Virginia Business Litigation Lawyer Blog

A shareholder acting on behalf of a corporation may bring a "derivative suit" against corporate directors and management for fraud, mismanagement, self-dealing or dishonesty. Before bringing such a suit, the shareholder must make a written demand that clearly identifies the alleged wrong and demands the corporation take action to redress it. A court will examine a complaint and a written demand to insure that they are sufficiently connected. A Norfolk Circuit Court recently addressed the sufficiency of a demand letter in Williams v. Stevens and Dornemann.

Alex Williams, Eric Stevens and Karl Dornemann were the sole shareholders of Dogsbollocks, Inc., a corporation that managed restaurants. Williams alleged that Stevens and Dornemann (the defendants) prevented him from involvement with the corporation and refused to give him pertinent corporate information. He also alleged that the defendants developed a restaurant independently. Williams' attorney sent two letters to the defendants. The first letter demanded access to the corporation's financial records and requested the name of the corporation's accounting firm, and the second letter accused defendants of ignoring the first letter and gave the defendants notice that Williams was requesting financial records pursuant to Virginia Code § 13.1-774. Williams later filed a derivative suit. In response to an Amended Complaint, defendants filed a plea in bar, arguing that Williams' suit was barred because he failed to make a written demand before bringing the derivative action. Williams contended that his two letters fulfilled the demand requirement.

The court considered what components a document must contain in order to satisfy the written demand requirement. No Virginia court had previously addressed the question, so the court looked to rules established in North Carolina, where the demand requirement is almost identical to Virginia's. Neither state's statutes specify the form of the demand other than requiring it to be written. North Carolina courts have held that the document should set forth the facts of share ownership and describe the remedy demanded with enough specificity to allow the corporation to correct the problem or bring a lawsuit on its own behalf. See e.g., LeCann v. CHL II, LLC, 2011 NCBC 29 (2011). In North Carolina, emails, sworn affidavits and letters have satisfied the written demand requirement where they identified the allegedly wrongful acts and demanded redress in a clear and particular manner sufficient to put the corporation on notice as to the substance of the shareholder's complaint.

The Virginia court extracted three principles from the North Carolina case law and adopted them in applying the Virginia statute: (1) The statutory demand requirement serves to put the corporation on notice of a shareholder's objection to an alleged wrong and allows the corporation an opportunity to redress the wrong; (2) a plaintiff may not bring a derivative action seeking redress of wrongs not first addressed in a written demand, as in such a situation, the corporation would not have sufficient notice and opportunity to act first on its own behalf; and (3) a written demand must be sufficiently clear and particular to give the corporation reasonable notice of the alleged wrongs but it need not discuss any specific legal theory nor every relevant fact.

Applying these principles, the court considered (1) whether the document at issue identified an alleged wrong; (2) whether the document demanded action on the part of the corporation to redress the alleged wrong; (3) whether the demands in the document were clear and particular enough to have put the corporation on notice as to the substance of the alleged wrong and allow the corporation to assess its rights and obligations with regard to the alleged wrong; and (4) whether the alleged wrong and the claims asserted in the plaintiff's complaint were sufficiently connected.

In the Williams case, the two letters identified several alleged wrongs such as failure to provide financial information and file tax returns and breach of fiduciary duty. Williams also demanded that these alleged wrongs be redressed. The court found that the demands were clear and particular enough to put Dogsbollocks on notice regarding the substance of the alleged wrongs. Williams' demands gave Dogsbollocks the opportunity to assess its rights and obligations and take action.

The court then examined whether any allegation in the complaint related to a wrong not sufficiently addressed in Williams' written demands. The wrongs that Williams alleged in his written demands all related to the corporation's financial records and the corporation's failure to give Williams access to those records. The complaint alleged breach of fiduciary duty based on these facts, but it also alleged breach of fiduciary duty based on a usurpation of corporate opportunities; i.e., that defendants had developed a restaurant independently. Williams' written demands did not mention usurpation of corporation opportunity. The court held that Williams had not sufficiently demanded redress of the alleged usurpation of corporate opportunity and therefore was not permitted to seek redress of any alleged usurpation in his lawsuit. The court sustained the defendants' plea in bar with regard to Williams' allegation of usurpation and otherwise overruled the plea in bar.

When Cecil Addison was passed over for promotion, he sued Volvo Trucks North America and Ivan Mitchell in the Western District of Virginia for breach of contract and discrimination. Volvo Trucks had a contract agreement with the United Auto Workers Union. Addison alleged the defendants changed the contract's job requirements without Union approval so they could put a white male employee in the position for which Addison, a black male, was the most senior qualified employee. He also claimed that, when he complained, they retaliated by terminating his employment. Addison sought $25 million for the career he said they destroyed, and an additional $25 million for pain and suffering. But this wasn't the first time he filed a lawsuit like this.

Addison made substantially the same allegations, plus others, in an earlier suit he filed in the same court in 2009. In that case, he didn't communicate with the defendants for over five months, failed to appear at his own scheduled deposition and, when the magistrate judge ordered him to show cause why the case shouldn't be dismissed, failed to respond. So that case was dismissed.

The principle of res judicata (Latin for "a thing adjudicated") bars a party from filing a new lawsuit if that party has filed a prior suit on the same claim or on claims arising from the same transactions that could have been raised in that prior suit. The Supreme Court has acknowledged the important reasons for this doctrine, which include (1) preventing the cost and vexation of multiple lawsuits, (2) conserving judicial resources, and (3) preventing inconsistent judicial decisions so parties can rely on adjudications.

Res judicata bars a federal case where (1) there has been a final judgment on the merits in a prior suit, (2) the same cause of action for the same facts was raised in both suits, and (3) the same parties or their privies were parties in both suits.

Addison's first case was dismissed for failure to comply with a court order. But was it a dismissal on the merits? Subject to a few exceptions, which didn't apply here, Rule 41(b) of the Federal Rules of Civil Procedure deems involuntary dismissals adjudications on the merits. The order dismissing the first action didn't state whether the dismissal was with or without prejudice. But in the absence of a clear statement in the order, under Rule 41(b), the dismissal is presumed to have been made "upon the merits."

Res judicata bars both the claims raised and those arising out of the same transaction or occurrence that could have been raised. The language and claims in the two complaints were virtually identical. Though the new complaint clarified a breach of contract claim, the first claim involved the same contract and Addison could have raised the breach claim in the first case.

Both cases also involved identical parties. Thus, Judge James C. Turk concluded that the two cases were essentially identical, satisfying all three elements of res judicata, and dismissed Addison's second complaint.

Judge Turk also dismissed the case against Volvo Trucks. Rule 4(m) of the Federal Rules of Civil Procedure requires defendants to be served within 120 days after the complaint is filed. Though the court ordered Addison to serve Volvo Trucks and gave him extra time to do so, Volvo was never served. Judge Turk rejected Addison's argument that serving Mitchell at his workplace constituted 'serving' the company as well. Dismissal under Rule 4(m) is without prejudice, but Judge Turk made a point of noting that any attempt to refile that claim would be barred by res judicata.

If a literal reading of 28 U.S.C. 1441 (the forum defendant rule) would lead to an absurd result, then it should not be interpreted that way, according to a recent decision of Judge Morgan of the Norfolk Division of the Eastern District of Virginia.

Eddie Campbell sued his former employer, Hampton Roads Bankshares, Inc., and related entities in the Circuit Court for the City of Norfolk for breach of contract. Mr. Campbell is a citizen of North Carolina. The bank defendants, who are citizens of Virginia, removed the action to federal court prior to being served with process. Mr. Campbell moved to remand the case back to Norfolk state court, and the court granted the motion.

Federal law permits a defendant to remove a state court action to federal court only if the plaintiff could have originally filed that action in federal court. The defendants claimed federal jurisdiction was proper because the case raised a federal question under 18 U.S.C. § 1331 and claimed diversity jurisdiction under 18 U.S.C. § 1332.

Federal question jurisdiction applies to "all civil actions arising under the Constitution, laws, or treaties of the United States." Courts look to the well pleaded complaint to see if it presents a federal question. Even where a federal cause of action isn't expressly pled, a federal question exists if federal law creates the cause of action or the plaintiff's right to relief depends on the resolution of a substantial question of federal law.

The defendants argued that federal "golden parachute rules" prohibited paying Campbell the severance package at the heart of Campbell's claim. But Campbell had pled a state law breach of contract claim. The defendants' argument centered on a defense they would assert. A defense cannot be a basis for removal.

For diversity jurisdiction, a federal district court has original jurisdiction, under 28 U.S.C. § 1332(a)(1), of "all civil actions where the matter in controversy exceeds the sum or value of $75,000 and is between citizens of different states." But under 28 U.S.C. § 1441(b)(2), an action removable on this basis can't be removed "if any of the parties in interest properly joined and served as defendants is a citizen of the State in which such action is brought."

The defendants are citizens of the State in which the action was brought. But they argued that, technically, they hadn't been served with the complaint and were not "properly joined and served" so the barrier to removal couldn't apply. Campbell argued that, though this was the literal reading of the statute, it would be absurd to allow forum defendants to remove an otherwise unremovable action to federal court solely because they hadn't yet been served.

Generally, courts adhere to a statute's plain unambiguous language. Some courts have read the statute literally, only prohibiting removal where at least one party in interest, properly joined and served as a defendant, is a citizen of the forum state. These cases are not remanded if the forum defendant hasn't been served. But some courts hold that, where strict adherence to a literal reading would create an absurd result that is "so gross as to shock the general common sense," allowing removal runs counter to the purpose and intent behind § 1441(b)(2) and the cases should be remanded.

Judge Morgan found it would be an absurd result if a forum defendant could seek federal jurisdiction through removal while, at the same time, arguing that it can't be barred from removal because it hadn't been served so it wasn't a proper party to the action. He construed "served" to mean "actual notice and involvement in the case," and found these defendants had been served in that sense of the word. They obviously knew about the case and had become involved by seeking removal.

Because the defendants were citizens of Virginia, removal was improper, so the court remanded the case.

Spoliation of evidence can result not only in an adverse inference instruction to the jury, but in an award of attorneys fees and expenses incurred in proving the spoliation. As demonstrated by the contentious trade secret litigation between E.I. DuPont de Nemours and Company and Kolon Industries, Inc., those fees and expenses can be substantial.

Several months ago, the court found that several key Kolon employees had intentionally deleted relevant emails, hampering DuPont's ability to present and prove its case. As a result, the court granted DuPont's request to instruct the jury that it could assume the destroyed evidence contained information damaging to Kolon. DuPont won the case, then sought an award of fees and expenses incurred in connection with proving the spoliation.

The court noted that DuPont had engaged in a "long, and oftentimes tortuous, journey" to discover emails Kolon had deleted and documents it had destroyed. Complicating DuPont's burden was what the court called Kolon's "overall obfuscatory conduct." Still, DuPont had to prove the reasonableness of the fees requested.

Under the lodestar approach, the court multiplies the number of hours attorneys reasonably spent on a matter times a reasonable hourly fee which is based on prevailing rates in the relevant community. Only fees incurred for issues on which DuPont prevailed could be included.

DuPont sought $4,497,047.50 in attorneys' fees and expenses and the court granted all of it, finding that amount to be reasonable under the circumstances. Kolon did not object to the rates DuPont applied but objected to the 6,917 hours of attorney service claimed. DuPont had already excluded some fees it had incurred, worth some $390,000 or about twenty percent of the total claimed.

Kolon claimed DuPont had been "recklessly inefficient" in investigating the spoliation and argued that the fees should be reduced by seventy five percent. The court rejected this. First, the search was based on information taken from screen shots of Kolon computers and was reasonable given the need to narrow the scope of the documents that must be reviewed and the risk of omitting relevant evidence.

Second, though DuPont had spent considerable time developing the spoliation issue before alerting Kolon's counsel to the problem, litigants must exercise due diligence before making a spoliation charge and telling Kolon earlier would not have reduced the time spent on the issue. Kolon knew of the spoliation earlier and concealed it, the court found, then evaded discovery requests relating to it, so the court would not conclude the company would have cooperated had it been told.

Third, though DuPont used only one document from its spoliation efforts, that was not surprising because many critical documents were never recovered. So DuPont had to use an adverse inference instead.

The court also rejected Kolon's assertion that the number of hours spent on the spoliation issue was excessive. The hours were reasonable because spoliation was central to DuPont's vital need to protect its trade secrets, Kolon's efforts to hide the spoliation amplified the hours needed, those who spoliated evidence were Kolon employees centrally involved with Kolon's para-aramid process and the misappropriation of trade secrets, and DuPont had proof showing that the deleted information had probative value in proving that misappropriation.

Kolon did not object to amounts Dupont sought for investigating and litigating the spoliation, computer forensics analysis services and expert testimony, contract attorneys to review and analyze the documents, and for translations. Based on DuPont's affidavits, the court awarded $2,068,313.60 for these costs.

If you're going to file a lawsuit against someone, you'd better explain the basis for it. A complaint doesn't need to include much detail, but it must at least allege facts showing that you've been wronged and that you are entitled to a remedy of some sort. In federal court, you must also demonstrate a basis to invoke the court's jurisdiction. Failure to do so can result in monetary sanctions.

Take the case of Michael Harris v. Jeffrey Seto, brought in the Harrisonburg Division of the Western District of Virginia. Michael F. Harris and his company, M. F. Harris Research, Inc., filed a complaint against Jeffrey K. Seto, Matthew S. Johnson, and others, alleging fraud, breach of fiduciary duty, and corporate diversion. Harris stated in conclusory fashion that Seto and others defrauded him by scheming to take over his company and steal confidential information and business opportunities.

The complaint consisted of a two-page handwritten document. (Hint: that's not the best way to make a good first impression with the judges). The complaint alleged nine counts but did not set forth the factual basis supporting them. According to the civil cover sheet filed with the complaint, Harris asserted the court's jurisdiction was based on a federal question. He checked boxes describing the case as being in the nature of "Assault, Libel & Slander," "Property Damage Product Liability," and "Patent." Defendant Johnson was the only defendant served and he wisely moved to dismiss the action for failure to state a claim.

In the federal court system, U.S. magistrate judges handle many aspects of pending cases subject to review by district judges. In this case, Magistrate Judge Waugh Crigler recommended that the case be dismissed with prejudice (i.e., permanently, without opportunity to reopen or refile) for failure to prosecute. The magistrate judge also issued a show cause order requiring Harris to prove the court had subject matter jurisdiction and explain how Harris Research, a corporation, could proceed without an attorney. The magistrate judge apparently took into account the fact that Harris had filed the same complaint in the Roanoke Division of the Western District where it was dismissed without prejudice for lack of proof of service on the defendants. The plaintiff's motion to reopen the case there was denied because the complaint failed to state a claim upon which relief could be granted.

District Judge Michael F. Urbanski focused on the apparent lack of the court's jurisdiction. The complaint raised no federal law violations that would suggest federal question jurisdiction and the parties were all based in Virginia so there could be no diversity jurisdiction. Judge Urbanski accepted the recommendation to dismiss the action for lack of subject matter jurisdiction, but dismissed it without prejudice, thereby leaving the door open to yet another bite at the apple. Given how much leeway Harris had already been given, the court cautioned that, if he does re-file the case, Rule 11 sanctions may be imposed if he doesn't properly demonstrate the existence of subject matter jurisdiction.

When analyzing personal jurisdiction, the Fourth Circuit (which includes both Virginia and South Carolina) had held that it is proper to consider the location where the effects of the alleged wrongdoing are felt. The so-called "effects test" is applied narrowly, however, and cannot be used to supplant the minimum contacts analysis required by the United States Constitution. The United States District Court for the District of South Carolina recently had occasion to apply the test in Power Beverages v. Side Pocket Foods.

Power Beverages, a South Carolina company, contracted with Side Pocket, an Oregon distillery, to manufacture and sell Ying Yang vodka and ship the product where directed. Power Beverages wired money to Side Pocket in Oregon to pay for materials, and Side Pocket delivered the vodka to a South Carolina licensed distributor.

A dispute arose between the founders of Power Beverages, and one of the founders demanded that Power Beverages cease operations. Side Pocket informed Power Beverages that the contract between them would terminate in thirty days, and it sent Power Beverages a final invoice which Power Beverages contested. Upon direction from one of the founders, Side Pocket released the remaining inventory to a distributor in California. Power Beverages then sued Side Pocket in South Carolina for breach of contract, fraud, conversion, unfair trade practices and conspiracy. Side Pocket argued that the South Carolina court lacked personal jurisdiction over it.

A federal court may exercise personal jurisdiction over a non-resident corporation if the state's long-arm statute authorizes jurisdiction and the exercise of jurisdiction complies with the due process clause of the Fourteenth Amendment. The South Carolina long arm statute authorizes jurisdiction to the same extent as does the due process clause which requires the party to have sufficient minimum contacts with the forum state such that the exercise of jurisdiction does not offend traditional notions of fair play and substantial justice. Consulting Engineers Corp. v. Geometric Ltd., 561 F.3d 273, 277 (4th Cir. 2009).

A court can exercise either general or specific jurisdiction over a non-resident corporation depending on the extent of the corporation's contacts with the forum state. Where contacts are continuous and systematic, a court may exercise jurisdiction over the party in matters unrelated to the party's contact with the state. Where contacts are not continuous and systematic, a court may still exercise jurisdiction over matters arising out of the party's contact with the state. To decide whether specific jurisdiction is appropriate, the court considers (1) the extent to which the defendant purposefully availed itself of the privilege of conducting activities in the state; (2) whether the plaintiff's claims arise out of those activities; and (3) whether the exercise of jurisdiction is constitutionally reasonable.

Here, Power Beverages insisted that the court had jurisdiction over Side Pocket because the contract between the parties required Side Pocket to supply goods in South Carolina and the goods would be used or consumed in South Carolina. Power Beverages also alleged that Side Pocket maintained an inventory in South Carolina and appointed a South Carolina distributor as its agent in South Carolina in order to penetrate the South Carolina market. Power Beverages asserted that Side Pocket shipped its products to South Carolina where they were received and sold.

Side Pocket argued that it is not registered to do business in South Carolina, has never owned property in South Carolina nor maintained an office in South Carolina, has not paid taxes in South Carolina, appointed an agent for service of process in South Carolina nor entered into a contract to be performed in South Carolina. Side Pocket denied hiring a South Carolina distributor and instead contends that it agreed to send some of its own products along with the Ying Yang vodka to the South Carolina distributor who paid for the products and their shipping. Side Pocket did not register brands in South Carolina.

The court found that the factors normally associated with physical presence in the forum state were absent here: an official agent, employees, a business license, incorporation, and corporate facilities. Even if Side Pocket had registered its brand in South Carolina, the court found that would be insufficient to satisfy minimum contacts. The court held that the facts did not support a finding that Side Pocket had continuous and systematic contacts with South Carolina to support general jurisdiction. As to specific jurisdiction, a contract with a South Carolina party alone cannot establish sufficient minimum contacts. Rather, the court must consider who initiated the agreement, where negotiations occurred, the extent of communication, where the agreement was executed and where the agreement was to be performed.

Here, the contract was negotiated, executed and primarily performed in Oregon, and the alleged breach occurred in Oregon. All of the alleged omissions and wrongs occurred in Oregon. Although the contract contained a South Carolina choice of law provision, the court noted that a choice of law provision is not dispositive and is rather only one factor to consider in evaluating personal jurisdiction.

Power Beverages also argued that the court could exercise personal jurisdiction over Side Pocket under the effects test. The effects test is three pronged and applied where: (1) the defendant committed an intentional tort; (2) the plaintiff felt the brunt of the harm in a forum that can be said to be the focal point of the harm; and (3) the defendant expressly aimed tortious conduct at the forum in a manner that the forum can be said to be the focal point of it. The court held that because the vodka and funds were allegedly converted in Oregon, the conversion claim did not meet the second prong. Additionally, the court found that South Carolina was not the focal point of the alleged tortious activity as Side Pocket did not expressly aim its allegedly tortious actions at South Carolina.

Although the court found that it did not have personal jurisdiction over Side Pocket, rather than dismissing the case, it transferred the case to the District of Oregon.

If you're going to sue a bunch of former employees for various business torts, you need to be clear in your allegations as to who did what. It's all too easy to lump all the defendants together when describing the wrongful conduct in the complaint, especially when there are numerous defendants. Increasingly, however, Virginia courts are dismissing defendants from cases in which their specific involvement cannot be ascertained from the face of the complaint.

Recently in a Virginia federal court, Alliance Technology Group, LLC (Alliance), an IT services provider, sued a cadre of its employees and Achieve 1, LLC (Achieve), a competing company, for conspiracy, fraud, misappropriation of trade secrets, and other claims. One defendant, William Ralston, moved to dismiss due to the fact that many of the allegations of the complaint lumped all the defendants together, accusing all the defendants of committing tortious conduct collectively.

The rules are pretty lenient on what a complaint must contain to survive a motion to dismiss. A complaint must include a short and plain statement of the claim showing that the pleader is entitled to relief, and enough factual information to give the defendant fair notice of the nature of the claim. It must allege enough facts--not conclusions--to make the asserted right to relief plausible on its face rather than merely speculative or conceivable.

According to the complaint, Michael Thomas joined Alliance intending to steal trade secrets and proprietary information for Achieve, a company he'd formed earlier. Thomas directed eight employees while at Alliance, all subject to confidentiality agreements with Alliance. But he and the other employees began competing against Alliance while they were still working there, using Achieve to do it. Eventually, they all joined Achieve where, Alliance alleges, they used proprietary information to appropriate its clients and business.

The complaint ties each defendant, except Ralston, to at least one specific transaction and specific date for joining Achieve. Ralston was lumped into the allegations against "the Defendants" except for allegations that he joined Alliance mere weeks before Thomas resigned and he now works for Achieve.

The court dismissed the common law and statutory conspiracy claims against Ralston. Common law conspiracy in Virginia requires (1) two or more persons, (2) acting in concert, (3) "to accomplish some criminal or unlawful purpose, or to accomplish some purpose, not in itself criminal or unlawful, by criminal or unlawful means." To satisfy the unlawful act requirement, at least one of the alleged co-conspirators had to have committed an underlying tort like the alleged inducement to breach a contract.

The complaint alleged the conspiracy had been going on since at least November 2011, but Ralston didn't join Alliance until March 2012 and no allegations claimed he'd joined in an ongoing conspiracy. It may have been conceivable that he was part of it before he joined the company, but that was pure speculation, which wasn't sufficient.

Statutory business conspiracy arises when two or more persons "combine, associate, agree, mutually undertake or concert together for the purpose of willfully and maliciously injuring another in his reputation, trade, business, or profession by any means whatsoever." The complaint didn't allege that Ralston joined the conspiracy before hiring on with Alliance or that he joined the others in malice or with knowledge of others' malice. So the court could not reasonably infer that he joined Alliance with a present intent to accomplish an unlawful purpose.

The fraud claim also failed for insufficient pleading. In Virginia, one who alleges fraud must allege: (1) a false representation, (2) of a material fact, (3) that was made intentionally and knowingly, (4) with the intent to mislead, (5) reasonable reliance by the party misled, and (6) resulting damage to the party misled. Because the allegations lumped Ralston in with the others on this count, the complaint lacked the necessary specific time, place and contents of false representations attributable to Ralston. The Court accordingly dismissed the fraud claim as well. Several claims remain, however, including breach of fiduciary duty, misappropriation of trade secrets, and tortious interference with existing contract, contract expectancy, prospective business relationship and economic advantage.

Earlier this year I noted the case of Precision Franchising, LLC v. Catalin Gatej, a breach of contract case filed by the Leesburg-based franchisor of the Precision Tune Auto Care system against a Massachusetts resident. The Eastern District of Virginia had denied the defendant's motion to dismiss the case and had issued a detailed written opinion explaining the grounds therefor. What happened next? Mr. Gatej promptly fired his lawyers, then proceeded to ignore Precision's discovery requests until several weeks after responses were due. The predictable result was another written opinion, this time granting summary judgment in favor of Precision Franchising.

Requests for admissions are deemed admitted if not timely answered. Gatej failed to respond timely to Precision's requests for admissions, resulting in certain key facts being deemed established. Precision, relying on those admissions, moved for summary judgment. Late responses, however, are generally treated as motions to withdraw or amend the admissions, which courts can allow if allowing the late or amended responses would promote "the presentation of the merits of the action" and "would not prejudice the party that obtained the admission." (See Federal Rule of Civil Procedure 36). Gatej filed late responses.

Judge Cacheris found that although allowing Gatej to amend his responses would certainly promote presentation on the merits, it would cause prejudice to Precision. Precision reasonably relied on the deemed admissions in preparing its motion. Allowing Gatej to amend his responses so late in the process would force Precision to expend more time and money to prove what the deemed admissions already conclusively established. Perhaps most importantly, Gatej filed his responses over two months beyond an extended deadline as part of a pattern of "general unresponsiveness and repeated delinquency." The looming discovery deadline left no room for Precision to complete more discovery. And the Court had already warned Gatej that his repeated noncompliance could result in sanctions, including the entry of a default judgment. Though the result was perhaps harsh, Judge Cacheris concluded that litigants must be able to rely on the rules of procedure or there is no point to having them.

In yet another case involving alleged defamatory Yelp reviews, Hadeed Carpet Cleaning has filed a "John Doe" action in Alexandria Circuit Court, seeking to first learn the identities of the anonymous posters, then recover damages from them. Yelp is based in California but conducts substantial business in Virginia, so Hadeed served Yelp's registered agent with a subpoena duces tecum seeking to identify the individuals who wrote the negative reviews. Yelp refused to comply.

Yelp objected to the subpoena on several grounds. It argued that serving a Virginia subpoena on its registered agent was insufficient to confer jurisdiction over a California company, that its advertising agreement with Hadeed required the parties to resolve their disputes in California, and that Hadeed did not meet constitutional requirements to compel Yelp to reveal the anonymous posters' identities.

The court rejected these arguments, finding that Hadeed complied with Virginia Code § 8.01-407.1, which spells out what a party must do to discover the identities of anonymous posters on the Internet. The court found that service of a subpoena on the registered agent was sufficient to confer jurisdiction, but even if it wasn't, Yelp would be subject to personal jurisdiction anyway due to its substantial business activities in Virginia. The forum-selection clause in Yelp's advertising agreement was inapplicable because the dispute did not arise under that contract.

Though anonymous and even false speech are entitled to some protection under the First Amendment, they do not receive the same level of protection that truthful speech and political speech are entitled to. To obtain the identity of an anonymous Internet poster, Virginia Code § 8.01-407.1 requires the requesting party to show that the statements "may be tortious" and that the identity of the anonymous communicator "is centrally needed to advance the claim, relates to a core claim or defense, or is directly and materially relevant to that claim or defense."

Federal Rule of Civil Procedure 19(a)(2) permits courts to join necessary parties as involuntary plaintiffs "in a proper case." Whatever a "proper case" might look like for purposes of Rule 19(a) joinder, Judge James P. Jones of the Western District of Virginia recently found that the case before him-- Childress v. UBS Financial Services--did not qualify.

Gary Childress established an IRA, naming Terry Lee Dodson, his wife, as the account's beneficiary. UBS Financial Services managed the account. The couple divorced and when Childress died six years later, Dodson sued UBS in state court seeking to be declared the beneficiary. Edward Childress, the estate administrator, then sued UBS in federal court based on diversity jurisdiction. Childress argued the divorce revoked, as a matter of law, the original beneficiary designation of Dodson. UBS moved to join Dodson as a necessary party plaintiff.

The Federal Rules require a court to join as a "necessary party" anyone who claims an interest in the action's subject matter and whose absence from the suit could hurt that person's ability to protect the interest or potentially result in another party being subjected to multiple or inconsistent obligations. The person has to be "subject to service of process" and the joinder cannot destroy the court's subject matter jurisdiction.

Judge Jones found Dodson was a necessary party, as failing to join her to the case could hurt her interests or expose UBS to inconsistent rulings in different courts regarding the IRA. Joining her as a defendant, however, would destroy diversity because she, like Childress, is a Virginia citizen. Casting about for a solution, Judge Jones considered whether joining her as an involuntary plaintiff under Rule 19(a)(2) might be feasible.

The court found this was not a proper case under Rule 19(a)(2) because Dodson was subject to personal jurisdiction and had the power to sue UBS. The court relied on Third Circuit precedent holding that one may only be made an involuntary plaintiff where "(1) the party to be joined has an obligation to permit its name or title to be used to protect rights asserted in the action; (2) is beyond the jurisdiction of the court; and (3) has refused to voluntarily join in the action following notification thereof."

Thus, the court found it could not join Dodson even though she was a necessary party. It offered two possible solutions to this predicament: UBS could join the estate administrator as an additional defendant in the state court action, or UBS could file an interpleader action in federal court, inviting Dodson and the administrator to assert any counterclaims they might wish to make against UBS.

Actor Corbin Bernsen has settled his breach-of-contract case against Innovative Legal Marketing, days after a Norfolk magistrate judge granted his motion to exclude the testimony of ILM's proffered expert witness. The case was seemingly progressing in Bernsen's favor - he survived ILM's motion for summary judgment back in August, when the court held that the jury could conceivably find that ILM waived not only the morality clause it contended Bernsen breached, but also the contract's non-waiver clause. The trial began November 7th and settled the next day.

One week before the trial commenced, the court granted Bernsen's motion in limine to exclude the testimony of ILM's expert witness, Randy Dinzler, finding that his anticipated testimony amounted to nothing more than an "explanation of common sense principles."

ILM designated Dinzler, a contract employee for ILM, to testify as to how Bernsen's actions negatively impacted his effectiveness as a spokesperson for ILM. ILM conceded that Dinzler lacked sufficient foundation to testify to any specific impact Bernsen's actions may have had on ILM's marketing campaign, but it asserted that he should be permitted to give general opinions about the use and impact of a spokesperson in an advertising campaign and factors by which marketing companies evaluate a spokesperson's conduct based on his seventeen years of experience in legal marketing. His opinion would be that advertising campaigns use spokespersons to evoke certain reactions from the potential consumer and that negative press coverage of the spokesperson creates an unfavorable impression in the minds of potential consumers.

The Federal Rules of Evidence permit expert testimony only where the expert is properly qualified and where the testimony will help a jury understand the evidence. The court noted that Dinzler's testimony was experiential rather than scientific, and as such, Dinzler needed to explain how his specific experience led to the conclusion he reached, why his experience alone was a sufficient basis for the opinion, and how his experience was reliably applied to the facts.

The court found that Dinzler did not have any training or experience in consumer behavior, psychology or sociology that would permit him to infer how negative press coverage of a spokesperson impacts consumer impressions of a product. His experience in marketing made him no more qualified to assert his general opinion than counsel or a lay witness. As a mere explanation of common sense principles, Dinzler's report was deemed unlikely to assist the jury in understanding any issue in the case. For these reasons, the court excluded the testimony.

In Virginia, a fraud claim must state (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. Fraud claims cannot be based on unfulfilled promises or statements regarding future events. Promises to perform future acts are not legal representations and failure to perform them doesn't change that fact. But if a defendant, at the time of making that promise, had no intention of carrying it out, that promise is considered a misrepresentation of present fact that can form the basis for a fraud claim. As demonstrated by the recent case of Cyberlock Consulting v. Information Experts, however, mere failure to perform is not evidence of the defendant's lack of intent at the time the contract was formed.

Information Experts (IE) and Cyberlock Consulting had a history of working together. As they were completing the work on a contract with OPM, they learned the agency would be seeking bids for a similar new project. So they entered into a teaming arrangement to land the new prime contract. The teaming agreement called for IE to give Cyberlock 49% of the work under a fixed price subcontracting agreement. Cyberlock would submit cost and price data to support IE's pricing strategy planning and the parties would use reasonable efforts to negotiate a subcontract. Ultimately, IE was awarded the prime contract but the parties were unable to reach agreement on the terms of a subcontract. Cyberlock sued IE, alleging breach of contract, fraud, and unjust enrichment. IE moved to dismiss the fraud claim.

Cyberlock claimed that, when they formed the teaming arrangement, IE had no intention of executing a subcontract. Instead, it claimed, IE planned to push Cyberlock out and hire its employees so it could perform the contract itself.

The court found that Cyberlock had failed to plead sufficient facts that made fraud plausible, rather than merely conceivable. When alleging fraud, a plaintiff must plead specific circumstances that constituted the fraud including time, place, contents of the false representations, identities of those making the misrepresentations, and what they obtained from them. A court must be able to draw the reasonable inference that the defendant is liable for fraud. Legal conclusions and bare assertions, unsupported by the specific required factual allegations, are not enough. The court found that Cyberlock failed to plead sufficient facts about the formation of the teaming agreement or IE's alleged intent and plan at that time.

Cyberlock claimed IE's lack of enough personnel with the appropriate security clearances to perform the prime contract was sufficient evidence to show IE's fraudulent intent. The Court recognized that this fact showed the alleged plan to push Cyberlock out was possible. But IE may have intended, instead, to solve the personnel problem by executing the subcontract with Cyberlock, a possibility the Court found bolstered by the recent joint work history the companies had doing the same type of work for the same government agency. Without more, the Court could not draw a reasonable inference that IE entered the teaming agreement with the intent to not perform later. Given the insufficient pleading, the Court dismissed the fraud claim.

Dr. Adel S. Kebaish filed a defamation case in Fairfax County Circuit Court against INOVA Health Care Services and several doctors alleging defamation, breach of contract, tortious interference, conspiracy, wrongful termination and unjust enrichment. Defendants removed the case to federal court, where Dr. Kebaish filed an amended complaint. He later filed a Notice of Voluntary Dismissal and then re-filed the case in Fairfax. The case proceeded to a jury trial, and on the second day of the trial Dr. Kebaish invoked the Virginia rule allowing plaintiffs to take one voluntary nonsuit as a matter of right. INOVA objected, arguing that because Dr. Kebaish had taken a voluntary dismissal in federal court, he had effectively already taken a nonsuit. The trial court disagreed and allowed Dr. Kebaish to nonsuit. INOVA appealed.

On appeal, the court was guided by well-settled principles of statutory review which bind courts to the plain meaning of statutory language and require them to apply the expressed legislative intent. Virginia's nonsuit statute was first enacted in 1789 and applied only to actions at law tried by a jury. The statute was amended in 1932 and again in 1954, the later amendment providing for a voluntary dismissal as a matter of right only up to the time the suit had been submitted for decision at law or in equity. Courts have recognized that the 1954 amendment intended the term "nonsuit" to be used in a comprehensive sense whether at law or in equity.

The current nonsuit statute allows a plaintiff to take one nonsuit as a matter of right before a motion to strike the evidence has been sustained, before the jury retires, or before the action has been submitted to the court for decision. Va. Code § 8.01-380(B). In federal court, a plaintiff may take a voluntary dismissal as a matter of right before the opposing party serves either an answer or a motion for summary judgment. Fed. R. Civ. P. 41(a)(1)(A)(i).

The court compared the Virginia nonsuit statute with the Federal Rule providing for voluntary dismissal and found that although a nonsuit and a voluntary dismissal under the federal rules both provide a plaintiff with a similar procedural right, the right to a nonsuit is much more expansive. A voluntary dismissal is available only if exercised at the outset of proceedings whereas a nonsuit may be exercised much later - even at trial.

The nonsuit statute does not address the impact of a plaintiff's prior voluntary dismissal in federal court. INOVA cited the statute's tolling provision which applies "irrespective of whether the action is originally filed in a federal or a state court and recommenced in any other court..." Va. Code § 8.01-229(E)(3). The court found that the plain language of the tolling statute demonstrates that the reference to actions originally filed in federal court applies only to the application of the tolling provision and was not instructive in the instant case.

INOVA also cited case law providing that "[f]ederal court practice...does recognize procedures which are substantially equivalent to Virginia's nonsuit..." but the court did not find that language applicable either. Rather, the court found that a nonsuit is only the functional equivalent to a voluntary dismissal to the extent that both provide a plaintiff with a method to voluntarily dismiss the suit up until a specified time in the proceeding. The court held that the trial court did not err in finding that Dr. Kebaish was permitted to take a nonsuit as a matter of right.

The law presumes that the public should have access to judicial records. This presumption stems from both common law and First Amendment concerns and may be abrogated only in unusual circumstances. Fourth Circuit case law indicates that a district court can seal court documents if competing interests outweigh the public's right to access.

When faced with a request to seal documents, a court must first determine the source of the right to access in order to weigh the competing interests. The court must then (1) give notice of the request to seal and allow interested parties a reasonable opportunity to object; (2) consider less drastic alternatives to sealing the documents; and (3) provide specific reasons and factual findings supporting its decision to seal the documents. A local rule in the United States District Court for the Eastern District of Virginia requires the party moving to seal documents to provide (1) a non-confidential description of the documents to be sealed; (2) a statement as to why sealing is necessary; (3) references to governing case law; and (4) a statement as to the period of time the party seeks to have the matter sealed and as to how the matter is to be handled upon unsealing.

In a recent case in the Eastern District of Virginia, East West, LLC v. Rahman, the plaintiff sought to seal four exhibits relating to the parties' expert reports. The reports were designated "Attorney's Eyes Only" under a confidentiality order entered during discovery that allowed the parties to so designate documents that contained highly sensitive business or personal information, the disclosure of which might cause significant harm.

The court granted the motion to seal. The documents at issue contained sensitive financial data, including gross profit data, pertaining to both parties. The court found that disclosure of such information would be highly likely to cause significant harm to the business competitive position of both parties. The plaintiff had docketed its motion to seal and the docket had been made available to the public; therefore, interested parties had been given a reasonable opportunity to object. The court found that redaction, a less drastic alternative to sealing the documents, would gut the documents substantially, rendering them useless to the public. The court held that sealing these documents was appropriate and narrowly tailored to protect confidential business information.

A defendant who failed to timely answer a complaint was recently rebuffed in his attempt to set aside the ensuing entry of default. Magistrate Judge Davis of the Eastern District of Virginia found that a brief filed by defendant's counsel, which consisted of a single page referring the Court to an affidavit filled with grammatical errors and incoherent statements, failed to meet a "minimum threshold of proficiency" and demonstrated "a lack of respect for this Court." The court found that the defendant failed to show "good cause" under Rule 55(c) for setting aside the default in that he failed to establish the existence of a meritorious defense.

MSSI Acquisition ("MSSI") sued Tariq Azmat for breach of a financing contract in December 2011. Process was served (and later mailed) on Azmat's cousin at Azmat's residence on December 7, but Azmat claimed to have not come across the notice until February 2012 because he was on multiple trips and did not have a chance to check his mail until then. When Azmat failed to respond in a timely manner, MSSI filed for a default judgment on February 17, 2012. Azmat promptly reacted and filed a motion to set aside the default entered against him on March 12, 2012, asserting that he was fraudulently induced into making the financing contract with an insolvent corporation and that the contract in question had been rescinded anyway.

In Virginia, fraudulent inducement exists where a party intentionally and knowingly makes a false representation of a material fact and the other party suffers damages as a result of relying on that misrepresentation. In this case, the court found that Azmat could not have reasonably relied on any alleged misrepresentations as to MSSI's solvency because the contract language drafted by Azmat's own attorney referred to MSSI's bankruptcy reorganization and Azmat had access to MSSI's financial information, since the company was publicly traded. Moreover, the court pointed out that Azmat failed later to disavow the contract, even though he clearly knew about MSSI's insolvency by that point, thus suggesting he did not rely on the misrepresentation that MSSI was solvent in deciding whether to enter into the financing contract.

The court noted that several factors weighed in favor of setting aside the default, such as the fact that Azmat acted reasonably promptly upon learning of the default, but ultimately found that Azmat's failure to demonstrate the existence of a meritorious defense or counterclaim compelled a finding that setting aside the default would be futile.