The Virginia Business Litigation Blog

September 25, 2013

Arbitrator Designation Deemed Severable from Contract

Virginia Code § 8.01-581.01 et seq. evidences a public policy favoring arbitration. Virginia’s statutory scheme provides that arbitration agreements between parties are valid and enforceable, and courts uphold the parties’ designated method of appointing an arbitrator. Where the parties’ appointed arbitrator is unable to act and the parties have not provided a method of appointing a successor, the court can make an appointment. Contracting parties are presumed to know the statutory scheme, and they may alter it, but they must do so with clear and unambiguous language. In Schuiling v. Harris, the Virginia Supreme Court considered whether a clause appointing a specific arbitrator was severable from the rest of the contract or integral to the contract rendering the whole agreement unenforceable if the appointed arbitrator was unavailable.

William Schuiling hired Samantha Harris as his housekeeper. The parties signed an arbitration agreement providing that any and all disputes arising out of the employment would be resolved “exclusively by arbitration administered by the National Arbitration Forum…” The agreement also contained a severability clause stating that if any provision of the agreement was found to be invalid or unenforceable, it would be severable from the rest of the agreement and not affect any other provision. The agreement did not contain any other terms relating to non-competition, salary, wages or term of employment. The sole subject of the agreement was arbitration.

Harris filed a complaint against Schuiling alleging multiple torts, statutory violations and breach of contract. Schuiling filed a motion to compel arbitration under Virginia Code § 8.01-581.02(A). Schuiling asserted that the National Arbitration Forum (“NAF”) was no longer available to arbitrate the dispute and requested the circuit court to appoint a substitute arbitrator pursuant to Virginia Code § 8.01-581.03. Harris opposed the motion, arguing that NAF’s exclusive designation was an integral part of the contract and that because NAF was unavailable, the whole agreement was unenforceable. The circuit court denied Schuiling’s motion to arbitrate, finding that the parties’ designation of NAF was an integral part of the contract and that NAF’s unavailability rendered the whole agreement unenforceable. Schuiling appealed.

September 23, 2013

Virginia Supreme Court Limits Opportunity to Obtain Quick Dismissals of Noncompete Cases

by Lee E. Berlik

When companies sue their former employees on the ground that they allegedly breached a broadly-worded noncompete agreement, a common defense tactic has been to file a demurrer, arguing that the complaint fails to state a claim upon which relief can be granted. The thinking was that if the noncompete agreement at issue was overly broad on its face, it would be deemed unenforceable as a matter of law and incapable of supporting a lawsuit. Those days are over, according to Assurance Data Inc. v. Malyevac, an employer-friendly ruling of Virginia’s high court decided earlier this month.

Assurance Data, Inc. (ADI) entered into an agreement with John Malyevac which required Malyevac to sell ADI’s computer products and services. The agreement contained non-competition, non-solicitation, non-disclosure and return-of-confidential-information provisions. A few months after entering into the agreement, Malyevac resigned. ADI filed a complaint in Fairfax County Circuit Court alleging that Malyevac violated the agreement. Malyevac demurred, asserting that the complaint failed to state a cognizable claim.

Like the 12(b)(6) motion to dismiss used in federal court, a demurrer tests the legal sufficiency of the facts alleged in the complaint and determines whether a complaint states a cause of action upon which relief can be granted. When ruling on a demurrer, a court may not decide the merits of a claim. (That’s what trials are for). If a complaint contains sufficient facts to inform a defendant of the nature and character of a claim, the complaint will survive a demurrer.

September 16, 2013

In Wrongful Termination Case, Court Employs Burden Shifting Framework Where No Direct Evidence of Discrimination Exists

by Lee E. Berlik

A plaintiff employee with no direct evidence of disability discrimination must establish a prima facie case of wrongful termination. If he succeeds, the defendant employer is required to articulate a legitimate, non-discriminatory reason for the termination. The burden then shifts back to plaintiff to show that the reason offered was merely a pretext for discrimination. The United States District Court for the Western District of Virginia recently employed this burden shifting framework in Ruggles v. Virginia Linen Service, Inc. and granted the employer’s motion for summary judgment.

Timothy Ruggles was a route salesman for Virginia Linen Service and New System Linen Service. His duties included bringing extra linens to clients who had run out of linens before their scheduled delivery date. The extra linens rarely weighed more than 25 pounds. Ruggles also acted as a substitute driver for ill or vacationing employees, although he contended that substitute driving or “running a route” was not a primary function of his position. Running a route required him to make new deliveries of linens and pick up bags of soiled linens from customers. Occasionally, the bags of soiled linens weighed up to 100 pounds. When running a route, Ruggles and other employees often separated the heaviest bags of soiled linens into smaller bags to reduce the weight and make the bags easier to lift.

Ruggles suffered a back injury that was not related to his work. As a result, his doctor ultimately placed him on restrictions that prevented him from lifting more than 10 pounds for four weeks. Later, an orthopedic specialist permanently restricted Ruggles from lifting more than 50 pounds and/or continuous lifting of more than 25 pounds. Defendants offered Ruggles a sales position that would not require heavy lifting, but Ruggles rejected the offer. Defendants eventually terminated him based on the permanent restrictions the orthopedic specialist put in place.

September 10, 2013

Even Plaintiffs Can Obtain a Transfer of Venue

by Lee E. Berlik

Upon a showing of a change in circumstances since the suit was originally filed, a plaintiff can successfully move for a change of venue to a district where the case might have originally been brought if such a transfer would be convenient to parties and witnesses and would serve the interests of justice. A federal court in Hawaii engaged in a balancing test to determine whether a plaintiff could successfully transfer venue in Reyes v. Schuttenberg.

Lidinila Reyes sued her cousin, sister and niece for libel and slander in Hawaii. Reyes’ cousin lives in New York, and her sister and niece live in Hawaii. Reyes lived with her sister in Hawaii from 2007 until 2012, when Reyes moved to Nevada. During the years Reyes lived in Hawaii, defendants allegedly made defamatory statements to relatives and acquaintances outside of Hawaii which Reyes contends injured her relationships with her children and other relatives and harmed her professional reputation, livelihood, and health. Reyes asserts that defendants delivered much of the defamatory matter to her daughter in Nevada via telephone, Facebook, email and in person. Comments also were allegedly communicated to other parties in Nevada as well as to parties in California and North Carolina.

Reyes asserts that when she learned of defendants’ actions, she moved out of her sister’s house and suffered emotional and physical setbacks to her already fragile health. Due to health concerns, Reyes could not travel to her home in Nevada, so she filed the lawsuit in Hawaii. Three months after filing in Hawaii, the court denied Reyes’ Motion to Transfer Venue to Nevada but did so without prejudice and granted Reyes leave to re-file a Motion to Transfer Venue should facts change. Two months later, Reyes renewed her Motion to Transfer Venue.

September 3, 2013

Fourth Circuit Asks Virginia Supreme Court to Clarify Business Conspiracy Statute

by Lee E. Berlik

Sometimes a court must decide a matter that turns on the law of another jurisdiction. If the other jurisdiction’s law is unclear, the deciding court can make a formal request to its sister court asking that court to clarify an issue. The Fourth Circuit recently invoked this procedure and certified two questions to the Virginia Supreme Court: one involving application of Virginia’s business conspiracy statute and another regarding the statute of limitations applicable to tortious interference claims.

James Dunlap operated two AAMCO Transmission franchises for over thirty years. When an asset-management company that owned a large share of AAMCO competitor Cottman Transmission Systems purchased AAMCO, Dunlap found his franchises on the chopping block as part of a plan to eliminate overlap among the businesses by converting Cottman franchises to AAMCOs and closing some franchises. Dunlap claimed that AAMCO attempted to terminate his franchises for minor violations as a pretext to force him out of business. Dunlap settled his dispute with AAMCO and was allowed to continue operations. Dunlap then brought an action against Cottman and new AAMCO principal Todd Leff alleging a conspiracy to force him out of business. The complaint, filed in Chesapeake Circuit Court and later removed to federal court, raised claims for violation of Virginia’s business conspiracy statute, tortious interference with contract, and tortious interference with business expectancy.

At one time, established case law indicated that conspiring to procure a breach of contract was actionable under Virginia’s business conspiracy statute. However, the Virginia Supreme Court shifted away from that approach in Station #2 v. Lynch, 280 Va. 166 (2010) where it held that an independent duty arising outside the contract is required to establish a conspiracy claim. Relying on Station #2, the district court dismissed Dunlap’s conspiracy claim because he did not allege a valid “unlawful act” as a predicate for the conspiracy. Rather, all of the allegedly breached duties and damages involved arose out of contractual obligations.

August 23, 2013

Virginia Law Firm Wins Dismissal of Negligent Hiring and Retention Claim

by Lee E. Berlik

Earlier this month, Judge Hilton of the Eastern District of Virginia tossed claims against Tysons Law Group, Vienna Law Group, and affiliated attorneys for “vicarious liability” and “negligent hiring, retention and supervision.” Virginia does not recognize an independent cause of action for vicarious liability or negligent supervision. While it does recognize negligent hiring and negligent retention as actionable torts, a plaintiff cannot pursue such claims without alleging a physical injury. The plaintiff in this particular case failed to do that, so the claims were dismissed.

The plaintiff hired Vienna Law Group for immigration related services. Michael Oveysi worked for Vienna Law Group, supervised by Ronald Coleman. According to the plaintiff’s contentions, Oveysi advised him to transfer investment funds and legal fees totaling $566,000 to a bank account that Oveysi controlled. Oveysi, he claims, then made off with the money. The complaint alleges that Oveysi was not subjected to a background investigation prior to his employment and that a background check would have revealed Oveysi’s financial problems. That plaintiff argued that it was negligent to allow Oveysi to work with clients and their money under these circumstances. The defendants moved to dismiss.

In Virginia, vicarious liability is a theory of liability rather than a separate cause of action. The court noted that the purpose of pleading is to facilitate a proper decision on the merits rather than to multiply the causes of action. Here, the theory of vicarious liability was addressed in another claim. Accordingly, the court found the separate claim for vicarious liability was improper and dismissed it.

August 19, 2013

Personal Guarantors Don’t Have Many Ways to Avoid Payment Obligation

by Lee E. Berlik

Those who personally guarantee repayment of a loan need to understand that a personal guarantee means what it says: if the primary obligor fails to pay, expect the noteholder to come after you. In City National Bank v. Tress (from the Western District of Virginia), the court considered various defenses raised by the guarantor and rejected them all, granting summary judgment to the bank.

Imperial Capital Bank loaned $3.2 million to Roanoke Holdings, LLC. Moishe Tress and Yehuda Dachs signed a promissory note on behalf of Roanoke Holdings and personally guaranteed the loan. Roanoke Holdings defaulted on the loan and Tress and Dachs failed to make payments as personal guarantors. Imperial Capital went into receivership, however, and the receiver sold the note and guaranty to City National Bank. City National sued the guarantors and promptly moved for summary judgment. The summary judgment motion against Dachs was unopposed and granted. Tress opposed the motion and sought summary judgment himself.

Under Virginia law, a guaranty is a contract in which a guarantor agrees to be answerable for the debt of another in case of that person’s failure to pay. To recover on a guaranty, a party must show (1) the existence and ownership of the guaranty contract; (2) the terms of the primary obligation; (3) default; (4) and nonpayment of the amount due from the guarantor.

August 15, 2013

Damages Must Be Proven With Reasonable Certainty

by Lee E. Berlik

A plaintiff must prove his damages claim with reasonable certainty by providing sufficient facts and circumstances to allow the fact finder to make an intelligent and probable estimate of the damages sustained. In Crum v. Anonymizer, the Fairfax Circuit Court refused to modify a jury verdict awarding the plaintiff less than he contended he was owed when the court found he failed to present sufficient evidence of his damages.

In Crum, the jury found that Anonymizer, Inc. had breached its Sales Incentive Plan when it capped Daniel Crum’s total commissions and cut his commission percentage from 6% to 3%. The jury awarded Crum $139,458.17 in damages, but it determined that Crum had not proven his breach of contract claim with regard to post-termination commissions.

Crum made a Motion for Judgment Notwithstanding the Verdict, asserting that the Sales Incentive Plan contained the only conditions he had to satisfy to earn commissions and that no evidence had been presented that he had failed to satisfy those conditions. Crum contended that the only evidence shown was that Anonymizer stopped payments once it no longer employed Crum. Anonymizer produced evidence that corporate practice was to stop paying sales commissions after termination, but there was no evidence that continued employment was a condition of the Sales Incentive Plan. Accordingly, Crum argued that the jury had no basis to conclude that continued employment was a condition and should have awarded him damages on his post-termination claim.

August 12, 2013

Business Tort Case Moves Forward Against Virginia Company

by Lee E. Berlik

AWP, Inc. is engaged in the business of traffic control solutions for road construction sites and emergency situations. AWP alleges that Shawn Watkins, a former employee, began his own traffic control business, Traffic Control Solutions, LLC (TCS) while still working at AWP, and that he misappropriated information he obtained from his position at AWP such as the identity, needs and issues of customers, pricing, and protocols and methodologies for traffic control. AWP deems this information protected trade secrets. Watkins also allegedly solicited four AWP employees to join him at TCS. AWP prepared to sue Watkins but settled prior to litigation, with Watkins agreeing to cease TCS operations, never work with an AWP competitor, and turn over all AWP property. Watkins also signed an affidavit stating that he was instrumental in creating TCS and had access to AWP’s trade secrets which he used without permission to underbid AWP on jobs and misappropriate AWP customers.

Instead, AWP sued its competitor Commonwealth Excavating, Inc. and its president, Ira Biggs. AWP claimed that Watkins approached Biggs and offered to sell AWP’s trade secrets and equipment for $45,000. Commonwealth allegedly offered to hire the four AWP employees who left for TCS, and it offered Watkins an $85,000 salary which Watkins refused for fear of violating his non-compete agreement. AWP believes that Watkins and Biggs plotted to have Commonwealth take over at least four of AWP’s customers, but the complaint does not state whether any of the customers accepted the offer. The complaint contains counts for common law conspiracy, statutory business conspiracy, misappropriation of trade secrets under the Virginia Uniform Trade Secrets Act (VUTSA), tortious interference with contract or business relationships and unjust enrichment. The defendants moved to dismiss.

Under Federal Rule of Civil Procedure 12(b)(6), a plaintiff must show more than a mere possibility that a defendant has acted unlawfully. Rather, a plaintiff must demonstrate enough factual matter which, if accepted as true, states a plausible claim for relief. In ruling on a 12(b)(6) motion, a court will accept factual allegations as true and construe them in the light most favorable to the plaintiff, but threadbare recitations of the elements of a cause of action are not sufficient and must be supported by sufficient facts.

August 5, 2013

Remedies Scrutinized in Trade Secrets Case Even After Default

by Lee E. Berlik

The allegations in Autopartsource, LLC v. Bruton presented a fairly egregious case of stolen trade secrets. Due to a defendant’s failure to answer, those allegations were deemed true. As remedies, Autopartsource sought $1,131,801.55 in compensatory damages, $350,000 in punitive damages (the statutory maximum), $59,409.72 in attorneys’ fees and costs, a worldwide production injunction to last seven years, and a permanent injunction prohibiting the use of Autopartsource’s trade secrets. The court held an evidentiary hearing and ruled that while Autopartsource was entitled to an injunction and substantial damages, the scope of the requested injunction would be narrowed and the damages would be reduced.

Autopartsource designated employee Stephen Bruton to spearhead the company’s effort to develop business in China, where it sources its automobile parts. Bruton secretly developed his own competing business, BBH Source Group, and misappropriated Autopartsource’s trade secrets in doing so, using them to redirect prospective Autopartsource customers to BBH. After Autopartsource discovered Bruton’s actions and fired him, Bruton broke into an Autopartsource facility and deleted proprietary information from its database.

Autopartsource sued for violation of the Virginia Uniform Trade Secrets Act, tortious interference with business expectancy, and tortious interference with contract. The court found that Autopartsource had established liability on all three theories but that, under Virginia law, it could not recover damages under both VUTSA and its claim for tortious interference with business expectancy, as a party cannot receive damages for a common law tort if the underlying conduct involves an intentional misappropriation of a trade secret.

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