The Virginia Business Litigation Blog

February 15, 2013

The Consequences of Destroying Evidence

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.

February 5, 2013

Failure to Allege Basis for Subject Matter Jurisdiction Can Result in Sanctions

by Lee E. Berlik

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.

February 1, 2013

Feeling the Effects of Out-of-State Conduct Won’t Guarantee Personal Jurisdiction Over Nonresident

by Lee E. Berlik

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.

January 28, 2013

Lumping Defendants Together Can Result in Dismissal

by Lee E. Berlik

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.

December 27, 2012

Attorney’s Lien Superpriority Subject to Reasonableness of Fees

by Lee E. Berlik

Russell Lee Ebersole recently won a $45,000 judgment in a case for defamation and business conspiracy, racking up over $135,000 in attorney fees to obtain it. In September, Judge Cacheris ruled that only around $80,000 of the incurred fees were reasonable, and awarded fees to the plaintiff accordingly. Alas, it appears that Mr. Ebersole is never going to see any of this money, because he owes the government–which timely perfected its restitution lien–over $700,000.

Shortly after the judgment was entered, the government applied for a Writ of Continuing Garnishment to enforce its lien against the proceeds. Ebersole’s lawyers intervened and objected, claiming that the superpriority of their attorney’s lien (under 26 U.S.C. § 6323(b)(8)) applied to all fees billed to their client, not just the amount deemed reasonable by Judge Cacheris.

The priority of a federal lien based on an order of restitution is generally determined by who got there first, i.e. “first-in-time, first-in-right,” and the government’s lien was filed first. But there is an exception to that rule. An attorney’s lien “to the extent of his reasonable compensation for obtaining such judgment” enjoys superpriority status under 26 U.S.C. § 6323(b)(8). Regulations interpret “reasonable compensation” as the amount customarily allowed under local law for similar legal work based on the individual case circumstances.

December 18, 2012

Leesburg Business Wins Summary Judgment After Defendant Fires Lawyers

by Lee E. Berlik

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 Judge Cacheris.jpg 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.

December 11, 2012

Does Virginia’s Subpoena Power Extend to Foreign Corporations?

by Lee E. Berlik

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.

November 26, 2012

Joinder of Involuntary Plaintiff Permitted Only “In a Proper Case”

by Lee E. Berlik

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.

November 19, 2012

Can I Sue My Boss for Wrongful Termination?

by Lee E. Berlik

Until recently, the answer to this question has not been clear. After all, it’s the employer that does the hiring and firing, not necessarily the individual managers and supervisors. Employment defense lawyers have argued that by definition, a supervisor cannot be liable for wrongful termination when the supervisor is not the one effecting the termination. But on November 1, 2012, the Supreme Court of Virginia clarified that Virginia law does, in fact, recognize a cause of action for wrongful discharge in violation of public policy against a supervisor who was not the plaintiff’s actual employer but who participated in the wrongful firing and who was responsible for the violation of Virginia public policy. The case is Angela VanBuren v. Stephen A. Grubb.

VanBuren was a nurse at Virginia Highlands Orthopedic Spine Center when (according to her allegations) she was sexually harassed by her supervisor, Virginia Highlands’ owner Dr. Stephen Grubb. The harassment escalated and resulted in Grubb firing VanBuren when she rejected his advances and told him she planned to stay with her husband. VanBuren sued both Dr. Grubb and Virginia Highlands in federal court for wrongful discharge. The district court granted Dr. Grubb’s motion to dismiss, finding that the Supreme Court of Virginia would most likely hold that wrongful discharge claims are only recognized against the employer and not against supervisors in their individual capacity. VanBuren appealed to the Fourth Circuit, and that court certified the question to the Supreme Court of Virginia.

Although Virginia strongly adheres to the employment-at-will doctrine, it does recognize an exception when a discharge violates public policy. The exception is narrow and not every policy violation will give rise to a wrongful discharge claim. Discharge based on the employee’s refusal to engage in a criminal act is one of the narrow exceptions to the employment-at-will doctrine, and the court found that VanBuren’s claim fell within this exception (adultery and “open and gross lewdness and lasciviousness” are crimes in Virginia).

November 10, 2012

Expert Witness Excluded From Bernsen Case, Settlement Reached Days Later

by Lee E. Berlik

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.

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