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.

Implied Covenant Does Not Add to the Terms of a Contract under Virginia Law

Terms of contract
In a July 28th opinion, the Eastern District provided some much-needed clarity on whether an implied covenant of good faith and fair dealing alters or adds terms in a written contract.  Judge Gerald Bruce Lee held that “Virginia law does not recognize an independent cause of action” for a breach of the implied covenant and granted summary judgment against the party asserting the claim. In Middle East Broadcasting Networks, Inc. v. MBI Global, LLC, No. 1:14-cv-01207, 2015 WL 4571178 (E.D. Va. July 28, 2015), the Plaintiff was a news broadcaster that had operated a bureau in Baghdad, Iraq, since 2004.  In 2013, the Plaintiff solicited proposals to build a special Blast Resistant Building (“BRB”), with a delivery of no later than December 31, 2013.  The Defendant, billing itself as “an expert ‘in the construction of BRBs’ and an ‘expert in the delivery of BRBs to locations in the Middle East,’” accepted the challenge, and the parties entered into a contract.  The delivery date, however, slipped several times to the following summer due to the Defendant’s difficulty in paying a subcontractor.  The parties finally agreed to a contract amendment that required delivery by August 3, 2014, and that this deadline “‘would not be waived or excused for any reason whatsoever.’”  The Defendant then missed the August 3rd deadline and never delivered the BRB.  After the Plaintiff filed suit for breach of contract, the Defendant counterclaimed for breach of the contract’s implied covenant of good faith and fair dealing.  After discovery, the Plaintiff moved for Summary Judgment on the implied covenant counterclaim. Judge Lee granted the Plaintiff’s Summary Judgment motion on the breach of the implied covenant of good faith and fair dealing claim “because Virginia law does not recognize an independent cause of action for this claim.”  Judge Lee went on to cite prior Eastern District case law that recognized that while such an implied covenant does exist in every contract under Virginia law, the covenant “simply bars a party from acting in such a manner as to prevent the other party from performing his obligations under the contract.” Judge Lee then used this analysis to determine that the Defendant had failed to demonstrate a genuine issue of material fact as to whether the Plaintiff had done something to prevent the Defendant from performing under the contract.  Notably, Judge Lee implicitly rejected the Defendant’s argument that the implied covenant somehow adds obligations to the contract. This decision is useful guidance for practitioners who often see breach of contract claims paralleled with breach of implied covenant claims in commercial litigation.  Prior to this opinion, different Virginia courts had gone in different ways when facing the question of whether an implied covenant added to the express terms of a contract.  Judge Lee’s opinion adds much-needed clarity to the subject and essentially answers that question in the negative.  Business litigators can rest (somewhat) more easily by knowing that the four-corners of the contract will not be expanded by a nebulous, undefined, implied covenant.