The Virginia Business Litigation Blog

January 23, 2010

Virginia Magistrate Judge Finds Reasonableness Paramount When Awarding Discovery Sanctions

As any experienced litigation attorney will tell you, the discovery process is where many cases are won and lost. Consequently, the process is often contentious and characterized by wild fishing expeditions, invasion of privacy, and abusive tactics. The Federal Rules of Civil Procedure, however, allow judges to sanction attorneys who cross the line between aggressive, zealous representation and outright discovery abuse. A recent decision out of the United States District Court for the Eastern District of Virginia lays out the guidelines for whether to punish such tactics by awarding attorneys’ fees to the other side, and if so, how much to award.

In Rutherford Controls Int’l Corp. v. Alarm Controls Corp., both the plaintiffs (“Rutherford”) and the defendants agreed to an extended deadline by which the defendants would produce all documents responsive to Rutherford’s discovery requests. The day of the deadline came, and by the close of business, the plaintiffs had not received the promised documents. Rutherford promptly filed a motion to compel the required discovery. The defendants did produce some material prior to receiving notice of the motion to compel, but the production was minimal. The court heard arguments, and while it did not officially grant Rutherford’s motion, the judge expressed serious dissatisfaction with the defendants’ discovery responses (calling them “absolute nonsense”) and commanded them to answer all of the requests more thoroughly and accurately. The defendants, without protest, complied with the judge’s demands.

Rutherford proceeded to move for sanctions in the form of reimbursement of the $11,858.07 in attorneys’ fees it incurred in connection with the motion. Rule 37(a)(5)(A) specifically permits the recovery of “reasonable expenses” incurred in moving to Paper Dump.jpg compel discovery, “including attorney’s fees.” The court quickly determined that an award of attorneys’ fees was appropriate. Rutherford made a good faith attempt to obtain the discovery without court action, the defendants’ inadequate response was not substantially justified, and there were no extenuating circumstances that would make an award of expenses unjust. The real question was whether it would be reasonable to award Rutherford the full amount of fees they incurred.

January 14, 2010

Terminated Employee May Pursue Tortious Interference Claim Against Former Supervisor

by Lee E. Berlik

Virginia employment lawyers who represent plaintiffs are often looking for creative legal theories to help their clients receive justice. Employees seeking redress for perceived wrongful termination face a steep hurdle in the employment-at-will doctrine, under which a private employer, subject to certain exceptions, is free to discharge its employees at any time, for any reason or no reason at all, without incurring civil liability. While it is usually the corporate employer who gets cast in the role of defendant, plaintiffs’ lawyers have occasionally tried to impose liability on the individual manager who terminated or discriminated against the employee, usually without much success. A recent decision from the Eastern District of Virginia’s Richmond Division, however, opens the door to possible claims of “tortious interference” against the individual bad actor.

Williams v. Autozone Stores, Inc. is a sexual harassment case brought under Title VII of the Civil Rights Act of 1964, which prohibits harassment of employees where the conduct is sufficiently severe or pervasive to create a “hostile work environment,” or where the harassing conduct results in a tangible change in an employee’s employment status or benefits (such as getting fired). Williams, a former employee of Autozone, claimed that her manager, Willie Pugh, touched her inappropriately and made sexually-charged comments toward her. After asking Pugh to stop, Williams alleges that he wrote her up for nonexistent problems and that she was consequently transferred to a different store and eventually fired. Williams sued Autozone for alleged discrimination, but also sued Pugh himself on the theory that he tortiously interfered with her employment contract with Autozone. Autozone moved to dismiss the claim, arguing that Pugh was an agent of the company and that a company cannot interfere with its own contracts, but Judge Spencer allowed the claim to go forward.

Pugh pointed out that claims for tortious interference with contract require the existence of three separate parties: the two parties to the contract, and a third party who induces one of the two contracting parties to breach the agreement. As an employee of the company, he argued, he and Autozone were the same entity, negating the possibility of a third party. Pugh also pointed out that Williams acknowledged in her complaint that Pugh was an employee acting within the scope of his employment with Autozone.

January 4, 2010

Virginia Government Contractor Accused of Business Conspiracy

by Lee E. Berlik

Conducting business in Virginia can be a cutthroat affair. Our capitalist system demands that firms compete with each other in price, quality, and technology, and the most innovative company will often win the largest number of lucrative government contracts. Unfortunately, some contractors utilize unfair, unethical, or illegal methods in the name of competition. Virginia is one of several states that have enacted “business conspiracy” statutes designed to discourage and punish some of these practices. The statute is very popular with Virginia lawyers, due in no small part to its provisions allowing recovery of both treble damages and attorneys fees.

In Turbomin AB v. Base-X, Inc., a case pending in the federal court sitting in Lynchburg, the plaintiff (Turbomin) had a contract to perform services for Base-X, a government contractor located near Lexington. In winning this contract, Turbomin beat out another defendant in the case, Lindstrand Technologies Ltd. Eventually, however, Base-X terminated its contract with Turbomin and refused to pay the balance allegedly owed to Turbomin. Turbomin’s officers suspected that disgruntled Lindstrand employees convinced Base-X employees to breach the contract. Invoking Virginia’s business conspiracy statute, Turbomin alleges that Base-X and Lindstrand “conspired to interfere with a business reputation”.

Judge Norman Moon, in granting the plaintiff’s motion to add a business conspiracy count to its complaint, clarified the requirements of this Virginia law. In order to win this type of conspiracy claim, a plaintiff must prove three things: that the defendants (1) engaged in a concerted action, (2) with legal malice, (3) resulting in damages. Judge Moon explained that a “concerted action” is any association or agreement among the defendants to engage in the conduct that caused the plaintiff injury. Legal malice, the court held, requires showing “that the defendant acted intentionally, purposefully, and without lawful justification” to injure the plaintiff. Judge Moon also observed that while a plaintiff need not prove that the defendant’s “primary and overriding purpose” in forming the conspiracy was to injure the plaintiff’s reputation, trade, or business, such must be at least one of the purposes of the conspiracy.

December 28, 2009

Richmond-Based Distributor of Indian Music Sued for Infringement

by Lee E. Berlik

The Internet has been a boon to business. It brought local economies into the global market, cut down on communications costs, and made accessible information that was once only available through painstaking research. That is not to say, however, that the technology has not had its drawbacks. Towards the end of the 1990’s, peer-to-peer file sharing websites became a haven for piracy of software, music, and movies. At first, those perpetrating these crimes were only a small segment of society, but gradually the practice became more widely accepted and piracy became prevalent in nearly every demographic. Various industries took notice and scrambled to fight back. Many are familiar with the Recording Industry Association of America‘s (RIAA) resort to the courts to sue and force settlements with those who share music over the Internet. While the RIAA pioneered this strategy, many companies are now following suit by filing suit. One such case was filed recently by Saregama India, Ltd., the biggest recording company in India, in the United States District Court for the Eastern District of Virginia.

Saregama discovered that many of its songs, popular both in India and among the Indian population in the United States, are being made available as ringtones on a website called Dishant.com. Saregama alleges that Dishant.com and its owners, Dishant Shah and Meeta Shah, violated Saregama’s copyrights because they never bought the rights to these songs nor received approval from Saregama to share the songs as ringtones. Further, Saregama claims that Dishant.com displayed Saregama logos next to the titles of the songs, which would be a trademark violation.

Under the Copyright Act, the right to distribute copies of copyrighted work, or to prepare derivative works based on the copyrighted work, belongs solely to the copyright owner. Under the Act, if Saregama can prove that the materials provided by Dishant.com are identical to or substantially identical to any property owned by Saregama, and that Dishant.com provided those materials without permission, then Saregama’s burden will be met. The consequences for a copyright violation can be substantial. If Saregama prevails, it may be entitled to recover any profits Dishant.com made from the use of the songs (or statutory damages up to $150,000 if the infringement was willful), plus reimbursement of its attorneys’ fees.

December 7, 2009

Contract or Tort? Look to the Origin of the Duty.

by Lee E. Berlik

Trial lawyers drafting lawsuits on behalf of their clients generally try to plead as many causes of action as possible. In particular, they often try to add “tort” claims to a case that is really just about a breach of contract. Virginia law generally does not permit recovery on tort claims when the duty that is breached is based on a contractual relationship. What’s the difference? For one thing, when it comes to assessing damages, the law of contracts looks to those that were within the contemplation of the parties when framing their agreement. Contract remedies are designed to compensate parties for foreseeable losses suffered as a result of a breach of a duty created by the contract itself. Tort law provides remedies for losses resulting from a breach of duty arising independently of any contract.

A recent case decided by Judge Conrad of the Western District of Virginia illustrates the distinction. In Raleigh Radiology, Inc. v. Eggleston and Eggleston, P.C., Raleigh Radiology (“RRI”), the plaintiff, entered into a contract with Eggleston, a practice management services business, which authorized Eggleston to manage and collect reimbursements owed to RRI for radiological services and which gave Eggleston control over RRI’s accounts in order to facilitate the process. In return for Eggleston’s work, the contract specified that RRI was to pay Eggleston $5.40 for each reimbursement it secured. Eventually, however, RRI came to believe that Eggleston had overcharged for services performed and had been billing for nonexistent reimbursements.

RRI sued Eggleston for breach of contract, unjust enrichment (a theory of implied contract) and the tort of conversion. Eggleston responded with a motion to dismiss the conversion claim on the ground that the duty breached was purely a contractual one, which precluded the filing of a tort claim. The court disagreed.

December 1, 2009

Big Changes to the Federal Rules of Civil Procedure

by Lee E. Berlik

Windows 7 was not my idea. But the new amendments to the Federal Rules of Civil Procedure? Maybe! A few years ago I received a stern reprimand from a federal judge in the Eastern District of Virginia for supposedly filing a brief past the 5-day deadline. I respectfully explained to the court that, under the Rules then in effect, because weekend days are not counted in time periods of less than 11 days, and because additional days are added to the deadline when papers are served by facsimile, and because if a deadline expires on a Saturday then the deadline is extended to the following Monday–or Tuesday if Monday happens to be a national holiday–then a “5-day deadline” can actually allow up to 147 days! The judge was not impressed. But I was right (up to a point), so now the Rules have been amended to prevent this sort of nonsense.

Effective today, “days” means days. For lawyers who practice in federal court, this is a radical concept. Perhaps even more radical, defendants now have 21 days in which to respond to a lawsuit rather than merely 20. I pity those about to take the bar exam. In any event, here is a summary of what are, in my view, the most significant changes to the Federal Rules of Civil Procedure:

Rule 6. Computing and Extending Time; Time for Motion Papers

November 24, 2009

Fraud: What It Is, and What It Is Not

by Lee E. Berlik

Fraud is a word that is thrown around a lot in everyday life. When pundits discuss the latest political or Wall Street scandal, the discussion often turns to the bad actors’ “fraudulent” behavior. In ordinary, non-legal parlance, the word fraud can mean anything from merely bad intent to criminal behavior. Outside the courtroom, accusing someone of fraud is generally synonymous with calling that person a cheat or a swindler. Sometimes this casual definition of fraud will overlap with the legal definition, but more often it does not. The law does not consider every act of dishonesty to amount to actionable fraud. You may be owed compensation, however, if you have truly been defrauded in a legal sense.

Actionable fraud requires more than just broken promises or a breach of contract. The law looks more harshly upon fraud. It is considered a tort, for which punitive damages are available. (Punitive damages are not recoverable in actions for breach of contract). Because a successful fraud claim will usually result in a higher damages award than an ordinary contract claim, lawyers often try to convert a contract claim into a fraud claim through artful drafting of their client’s complaint. Under Virginia law, a party alleging fraud must prove by clear and convincing evidence (1) a false representation, (2) of a present, material fact, (3) made intentionally and knowingly, (4) with intent to mislead, (5) reasonable reliance by the party misled, and (6) resulting damage to him. (See Thompson v. Bacon, 245 Va. 107, 111 (1993)). Let’s take a closer look at these elements.

1. False Representation. This is the essence of a fraud claim. The defendant must have misrepresented the truth. If somebody steals your wallet but does not communicate with you, you have not been “defrauded” and cannot maintain a fraud action against that person. (You would have other remedies you could pursue, but the correct legal theory would not be fraud because no misrepresentation was made).

November 17, 2009

Discovery in the Information Age

by Lee E. Berlik

The discovery process, the primary fact-finding tool available to litigants, has always been contentious. Parties are loathe to hand over potentially embarrassing or incriminating documents, and the costs involved can be staggering. The information age has only served to make things more complicated. As the Northern District of Illinois observed in the 2002 case of Byers v. Illinois State Police, “[m]any informal messages that were previously relayed by telephone or at the water cooler are now sent via e-mail.” Now that so many casual conversations are documented in e-mail and are, therefore, potentially subject to discovery, the discovery costs in the typical case have skyrocketed . Two recent United States District Court Cases, one out of Minnesota, Kay Beer Distributing, Inc. v. Energy Brands, Inc., and the other out of Florida, Kilpatrick v. Breg, Inc., provide a window into just how daunting electronic discovery can be, how judges are adapting traditional discovery rules to deal with these new problems, and how parties can do their part to avoid potential problems.

Information is generally discoverable if it is non-privileged and either directly relevant to a party’s claim or reasonably calculated to lead to the discovery of evidence that is directly relevant. In the Kay Beer case, Kay alleged that an oral contract gave it the exclusive right of distribution for Energy Brands’ products. Energy Brands claimed that by its understanding of the agreement, Kay’s distribution rights were limited. This was essentially a run-of-the-mill contract dispute. What made the case unique, however, was the plaintiff’s demand that the defendant hand over five DVDs containing nearly 13 gigabytes (between 650,000 and 975,000 pages) of e-mails and other documents. Each of the documents had been identified as referencing “Kay Beer”, “Kay Distributing”, or simply “Kay” by a keyword search of Energy Brands’ archives. Kay Beer argued that the documents might contain discoverable evidence showing that Energy Brands originally shared Kay’s understanding of their agreement.

The court’s approach to the discovery contest was to weigh Kay Beer’s interest in obtaining the documents against the burden Energy Brands would experience in turning them over. The court found that just because a document references a party does not support the conclusion that it contains relevant evidence. It further reasoned that in contract litigation, the only relevant statements are those made between the representatives of the companies involved; statements made by lower-level employees not empowered to speak for the company are not relevant to the official understanding of the contract. The court concluded that Kay Beer’s interest in the documents was relatively minor.

November 12, 2009

Quantum Meruit: A New Tool Available to Virginia Landowners

by Lee E. Berlik

In Virginia, an action for trespass is no longer the only remedy a landowner has against a trespasser. A Norfolk judge recently held that a landowner may sue for rent even in the absence of an express or implied lease agreement. A duty to pay rent can arise under the doctrine known as quantum meruit.

In the case of City of Norfolk v. Muladhara, LLC, Norfolk managed several lots of prime commercial real estate on which the city collected rents. The Defendant, Muladhara, began conducting business on one of the lots without ever receiving permission from Norfolk. Upon discovering the trespasser, Norfolk informed Muladhara that the city managed the land and collected rent for its use. This conversation prompted the Defendant to pay the back rent the city claimed was due. However, Muladhara continued to occupy the space without any further payment.

The court held that Norfolk may base its claim for recovery on two distinct theories. First, the court found that the conversation between the city and Muladhara that led to the payment of back rent could form the basis of an implied contract. Judge Hall clearly laid out the three elements of an implied contract: offer, acceptance, and a meeting of the minds. Simply put, the city offered to overlook the previous trespass if Muladhara paid back rent, and Muladhara accepted the offer. Even though this agreement only covered Muladhara’s past occupation of the parcel, the Defendant’s payment of back rent constituted a meeting of the minds as to the rental value of the land. Should Muladhara continue to occupy the land, the meeting of the minds forms the content of the implied contract. The city, therefore, is allowed to sue for payment of rent due, and the amount will be determined by looking to the parties’ prior agreement.

November 10, 2009

Virginia Supreme Court Allows 500-Kilovolt Power Line Into Northern Virginia

by Lee E. Berlik

The Virginia Electric and Power Company (VEPCO) and the Trans-Allegheny Interstate Line Company (TrAILCo) plan to build a 265-mile, 500-kilovolt transmission line between Loudoun County, Virginia, and Washington County, Pennsylvania. They claim that due to rapid growth in the Washington, DC metro area, energy consumption along the Potomac will likely continue to grow to levels unsupportable by the current infrastructure, and the anticipated blackouts and line failures would put them in violation of federal regulations. The State Corporation Commission approved the power line, and after a challenge by the Piedmont Environmental Council, the Supervisors of Fauquier County, Prince William County, and Culpeper County, and other interested groups, the Supreme Court upheld the construction permits.

In the case of Piedmont v. VEPCO, the court shed some light on the role of Virginia’s State Corporation Commission in developing an effective and efficient system for energy production and distribution. First, before new lines of that size can be constructed, the North American Electric Reliability Corporation (NERC) must find that they are needed to avoid regulatory violations. Second, regardless of federal approval, because the proposed placement of the lines was in Virginia, approval must be obtained from the State Corporation Commission, to whom regulatory authority has been delegated by the Virginia legislature.

The plaintiffs argued, and the court acknowledged, that the federal approval process heavily favors new transmission line construction over other possible solutions such as demand-side regulation, new power generation, and conservation efforts. The Commission, on the other hand, is required by the Commonwealth to consider the viability of these other possible solutions. Therefore, the plaintiffs claimed, the Commission’s reliance on the NERC’s findings was flawed because the federal process is biased against alternative solutions. The plaintiffs demanded that the Commission independently investigate alternative solutions and require them to be incorporated into their interstate operations.

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