The Virginia Business Litigation Blog

November 25, 2013

Fraudulent Joinder Issue Deferred Until Service of Process Achieved

Federal courts have jurisdiction over civil actions that arise under the Constitution, laws or treaties of the United States (“federal question” jurisdiction) and in civil actions where the amount in controversy exceeds $75,000 and the matter is between citizens of different states (“diversity” jurisdiction). Parties must be completely diverse for diversity jurisdiction to apply, meaning that no party may share common citizenship with any party on the opposite side. A defendant may “remove” a case from state to federal court if the federal court has either federal question or diversity jurisdiction. The party seeking removal must establish that jurisdiction is proper, and if federal jurisdiction is doubtful, removal is not appropriate. In Terry Phillips Sales, Inc. v. Suntrust Bank, on a motion to remand due to failure of service on nondiverse defendants, the United States District Court for the Eastern District of Virginia retained jurisdiction of the case and ordered plaintiffs to properly serve the nondiverse defendants.

The plaintiffs in Sales were Virginia residents and employees of Suntrust Bank. They filed a complaint in a Richmond circuit court alleging multiple tort claims arising from an Employee Stock Ownership Plan. The complaint named Suntrust and three of its employees who plaintiffs alleged were Virginia citizens. Defendants contended that Suntrust is a citizen of Georgia with its principal place of business in Atlanta and that plaintiffs fraudulently joined the individual Virginia defendants to destroy diversity. Defendants removed the case based on diversity jurisdiction, and plaintiffs moved to remand the case back to state court.

Plaintiffs apparently had not properly served the nondiverse individual defendants but argued that their failure to do so was not evidence of fraudulent joinder as that those defendants were aware that plaintiffs intended to pursue their claims. Plaintiffs submitted an exhibit indicating that two of the defendants received at least some indication that they were being sued in the Richmond circuit court, but they did not provide any evidence that the third individual defendant had any notice.

November 18, 2013

Failure to Mediate Prior to Litigation Held Grounds for Dismissal

by Lee E. Berlik

A court will not substitute a judicial resolution for a contractually agreed-upon remedy when two sophisticated parties negotiate a contract at arm’s length. In Dominion Transmission, Inc. v. Precision Pipeline, the United States District Court for the Eastern District of Virginia dismissed a complaint where the two corporations had agreed to submit any disputes to mediation before commencing litigation and failed to do that. The basis for the dismissal, however, relied on the court’s inherent authority to control its docket, not on any lack of subject matter jurisdiction.

Utility company Dominion Transmission contracted with Precision Pipeline to construct a portion of the Appalachian Gateway pipelines. The parties’ contract provided that the parties would abide by a multi-tiered, progressive alternative dispute resolution (“ADR”) process before commencing litigation. In the event of a dispute, (1) the aggrieved party was to notify the other party of the dispute; if the parties could not resolve the dispute, they were required to (2) meet and discuss the issue among the project managers; then (3) proceed to a meeting of senior officers; and finally (4) proceed to mediation governed by the American Arbitration Association standards.

After Precision completed the pipelines, the parties met to close out the contract but could not reach agreement. Precision presented change order requests and filed mechanics’ liens and foreclosure actions. The parties communicated for several months, Dominion invoked its audit rights, and the parties disagreed over the amount, format and content of Precision’s required production of information. Both parties referred to the ADR provision of the contract in their communications, and counsel for the parties met at least once, but neither party initiated a meeting of senior executives or submitted the dispute to formal mediation as steps (3) and (4) of the contractual ADR provision required. Instead, Dominion filed suit in the United States Court for the Eastern District of Virginia, and Precision moved to dismiss for lack of subject matter jurisdiction, arguing that the court lacked power to hear the case because a contractual condition precedent (submission to mediation) was not met.

November 11, 2013

Who Is Race Judy Cotta and Why Is She Barring My Claim?

by Lee E. Berlik

“Res judicata” is Latin for “the thing has been judged.” It basically means that once you sue someone and obtain a result–win or lose–the matter is over and you can’t sue the same person again for the same harm. It’s like the civil equivalent of double jeopardy. The doctrine is designed to conserve judicial resources, deter multiple lawsuits, and promote reliance on judicial decisions. A party claiming that a suit is barred by res judicata must establish: (1) a previous final judgment on the merits; (2) an identity of the cause of action in both suits; and (3) an identity of parties or their privies in the two suits.

A recent example is provided by Nathan v. Takeda, in which the United States Court of Appeals for the Fourth Circuit affirmed the district court’s dismissal of a defamation claim based on res judicata grounds.

In an earlier case, Noah Nathan sued his employer, Takeda Pharmaceuticals America, for discrimination and retaliation under Title VII. After proceeding to judgment in that case, he filed a second suit, this time including several Takeda employees as defendants and changing his legal theory to defamation, conspiracy, and negligent supervision and retention. Nathan admitted the existence of a prior final judgment on the merits, but argued that his second case should have been allowed to proceed because the causes of action were different and different parties were involved.

November 1, 2013

Trial Courts have Sole Discretion Whether to Allow Cameras in the Courtroom

by Lee E. Berlik

Virginia Code § 19.2-266 governs media coverage of judicial proceedings and provides that a court “may solely in its discretion” permit photographs and broadcasting. Elsewhere, the statute specifies that “for good cause shown,” the presiding judge may prohibit or restrict coverage. Yesterday, the Supreme Court of Virginia clarified the seemingly ambiguous language of this statute in Virginia Broadcasting Co. v. Commonwealth.

The trial of George Huguely V for the murder of his on-again off-again girlfriend Yeardly Love was sensational news. Huguely and Love were young, attractive student athletes at the University of Virginia, with privileged pasts and bright futures engaged in a volatile relationship. The case was covered extensively in the media, but the court did not allow cameras in the courtroom during the trial. The court also refused to allow Virginia Broadcasting Company (“VBC”) to have a camera in the courtroom during Huguely’s sentencing hearing, and VBC appealed the decision.

The trial court, the Circuit Court of the City of Charlottesville, held a hearing on VBC’s request to record the sentencing proceedings. VBC argued that concerns about the impact of cameras on jurors and witnesses were not implicated in a sentencing hearing and that neither the Commonwealth nor Huguely had offered evidence of prejudice or established good cause for keeping a camera out of the hearing. Both the Commonwealth and Huguely opposed VBC’s request, arguing that cameras would have a detrimental impact on witnesses testifying at the hearing. Huguely asserted that VBC had not articulated any change in circumstances that would warrant the trial court’s reconsideration of its previous ruling to keep cameras out of the courtroom. Concerned about the effects of cameras on the witnesses and the effect of coverage on witnesses and jurors in a pending civil case that Love’s family had filed against Huguely, the trial court denied VBC’s request.

October 29, 2013

Citizenship of LLC Members Determines LLC’s Citizenship for Diversity Purposes

by Lee E. Berlik

A federal court must determine that it has subject matter jurisdiction and personal jurisdiction and that venue is proper before it can adjudicate a matter. If it lacks any one of the three, the court will not proceed, and it need not examine whether the other two requirements are met. In diversity actions, subject matter jurisdiction is appropriate where the amount in controversy exceeds $75,000 and the dispute is between citizens of different states. In Liberty Mutual v. KB Home, the Newport News Division of the Eastern District of Virginia found that a plaintiff need not show with legal certainty that the amount-in-controversy requirement is met, but must allege the citizenship of all individual members of a defendant limited liability company to establish the citizenship of the LLC.

Liberty Mutual Fire Insurance Company filed a complaint against KB Home, KB Home Raleigh-Durham, Inc. and Stock Building Supply, LLC–a subcontractor for KB Home Raleigh-Durham–seeking a declaratory judgment that it had discharged its duties as defendants’ insurer in a North Carolina state court action. The KB Home defendants moved to dismiss for lack of subject matter jurisdiction, personal jurisdiction and improper venue.

To determine whether the amount in controversy requirement for subject matter jurisdiction is met, courts rely on the sum claimed by the plaintiff in good faith. A defendant contesting the amount in controversy must show that it is legally impossible for the plaintiff to recover the amount sought. Liberty Mutual’s complaint alleged in a simple and conclusory fashion that the amount in controversy exceeded the sum or value of $75,000. The defendants pointed out that the complaint also alleged that the insurance policy between the parties was exhausted such that the sum at stake could not exceed $75,000. Liberty Mutual responded that legal defense costs totaling $82,314.74 were at issue as evidenced by a legal billing invoice.

October 21, 2013

Oral Profit Sharing Agreement Held Enforceable

by Lee E. Berlik

Virginia’s statute of frauds provides that “[u]nless a …contract…is in writing and signed by the party to be charged or his agent, no action shall be brought…[u]pon any agreement that is not to be performed within a year.” Va. Code Ann. § 11-2(8). A party wishing to assert the statute of frauds as an affirmative defense to a breach of contract action must show that the parties’ oral agreement was within the statute of frauds. The issue is whether the contract as a whole can be fully performed on one side within a year, even through the occurrence of some improbable event. If a court can conjure up some contingency, no matter how unlikely, that would allow either party to completely perform all of its contractual obligations within one year, the statute of frauds will not apply. The United States District Court for the Eastern District of Virginia recently examined this issue in Blue Sky Travel v. Al Tayyar.

Blue Sky purchased airline tickets that Al Tayyar Group (“ATG”) then resold to the Saudi Arabian Ministry of Higher Education (the “Ministry”). The parties orally agreed to share the profits that ATG realized from the re-sales. When Blue Sky sued ATG for breach of contract, ATG asserted the statute of frauds as an affirmative defense arguing that since Blue Sky’s share of the profits could not be calculated until after the end of the calendar year, an oral contract for profit sharing could not have been performed within a year and therefore fell within the statute of frauds.

The court found that the parties’ agreement was premised on ATG receiving orders for tickets from the Ministry and that without an order, Blue Sky would not purchase tickets and the parties would not share any profits. The contract did not obligate the Ministry to order tickets, so it was possible that the Ministry could have decided not to order any tickets in a year or stopped split money.jpg ordering tickets at any time such that neither Blue Sky nor ATG would be required to perform. Also, the Ministry contract could have been terminated within a year of the parties’ agreement. Therefore, either or both parties could have completed their performance under the oral agreement within a year without breaching or terminating the agreement. The court held that ATG failed to carry its burden of establishing that the parties’ oral agreement could not have been fully performed by either party within a year, and that the oral contract was therefore outside the statute of frauds.

October 7, 2013

References to Marketing Brochure Deemed Insufficient to Support Fraud Claim

by Lee E. Berlik

Although a plaintiff asserting a fraud claim in federal court may allege malice, intent, knowledge, and other conditions of a person’s mind in general terms, he must plead the circumstances constituting the fraud with particularity, identifying the time, place, content, and maker of each alleged fraudulent circumstance. Failure to plead fraud with sufficient particularity will result in dismissal under Federal Rule of Civil Procedure 12(b)(6), as demonstrated by the recent failed case against Capella University.

Melvin Murphy had a Bachelor of Arts degree and was pursuing an M.B.A. when he received online advertisements for Capella University’s doctoral programs in business management. Capella’s “enrollment counselors” responded aggressively to Murphy’s initial inquiries with calls, emails and marketing materials. Murphy contends that Capella’s promotional materials contained misstatements and misrepresentations upon which he relied when he enrolled in the school’s Ph.D. program in Organization and Management with a specialization in Leadership. For example, one brochure featured testimonials from supposed Capella doctoral students accompanied by photographs and quotes. Murphy asserts that at least one person pictured and quoted was not a graduate of Capella, was not a current student in the Ph.D. program and did not give permission for Capella to use his image. According to Murphy, the promotional materials were false and misleading as Capella did not award doctoral degrees in the field of Organization and Management and had no plans to do so. Capella agents allegedly reemphasized these misrepresentations when speaking with Murphy.

Murphy complains that Capella also failed to tell him that a doctoral candidate in any subject must pass Comprehensive Exams in order to be eligible for a Ph.D. and that most candidates fail these exams. According to Murphy, only 10% of Capella’s degree candidates obtained their desired degree. He asserts that these material omissions happened despite frequent contact with “representatives of Capella, including the Capella ‘enrollment counselors.'”

September 25, 2013

Arbitrator Designation Deemed Severable from Contract

by Lee E. Berlik

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.

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