would not give the plaintiff a blank check to perform system updates that were not reasonably necessary to restore and re-secure the system.

If a victim of computer fraud can establish a loss, however, the CFAA offers a potentially powerful deterrent in the form of a federal cause of action.

When a couple of home buyers in Loudoun County filed a lawsuit against Ritz-Carlton and a Loudoun developer, they chose Loudoun County Circuit Court as the forum. The immediate response of the defendants' lawyers was to remove the case to federal court, where summary judgment is much easier to obtain than in Virginia state court. The home buyers, likely worried about having their case dismissed at an early stage by a federal judge, sought to remand the case back to Loudoun County, pointing to a forum-selection clause which provided: "In connection with any litigation between Buyer and Seller arising out of this Agreement...[t]he sole venue for any litigation shall be Loudoun County, Virginia." The court refused to send the case back to state court. All of that procedural maneuvering meant very little in the end, however, as the court recently denied the defendants' motion for summary judgment and allowed the case to go forward.

In Nahigian v. Ritz-Carlton, LLC, the home buyers (the Nahigians) claim the defendants fraudulently induced them into buying property by making multiple misrepresentations about the nature and extent of the involvement of the prestigious Ritz-Carlton company in the management of the property and its adjoining private golf course. The Nahigians allege they were duped into buying an expensive property at Creighton Farms near Leesburg by various statements by sales agents referring to the development as a "Ritz-Carlton community" and part of the "Ritz-Carlton Life." As it turned out, they allege, Ritz-Carlton was merely a temporary manager of the golf club and never had any long-term commitment to the neighborhood. In March of 2009, Ritz-Carlton announced they were pulling out of the development.

The Nahigians sued for fraud and related claims, and the defendants moved for dismissal, arguing that the plaintiffs had failed to plead fraud with sufficient particularity, and that they failed to allege all the requisite elements of a fraud claim. The court disagreed and denied the motions to dismiss.

The court laid out the basic elements of fraud as: "(1) a false representation, (2) of a material fact, (3) made intentionally and knowingly, (4) with intent to mislead, (5) reliance by the party misled, and (6) resulting damage to the party misled." Under Federal Rule of Civil Procedure 9(b), each element of fraud must be plead with the required degree of specificity identifying "at a minimum...the time, place, and contents of the false representations, as well as the identity of the person making the misrepresentation."

The plaintiffs had alleged only that the misrepresentations were made by "Juno/Ritz representatives." However, the court found that Rule 9(b)'s specificity requirement does not require that the full name of the person making the statement be identified. The court found the allegations of the Complaint sufficient because the defendants had been made amply aware of the "particular circumstances for which they will have to prepare a defense." The court also rejected the defendants' argument that the reliance element was lacking because the contract specifically disclaimed reliance on outside statements. The court reasoned that the terms of a contract fraudulently induced cannot preclude a Plaintiff from bringing suit for that fraud.

Even in Virginia, which recently placed first in a ranking of the "Best States for Business" by Forbes.com, businesses often fail. Particularly in small companies, relationships among the owners sour and partnership disputes arise. Here in Fairfax County, where my practice is located, it is not uncommon for disgruntled partners to attempt to withdraw large sums from corporate bank accounts prior to dissolution or to attempt to block other owners' access to the company's accounts. Banks need to be careful not to get caught in the crossfire by inadvertently facilitating a wrongful cash grab by one of the business owners. Fortunately, as illustrated by a recent decision by Fairfax Judge Bellows, Virginia's adoption of the Uniform Commercial Code provides some valuable protection to banks.

Khan v. Alliance Bank (Fairfax Circuit Court, Dec. 22, 2009) involved a dispute between two owners of Advantage Title and Escrow, LLC, Khan and Kazmi. Both were authorized signatories on the company's account held with Alliance Bank. After the two had a falling out, Kazmi instructed the bank to remove Khan as a signatory. A few days later, Khan wrote a $35,000 check against Advantage Title's account in exchange for a cashier's check for that amount. Upon learning of the transaction, Kazmi sent an "Affidavit of Unauthorized Transaction" to Alliance Bank. This document alleged, under oath, that Khan obtained the cashier's check through fraud as Khan was (according to Kazmi) not authorized to withdraw funds from the company's account. In reliance on that affidavit, Alliance Bank canceled the cashier's check and credited $35,000 back to the Advantage account.

Normally, putting a stop-payment order on a check is not a big deal. But cashier's checks, which are governed by the UCC, are different. Unlike personal checks, cashier's checks carry a promise of the bank to the holder. For that reason Khan sued Alliance Bank, claiming that the promise was unconditional and that, by terminating payment, Alliance was liable to Khan for breach of contract and conversion.

The court disagreed and threw out the case. Under the applicable provisions of the UCC, a bank will only be liable for canceling a cashier's check if the bank acted "wrongfully." A bank is justified in refusing to honor a cashier's check if the bank "asserts a claim or defense of the bank that it has reasonable grounds to believe is available against the person entitled to enforce the instrument" or the bank "has a reasonable doubt whether the person demanding payment is the person entitled to enforce the instrument." See Va. Code § 8.3A-411(c).

In this case, Kazmi's affidavit gave Alliance Bank all the protection it needed. The affidavit (like all affidavits) was made under oath, and its allegations were reasonable on their face. Therefore, the court found, the sworn statement provided the bank with reasonable grounds to believe the check was procured by fraud, which is a defense to the negotiability of the check. Alliance Bank did not act "wrongfully" within the meaning of the UCC, so the court dismissed the case.

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.

To file a lawsuit in Virginia's state or federal courts against a non-resident of Virginia or an out-of-state corporation, it is necessary to establish "personal jurisdiction" over the defendant. A court has no power over parties to a lawsuit absent such jurisdiction. Personal jurisdiction will exist only if (1) Virginia's "long-arm" statute authorizes it; and (2) the defendant has certain "minimum contacts" with Virginia "such that the maintenance of the suit does not offend traditional notions of fair play and substantial justice," which is required by constitutional due process. In a recent case from the Eastern District of Virginia, Judge Trenga held that a passive website not purposefully targeted at Virginians was not sufficient to create a basis for personal jurisdiction and he dismissed the case.

The case, which contains counts for actual fraud, constructive fraud, negligence, and breach of fiduciary duty, was filed by Dr. Olimpia Rosario, a Virginia psychiatrist, against professional psychic Jeffrey Wands, who operates Psychic Eye Media in New York. Dr. Rosario became impressed with Mr. Wands several years ago when he correctly predicted that she would obtain a residency in a New York-based hospital. Ever since, Dr. Rosario has sought counseling and guidance from Mr. Wands on a wide range of issues, including spiritual issues and substance abuse problems, despite the fact he held no degree or license to practice any type of healing art, medicine, counseling, or social work in either Virginia or New York.

Eventually, Mr. Wands became concerned about certain of Dr. Rosario's behavior and reported it to both the New York Police Department and the Virginia Board of Medicine. Dr. Rosario sued, claiming Mr. Wands caused her condition to worsen and denying abuse of prescription drugs. Mr. Wands, a resident of New York, moved to dismiss the case for lack of personal jurisdiction.

Dr. Rosario's main argument in support of jurisdiction was that Mr. Wands maintained a website accessible to residents of Virginia (as well as everyone else in the world having an Internet connection) and touting a national following. The court disagreed that such a website was sufficient to establish a "presence" in Virginia sufficient to form a basis for personal jurisdiction. Citing a Fourth Circuit case, the court noted that "a person who simply places information on the Internet does not subject himself to jurisdiction in each State into which the electronic signal is transmitted." There were no allegations that Mr. Wands' website was interactive or that users could conduct transactions through the website. The court also noted the absence of any facts demonstrating that Mr. Wands was intentionally targeting citizens of Virginia. For these reasons, the court found general jurisdiction lacking.

Specific jurisdiction was also found to be absent. This more limited type of jurisdiction, the court noted, exists when a defendant "purposefully directed his activities at the residents of the forum" and the plaintiff's causes of action "arise out of those activities" (citing Burger King Corp. v. Rudzewicz, 471 U.S. 462, 472 (1985)). In Virginia, courts must consider the following in determining whether specific jurisdiction should be asserted: "(1) the extent to which the defendant purposefully availed itself of the privilege of conducting activities in the State; (2) whether the plaintiffs' claims arise out of those activities directed at the State; and (3) whether the exercise of personal jurisdiction would be constitutionally reasonable" (citing Consulting Eng'rs Corp. v. Geometric, Ltd., 561 F.3d 273, 278 (4th Cir. 2009)). Dr. Rosario argued that Mr. Wands purposefully directed his activities at Virginia when, for seven years, he and Dr. Rosario participated in quarterly telephone discussions. The court found such minimal contact insufficient, especially since Mr. Wands never physically came to Virginia for any of those discussions.

D.C. has brought an action in D.C. Superior Court against several computer-leasing companies, charging them with deceiving numerous church congregations into paying hundreds of thousands of dollars for unneeded or broken computer equipment. 

In the lawsuit, filed last Wednesday, the city claims that United Leasing Associates of America, Television Broadcasting Online, and others hatched a plan to offer "free" computer equipment to hundreds of area church congregations, but then trick them into signing papers binding them to long-term lease payments of $50,000 or more.  The equipment, marketed by the defendants as "information kiosks" designed to help congregations communicate with members of the community and post job listings, consisted of ordinary desktop computers disguised in mahogany casing.  Those congregations who refused to pay the exorbitant monthly fees suffered harm to their credit rating.

Businesses need to conduct their operations in good faith and deal fairly with their customers.  An action for fraud and deceit arises when a defendant makes (1) a false representation (2) in reference to material fact, (3) made with knowledge of its falsity, (4) with the intent to deceive, which (5) causes the subject of the fraud to take action in reliance upon the representation.  See Atraqchi v. GUMC Unified Billing Servs., 788 A.2d 559, 563 (D.C. 2002).  Stated more simply, you commit fraud if you lie to someone for the purpose of tricking them into doing something, and the person falls for it.  Virginia has similar laws prohibiting fraudulent business transactions. 

In this case, according to the Complaint, the defendants tricked the congregations into signing the leases by assuring them (falsely) that all lease payments would be paid by advertisers and sponsors, and that the congregations would have "no financial liability" whatsoever.  (Note: never rely on others (except your lawyer) to tell you what a document says, especially a contract that you are signing.  When you sign a contract, you become bound by what the words actually say, not by what you assume they say based on the representations of others).

The lawsuit seeks an order that the defendants immediately stop the unlawful activity, that the fraudulent contracts be undone, and that each defendant pay attorney fees and civil penalties of up to $1,000 for each violation of the D.C. Consumer Protection Procedures Act (found at D.C. Code §§ 28-3901 through 28-3911 (2001)).