Business attorneys frequently agonize over the statute of limitations. After a debt has gone unpaid, attorneys often seek an alternative to filing suit to provide more time to collect the debt before the running of the statute of limitations. Many attorneys demand a debtor execute a waiver of a statute of limitations defense in return for refraining from filing suit. Such waivers, however, contain hidden landmines due to a little-known Virginia statute. The Eastern District of Virginia recently relied upon that statute to allow a debtor to escape repayment of a $235,000 loan despite signing such a waiver. This case is a warning to corporate practitioners and creditors’ counsel, but it also provides a road map to successfully navigate this statutory minefield. In Slaey v. Harrington, 1:14-cv-1210, 2015 WL 5139317 (E.D. Va. Sept. 1, 2015), Judge T.S. Ellis reversed the EDVA bankruptcy court which initially ruled in favor of the creditor. The facts of the case are straight-forward. Harrington (an attorney) loaned $235,000 to Slaey (a client of Harrington’s) in 2002 in return for a signed promissory note requiring repayment in 30 days. Slaey, however, failed to repay the loan. Approximately three days prior to the expiration of Virginia’s statute of limitations, Harrington had Slaey sign a written agreement that purported to waive any defense of the statute of limitations in a subsequent lawsuit. Based upon this new agreement, Harrington did not file suit until five years later during Slaey’s Chapter 11 bankruptcy proceeding. Slaey opposed, arguing that Harrington’s claim was time-barred under Virginia law and that the waiver signed five years earlier was unenforceable under Section 8.01-232(A) of the Virginia Code. Normally, most defenses to a breach of contract action are waivable by a defendant, and this general rule has led many attorneys to mistakenly assume that they can easily contract around a looming statute of limitations defense. But little-known Va. Code § 8.01-232(A) restricts the enforceability of such waivers, and unfortunately, the statute is not a model of clarity: 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 the 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 no longer than the applicable limitations period. The bankruptcy court initially agreed with Harrington’s argument that to ignore Slaey’s waiver would operate as a “fraud” on Harrington, and thus, the first sentence of the statute should apply. In doing so, the bankruptcy court relied upon a 1938 Fourth Circuit case that broadly interpreted the term “fraud” in this context. In Tucker v. Owen, 94 F.2d 49 (4th Cir. 1938), the Fourth Circuit focused on the apparent purpose of the statue to protect creditors and noted that the “[Virginia] Legislature intended to stigmatize as fraudulent the failure of a debtor to keep a promise of this sort upon which his creditor has relied, and to estop the debtor from pleading the defense when at his request the suit has been delayed.” Based upon this, the bankruptcy court sided with Harrington and enforced the waiver of the statute of limitations defense. After Slaey appealed to the U.S. District Court, Judge Ellis reversed. The judge noted that two years after the Tucker case, the Supreme Court of Virginia handed down a contrary ruling in Soble v. Herman, 9 S.E.2d 459 (Va. 1940). In that case, the Supreme Court rejected the Fourth Circuit’s reasoning and held that the “fraud” exception must be interpreted narrowly. Looking to the elements of common law fraud, the Virginia high court stated that the exception only applied if the debtor misrepresented a present fact at the time of execution of the waiver. Judge Ellis noted that the bankruptcy court should have followed the Virginia Supreme Court’s Soble decision and not the Fourth Circuit’s Tucker opinion since the question turned on interpretation of a Virginia statute. Judge Ellis found no evidence in the record of Slaey’s intentions at the time she executed the waiver, let alone “clear and convincing evidence” that she never intended to comply with the agreement. This was fatal to Harrington’s claim. According to Judge Ellis, “[s]imply put, therefore, the circumstances presented here involve merely an unfulfilled written promise on Slaey’s part not to assert a statute of limitations defense in a future suit brought by Harrington. Such a naked, unfulfilled promise is precisely what the Soble court made clear would not satisfy the limited fraud exception set forth in Va. Code § 8.01-232(A).” While this case stands as a warning to corporate practitioners, the most useful part of this opinion is the road map through section 8.01-232(A) provided by Judge Ellis. After noting that unwritten waivers are flatly barred under the statute, the judge turned to written waivers: [A] written promise not to plead the statute is generally valid and enforceable only if three specified requirements are met, namely, if the written promise (i) is made to avoid or defer litigation pending settlement of a case, (ii) is not made contemporaneously with any other contract, and (iii) is made for an additional term not longer than the applicable limitations period. The only exception to this rule, according to Judge Ellis, is the “limited” fraud exception. To trigger this exception, a creditor must meet the heavy burden of showing the debtor misrepresented a present fact at the time of the waiver (as opposed to merely failing to fulfill a future promise such as payment). As a practical matter, most creditors will not successfully meet this burden. Thus, Judge Ellis’s opinion essentially means that creditors must strictly follow the road map to enforce a limited, written waiver of a statute of limitations defense. For example, such a waiver must come after a promissory note has been signed (and cannot be included in the promissory note itself), must be contained in a separate document, and can only extend the time to file suit to a date that is twice the amount of time under the applicable statute of limitations (meaning that if the applicable statute of limitations is three years, the waiver can only extend the time to file suit another three years). The practical effect is that general, open-ended waivers of the defense are unenforceable under the statute. Judge Ellis’s ruling makes sense as a matter of statutory interpretation. To otherwise apply a broad reading of the “fraud” exception would allow the exception to swallow the rest of the statute, encouraging a creditor to draft an open-ended waiver and then claim that the failure of a debtor to pay the legitimate obligations operated as a fraud on the creditor. The Fourth Circuit, however, may have the final say as Harrington has already filed a Notice of Appeal with the district court. Assuming that Harrington follows through on the appeal, a decision from the appellate court can be expected in the fall or winter of 2016. But regardless of the outcome, this case stands as a warning and a road map for Virginia corporate practitioners and creditors’ counsel.
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On May 11, 2016, President Obama signed into law the Defend Trade Secrets Act of 2016 (“DTSA”) , which dramatically expands federal jurisdiction over trade secret claims. The impetus for this law was to provide some response to the reports of Chinese and possibly Iranian hacking into U.S. corporate and government sites. Prior bills were introduced in 2013 and 2014. These served as models for the eventual statute. The new law, however, closely resembles in many ways the current state trade secrets laws but provides jurisdiction in federal courts. The federal Intellectual Property protection scheme until now has been a three-legged approach: Patent protection, trademark laws, and copyright provisions. After the DTSA, however, the trade secrets protection of the enactment becomes the fourth leg. While the new law overlaps in many respects the Uniform Trade Secrets Act (“UTSA”) on the books in 47 states (including Virginia, Maryland, and D.C.), the DTSA changes the federal jurisdiction analysis, expands the definition of “trade secrets,” adds new remedies, and includes express whistleblower protections. While the DTSA does not significantly alter the substance of U.S. trade secrets law, the procedures and available civil remedies – especially the civil ex parte seizure terms – introduce new and potentially powerful enforcement tools. The DTSA arrives as an amendment to the Economic Espionage Act of 1996, 18 USC § 1331 et seq. The coverage below highlights five points in the new law.
- Federal Jurisdiction. Just about any trade secret claims is now a federal claim which can provide subject matter jurisdiction in the federal courts. 2(b)(1) allows for civil actions this way:
- Broader Definition of “Trade Secrets?” Much of the new law’s substance is found in the Definitions, either already included in or added to 18 USC § 1839. For example, the current “trade secrets” definition reads:
- Ex Parte Seizure Remedy. The DTSA goes beyond the state laws where it includes in Sec. 2(b)(2) a “Civil Seizure” remedy:
- Trade Secrets Misappropriation as Racketeering Activity. 3(b) amends the RICO statute’s definition of Racketeering Activity found in 18 USC 1961(1) to include “sections 1831 and 1832 (relating to economic espionage and theft of trade secrets).”
- Whistleblower Protection. 7(b) provides immunity from all criminal and civil liability for disclosure of trade secrets made “in confidence to a Federal, State, or local government official, either directly or indirectly, or to an attorney” provided the disclosure is “solely for the purpose of reporting or investigating a suspected violation of law . . .”
- Summary—What to Expect from the DTSA
In this blog post, we reach back to a 2003 Judge Ellis opinion applying FRCP Rule 4(k)(2). In Graduate Management Admission Council v. RPV Narasimha RJU d/b/a GMATPlus.com, 241 F. Supp. 2d 589 (E.D. Va. 2003) (the “GMAC Case”), the judge applied this little-known rule to rescue a complaint from dismissal for lack of in personam jurisdiction. The decision has had little visibility, but with the recent enactment of the Defend Trade Secrets Act of 2016 (“DTSA/2016”) the rule and the Judge Ellis’s opinion have new relevancy. Stated differently, Rule 4(k)(2), as applied by Judge Ellis thirteen years ago, potentially turbocharges DTSA/2106’s role in trade secrets litigation involving overseas defendants. Rule 4(k)(2), the Federal Long-arm Statute Rule 4(k)(2) is buried deep in Rule 4, which has the innocent title of “Summons.” Rule 4(k), titled “Territorial Limits of Effective Service,” also seems easily overlooked. Our target, subpart 4(k)(2), provides: (2) Federal Claim Outside State-Court Jurisdiction. For a claim that arises under federal law, serving a summons or filing a waiver of service establishes personal jurisdiction over a defendant if: (A) the defendant is not subject to jurisdiction in any state’s courts of general jurisdiction; and (B) exercising jurisdiction is consistent with the United States Constitution and laws. It’s a decent bet that most of us (except some of the patent bar), even those with decades of federal court experience, have never before encountered Rule 4(k)(2). Since its arrival in 1993, the rule has only rarely been applied, and the limited appearances have mostly been in patent and copyright cases. The 2003 GMAC Case In the GMAC Case, Judge Ellis rescued a copyright infringement complaint by resorting to Rule 4(k)(2) on behalf of a plaintiff who was having difficulty establishing in personam jurisdiction using Rule 4(k)(1) and the Virginia long-arm statute. The issue was jurisdiction over an Indian citizen who was selling copyrighted GMAT questions marketed as test preparation resources for aspiring MBA candidates. The solicitations and sales of the test preparation materials were made over the Internet, and seemingly were not directed to any one state but at a broader United States market. The defendant failed to answer GMAC’s complaint notwithstanding adequate service in India. Following routine court procedures, Judge Ellis referred the case to Magistrate Sewell to prepare the R&R report. The magistrate considered the jurisdiction claim under Rule 4(k)(1) and the Virginia-long arm statute as the complaint alleged. The magistrate concluded that while the conduct fell within the expansive reach of the long-arm statute, the constitutional due process requirements for in personam jurisdiction were not met. The case might have disappeared from the radar screen at that point, but Judge Ellis saved the case using Rule 4(k)(2). GMAC’s complaint came before Judge Ellis when the plaintiff challenged the R&R report. The judge agreed with the magistrate’s conclusions regarding the Virginia long-arm statute, but he applied retroactively Rule 4(k)(2) (the plaintiff had not alleged jurisdiction under Rule 4(k)(2)), which is often referred to as the Federal long-arm statute, to find in personam jurisdiction. Citing authority from the 1st Circuit and the 7th Circuit, Judge Ellis explained: Rule 4(k)(2) was added in 1993 to deal with a gap in federal personal jurisdiction law [identified in Omni Capital Int’l, Ltd v. Rudolph Wolff & Co., 484 U.S. 97 (1987)] in situations where a defendant does not reside in the United States, and lacks contacts with a single state sufficient to justify personal jurisdiction, but has enough contacts with the United States as a whole to satisfy the due process requirements. The GMAC Case fell into the gap identified in the referenced 1987 Supreme Court decision, only to be rescued by the little-known rule. Judge Ellis’ decision is important not just because it reminds that Rule 4(k)(2) is part of the landscape, but also for his retroactive use of the rule and how he assigned the burden of the tricky third element in the analysis under the rule. Three-part Analysis Under Rule 4(k)(2) When Rule 4(k)(2) comes into play, it tracks a three-part analysis taken directly from the rule’s text. First, the rule applies the same minimum contacts due process analysis that is conducted under Rule 4(k)(1), but with the significant difference that the relevant forum is the United States as a whole, not an individual state. The second element of the rule is that the claim arises under federal law. In the GMAC Case, Judge Ellis cited five federal statutes, including the Copyright Act, invoked in the complaint. The third and final element—the tricky element—requires a showing that the defendant is not subject to the jurisdiction of the courts of general jurisdiction in any particular state. Courts have wrestled with how to assign the burden on this element. Does the plaintiff have to prove a negative across 50 states? Or does the burden fall to the defendant to establish that at least one state should have jurisdiction? Judge Ellis answered the burden question—it is the defendant’s burden to identify some other forum state, and if no state is identified then Rule 4(k)(2) applies. The defendant in the GMAC Case was in default and did not appear; Judge Ellis found that there was no evidence showing the jurisdiction was not available in any one state, and from there moved to his conclusion that Rule 4(k)(2) gave the court jurisdiction. The judge followed a mix of the 1st Circuit’s pure burden shifting approach from United States v. Swiss American Bank, 191 F.3d 30 (1st Cir. 1999) and the 7th Circuit’s more pragmatic approach in ISI Int’l, Inc. v. Borden Ladner Gervais, LLP, 256 F.3d 548 (7th Cir. 2001) where a defendant must name a suitable forum state or concede that jurisdiction is not available in any state. Under Judge Ellis’s logic, a defendant who has general contacts with the United States but who coyly argues that it cannot be sued in the forum state and then refuses to identify any other state where the suit could be brought faces in personam jurisdiction under Rule 4(k)(2). The Rule 4(k)(2) case law in the years since the GMAC Case is sparse outside the patent arena. Not surprisingly, because the cases where the rule has been applied are mostly patent and copyright matters, the Federal Circuit has spoken. In Merial Ltd. v. Cipla Ltd, 681 F.3d 1283 (Fed. Cir. 2012), the Federal Circuit employed an analysis much like Judge Ellis’s GMAC Case opinion, and approved retroactive application of the rule. The 4th Circuit’s consideration of Rule 4(k)(2) is not completely blank. In the few reported cases, the court has been generally hostile to Rule 4(k)(2) argument, but has not offered much analysis. In Base Metal Trading v. OJSC Novokuznetsky Aluminum Factory, 283 F.3d 208 (4th Cir. 2002), the Court rejected jurisdiction based on Rule 4(k)(1), and noted that there was insufficient evidence generally of contacts with the United States to support the Rule 4(k)(2) argument. The same result for the same reason appears in Saudi v. Northrop Grumman Corp., 427 F.3d 271 (4th Cir. 2005). More recently, in Unspam Techs., Inc. v. Chernuk, 716 F.3d 322 (4th Cir. 2013), in a case that alleged a conspiracy involving illegal prescription drugs, the appellate court rebuffed the Rule 4(k)(2) jurisdiction argument against four foreign banks that processed the associated credit card transactions. The opinion cryptically states that jurisdiction “would not, in the circumstances here, be ‘consistent with the United States Constitution and laws.’” The Combination of Rule 4(k)(2) and DTSA/2016 As suggested above, Rule 4(k)(2) and the GMAC case might easily have been left in the irrelevancy bin. In copyright, patent, and trademark cases where the defendant is foreign, perhaps from India or China, the evidence often is sufficient to pinpoint one or more states, or at least to provide sufficient contacts to satisfy the due process concerns associated with suing the foreign persons or entities in the federal courts in those states. These cases likely arise after infringing goods are being sold and/or marketed, which means that there typically is evidence which supports jurisdiction under Rule 4(k)(1) and state long-arm statutes. In the few cases where a defendant might contest state-specific activity, Rule 4(k)(2) allows the plaintiff to hold the defendant in the proceeding. Claims alleging trade secrets misappropriation, on the other hand, very well might present facts that confirm misappropriation, but where the facts precede any significant targeted sales and marketing by the misappropriator. The plaintiff could be seeking at an early stage to enjoin sales, and perhaps is aiming to employ DTSA/2016’s civil seizure remedies, including the ex parte remedies. The conduct might come within DTSA/2016’s broad “misappropriation” definition, but limited facts connecting the activity to any one state could defeat in personam jurisdiction under Rule 4(k)(1) and state long-arm statutes. Until the DTSA/2016 enactment, trade secrets claims were governed by state laws, which meant that Rule 4(k)(2)’s application was blocked because the second element of the analysis could not be satisfied. Under DTSA/2016, just about every trade secrets claim is now a federal claim, and the rule’s three-step analysis can now be satisfied. This does not negate the requirement of established contacts with the United States generally, but trade secrets cases against foreign defendants now have a fortified argument to get around the earlier nemesis of the lack of in personam jurisdiction Conclusion The combination of Rule 4(k)(2), as applied by Judge Ellis back in 2003 in the GMAC Case, and the enactment of DTSA/2016 potentially opens wide the doors of federal courthouses to trade secrets litigation against overseas defendants. For litigators who represent foreign companies, there is new concern that their clients can now be forced to defend trade secrets cases in the U.S. federal courts. And for those attorneys whose clients have reason to complain about misappropriation of their trade secrets by overseas entities, the combination of Rule 4(k)(2) and DTSA/2016 is an invitation to bring their claims here.