Pretrial Practice and Civil Procedure Category Archives — Page 9 of 10 — The Virginia Business Litigation Blog Published by Virginia and Washington, D.C. Litigation & Appeals Attorney

October 17, 2011

Fraud Claim Knocked Out by Statute of Limitations for Negligence Actions

A Swedish law firm has failed in its effort to sue a director of a former client for “misrepresentation” in Virginia federal court after the court ruled the claim was barred by Virginia’s two-year statute of limitations applicable to negligence claims. The law firm had conceded that it would be unable to maintain a cause of action for fraud under the laws of Virginia, and the court opted to analyze the viability of the claim as a negligence action.

The law firm, Andersson Gustafsson Advokatbyra KB, sued eSCRUB Systems, Inc., a Virginia company, and three people associated with the company, claiming that eSCRUB had failed to pay the firm’s legal bills after it hired the law firm in 2007 to help it resolve a dispute. The law firm alleged that John Packard, a former director of eSCRUB, committed fraud in that he breached a “continuing obligation to notify Andersson of the risks of non-payment it ran in performing services for eSCRUB.” The allegation was essentially that Packard was part of a scheme to induce the law firm to provide legal services to eSCRUB with the full knowledge that the company would never pay the firm’s legal fees.

In Virginia, negligence claims carry a two-year statute of limitations. Virginia follows the general rule that the event that starts the limitations clock ticking is the negligent act itself. There is no “discovery exception” that starts the clock at a later date, such as the date the plaintiff actually discovers that the alleged negligence occurred or that he has been damaged. Statutes of limitation can expire before a potential plaintiff even learns of the grounds for a lawsuit.

October 10, 2011

Copyright Troll Lawyer’s Tactics Criticized by Virginia Judge

by Lee E. Berlik

United States District Judge John A. Gibney, Jr., sitting in Richmond, Virginia thought so little of the well-publicized shakedown tactics of the new wave of “copyright troll” lawyers–in this case practiced by Richmond lawyer Wayne O’Bryan–that he took it upon himself (without any Defendant asking for it) to issue a show-cause order against the lawyer demanding that he explain why his conduct should not be punished with Rule 11 sanctions.

The subject of the lawsuit at issue is Gangbang Virgins, a pornographic film allegedly downloaded by 85 unnamed “John Doe” defendants using popular peer-to-peer network BitTorrent. The Court initially granted the plaintiff permission to issue subpoenas to Internet Service Providers to learn the identities of the people behind the accused I.P. addresses. Later, however, Judge Gibney was apparently moved by some of the letters he received from the John Doe defendants. Several of the defendants, for example, notified the Court that the plaintiff made harassing telephone calls to them as soon as their identities were revealed, asking for a payment of $2,900 to end the litigation.

What the Court found particularly troubling was the lawyer’s behavior after certain defendants filed motions challenging their inclusion in the case. Rather than proceed to argue the merits of the motions in court, he routinely dismissed them, apparently to ensure the Court did not actually rule on any of the motions so that he could continue to threaten others. That, the Court found, amounted to nothing more than a “shake down” and an abuse of the Court’s resources.

October 4, 2011

Virginia Court Rejects “Stream of Commerce” Theory of Jurisdiction

by Lee E. Berlik

The United States Supreme Court recently held that a foreign manufacturer that places a product into the stream of commerce in the United States does not automatically subject itself to jurisdiction in each of the states where the product might foreseeably end up. Relying on this decision, a Roanoke Circuit Court judge has dismissed a Japanese manufacturing company from a product-liability case brought against it in Virginia.

Janet May was employed by Progress Press in 2006 and was operating a stitching machine made by Osako & Co., a Japanese company. She alleged that she was injured because the machine had an improper conveyor belt. She sued Osako and others for negligence and breach of warranty.

Osako sold its products in the United States through Consolidated International Corp., its exclusive distributor, which was a company independent of Osako. Osako knew that its products would be sold in the United States generally and made some product changes for the U.S. market but did not take any actions to specifically target Virginia. Osako has no physical locations in the United States. On these facts, Osako moved to dismiss May’s suit for lack of jurisdiction.

September 26, 2011

Law of Fraudulent Conveyances Outlined by Virginia Supreme Court

by Lee E. Berlik

Once a plaintiff has introduced evidence to establish a “badge of fraud,” a prima facie case of fraudulent conveyance is established and the burden shifts to the defendant to establish that the transaction was not fraudulent. So held the Virginia Supreme Court, in reversing the Henrico County Circuit Court’s decision to strike the plaintiff’s evidence and enter judgment in favor of the defendant.

Fox Rest Associates, L.P. v. Anne B. Little involved a dispute between George B. Little, an attorney and the general partner of Fox Rest Apartments, and the limited partners of Fox Rest Apartments, arising out of an alleged sale of the apartments by the general partner without the consent or knowledge of the limited partners. After learning that the limited partners planned to sue him, Mr. Little made various transfers, including transfers into an account at SunTrust Bank held jointly with his wife. The limited partners filed a derivative action against Fox Rest for malpractice, double billing, and other claims. The limited partners obtained a judgment but were unable to collect approximately $856,400. They then proceeded to file a fraudulent conveyance action to attempt to set aside various transfers as fraudulent.

The trial court struck the limited partners’ evidence, finding that they had produced insufficient evidence of fraudulent intent. The Supreme Court, however, reversed. Under Virginia law, it pointed out, to survive a motion to strike, a plaintiff need only introduce evidence of “badges of fraud.” Badges (or presumptions) of fraud include:

September 12, 2011

Validity of Restrictive Covenants Turns on Facts of Each Case

by Lee E. Berlik

Virginia courts will not necessarily rule on the enforceability of a restrictive covenant in an employment agreement without first examining the facts. In a recent federal-court decision from Roanoke, Judge Wilson denied a defendant’s motion for judgment on the pleadings in a case involving an alleged assignment of patent rights in violation of various contractual restrictions, finding that the factual record wasn’t sufficiently developed to permit a ruling.

Travis Mickle, President of KemPharm, Inc., a small early-phase biopharmaceutical company, was working as a senior research scientist for Lotus Biochemical Corporation (which became New River Pharmaceuticals (“NRP”)) in 2001. At that time, he entered into an employment agreement with Lotus. In 2005, he left the company and entered into a settlement agreement governing various post-employment responsibilities.

Shire LLC, a subsidiary of NRP, sued Mickle for breach of both the original employment agreement and the settlement agreement. Shire pointed to paragraphs in the employment agreement that make all discoveries or inventions made by Mickle the property of the company; that prohibit Mickle from disclosing company confidential information for his own benefit; and that require that all patents and other intellectual property developed by Mickle be assigned to the company.

August 8, 2011

D.C. Law Firm Loses Motion to Reconsider Dismissal of D.J. Action

by Lee E. Berlik

In a case that turns on a law firm’s ethical obligations to avoid conflicts of interest, a large D.C. law firm has once again been procedurally rebuffed in its effort to have a federal judge in the District of Columbia declare that it has not violated any ethics rules in a high-profile environmental case.

Patton Boggs, a major D.C. firm, represents various parties in Ecuador that are involved in high-stakes environmental litigation against Chevron. A lobbying subsidiary of Patton Boggs, the Breaux Lott Leadership Group, has done work on behalf of Chevron on similar issues. Gibson Dunn, the law firm representing Chevron, is taking the position that Patton Boggs has a conflict of interest and has tried to have Patton Boggs removed from the case.

Patton Boggs moved in U.S. District Court for the District of Columbia for a declaratory ruling that it does not have such a conflict. Last April, however, U.S. District Judge Henry Kennedy dismissed this case, finding that the courts that are actually hearing the environmental cases against Chevron are best equipped to handle that issue. Judge Kennedy also ruled that Patton Boggs could not amend its complaint to allege that Chevron and Gibson Dunn had tortiously interfered with its contract with the Ecuadorian plaintiffs and had engaged in a civil conspiracy, since Patton Boggs had not alleged facts suggesting that they had caused any actual breach of the contract.

August 1, 2011

Virginia Court Pierces Corporate Veil But Declines to “Reverse Pierce”

by Lee E. Berlik

Courts don’t often grant requests to “pierce the corporate veil” – in other words, to disregard the existence of a corporation and to hold a shareholder personally liable for the corporation’s debts – but in a recent Virginia case, a judge did just that, entering a personal judgment against a corporation’s sole shareholder for nearly $140,000. His mistake? Failing to observe corporate formalities, and arranging for the corporation to enter into a contract while grossly undercapitalized.

Advance Technologies, Inc., had been hired as a sub-subcontractor by subcontractor ACE Electric Company on a boiler maintenance project for the University of Richmond. ACE, however, soon terminated Advance from the project, and Advance went out of business. In December 2009, a default judgment was entered against Advance for more than $137,500. ACE was unable to recover any of this money from Advance, so it sued Erik Butler, the sole shareholder, officer, and director of Advance, in an attempt to pierce the corporate veil and recover funds from Butler’s personal assets to satisfy the judgment. ACE’s lawyers also invoked a “reverse piercing” theory by seeking to impose liability against Butler’s wife, DeAnne Butler, and from another corporation, ADVTEC, Inc., of which she was the sole officer, shareholder, and director. ACE claimed that ADVTEC was created by DeAnne Butler in a fraudulent attempt to avoid the debts incurred by Advance.

In an opinion handed down on April 29, 2011, Judge Gary A. Hicks of the Circuit Court of Henrico County wrote that piercing the veil and permitting a plaintiff to recover from the personal assets of a shareholder is “an extraordinary remedy that is infrequently granted.” The judge pointed out that there are generally sound legal and economic reasons for granting immunity to shareholders. However, the judge noted, exceptions do exist. In this case, the judge wrote, the evidence was “sufficient to pierce the corporate veil as to Erik Butler.” The court found that Butler failed to adhere to corporate formalities (such as conducting annual meetings and maintaining separate books for the corporation), and that when Advance entered into the contract with ACE, Advance was “grossly undercapitalized.” It had only between $10,000 and $15,000 in the bank, and owed back taxes both to the IRS and to Virginia authorities. Under these circumstances, Judge Hicks wrote, it would be a “profound injustice” not to permit ACE to go after Erik Butler’s personal assets to satisfy the default judgment.

May 7, 2011

ADA Plaintiff Perpetrates Fraud on Court, Sees Claim Stricken

by Lee E. Berlik

In a memorandum opinion dated April 27, 2011, United States District Judge T.S. Ellis, who sits in the Alexandria Division of the Eastern District of Virginia, taught plaintiff Stephanie Holmes that it was not a good idea to change her story multiple times during her deposition. Finding that she had “perpetrated a fraud on the court,” Judge Ellis affirmed the magistrate judge’s recommendation to strike Holmes’s claim for compensatory damages for pain and suffering.

Holmes, who had worked as a stocker at a Wal-mart in Alexandria, Virginia, for four years, filed a complaint with the Equal Employment Opportunity Commission (EEOC), alleging that Walmart had failed to make reasonable accommodations for her hearing impairment. She alleged that Walmart had refused to provide her with an interpreter and with comprehensive notes of meetings and instructions, all of which she needed to perform her job properly. She sought compensation for pecuniary losses, an injunction, punitive damages, and back pay.

The EEOC filed suit on Holmes’s behalf. During Holmes’s deposition in 2010, Walmart’s attorneys asked her about whether she had received any treatment from a mental health provider for emotional distress caused by her employment at Walmart. First, she said, “I don’t need therapy, and I don’t see doctors.” Then she said she saw a therapist just once in 2007. She later changed her story again and said she saw one doctor three times a week from March 2004 through February 2005. Finally, at the end of her deposition, she acknowledged that she had received therapy for anxiety and depression in a 13-year period from 1994 to 2007 and that some of the treatment related to her work at Walmart.

April 11, 2011

Judge Alper Grants Limited Discovery to Lacoste in Counterfeiting Case

by Lee E. Berlik

Lacoste Alligator, S.A., which sells tennis shirts and other apparel with the distinctive green crocodile logo in high-end stores like Nordstrom and Saks Fifth Avenue, will get a chance to find out, through discovery in a lawsuit, which of its distributors (if any) have been selling its products to Costco and other warehouse stores without its express permission, in violation of its trademark rights and in breach of contract.

Lacoste, a Swiss company, is attempting to prevent its clothing from being sold in big-box and other unauthorized retail locations. The first problem facing Lacoste, however, was that although it believed that some distributor was making sales to those stores, it didn’t know who it was. Accordingly, it filed a “John Doe” complaint in Arlington County Circuit Court on trademark-infringement, breach of contract, and other grounds, hoping to use discovery in the case to ferret out the identity of the distributor responsible for the unauthorized sales. After filing the “John Doe” suit, Lacoste promptly served a subpoena on Costco Wholesale Corp., trying to ascertain the source from which it was receiving Lacoste products for resale in its stores. Costco objected to handing over any documents, and Lacoste filed a motion to compel compliance with the subpoena.

Judge Joanne F. Alper overruled most of Costco’s objections and held that Lacoste was entitled to the discovery subject to the entry of an appropriate protective order to prevent misuse of the information.

March 16, 2011

Summary Judgment Granted in Breach of Contract Action

by Lee E. Berlik

A U.S. district judge in Virginia has ruled that a restaurant chain operator is liable for breach of contract and is obligated to pay a franchise consulting company for sales and marketing services that the consultant performed for the chain under the contract between the two companies. Rejecting the contract defenses of lack of standing, fraudulent inducement, lack of specificity, lack of mutuality, and unconscionability, U.S. District Judge T.S. Ellis, III, of the Eastern District of Virginia, granted summary judgment in favor of the consultant.

The case arose from a 2008 contract between Freshii Development, LLC, which owns a chain of healthy fast-food restaurants, and Fransmart, LLC, an Alexandria, Va.-based company that agreed, in exchange for a percentage of franchise fees and revenues, to help Freshii expand by finding appropriate franchisees for its restaurants. In early 2010, Fransmart restructured its business and set up a new company to which it assigned its contracts and transferred its assets and liabilities. Freshii then stopped paying Fransmart under the contract, and Fransmart sued for breach. Freshii asserted five defenses to the lawsuit, all of which Judge Ellis rejected.

Freshii first argued that Fransmart lacked standing because the 2008 agreement was a personal services contract and therefore not assignable to a separate entity (such as the “new Fransmart”) without Freshii’s consent. Judge Ellis rejected this defense, noting that many aspects of the agreement led to the conclusion that it was not a personal services contract. For example, the agreement was between two corporate entities, it was for a duration of ten years, and it did not identify any individual as being material to performance. In any event, the judge wrote, it was not necessary to reach that issue because the contract contained a “successors and assigns” clause, stating that “the provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and to their successors and assigns.” This language, the court found, demonstrated that the parties intended the agreement to be assignable to a successor entity like the new Fransmart.