EDVA Tightens Reins on Punitive Damages

edva tightens
In an opinion released on July 14th, Judge James C. Cacheris used a motion to dismiss to carve back a plaintiff’s personal injury claim for punitive damages under Virginia state law.  In granting the motion to dismiss, the judge held that punitive damages are only available for “willful and wanton conduct,” not for negligent conduct.  The opinion takes a narrow view of what qualifies as “willful” conduct, and this approach could affect not only the personal injury bar, but also other civil litigators who seek punitive damages in business cases. The case, Gillespie v. Ashford Hospitality Prime, No. 1:15-cv-350, 2015 WL 4361262 (E.D. Va. July 14, 2015), arose from hard facts:  While visiting the Marriott Crystal Gateway Hotel in Arlington, Virginia, the plaintiff and her infant granddaughter were severely injured when a lighting fixture fell from a ballroom ceiling.  The plaintiff sued both the hotel owner and the construction general contractor who installed the light fixture.  In the plaintiff’s personal injury lawsuit for negligence, she sought both compensatory and punitive damages.  The defendants then moved to dismiss the amended complaint. Judge Cacheris denied the motion as to the negligence claim for compensatory damages, but he granted the motion as to the punitive damages.  Quoting prior case law, Judge Cacheris said that “[u]nder Virginia law, to properly plead a claim for punitive damages, a plaintiff must allege sufficient facts to plausibly demonstrate such willful and wanton conduct.  Mere conclusory legal statements, without facts to support them will not suffice.” The judge went on conclude that the alleged negligent installation of the light fixture was not “willful” conduct that would justify punitive damages because the hotel owner did not intend to commit negligence:  “[The hotel owner’s] willful and conscious maintenance of an unreasonably safe hotel defies logic.  Similarly, [the general contractor’s] willful and malicious installation of an unreasonably safe light fixture would be just as bad for its business, such that it is too an illogical proposition.  In short, Plaintiff’s request for punitive damages is vaguely pleaded as a mere conclusion . . . .”.  Judge Cacheris then quoted from previous Fourth Circuit case law, stating that “[e]xemplary damages are allowable only where there is misconduct or malice, or such recklessness or negligence or as evinces a conscious disregard of the rights of others.” This opinion is notable because Judge Cacheris focuses on the question of intent, specifically whether the defendant consciously intended to harm the plaintiff, as opposed to whether the defendant intended a more general act (such as installing a light fixture).  This appears to be a tightening of the availability of punitive damages, not only in personal injury cases, but in commercial business torts.  The opinion is also noteworthy because Judge Cacheris was willing to take this action at the motion to dismiss stage, making conclusions that could be characterized as factual determinations in a future appeal. Regardless of any appeal, business litigators who seek punitive damages should be aware of this opinion and structure their complaints to adequately plead a conscious intent that satisfies the tightened standard.

Timing is Critical when Asserting Trade Secrets and Business Conspiracy Claims in Virginia Courts

partnerships issues
In a recent case, Judge James C. Cacheris of the Alexandria Division of the U.S. District Court for the Eastern District of Virginia issued an opinion that clarified the preemption provision of the Virginia Uniform Trade Secrets Act.  This opinion is useful guidance to commercial litigators in Virginia. In MicroStrategy Servs. Corp. v. OpenRisk, LLC, No. 1:14-cv-1244, 2015 WL 1221263 (E.D.Va. Mar. 17, 2015), the parties were embroiled in contentious litigation that sprang from a failed vendor agreement.  MicroStrategy provided cloud-based data storage to OpenRisk, which in turn was using the storage to develop a software platform to estimate damages to real property caused by natural disasters.  OpenRisk contracted to pay MicroStrategy for the storage space, and then provided its proprietary software to MicroStrategy to utilize the space.  The relationship between the parties soon soured, however, , OpenRisk was hit with significant employee turnover, some of which involved allegations that MicroStrategy poached OpenRisk employees.  This loss of key employees led OpenRisk to cease business operations. MicroStrategy then sued OpenRisk in the Eastern District for failure to pay contracted monthly fees relating to the data storage.  OpenRisk asserted counterclaims for misappropriation of trade secrets, business conspiracy, and aiding and abetting a breach of fiduciary duty.  MicroStrategy moved to dismiss OpenRisk’s counterclaims under Fed. R. Civ. P. 12(b)(6). As low-hanging fruit, Judge Cacheris first focused the counterclaim for “aiding and abetting a breach of fiduciary duty.”  OpenRisk asserted that MicroStrategy “aided and abetted” a key former employee of OpenRisk to violate his fiduciary duty to the company.  Judge Cacheris made short work of this claim and held that Virginia law does not recognize an independent cause of action for aiding and abetting a tort.  The judge distinguished a Supreme Court of Virginia case, Halifax Corp. v. Wachovia Bank, 604 S.E.2d 403 (Va. 2004) by noting that the Virginia high court merely assumed, for purposes of analysis, the existence of such a claim, and this was a far cry from holding that such a claim, in fact, existed. Judge Cacheris next turned to OpenRisk’s claims for business conspiracy under Va. Code § 18.2-499-500 and dealt with the procedural confusion that arises when such claims are pled alongside trade secret claims.  Under the Virginia Uniform Trade Secrets Act, if information qualifies as a “trade secret,” then the uniform act “displaces conflicting tort, restitutionary, and other law of this Commonwealth providing civil remedies for misappropriate of a trade secret.”  Va. Code § 59.1-341(A). The procedural confusion arises from the question of when in the litigation any other preempted claims must be dismissed.  In litigation, a party asserting a trade secrets claim bears the burden of proving that its stolen information qualifies as a trade secret.  Often in such litigation, the parties spar over whether reasonable efforts were taken to safeguard the secrecy of the information.  If the party asserting the trade secrets claim fails to prove this, then it has failed to prove that it had a trade secret to protect.  At that point, the Uniform Act (and the preemption provision) should not apply to the information.  But if this determination is made after the party’s alternative causes of action were dismissed as preempted under the Uniform Act, the party can be left without a remedy.  Thus, the procedural timing matters greatly in trade secrets litigation. Judge Cacheris held that he could not rule as a matter of law on an early motion to dismiss that the conspiracy claims were preempted by the Uniform Act.  He surveyed the case law on the issue and noted that the Virginia Supreme Court has not yet provided a definite answer on the timing issue.  Thus, Judge Cacheris’s opinion would leave the determination of preemption until later in the litigation, though the opinion notes contrary authority from other states holding the determination should be made at the outset of litigation. Finally, Judge Cacheris examined OpenRisk’s trade secrets claim, which was based upon the company’s proprietary software that was provided to MicroStrategy for use in the data storage.  MicroStrategy attacked the claim on the ground that OpenRisk supposedly did not take sufficient efforts to safeguard the secrecy of the software, and Judge Cacheris agreed with this argument.  The judge focused on OpenRisk’s pleading (or lack thereof), specifically that OpenRisk did not allege that the person at MicroStrategy who was provided the software was under any duty of confidentiality.  In other words, the consultant was never made to sign a Non-Disclosure Agreement that legally prevented him from sharing the software.  Because no duty of confidentiality was alleged in the counterclaim, Judge Cacheris sustained the 12(b)(6) motion on this count. MicroStrategy v. OpenRisk provides commercial litigators useful guidance regarding the procedural complexity of alternative trade secrets and business conspiracy claims – two claims that often arise in business disputes.  The opinion is useful for illustrating the EDVA judges currently view these claims, but it also demonstrates what we do not yet know.  Practioners must wait for further answers from Richmond on the remaining issues.

Fourth Circuit Recognizes Limited Federal Common-Law Due Process Review of Accreditation Decisions

limits of contracts
The Fourth Circuit recently recognized that higher-education accreditation agencies have a federal common-law duty to employ fair procedures when making accreditation decisions.  In reversing the U.S. District Court for the Eastern District of Virginia for its failure to show appropriate judicial deference to the accrediting agency’s denial of re-accreditation, the Fourth Circuit also emphasized the degree of judicial deference required when considering federal common-law challenges to such decisions and laid out a road map for what kinds of challenges might succeed in the future Although it did not reach the question whether the federal common law preempts state-law claims challenging accreditation decisions, the Fourth Circuit leaves little room for employing such claims to expand judicial review beyond the limited review afforded to federal common-law due-process claims. In Professional Massage Training Center, Inc. v. Accreditation Alliance of Career Schools and Colleges, No. 14-1086, slip op. at 13 (4th Cir. Mar. 24, 2015) (“PTMC v. ACCSC”), the Fourth Circuit joined the D.C., Third, Fifth, Sixth, and Eighth Circuits in recognizing a federal common-law duty on the part of private accrediting agencies to “employ fair procedures when making decisions that affect their members.”   This duty derives from the quasi-public function played by these private agencies as gatekeepers to a school’s participation in various federal-funding programs and the enormous power that this function gives such agencies over their member schools.  Although these private organizations are neither state actors subject to constitutional due-process requirements nor subject to any express private right of action under the Higher Education Act, Congress has given accrediting agencies “life-and-death” power over these schools by delegating to them decision-making power that affects student access to federal funding.  The Fourth Circuit recognized that this power comes with a corresponding due-process-like duty to employ fair procedures in the exercise of this power to avoid “allowing such agencies free rein to pursue personal agendas or go off on some ideological toot.”  Id. at 14. However, the federal common-law rights granted to higher-education institutions are severely circumscribed by the court’s emphasis on the limited nature of judicial review of accreditation decisions.  Based on principles of administrative law and judicial deference, the Fourth Circuit restricted judicial review of decisions by private accrediting agencies to whether the accrediting decision is “arbitrary and capricious” and is supported by “substantial evidence.”  Id. at 15-16.   The Fourth Circuit adopted this deferential standard based on the “quasi-public nature of accrediting institutions and their wide-ranging expertise in what may be highly technical and specialized fields of education.”  Id. at 16-17.  Because the accreditation process “operates as an instrument of quality control on educational institutions,” which Congress and the U.S. Department of Education have delegated to private accrediting agencies certified by the Department, the Fourth Circuit reasoned that generalist federal courts owed deference to the accrediting agency’s “expertise and knowledge” in not only the accreditation process and higher education, but also in the specialized fields under review.  Id. at 17-18 (citing Chevron U.S.A., Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837(1984)).  The court emphasized the relative importance of judicial deference by spending the greater weight of its opinion detailing the manner in which the district court was “remedially aggressive” and “conducted an impermissible de novo review” of the accreditation decision.  Id. at 20-40. PMTC v. ACCSC is significant not only for its recognition of the federal common-law rights of higher-education institutions and the deference due to decisions by accrediting agencies, but also because it clarifies the nature of these rights and provides a detailed road map into what sorts of challenges, if any, might be successful.  First, the Court defined the contours of the federal common-law right by reference to cases involving constitutional due-process claims against state actors. Second, the procedural opportunities that an accrediting agency provides an educational institution to “make its case” for accreditation is critically (if not conclusively) important to finding that these due-process standards have been satisfied.  Although the existence of discernible substantive standards used to measure performance is also important, the PMTC opinion makes it unlikely that any attack on the substantive adequacy of such standards would succeed in the Fourth Circuit, at least where the agency has provided the school with sufficient procedural opportunities to adequately respond to the agency’s reasons for denying or withdrawing accreditation. Third, the Fourth Circuit sent a very clear signal that the “substantial evidence” standard is satisfied as soon as the federal court finds in the record “anything ‘more than a mere scintilla’ provided that a ‘reasonable mind might accept [the evidence] as adequate to support’” the agency’s decision.  Id. at 26 (internal citations omitted).  Indeed, the Fourth Circuit appears to leave no room for a court to consider record evidence that an agency’s accreditation decision was wrong, as long as this there is some evidence to support the agency’s decision. Fourth, the court set a high bar for establishing “agency bias” that might justify a less deferential inquiry into the agency’s decision making.  Like their state-actor counterparts, private administrative decision makers are entitled to a presumption of honesty and integrity, absent a showing that a decision maker has a personal bias that “‘stem[s] from a source other than knowledge … acquire[d] from participating in a case.’”  Id. at 34 (internal citations omitted).  Absent evidence that the agency decision makers had this kind of personal bias or conflict of interest, the Fourth Circuit made it very difficult, if not impossible, for claims of agency bias to succeed.  The Fourth Circuit rejected the notion that agency staff expressions of frustration, or even dislike, anger, or dissatisfaction, regarding the school or its representatives was sufficient to support a claim that personal bias improperly influenced the creation of the agency record.  Absent evidence that information was improperly included in or omitted from the administrative record, evidence of what agency staff members may have thought or said about the school or its representatives appears to be irrelevant. Finally, although the Fourth Circuit avoided deciding “a serious question of cognizability” regarding the preemption of state-law challenges to accreditation decisions, id. at 40 n.3, it left little room for state-law claims to expand judicial review of such decisions.  After clarifying that an accrediting agency’s standards of accreditation do not constitute a contract between the agency and the accredited educational institutions, and that negligence claims are foreclosed by the economic-loss doctrine, the court relied on its analysis of the federal common-law claims to reject the state tortious-interference claims on the ground that the accrediting agency’s accreditation decisions were legally justified.  Id. at 42-43.
Disclosure:  Redmon, Peyton & Braswell, LLP served as counsel of record for Defendant Accreditation Alliance of Career Schools and Colleges in the District Court.