The Virginia Business Litigation Blog

July 13, 2020

Principal and Agent Are Not Separate Persons for Purposes of Tortious Interference Claim

To state a claim for tortious interference with a business expectancy (as opposed to a realized contract), a plaintiff must allege: (1) the existence of a valid business relationship or expectancy “with a probability of future economic benefit”; (2) knowledge of the relationship or expectancy; (3) reasonable certainty that, absent intentional misconduct, “the claimant would have continued in the relationship or realized the expectancy”; and (4) damage as a result of the interference. (See Glass v. Glass, 321 S.E.2d 69, 77 (Va. 1984)). The intentional, interfering misconduct must involve “improper methods” such as unfair competition, unethical conduct, sharp dealing, misuse of confidential information, or breach of fiduciary duty. Only strangers to the relationship can be held liable for interfering with it. Tortious interference requires interference in a plaintiff’s relationship with another, rather than in plaintiff’s relationship with the defendant or his principal.

Where the party interfered with and the alleged interferor are in a principal-agent relationship, the interferor is not considered a third party. Agents, for example, can’t be liable for tortiously interfering with business expectancies to which their principals are parties. (See Livia Prop., LLC v. Jones Lang LaSalle Americas, Inc., No. 5:14cv53, 2015 WL 4711585, at *6-7 (W.D. Va. Aug. 7, 2015). Think of it this way: if your answer to the second element of tortious interference (whether the defendant had knowledge of the existence of the business expectancy) is “of course the defendant had knowledge–he was part of it!”, that would be a good sign that the defendant is not a stranger to the relationship and can’t be sued for tortious interference.

June 13, 2020

Source-of-Duty Rule May Apply to Bar Fraud Claim Inextricably Entwined with Contractual Duties

by Lee E. Berlik

If you sue someone for fraud, you can win punitive damages in addition to regular compensatory damages. If you’re suing only for breach of contract, punitive damages are a no-go. As punitive damages can add up to $350,000 to the value of the plaintiff’s claim, plaintiffs naturally try to add fraud claims to their breach-of-contract lawsuits whenever possible. The “source of duty” rule, however, limits the circumstances under which plaintiffs can pursue such a strategy. The rule provides that tort claims (like fraud) can only be pursued if the source of the duty allegedly breached is the common law and not a contract entered into between the parties. The Virginia Supreme Court has clarified in recent years that if a fraudulent misrepresentation is made within a contract, the plaintiff is limited to contract remedies, but if a misrepresentation is made for the purpose of inducing another party to enter into a contract, a separate fraud claim can be pursued.

If a fraudulent misrepresentation is made before a contract even comes into existence, it’s a pretty good bet that you’re dealing with a separate fraud claim and won’t be limited to contract remedies. After a contract is formed, however, it can be tricky to determine the source of the duty violated. One reason for this is that courts have applied the source-of-duty rule to exclude fraud claims when they are based on misrepresentations that are closely related to promises made within the contract, even if the misrepresentations are not made expressly therein. (See Tingler v. Graystone Homes, Inc., 834 S.E.2d 244, 257–58 (Va. 2019) (noting that “a putative tort can become so inextricably entwined with contractual breaches that only contractual remedies are available)). If a fraudulent act “arises out of” a contractual relationship and the damages caused by the fraud also arise out of that relationship, that can be enough for application of the source-of-duty rule.

May 16, 2020

Motions Craving Oyer in Virginia

by Lee E. Berlik

One of the delightful aspects of practicing law in Virginia is that we still get to use antiquated legal terms that most states stopped using a century or so ago. Where a lawyer might file a motion to dismiss in some states, here we file a “demurrer” or a “plea in bar.” Rather than move for a directed verdict or judgment as a matter of law at the close of the plaintiff’s evidence at trial, we make a “motion to strike.” Until relatively recently, we weren’t even initiating lawsuits with complaints; we were filing “motions for judgment” instead. In today’s blog post, I’m going to tell you about a fun little motion we call a “motion craving oyer.”

A motion craving oyer sounds a lot more exotic than it is. To “crave oyer” is simply to demand production of a written instrument when a plaintiff files a lawsuit based on that instrument but fails to attach a copy to the complaint. It’s based on the idea that a court can’t rule intelligently on a claim without having the opportunity to see all essential documents upon which the claim is based. “When a court is asked to make a ruling on any paper or record, it is its duty to require the pleader to produce all material parts.” (Culpeper National Bank v. Morris, 168 Va. 379, 382-83 (1937)). Motions craving oyer should be granted, however, only where the missing documents are essential to the claim. (Byrne v. City of Alexandria (Va. Sup. Ct. May 28, 2020)). These motions can be useful when a defendant may have defenses to a lawsuit that aren’t apparent without examining the instrument in question. If oyer is granted, the instrument becomes part of the complaint and a defendant can proceed to file other responsive pleadings that may be appropriate.

April 11, 2020

Unjust Enrichment vs. Quantum Meruit

by Lee E. Berlik

Express contracts are easy enough to understand. An express contract is a legally enforceable agreement formed by an exchange of promises, the terms of which are declared, either orally or in writing, at the time the agreement is formed. A mutual meeting of the minds is required, and the agreement must be supported by consideration. If I promise to pay you $10 to wash my car, and you accept my offer and proceed to wash my car, we’ve formed a contract and I am legally obligated to fork over that $10. But what if you just decided on your own to wash my car without discussing it with me first? Or maybe I ask you to wash my car and you accept, but we never discuss price? In situations like these, I may still be required to pay you a fair price for the service you provided, even though we never actually formed a contract. The legal concepts involved are known as unjust enrichment and quantum meruit. Let’s review what these related-but-distinct terms mean.

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March 14, 2020

No Tortious Interference Claim Unless Expectancy is Real

by Lee E. Berlik

Virginia recognizes claims for both tortious interference with existing contracts and tortious interference with prospective, anticipated contracts, known as business expectancies. If your business is counting on winning a major contract but then the work suddenly goes to a competitor instead, it may be natural to wonder whether the competitor won the business fairly or through unfair competition or other improper methods. The success of a tortious interference claim based on some unrealized economic benefit anticipated in the future depends heavily on the certainty with which that benefit was expected. There is no claim for tortiously interfering with one’s dreams and aspirations.

The first element of a tortious interference claim is showing “the existence of a business relationship or expectancy, with a probability of future economic benefit to plaintiff.” (See Am. Chiropractic v. Trigon Healthcare, 367 F.3d 212, 228 (4th Cir. 2004)). A mere possibility of future economic benefit is insufficient. A recent case out of the Norfolk Division of the Eastern District of Virginia provides a good example.

February 17, 2020

Non-Compete Agreements Between Businesses More Likely to Be Held Enforceable

by Lee E. Berlik

Noncompete agreements are typically found in employment agreements between employers and their employees. But that’s not the only place these clauses are found. Sometimes you’ll have two sophisticated companies of roughly equal bargaining power who, for whatever reason, wish to enter into a binding agreement placing restrictions on the one of the entity’s ability to compete with the other. Perhaps one company has acquired or merged with another and needs to ensure that the target company’s former officers and directors don’t immediately form a competing business and take their old clients with them. Or perhaps, as was the case recently in the dispute between wood-flooring contractors Lumber Liquidators and Cabinets To Go, two businesses with overlapping ownership simply seek to reach an agreement to reduce competition and minimize the sharing of confidential information. The important thing to note is that most of the reasons Virginia courts disfavor noncompete agreements have to do with fairness to the employee and do not apply when the two contracting parties are both businesses. Therefore, courts are much more likely to enforce noncompete agreements found in a business-to-business context than in an employment setting.

The basic facts of Lumber Liquidators v. Cabinets To Go are as follows. About 10 years ago, hardwood flooring retailer Lumber Liquidators learned that its Chairman and largest shareholder, Thomas D. Sullivan, was also involved in the ownership and operation of Cabinets To Go, which sold kitchen and bath fixtures and building supplies. Concerned that Sullivan might divert business opportunities or confidential business information over to Cabinets To Go, Lumber Liquidators entered into a number of agreements with Cabinets To Go. Among the agreements formed between the companies was a pair of “reciprocal restrictive covenants” in which Cabinets To Go agreed not to engage in the sale of hardwood flooring anywhere in the world during the term of the agreement and a period of two years thereafter. Lumber Liquidators similarly agreed not to sell kitchen cabinets.

January 16, 2020

Can Your Business Prove its Noncompete Agreements Are Reasonable?

by Lee E. Berlik

Once upon a time, courts would routinely dismiss non-compete lawsuits brought by businesses against their former employees if the agreements at issue appeared to impose an unreasonable burden on the employee’s ability to earn a living. The rules of the game changed a bit back in 2013 when the Virginia Supreme Court decided Assurance Data v. Malyevac, where it held that in most cases, even if the agreement appears overly broad on its face, the employer should be given an opportunity to prove that for its particular business model, it has a legitimate business interest in restricting a particular employee’s ability to compete with it for the length of time and in the geographic area specified in the agreement. Proving reasonableness is often easier said than done.

For a noncompete to be enforceable in Virginia, it has to be worded so that its restrictions (a) are no greater than necessary to protect the employer’s legitimate business interests, (b) are not unduly harsh or oppressive in limiting the employee’s ability to earn a living, and (c) are reasonable considering sound public policy. It’s up to the employer to produce evidence sufficient to demonstrate each of these elements. As reasoned by the Assurance Data court, “restraints on competition are neither enforceable nor unenforceable in a factual vacuum.” A recent decision out of Fairfax County Circuit Court demonstrates how this can play out in the real world.

December 19, 2019

Fraudulent Inducement Claims Not Covered by Source-of-Duty Rule

by Lee E. Berlik

Many lawyers pursuing business litigation on behalf of their clients will file a whole panoply of claims rather than content themselves with a single count for breach of contract. As the law generally permits a wider range of remedies (and higher damages awards) for tort claims like fraud and tortious interference, plaintiffs seeking to enforce contract rights in court will often sue for various tort claims in addition to breach of contract. Sometimes this works and sometimes it doesn’t. Courts are guided by various principles to help them weed out contract-based claims disguised as tort claims. One such principle is known as the “source of duty” rule.

When a plaintiff alleges that the defendant violated some duty owed to him, the court will examine the source of the duty allegedly violated. If the source of the duty is a contract entered into by the parties, as opposed to common law or some provision of the Virginia or United States Code, the court will treat the claim as one for breach of contract and limit remedies accordingly. Of course, there are circumstances in which a defendant can both breach a contract and commit a tort by violating a common-law duty. It is up to the court, however, to dismiss any tort claims based on the alleged violation of a duty that exists solely by virtue of a contractual agreement. (See Preferred Sys. Sols., Inc. v. GP Consulting, LLC, 284 Va. 382, 408 (2012)).

November 27, 2019

Kevin Hart Did Not Breach Fiduciary Duty, Says Virginia Court

by Lee E. Berlik

A couple of years ago, comedian Kevin Hart teamed up with a Virginia mobile-game developer called Stand Up Digital, Inc., to develop and release a video game called “Gold Ambush” that would feature Hart and his family members as playable characters. Hart licensed his likeness to Stand Up and was granted a 20% stake in the company as well as a seat on the board of directors in exchange. The game was launched in September 2017 but did not perform as well as the developer had hoped and is no longer available for download. Stand Up attributes the poor performance of the game to Hart’s decision to issue an emotional apology on Instagram–just days prior to the game’s launch–following rumors of infidelity. In the recording , Hart apologized to his wife and kids for having done “something wrong” and said that he would not permit “another person to have financial gain off his mistakes.” The video has been viewed several million times.

Stand Up sued Hart for breach of fiduciary duty (amid other claims), arguing that Hart’s failure to warn it of his plans to “go public” about the alleged affair before posting his Instagram apology damaged the success of Gold Ambush. The court allowed the case to proceed through the discovery phase but ultimately entered summary judgment in Hart’s favor on the fiduciary-duty claim, finding that there was no evidence he breached such a duty.

October 29, 2019

Waiving the Statute of Limitations: Harder than You Might Think

by Lee E. Berlik

As a general rule, legal rights may be waived by contractual agreement. The protection afforded by statutes of limitations may be waived like other rights, but only in very narrow circumstances, due to a Virginia law that few know about. The General Assembly decided to make it a bit more difficult to waive a statute of limitations than some other rights, and enacted Virginia Code § 8.01-232, which states in pertinent part as follows:

Whenever the failure to enforce a promise, written or unwritten, not to plead the statute of limitations would operate as a fraud on the promisee, the promisor shall be estopped to plead the statute. In all other cases, an unwritten promise not to plead the statute shall be void, and a written promise not to plead such statute shall be valid when (i) it is made to avoid or defer litigation pending settlement of any case, (ii) it is not made contemporaneously with any other contract, and (iii) it is made for an additional term not longer than the applicable limitations period.

Now that’s a pile of nearly incomprehensible legalese. One of the purposes of this blog, however, is to help people understand stuff like this, so let me try to decode it for you.

The VirginiaBusiness Litigation Blog