Tag Archives: business litigation

Supreme Court of Virginia Provides Added Guidance on Attorney’s Fees Awards

The Supreme Court of Virginia released three decisions in recent months that provide added guidance on attorney’s fees awards.   While these are state court decisions, it is Virginia law, not federal law, that governs attorney’s fees awards on matters arising under Virginia law in the federal courts.  For example, attorney’s fees awarded by a federal court under the Virginia Business Conspiracy Act are governed by Virginia state law.  Also, fee awards by a federal court pursuant to a Virginia contract claim where the contract includes an attorney’s fees provision are governed by Virginia state law.

We have posted multiple times on attorney’s fees awards in the Eastern District.  For example, D. Mauler, New Trends in Attorney’s Fees Declarations? (November 15, 2016); D. Mauler and J. Kurz,  E.D. Va. Whacks Attorneys’ Fees Claim: Further Split on Court Revealed (September 30, 2016); D. Mauler, Recent Opinion Highlights Differing View in EDVa on Appropriate Hourly Rates (September 22, 2015).   While there are obvious overlaps in the consideration of attorney’s fees under federal precedents as opposed to Virginia law, separate consideration of recent developments at the Supreme Court of Virginia merits attention.

The Prevailing Standard for Attorney’s Fees Awards Under Virginia Law

As the starting point, the party claiming legal fees must plead a claim for the award of fees.  in Graham v. Community Management Corp., Record No. 161066 (Oct. 12, 2017), the Supreme Court confirmed that Rule 3:25 requires in most matters pleading the claim for fees (the few exceptions are covered in subpart A of the Rule).  In Graham, the prevailing defendant had not requested attorney’s fees in any pleading, including her pleas in bar, demurrers and answer.  After the defense verdict, she returned with a claim for fees based on the employment contract that was the basis for the plaintiff’s original claim.  The Fairfax Circuit Court held that the claim was waived when not pled, and the Supreme Court, applying the “express language of Rule 3:25(C),” affirmed.

A party seeking an award of fees then has the burden of proving a prima facie case that the fees were reasonable and necessary.  A party may not recover fees for duplicative work or for work that was performed on unsuccessful claims.  In determining whether the prima facie case is established, the factfinder may consider some or all of the seven factors identified in Chawla v. BurgerBusters, Inc., 255 Va. 616 (1998):

In determining whether a party has established a prima facie case of reasonableness, a fact finder may consider, inter alia, (1) the time and effort expended by the attorney, (2) the nature of the services rendered, (3) the complexity of the services, (4) the value of the services to the client, (5) the results obtained, (6) whether the fees incurred were consistent with those generally charged for similar services, and (7) whether the services were necessary and appropriate.

Chawla involved an attorney’s fees provision in a commercial lease.  Both parties sought fees.  A threshold issue was where the initial burden of proof fell – on either the party seeking fees must or the defending party to prove the fees were unreasonable.  Relying on Seyfarth Shaw v. Lake Fairfax Seven Ltd. Partnership, 253 Vas. 93 (1997), the Supreme Court held that “the party claiming legal fees has the burden of proving prima facie that the fees are reasonable and were necessary.”

Lambert v. Sea Oats Condominium Association, Inc.

In an April 2017 decision, Lambert v. Sea Oats Condominium, 293 Va. 245 (2017), the Plaintiff sought recovery of $500 from her condominium association after she paid to repair an exterior door.  Ms. Lambert lost in the general district court but prevailed when she took the case to the circuit court.   In pursuit of her claims, she spent more than $9,500 in attorney’s fees to win $500.   She claimed recovery of her attorney’s fees pursuant to the statutory provision in Va. Code § 55-79.53.  The circuit court awarded only $375 reasoning that the fee award should be proportional to the damages.

The Supreme Court rejected the circuit court’s analysis.  Courts may consider the amount of damages a plaintiff recovers, and they do so within the scope of the “results obtained” factor.   The Court directed, however, “that merely applying a ratio between the damages actually awarded and damages originally sought will not satisfy the reasonableness inquiry.”  The issue is “the necessary costs of effectively litigating a claim.”  The Court determined that the circuit court abused its discretion by failing to consider all the relevant factors, and it remanded the case back to the circuit court, directing the trial court to include “an award of the cost of the amount of reasonable attorney’s fees incurred at trial and in this appeal.”

Justice Mims, the author of the Sea Oats opinion, uses his footnotes to provide broader guidance on attorney’s fees. For example, in footnote 1 he observes that attorney’s fees may be decided by a jury, and he suggests that the review of a jury verdict on fees should not be any different than the typical appellate review of determinations of punitive damages, physical pain, suffering or mental anguish.  Citing a 1959 decision, the Court observed that jury decisions are not disturbed “unless it appears that [they were] influenced by partiality, prejudice, corruption of the jury, or some mistaken view of the evidence.”  The footnote stops short, however, of providing a definitive statement of the standard of review applicable to a jury decision on attorney’s fees because, as the opinion observes, there was no jury award at issue in the Sea Oats case.

In his footnote 7, Justice Mims discusses the use of experts in the proof of the reasonableness of attorney’s fees.  While there is no per se requirement of an expert, the footnote instructs that proving that the requested fees are reasonable “may require supplying an expert who was undertaken a detailed evaluation of its attorneys billing records to testify about what amount is reasonable.” The opinion adds that “the likelihood that such testimony is necessary will often be proportional to the complexity of the case.”

A final point from Sea Oats addresses the pleading requirements when the plaintiff is seeking attorney’s fees. The condominium association argued that because Ms. Lambert had not identified in her complaint the amount of fees she sought she should later be precluded from claiming any fees.  The Supreme Court rejected the argument instructing that “the party who may be entitled to an award of attorney’s fees is merely required to notify the opposing party that it will seek them if it prevails, as required by Rule 3:25(B).”

Denton v. Browntown Valley Associates, Inc.

In Denton v. Browntown Valley Associates, Record No. 160999 (Va. Aug. 31, 2017), a decision also authored by Justice Mims, the Supreme Court made clear that the fees incurred in litigating the reasonableness of the underlying attorney’s fees are themselves recoverable.  For example, if the fee claim is for $50,000, and the proponent must spend $20,000 to prove the reasonableness of the fees, the total of $70,000 is recoverable.  The opinion explains, “The attorney’s fees that the prevailing party incurs while litigating the issue of attorney’s fees are no different from those it incurs while litigating any other issue on which it prevails.”

At the beginning of the discussion about attorney’s fees, the Denton opinion cites both Chawla and Sea Oats for the identification of the “seven nonexclusive factors for courts to consider when weighing the reasonableness of an award of attorney’s fees.”   Relying on Sea Oats, the Denton opinion repeats the principle that fees necessary to prove the reasonableness of the underlying attorney’s fees are recoverable applies to the fees incurred on appeal as well.

Summary

With Sea Oats, Denton, and Graham, the Supreme Court of Virginia is rounding out its discussion of attorney’s fees awards.  The Seyfarth Shaw and Chawla opinions summarized the law to 1998, and provided us with the 7-factor analysis.  Subsequent decisions, now capped with the three recent opinions, confirm the test for reasonableness, explain further necessary fees, comment on the need for a fees expert, and clarify the pleading requirements.   Denton adds that fees-to-prove-fees are recoverable, and that this extends to fees on appeal.

Despite this, the Court’s attorney’s fees mosaic is not yet fully complete.  Justice Mims provided some guidance on the review of jury verdicts on attorney’s fees and on the desirability, but not the necessity, of expert testimony to assist a jury.  But the Sea Oats opinion stops short of explicit instructions because there was no jury verdict at issue in that case.  The more complete mosaic may have to wait until the Supreme Court has before it the review of a jury verdict on attorney’s fees.

Supreme Court of Virginia Addresses the Reach of Conspirator Liability under the Virginia Business Conspiracy Act

The Supreme Court of Virginia recently addressed conspirator civil liability under the Virginia Business Conspiracy Act, Va. Code §§ 18.2-499 and -500.  Borrowing from Illinois law, the Court recited that “[t]he function of the conspiracy claim is to extend liability in tort beyond the active wrongdoers to those who have merely planned, assisted or encouraged the wrongdoer’s acts.”   While the case does not really change the substance of Virginia law, the opinion in Gelber v. Glock offers language that will likely appear in every future Virginia brief on conspirator liability and in the conspiracy jury instructions.

Tucked into the back of a 39-page opinion dealing with a family feud over an estate, the Supreme Court provides its tutorial on conspirator liability.   Admittedly, this is not federal law, but VBCA claims often appear in E.D. Va. litigation when state claims are before the federal court under diversity jurisdiction or pendent jurisdiction.

The Family Feud Case

The case is Gelber v. Glock, Record No. 160500 (June 22, 2017), a decision from an appeal heard during the Supreme Court of Virginia’s February 2017 Session.  The facts are those of the classic family feud.  In an early will, Mrs. Gelber left her estate to be divided among her five children.  Subsequent estate documents seemingly altered this directive—Mrs. Gelber’s real and personal property was to go to just one of her daughters.  The Executors sued on multiple theories, including a claim that the lucky daughter was part of a civil conspiracy with one of her sisters and a brother-in-law.

The Circuit Court for Henrico County granted a Motion to Strike the conspiracy claim.   The Supreme Court found no error in this circuit court ruling.  Given this straightforward appellate finding, the Supreme Court perhaps likely could have addressed the conspiracy Assignment of Error in a single paragraph.  But the Justices chose to give us a powerful tutorial on conspirator liability under the VBCA.  The tutorial is perhaps dicta, but it is nonetheless part of the Supreme Court opinion.

The Language of the Virginia Business Conspiracy Act

The VBCA is a two-part statute found in Title 18 of the Virginia Code, the criminal law title.  Va. Code § 18.2-499 identifies the elements of the criminal conspiracy. The next section, Va. Code § 18.2-500, provides for civil remedies for conspiracy violations.  Subpart A of the section reads:

Any person who shall be injured in his reputation, trade, business or profession by reason of a violation of § 18.2-499, may sue therefor and recover three-fold the damages by him sustained, and the costs of suit, including a reasonable fee to plaintiff’s counsel, and without limiting the generality of the term, “damages” shall include loss of profits.

The Reach and Purpose of Civil Conspiracy Liability

The real punch from the Gelber decision is the confirmation of conspirator liability beyond the primary tortfeasor.  The decision explains, “the object of a civil conspiracy claim is to spread liability to persons other than the primary tortfeasor.”  Gelber at 37.  The Court expands its discussion in footnote 21.  Quoting from Beck v. Prupis, 162 F. 3rd 1090, 1099 n. 18 (11th Cir. 1998), aff’d, 529 U.S. 494 (2000), the Gelber Court adds that “[i]n a civil context … the purpose of the conspiracy claim is to impute liability– to make X jointly liable with D for what D did to P.”   This is language is straight from Prosser and Keeton on Torts § 46 (5th Ed. 1984).

The Gelber opinion continues, in the same footnote 21, “[t]hus, a civil conspiracy plaintiff must prove that someone in the conspiracy committed a tortious act that proximately caused his injury; the plaintiff can then hold other members of the conspiracy liable for that injury.”  In support of this statement, the Supreme Court cites authority not only from the 11th Circuit, but also from the 8th Circuit, and from the Utah federal court and the Illinois Supreme Court.

The cited Eighth Circuit decision, Simpson v. Weeks, 570 F.2d 240, 242-43 (8th Cir. 1978), provides a clever analogy, “[t]he charge of conspiracy in a civil action is merely the string whereby the plaintiff seeks to tie together those who, acting in concert, may be held responsible for any overt act or acts.”   The Utah federal court decision, Boisjoly v. Morton Thiokol, Inc., 707 F. Supp. 795, 803 (D. Utah 1988), explains that “[c]ivil conspiracy is essentially a tool allowing a plaintiff injured by the tort of one party to join and recover from a third party who conspired with the tortfeasor to bring about the tortious act.”

Finally, Gelber confirms that conspiracy liability is the same for low-level players as it is for conspiracy kingpins.  The cited Supreme Court of Illinois decision, Adcock v. Brakegate, Ltd., 645 N.E.2d 888, 894 (Ill. 1994), offers, “[t]he function of the conspiracy claim is to extend liability in tort beyond the active wrongdoers to those who have merely planned, assisted or encouraged the wrongdoer’s acts.”

Summary: Gelber and VBCA Conspirator Liability

The Supreme Court of Virginia ranges far and wide for its authority on conspirator civil liability perhaps because a clear statement of civil liability tied to a conspiracy claim was previously missing from the Virginia case law.  For instance, plaintiffs looking for authority for conspirator civil liability have frequently cited Carter v. Commonwealth, 232 Va. 122 (1986), a criminal case about vicarious liability for the use on a firearm in a felony.  This is not to say that Virginia law was any different before Gelber, but that it was challenging to find on-target Virginia citations supporting conspirator civil liability.

Expect that the Gelber language will be prominent in trial briefs and jury instructions for future VBCA claims in the state courts and in the federal courts.

Personal Jurisdiction in the Internet World Redux

In this Blog post, we look at two recent Judge Ellis decisions on personal jurisdiction: Zaletel v. Prisma Labs, Inc., 226 F.Supp.3d 599 (E.D. Va. 2016), and Thousand Oaks Barrel Co., LLC v. Deep South Barrels LLC, 2017 WL 1074936 (E.D. Va. 2017).

It seems that the Alexandria federal court’s Friday Motions Docket often has at least one personal jurisdiction motion.  You might think that a simple test for personal jurisdiction could be applied to greatly reduce the frequency that this issue comes before the courts.  But think again.  Pulitzer Prize winner Thomas Friedman contends in his recent best-seller, Thank You for Being Late, that the pace of technological change has for at least the last 10 years been accelerating faster than we can adapt.  Why, then, should we expect the law of personal jurisdiction to keep up with the changing technology landscape?   As Friedman argues, it is not just technology per se that is accelerating, it is everything that is driven by technology that is also accelerating at unsettling speeds.  This understandably includes the exploding e-commerce world.

Zippo: a 20-year old Precedent for the Internet World   

The most widely cited case on personal jurisdiction in the Internet world is now 20 years old.  In Zippo Manufacturing Co. v. Zippo Dot Com, Inc. Co., 952 F.Supp. 1119 (W.D. Pa. 1997), the court divided Internet activities into three kinds – active, passive, and interactive.  The jurisdictional question was decided based on where a website fell within these categories.  Think back to 1997, the year of the Zippo decision. The leading ISP was AOL, and the majority of online users joined the Internet via dial-up access.  Amazon (first known as Cadabra, Inc.) was just getting started and was only beginning to sell books online.  The leading web browser was Netscape, and e-commerce was not much more than a handful of infrequently accessed “storefronts.”   Times have changed.

Fourth Circuit Law on Personal Jurisdiction in the Internet World

The controlling law in the Fourth Circuit is from 2002 – ALS Scan, Inc. v. Digital Service Consultants, Inc., 293 F.3d 707 (4th Cir. 2002).   In that case, now 15 years old, Judge Niemeyer wrote, “the convergence of commerce and technology thus tends to push the analysis to include a ‘stream-of-commerce’ concept under which each person who puts an article into commerce is held to anticipate suit in any jurisdiction where the stream takes the article.”  The Court lamented that the Supreme Court had not provided updated guidance.  Absent such controlling authority, Judge Niemeyer settled on the model developed in Zippo.

Zippo provides a three-part test:  A state may, “consistent with due process, exercise judicial power over a person outside of the state when that person (1) directs electronic activity into the state, (2) with the manifested intent of engaging in business or other interactions within the state, and (3) that activity creates, in a person within the state a potential cause of action cognizable in the state’s courts.”  ALS Scan, 293 F.3d at 714.

Later, in 2013, the Fourth Circuit revisited ALS Scan in Unspam Technologies, Inc. v. Chernuk, 716 F.3d 322 (4th Cir. 2013).   In Chernuk, the defendants were four foreign banks that were alleged to have financed the credit card operations for illegal prescription pharmacies.  They were sued as part of an alleged global conspiracy to market and sell pharmaceuticals online.  Chernuk adopted with minor adjustments the three-part test from ALS Scan.  Relying on some interim Supreme Court guidance, the Fourth Circuit added that “it is the defendant’s actions, not his expectations, that empower a State’s courts to subject him to judgment.”

Zaletel v. Prisma Labs—70 Million Downloads, but no Personal Jurisdiction

In Zaletel, a 2016 trademark case involving s photo-filtering app known as “Prisma,” Judge Ellis applies a somewhat modified ALS Scan test.  Before getting to the core of the legal analysis, Judge Ellis walks us through International Shoe and the difference between general jurisdiction and specific jurisdiction.  He then introduces the central issue with a quote from Chernuk.  The Fourth Circuit has adopted the three-part inquiry “to determine whether a defendant is subject to jurisdiction in a State because of its electronic transmissions to that State.”   That inquiry, the judge writes, should consider: “(1) the extent to which the defendant purposely availed itself of the privilege of conducting activities in the forum state; (2) whether the plaintiff’s claims arose out of those activities; and (3) whether the exercise of personal jurisdiction is constitutionally reasonable.”

Judge Ellis refers to the first part of this test as the “purposeful availment” prong, which he explains “is grounded on the traditional due process concept of minimal contacts.”  To determine whether a foreign defendant has purposely availed itself of the privilege of conducting business in a state, the court should ask whether “the defendant’s conduct in connection with the forum state are such that he could reasonably anticipate being haled into court there.”  To satisfy this standard, “a defendant outside the forum state must have at least ‘aimed’ its challenged conduct at the forum state.”  Chernuk at 328.

The defendant in Zaletel had no Virginia presence and did not sell its app directly into Virginia.  The app, however, could be downloaded from the Google Store.  Judge Ellis reverted to the more general “stream of commerce” theory.  Simply placing products into the stream of commerce, even with the expectation that they would be purchased in the forum state, is not enough to constitute “activity purposely directed” at the forum state.  The Prisma Labs app was downloaded more than 70 million times, but apparently not specifically aimed at Virginia.  Due process requires that a defendant be haled into court in a forum state based on his own affiliation with the state, and “not based on the ’random, fortuitous, or attenuated’ contacts he makes by interacting with other persons affiliated with the State.”  The Zaletel court must have recognized that some percentage of the 70 million downloads likely landed in Virginia, it was not by defendant’s doing.  Something more is required.

Thousand Oaks Barrel Co.—99 Shipments Supports Personal Jurisdiction

Three months after Zaletel, Judge Ellis again addressed personal jurisdiction in a trademark/copyright case.  Thousand Oaks Barrel sued Deep South Barrels, a Texas company that made and sold oak mini-barrels similar to the Thousand Oaks Barrel product, claiming trademark and copyright violations in Virginia.  Judge Ellis applied the now familiar ALS Scan test with specific reference to Zippo.  Restated again with minor adjustments in this decision, the three-part test is that a State can exercise personal jurisdiction over a nonresident defendant when that defendant “(1) directs electronic activity into the state, (2) with the manifested intent of engaging in business or other interactions within the state, and (3) that activity creates, in a person within the state, a potential cause of action cognizable in the state’s courts.”

Judge Ellis concluded first that Plaintiff Thousand Oaks established a prima facie case of personal jurisdiction over Deep South Barrels by showing that “Deep South Barrels directed electronic activity into Virginia with the manifest intent to do business with Virginia residents when it set up an interactive e-commerce website accessible to Virginia residents and used that website to fulfill Virginia customers’ Internet purchases.”  The facts established that website customers in Virginia could purchase the Deep South mini-barrels directly over the website, and that approximately 99 shipments originated from website sales to Virginia customers.  The judge found that Deep South Barrels’s use of an interactive e-commerce website to sell even a modest quantity of products to Virginia residents was sufficient to show that the defendant “purposely availed itself of the privilege of conducting activities [in Virginia].”

Summary

The center of the test for personal check jurisdiction in Internet or cyberspace transactions is whether there has been “purposeful availment” by the defendant, which requires that the commerce in question be aimed at the forum state.  The Zippo test addresses the relatively easy questions of personal jurisdiction with passive websites (no personal jurisdiction) and sales from highly active website (personal jurisdiction).   By the broad swath of middle-ground interactivity remains uncertain territory.

The current Fourth Circuit test yields what might tactfully be described as uneven results.  In Zaletel, 70 million downloads of the defendant’s app – of which some percentage were certainly to Virginia customers – did not support personal jurisdiction because the defendant did not aim at Virginia.  Yet the same judge only three months later and applying the same test concluded that 99 shipments of oak mini-barrels was sufficient for personal jurisdiction.

Judge Ellis’s analysis seems to be consistent between the two cases.  The problem is that the legal test for personal jurisdiction in the Internet world is from a bygone era, leaving us with no clear test of the critical “purposeful availment” analysis.

Failure to Use Basic Security Protections when Transferring Electronic Files Results in Waiver of Privilege

The Attorney/Client Privilege and Work Product Protection for a video file transferred via Box.com was lost when a client failed to use basic security precautions.  A February 2017 ruling by a Western District of Virginia magistrate judge in Harleysville Insurance Company v. Holding Funeral Home, Inc. (Case No. 1:15-cv-00057) should reinforce a requirement that lawyers use basic security protections (at a minimum) for all potentially privileged or protected communications.

  1. All Too Common Facts

There are no winners in this case. Both sides of the Harleysville Insurance matter were scolded by the magistrate judge.  In this case, an insurance investigator transferred a video file to its company’s counsel using Box.com, a popular file transfer and sharing service. To notify counsel of the transfer, the investigator sent an email that included the hyperlink to the video file.  Months later, the transmission email was produced in discovery.  Defendants’ counsel spotted and then tested the hyperlink, and immediately found the video file.

It appears from the recitation of the facts that the investigator knew how to use the basic transfer capabilities of Box.com but was never trained or instructed to use even the basic security tools. For example, Box.com allows for the creation of secure folders and the controlled access to any folder.

To make matters worse, the video file resided on the Box.com site accessible by the hyperlink for at least six months.

  1. Attorney/Client Privilege and Work Product Protection Waiver

After the access to the Box.com site and the video file were exposed, Harleysville argued that the defense counsel’s access to the file was an improper, unauthorized access to privileged information, and this should require the disqualification of defense counsel. The argument in response was that Harleysville had waived any claim of privilege or confidentiality by placing the information on Box.com without using any of the available security tools.

Attorney/Client Privilege.  The court analyzed the Attorney/Client Privilege waiver separately from the Work Product Protection issue.  Its first finding was that Harleysville waived any claim of Attorney/Client Privilege with regard to the information posted on Box.com.  The court concluded that “the information uploaded to this site was available for viewing by anyone, anywhere who was connected to the Internet and happened upon the site by use of the hyperlink or otherwise.”  The decision continues, “In essence, Harleysville has conceded that its actions were the cyber world equivalent of leaving its claim file on a bench in the public square and telling its counsel where they could find it.”

Attorney/Client Privilege issues in the case were governed by state law. Virginia law provides protection for privileged communications. See Walton v. Mid-Atlantic Spine Specialists, 694 S.E.2d 545. 549 (Va. 2010).  But this privilege is an exception to the general duty to disclose and should be strictly construed.   Continuing, the proponent of the privilege has the burden to establish that the Attorney/Client Privilege applies and that the privilege has not been waived.

The Walton case adopts a multifactor analysis for determining whether the holder of a privilege took reasonable steps to prevent disclosure and also took reasonable steps to rectify the error. The first listed factor is “the reasonableness of precautions to prevent inadvertent disclosures.”  Harleysville’s failure to take any reasonable security precautions doomed its argument from the start.

Work Product Protection.  Work Product Protection in this matter was governed by federal law.  The Harleysville Court built its analysis on the Fourth Circuit’s recognition “that the inadvertent disclosure of attorney work product, even opinion work product, can result in a waiver of its protected status.”  This guidance is tempered by additional appellate authority that holds that a waiver should occur only when an attorney’s or client’s actions are “consistent with a conscious disregard of the advantage that is otherwise protected by the work product rule.”

FRE 502(b) would protect an “inadvertent” disclosure.  But the magistrate judge reasoned the disclosure here could not be inadvertent because the investigator clearly intended to transfer the video file to Box.com.  The Court also looked to Rule 502(b)(2), which provides that the disclosure is not a waiver if the holder of the protection “took reasonable to prevent disclosure.”  Again, Harleysville was in a bad place because it failed to take any steps.

The magistrate judge was obviously troubled not only by the transfer of the video file to Box.com without any security precautions, but also by the client leaving the unprotected file on the Internet site for at least six months.  The conclusion followed that this carelessness waived the Work Product Protection.

  1. Sanctions Imposed against Defense Counsel

In the introduction to this Blog post, we noted that both sides were scolded by the Court.  The investigator’s email that included the hyperlink also included a Confidentiality Notice.  This Notice coupled with the obvious significance of the video file was sufficient for the Court to conclude that the defense counsel should not have downloaded and studied the file. The Court wrote, “by using the hyperlink contained in the email also containing the Confidentiality Notice to access the Box Site, defense counsel should have realized that the Box Site might contain privileged or protected information.”

Harleysville argued that the appropriate sanction should be the disqualification of defense counsel. The magistrate judge agreed that there was an ethical stumble, but concluded that the disqualification was an unnecessarily severe sanction. She did, however, order that defense counsel should bear the parties’ costs in obtaining the Court’s ruling on the matter.

  1. Summary and Conclusions

The immediate instruction from the Harleysville magistrate judge’s ruling is that if a party chooses to use a new technology, it will be held responsible for ensuring that its employees and agents understand how the technology works, and, more importantly, whether the technology allows unwanted access by others to its confidential information.   The Box.com facts present a straightforward set of facts—the basic security features of Box.com would, if utilized, have blocked access to the video file.

The case sets the stage for a broader set of responsibilities associated with newer and more sophisticated security technologies.  For example, now that encryption technologies are readily available, should a disclosure that would have been blocked by the use of even simple encryption be deemed a waiver of privileges?   In Harleysville, the Box.com tools were present but not utilized.  In the encryption example, the tools can be acquired and then used, but as of today are probably not widely installed.  But this could change overnight when courts understand that Microsoft has added encryption options to Outlook.   The Harleysville reasoning likely will make it a requirement, not just a recommendation, that lawyers employ encryption for potentially privileged or protected communications.

H/T to Sharon Nelson and the VSB 2017 TechShow for flagging the significance of the Harleysville Ins. Co. v. Holding Funeral Home, Inc. ruling.

EDVA: Legal Malpractice Does Not Give Rise to Breach of Fiduciary Duty Claim

A claim of legal malpractice by client against a former attorney does not, at the same time, give rise to a breach of fiduciary claim under Virginia law, according to Judge Henry Hudson of the Eastern District of Virginia (Richmond Division).  Judge Hudson’s ruling is a development in the law of fiduciary duty, and it goes into territory that has not yet been covered by the Virginia Supreme Court.

In Kylin Network (Beijing) Movie & Culture Media Co. Ltd v. Fidlow, 3:16-cv-999-HEH, 2017 WL 889620 (E.D. Va. Mar. 6, 2017), the case began with a Chinese company that wanted to make a movie about the life of martial arts legend Bruce Lee.  The company hired the defendants (a Virginia attorney and his former law firm) to negotiate and obtain the movie rights with the supposed copyright owner.  According to the Complaint, after some negotiation, the attorney recommended that the plaintiff pay $1 million to the supposed seller of the rights.  After the payment was made, the plaintiff allegedly discovered the seller did not have good title to the movie rights.  The unhappy client then filed a three-count complaint in federal court against its former attorney for legal malpractice, breach of fiduciary duty, and fraud.

The defendants sought to dismiss all counts of the Complaint under Fed. R. Civ. P. 12(b)(6).  The defendants first argued that the legal malpractice claim failed due to the plaintiff’s contributory negligence.  While Judge Hudson recognized that contributory negligence could be a complete defense to legal malpractice, he ruled that the defense had to be resolved at trial by the fact-finder when “reasonable minds could disagree” on the disputed facts.  Thus, the judge denied the 12(b)(6) motion on this count.

The defendants, however, had better luck on the remaining two counts.  The plaintiffs’ breach of fiduciary duty claim, according to Judge Hudson, was based upon duties arising from the attorney-client relationship.  In turn, this relationship was based in contract, specifically the written engagement agreement between the law firm and the clients that gave rise to the legal malpractice claim.  Judge Hudson noted that the Virginia Supreme Court has not ruled on the issue, but based upon prior precedent, he held that the breach of fiduciary duty had to arise from a duty independent of the attorney-client contract.  According to Judge Hudson, “[i]n Virginia, because legal malpractice is a contract claim, an additional claim for breach of fiduciary duty must be based on something other than a violation of a duty arising under the attorney-client relationship.”

Judge Hudson then made short work of the remaining fraud count, dismissing it on similar grounds and holding that such a claim must arise from a source other than the contractual relationship between the parties.

The plaintiffs’ legal malpractice claim survived the 12(b)(6) stage, which appears to be the true core of the plaintiffs’ case.  But Judge Hudson’s opinion is notable as a development in the law of fiduciary duty in Virginia, a claim that seems to appear more frequently in business litigation in the Eastern District.

Suing a URL: A Roadmap to a Cybersquatting Action

As more economic activity occurs online, internet domain addresses are increasing in value, especially for small- and medium-sized businesses.  Businesses of all sizes need to pay attention to the security of their internet domain addresses, and a recent EDVA decision highlights the dangers of losing control of a business’s domain address.

In Jacobs Private Equity, LLC v. <JPE.com>, Case No. 1:16-cv-01331, 2017 WL 830397 (E.D. Va. Feb. 2, 2017), Magistrate Judge Ivan D. Davis faced a “cybersquatting” claim that is becoming more common.  Plaintiff Jacobs Private Equity, LLC, operated www.jpe.com as its website for over 12 years.  One day, however, its employees suddenly found that their login credentials to the website no longer worked.  According to the Complaint, an employee was the victim of an email “phishing” scheme where she was conned into divulging her login credentials.  The hackers then logged into the internet domain registry and changed the password to the business’s account.  As a result, the business lost control over its website and email addresses, and a new entity registered its purported ownership of the domain address.

Represented by Mark H. M. Sosnowsky of Drinker Biddle’s DC office, the business filed suit in the Eastern District of Virginia under the federal Anti-Cybersquatting Consumer Protection Act (the “ACPA”), 15 U.S.C. § 1125(d), et seq.  The Eastern District frequently sees these actions because many of the most popular internet domain registrars have offices in northern Virginia.  In this case, VeriSign, Inc., served as the registry, and it has an office in Reston, Virginia.

Suing an Internet Address

In a marriage of ancient legal principles and new information technology, a lawsuit under the ACPA is an in rem action against the internet domain address itself (and similar to an in rem action against a parcel of real estate or tangible personal property).  While the actual internet domain address is named as a defendant, the real defendant is, of course, the party who registered the address.

An ACPA action also involves elements of traditional trademark law.  In fact, the ACPA is part of Title 15 of the U.S. Code which focuses on federal law governing trademarks, also commonly referred to as the Lanham Act.  Under the ACPA, a court may order the forfeiture or cancellation of a domain name, or transfer of a domain address to the rightful owner of the mark. The ACPA applies, for the most part, to marks that are distinctive or famous.

A Common Problem

Fraudulent phishing schemes, such as the one that snared Jacobs Private Equity, are unfortunately increasingly common.  The usual pattern for this scheme is that bad actors outside of the United States will either take over the registration for a valuable website, or will watch for a non-renewal of registration for an active website.  The new party will swoop in, register the domain, and then offer to sell the domain back to the previous user for exorbitant amounts.  This frequently ensnares small businesses who fail to renew a website registration, such as by relying upon an expired credit card for an expected “auto-renewal” that never occurs.  The ACPA was enacted in 1999 in hopes of curbing such problems.

Elements of an ACPA Claim

Judge Davis’s opinion provides a useful roadmap for cybersquatting claims.  Treating an internet domain address as a trademark, a plaintiff must prove two elements to succeed on a cybersquatting claim:

  1. The domain name is identical or confusingly similar to the plaintiff’s mark.
  2. The registrant had bad-faith intent to profit from the domain name.

Traditional Trademark Law

The ACPA protects both registered trademarks and unregistered, common law marks.  While a common course of action for a business is to register its trademarks with the U.S. Patent & Trademark Office, a business may also acquire common law trademark rights by actual use of the mark in the market place.  For example, a small jewelry shop that has operated for 15 years as “Kitty’s Fine Jewelry” likely has a common law trademark rights in the name.  And if that small jewelry shop also operated a website (such as www.kittysfinejewelry.com), it will likely have a strong ACPA claim against a subsequent registration of the domain by a party acting in bad faith.  A business need not make a formal registration with the USPTO to have such protection.

Proving Bad Faith

Proving “bad faith intent” is often the challenge in these types of cases.  Because we cannot see into a person’s mind to determine intent, the ACPA sets forth nine “factors” that a court “may consider” in determining a person’s intent.  These factors operate as non-exclusive guides to the court (which is a concept similar to the common law “badges of fraud” used in traditional fraudulent conveyance law).  The nine factors under § 1125(d)(1)(B)(i) are as follows:

  1. Any preexisting trademark or other rights in the name used in the domain address.
  2. Whether the domain name contains the legal name of the person or a name that is commonly used to identify the person.
  3. Prior use of the domain name in connection with bona fide goods or services.
  4. Legitimate noncommercial or fair use of the mark in a site that uses the mark in the domain address.
  5. Intent to divert consumers from the mark owner’s online location to another site that could harm the goodwill represented by the mark.
  6. Whether the person offered to sell the domain name back to the mark owner for financial gain without having used the domain in any legitimate business activities. (This factor also includes whether the person has engaged in such activity in the past, indicating a pattern of such conduct.)
  7. Providing false or misleading contact information during the registration of the domain address.
  8. Acquiring multiple domain names which are identical or confusingly similar to multiple preexisting marks.
  9. Whether the mark is distinctive or famous at the time of registration of the domain name.

Of course, not all of these factors will apply in a given case, and there is no set standard for how many factors need to be present to establish bad faith.  Rather, a court has wide-latitude in these fact-intensive cases.

Service of Process Issues

In Jacobs Private Equity, the new registrant of the disputed internet domain address never responded to the complaint, so Judge Davis recommended that a default judgment be entered.  In Judge Davis’s Report and Recommendation (“R&R”), he first focused on the efforts that the plaintiff went to effect service of process.  The plaintiff tried the telephone number, mailing address, and email address listed by the new registrant, but all turned out to be bogus.  The plaintiff then sought court approval to publish notice of the lawsuit in The Washington Times.  Once this was accomplished, the court was satisfied that the default judgment could be granted.

The Plaintiff Prevails

Even though the defendant defaulted, Judge Davis still performed the ACPA statutory analysis in his R&R.  He determined that the plaintiff had a valid common law trademark rights in “JPE” and that the new registrant acted in bad faith by providing bogus contact information to VeriSign, among other factors.  No objections to Judge Davis’s R&R were ever filed, and on March 2nd, District Judge Liam O’Grady adopted the R&R in full, ordering the internet register to return the domain address to the plaintiff.

Alternatives to Litigation

 While the ACPA provides a legal remedy in federal court, aggrieved mark owners can also pursue an administrative challenge to bad-faith registration.  Known as a “Uniform Domain Name Dispute Resolution Policy” (“UDRP”) proceeding, the action is essentially a private arbitration filed with the internet registry overseeing the disputed domain.  While it can be faster and cheaper than litigation, the range of remedies allowed in such an arbitration are fewer than those available from a federal court.  And a successful arbitration can have little or no deterrence or precedential value against other cybersquatters targeting a specific website.

 Conclusion

The ACPA provides a legal remedy to businesses and individuals who have been victimized by the theft  or loss of control of their internet domains.  The statutory framework is straight-forward, but proving bad-faith intent can be challenging, especially when defendants evade service of process or mask their identities.  Yet, with the rise of online commerce (especially for small- and medium-sized businesses), we will likely see more incidents of stolen internet websites, and by virtue of the Eastern District’s geographic location, more cybersquatting claims brought in this court.

President Trump’s Immigration Executive Order Heads to the Fourth Circuit

The Trump Administration issued its replacement Immigration Executive Order on March 6, 2017 (Order No. 13,780).  This Executive Order arrived three weeks after several federal courts, including the EDVa and the Ninth Circuit, enjoined enforcement of core terms of the earlier Immigration Executive Order (Order No. 13,769).

In this Blog Post, we report on two federal court rulings blocking enforcement of the replacement Immigration Executive Order. EDVa has not yet been drawn into this legal battle.  But it is emerging that Judge Brinkema’s analysis in her widely-reported February 13, 2017 decision in Aziz v. Trump provides the template for judicial review of the new Executive Order.  This Post revisits Judge Brinkema’s decision and shows how the decisions this week from federal courts in Hawaii and in Maryland have tracked her analysis.  This analysis will soon be scrutinized in the Fourth Circuit, as, the Government noticed its appeal late on Friday night (March 17).

We previously reported on Judge Brinkema’s ruling in Aziz v. Trump granting the Commonwealth of Virginia’s Motion for a Preliminary Injunction.  Judge Brinkema ruled that Virginia would likely prevail on its Establishment Clause claim and issued a narrowly-drafted Preliminary Injunction Order.  No appeal was taken by the Government.

The Aziz v. Trump decision is significant not so much for developments in Immigration Law (although it has significance consequences), but for the three-step analysis applied by Judge Brinkema: (1) It was first decided that Virginia had standing to challenge the Executive Order as a party whose own interests were at stake (the Court did not reach a decision on Virginia’s parens patriae standing theory); (2) her opinion then confirms that federal courts unquestionably have the authority to review the constitutionality of actions by the Executive Branch, including actions of the President; (3) and lastly, perhaps most importantly, a federal court does not have to accept the facial justifications offered for Executive Branch action, but may consider evidence of contrary, unconstitutional motives.

The Replacement Immigration Executive Order

The Administration’s replacement Immigration Executive Order is identically entitled “Protecting the Nation from Foreign Terrorist Injury into the United States.”  The Order seeks to restrict the entry of foreign nationals from specified countries and suspends entrance from the United States refugee program for a set time period.   The new Order seeks to address the Ninth Circuit’s February 9, 2017 decision in Washington v. Trump, and to some degree to answer concerns from Judge Brinkema’s February 13, 2107 Aziz v. Trump decision.

Some of the more obvious flaws and procedural frailties from the earlier Immigration Executive Order are either omitted or repaired, but the core of the order remains essentially unchanged.  That is, the so-called “travel ban” provisions remain in the Order.

The Hawaii Court’s Ruling and “Pretextual Justification”

The legal arguments have shifted slightly in the challenges to the new Immigration Executive Order. In the February challenges to the first Order, the Government argued that the President’s actions in the realm of national security could not be reviewed by a federal court. When Judge Brinkema and the Ninth Circuit forcefully batted down this argument, the Government was left without any factual defense.  Recall that Judge Brinkema’s opinion cited Virginia’s factual allegations showing evidence that the Order’s true purpose was to block Muslim entry into the United States.  The evidence included multiple quotes from Donald Trump on the campaign trail, and added quotations from Rudy Giuliani alleging that the purpose of Order was to make good on the so-called “Muslim Ban” campaign promises.

In wading into the Pretextual Justification issue, Judge Derrick K. Watson, from the Hawaii District Court, begins with an acknowledgment that “It is undisputed that the [new] Executive Order does not facially discriminate for or against any particular religion, or for or against religion versus non-religion.”  The Government argued that the core language was “religiously neutral,” and that the new Immigration Executive Order could not have been religiously motivated because “the six countries represent only a small fraction of the world’s 50 Muslim-majority nations, and are home to less than 9% of the global Muslim population . . . .”  The Government continued that “[C]ourts may not ‘look behind the exercise of [Executive] discretion’ taken ‘on the basis of a facially legitimate and bona fide reason.’”  In the Government’s analysis, this should have ended the case and defeated Hawaii’s arguments.

But the Hawaii federal judge did not stop with the Government’s argument.  He cited the Ninth Circuit’s February 9, 2017 decision regarding the earlier Immigration Executive Order in Washington v. Trump:  “It is well-established that evidence of purpose beyond the face of the challenged law may be considered in evaluating Establishment and Equal Protection Clause claims.”  This is the entry of the “Pretextual Justification” issue: Were the Trump Administration’s facially-neutral legal justifications intended to obscure a purpose of barring Muslim immigrants?

The allegations of anti-Muslim animus—taken in substantial part from the record in Aziz v. Trump—was obviously not going away.  Judge Watkins continued, “Any reasonable, objective observer would conclude, as does the Court for purposes of the instant motion for TRO, that the stated secular purpose of the Executive Order is, at the very least, ‘secondary to a religious objective’ of temporarily suspending the entry of Muslims.”

The evidentiary record before Judge Watson included more than the Trump campaign statements and promises, and more than the Giuliani commentary on a “Muslim ban.”  The judge had before him the earlier Declaration National Security Officers that criticized the Trump Administration’s arguments.   In the view of Judge Watson, the Administration’s case was further damaged a by February 21, 2017 statement by Stephen Miller, the President’s Senior Advisor.  Miller stated, “fundamentally, [despite ‘technical’ revisions meant to address the Ninth Circuit’s concerns in Washington v. Trump,] you are still going to have the same basic policy outcome [as the first].”

The Hawaii District Court found that the plaintiffs would likely prevail on their Establishment Clause claim.   Late on March 15, 2017, Judge Watson entered a nationwide TRO enjoining enforcement of Sections 2 and 6 of the new Immigration Executive Order.  Section 2(c) is the “travel ban” part of the Order, and Section 6 suspends the refugee program.

Maryland Federal Court Frames Issue as “Pretextual Justification”

Meanwhile, in the Maryland District Court, Judge Theodore D. Chuang authored a 43-page opinion in International Refugee Assistance Project v. Trump.  Judge Chuang released his decision on March 16, 2017, along with a nationwide preliminary injunction enjoining enforcement of Section 2(c) of the new Executive Order. Unlike the earlier cases involving the first Immigration Executive Order where the lead plaintiffs were the states, the plaintiffs in the Maryland action are nonprofit entities and several individuals. The Maryland District Court, however, had no difficulty finding that these plaintiffs have standing.

As in the Hawaii ruling, the Maryland plaintiffs prevailed on the Establishment Clause claim, the greatest vulnerability for the Immigration Executive Order.  The Court considered in some detail claims based on the Immigration and Nationality Act, but rejected those claims.  The Court also weighed and credited a number of the Government’s arguments. For example, the President’s assertions that the Order is driven by national security and foreign policy judgments is in the opinion recognized as a valid secular purpose.

Judge Chuang, citing Supreme Court precedent, framed the critical issue this way: “The question, however, is not simply whether the Government has identified a secular purpose for the travel band.  If the stated secular purpose is secondary to the religious purpose, the Establishment Clause would be violated.”  Here the Government’s argument that the case is only about a “facially legitimate and bona fide reason” for the Executive Branch action is rejected   The judge concludes that “in this highly unique case, the record provides strong indication that the national security purpose is not the primary purpose for the travel ban.”

Where Do We Go From Here?  To the Fourth Circuit.

The Government has now picked its battleground.   Late on Friday, March 17, 2017, the Government noticed its appeal of the Maryland District Court ruling to the Fourth Circuit.  While Judge Brinkema’s ruling will not formally reach the Fourth Circuit, her reasoning will be examined on appeal when the Circuit Court reviews Judge Chuang’s decision.

Under the current Briefing Order, the Government’s Opening Brief will be due on April 26, 2017 in the Fourth Circuit.  Unlike in last month’s Ninth Circuit consideration in the Washington case where the Government sought emergency review of the TRO, the Government is not seeking an emergency review of the Maryland District Court’s preliminary injunction ruling.  After the Government’s rough experience in the Ninth Circuit, it was probably an easy decision to go to Richmond rather than San Francisco.

Proportionality Redux: The Sedona Conference Revisits its Commentary on Proportionality in Electronic Discovery

When Working Group 1 of The Sedona Conference (Sedona) publishes one of its eDiscovery White Papers, the consequence is often that Sedona steers the development of the law rather than merely reports on developments.  This observation is intended as a compliment, not a criticism. Sedona’s publications have guided the development of eDiscovery law since publication in 2003 of The Sedona Principles; Best Practices, Recommendations & Principles for Addressing Electronic Document Production, and have earned recognition as the gold standard for both the practical and scholarly discussion of eDiscovery issues.

In November 2016, Sedona released its Public Comment Version  of its Commentary on Proportionality in Electronic Discovery (“2016 Commentary”).  This version follows Sedona’s 2010 and 2013 Commentaries on Proportionality and its Fall 2015 publication in The Sedona Conference Journal of Judge Craig B. Shaffer’s scholarly article, “The ‘Burdens’ of Applying Proportionality” (also available for download from Sedona’s website).

This Blog post is not a critique or even a summary of the 2016 Commentary, but serves as a signpost directing litigators to Sedona’s website and the White Paper with the suggestion that the work be a resource for every federal litigator.

The December 2015 Rules Amendments: Key Rules Completely Revamped

The 2016 Commentary reminds us that “Rules 26 (b)(1) and 37(e) were completely revamped in December 2015.”  The amendments are the product of at least five years of  committee work and the most extensive public debate over any rules amendment going back to and probably including the Federal Rules of Civil Procedure introduction in 1938.

For federal court litigators on the front lines, these amendments should carry enormous, almost religious significance.  Chief Justice John Roberts emphasized in his 2015 Year-End Report on the Federal Judiciary that these developments were indeed a “Big Deal.”   See Kurz, J, “The Chief Justice and the Big Deal in the December 2015 Amendments to the Federal Civil Rules,” EDVA Update Blog (February 8, 2016).

The Chief Justice wrote that amended Rule 26(b)(1) “crystallizes the concept of reasonable limits on discovery through increased reliance on the common-sense concept of proportionality.”   Before the amendment, the boundary for the scope of discovery was relevancy.  While for at least three decades federal courts had wrestled with various proportionality considerations embedded in the discovery section of the Federal Rules, the consensus is that proportionality had gained little or no traction for the day-to-day practice of law.  Each time we checked, proportionality slipped deeper into the forgotten fine print of rule subsections and subparts.  With the December 2015 amendment, the discovery scope boundaries are revised to matters “relevant to any party’s claim or defense and proportional to the needs of the case . . .” (emphasis added).  The amended rule then identifies six consideration points.  Proportionality thus moved from the proverbial rule sub-basement (Rule 26(b)(2)(iii)) to the front foyer.

The rule-makers opted in Rule 26(b)(1) not only to elevate proportionality as a discovery touchstone along with relevancy, but seemingly weighted them equally.  This amendment was then paired with the total revision of Rule 37(e), the rule that provides directions for data preservation and spoliation sanctions.   For our coverage of the Rule 37(e) amendment, see Kurz and Mauler, “Proposed Rule 37(e) Cleared by the U.S. Judicial Conference,” EDVA Update Blog (September 29, 2014).  Under these combined rules, a proponent of discovery should now be prepared to defend both the relevancy and the proportionality of requested discovery. Additionally, when conducting a post hoc analysis of preservation decisions, the reasonableness of the preservation should depend in part on proportionality considerations.

Sedona’s 2016 Commentary on Proportionality in Electronic Discovery

The intervening development between the earlier Commentaries and Judge Shaffer’s work and now the 2016 Commentary is the arrival of the December 2015 amendments to Rule 26(b)(1) and Rule 37(e).

The 2016 Commentary revises only slightly the previously published Sedona Principles of Proportionality.  These principles first appeared in the 2010 Commentary. The discussion under each principle is now considerably more robust than in the prior versions. Of course, this is the expected result now that we have the amended rules, the Committee Notes, and nearly a year of case law applying the amended rules.

Some commentators have observed that many practitioners, and even some federal courts, have continued seemingly oblivious to the December 2015 amendments.  This was expected—as we all know, court procedural rules can be mind-numbing, and it will reasonably  take several years for amendments, even highly consequential amendments, to achieve broad effect.  The Chief Justice’s “Big Deal” reminder in his 2015 Report was probably more an effort to accelerate what was otherwise anticipated to be slow change, and not a response to minimally-observed changes on the front lines of litigation.

Sedona’s 2016 Commentary does not admonish either the bar or the bench regarding recognition of the rules amendments.  Rather, the Commentary summarizes the rules amendments, and then works through the six Principles of Proportionality using for the first time a detailed set of 24 Comments.  With each Comment, the Commentary suggests how the new rules can and should work in practice.  For example, under Principle 1 (which addresses proportionality in preservation) in Comments 1.a and 1.b, the language is “proportionality principles may be considered in evaluating the reasonableness of prelitigation preservation efforts,” and “a post hoc analysis of a party’s preservation decisions should [be made] in light of the proportionality factors set forth in Rule 26, and the reasonableness of the preservation parties’ efforts.”  Consistent with Sedona’s practices, the Comments are supported by comprehensive footnotes.

As a second example, the same bridge from Principle to Comments and practical advice can be seen in the discussion of Principle 4 (proportionality decisions should be based on information other than speculation). Comment 4.b directs that “Discovery must be limited if producing the requested information is disproportionate to its likely benefits . . . .”  In Comment 4.c the instruction is that “courts may order sampling of the requested information to determine whether it is sufficiently important to warrant discovery.”

Making Use of Sedona’s 2016 Commentary

Sedona’s White Papers should be a part of every federal litigator’s eDiscovery toolkit.  The White Papers are the preferred starting point to understand the current state of eDiscovery law, to track recent developments, and to appreciate pending or future rules amendments.  Overall, Sedona presents balanced assessments of eDiscovery issues, and provides the best available practical guidance as well as scholarly research and analysis.

We appreciate the practical value of the 2016 Commentary.  This reflects the make-up of the team of lawyers and judges who drafted the Comments. The team members, all respected eDiscovery veterans, include front-line litigators and two federal court magistrate judges.  In many instances, they provide granular, step-by-step recommendations for implementing the Principles.  For this reasons, the Commentary may prove to be especially valuable in resolving many of the eDiscovery challenges that routinely arise in federal court litigation.

The 2016 Commentary, while currently at the Public Comment Version stage, is no exception to the continuing quality of Sedona’s White Papers.  The writers and editors have produced the best available resource on proportionality in eDiscovery, including bringing to date the developments associated with the December 2015 amendments to Rule 26(b)(1) and Rule 37(e).

Filing Deadline Changes: The Disappearance and then the Return of the 3-Day Cushion

On December 1, 2016, amendments to Fed. R. Civ. P. Rule 6(d) went into effect.  At the same time, amendments to EDVa Local Civil Rule 7(F)(1) also went into effect.  For practical purposes, the F.R.C.P amendments make ECF service good for nearly all purposes and eliminate the added 3-day cushion that applied to most response and reply filings.  The EDVa Local Rule revision adds back the otherwise lost three days.  While the overall consequence may seem insignificant, you should be alert to at least one nuance from these changes.

To appreciate the changes, we summarize below the F.R.C.P. Rule 6(d) amendment and the changes to Local Civil Rule 7(f)(1).  Then we revisit the Sprint Option provision in the standard Rule 16(b) Scheduling Order used in the Alexandria Division.  See R. Larson, “The 1-Week EDVa Discovery Sprint from Filing to Ruling in 7½ Days.”  As explained below, the combined new F.R.C.P. and Local Rule amendments provide some added coverage for the beloved Sprint Option.

FRCP Rule 6(d) Amendments — Good-bye 3-Day Cushion

In April 2016, the U.S. Supreme Court approved the F.R.C.P. Rule 6(d) amendment that removes electronic service from the modes of service under Rule 5(b) that allows an extra three days for responses.   The Rule before amendment provided:

(d) Additional Time After Certain Kinds of Service. When a party may or must act within a specified time after service and service is made under Rule 5(b)(2)(C), (D), (E), or (F), 3 days are added after the period would otherwise expire under Rule 6(a).

The workings of this Rule for the most part simply extended the motion response and reply times by three days.  For example, a motion that provided 11 days for the response in fact provided 14 days because of the 3-day cushion that was automatically added.  Now, when the services is by ECF (which is covered as electronic service under Rule 5(b)(2)(E)), the 3-day cushion vanishes.

The amended version of the Rule looks almost exactly the same except a close look shows that subpart 5(b)(2)(E) has been erased.   This now-gone segment is where Rule 5(b) allows for electronic service, which we usually translate to mean ECF service.  A quick look at Rule 5(b)(2)(E) suggests that the electronic service provisions apply only if the receiving party “consented in writing” to electronic service.   You might conclude that the changes add to a big nothing because you perhaps could refuse to consent.  You may have forgotten, however, that when you registered for ECF filing (as all EDVa practitioners are required to do) you consented to electronic service.   The EDVA Complete E-Filing Policies and Procedures Manual provides in Chapter 4 that “[b]y participating in the electronic filing process, the parties consent to the electronic service of all documents and will make available electronic mail addresses for service.”

To this point in the analysis, the F.R.C.P. Rule 6(d) amendments effectively shorten the response and reply times for most motion pleadings.

Local Civil Rule 7(F)(1) Amendment — the 3 Lost Days Return

EDVa Local Civil Rule 7 covers local Motions practice.  Subpart (F)(1) provides for filing response and reply briefs, and until the new revisions took effect set the filing dates at 11 days and three days respectively.  But with the addition of the 3-day cushion, the effective response and reply dates have been 14 days and six days.  The Local Rule subpart read (until now):

(1)  All motions, unless otherwise directed by the Court and except as noted herein below in subsection 7(F)(2), shall be accompanied by a written brief setting forth a concise statement of the facts and supporting reasons, along with a citation of the authorities upon which the movant relies. Unless otherwise directed by the Court, the opposing party shall file a responsive brief and such supporting documents as are appropriate, within eleven (11) days after service and the moving party may file a rebuttal brief within three (3) days after the service of the opposing party’s reply brief. No further briefs or written communications may be filed without first obtaining leave of Court. [Emphasis added.]

Absent modification of this Local Rule, the amendments to F.R.C.P. Rule 6(d) would result in significantly shorter response and reply times.

The EDVa amendments to Local Civil Rule 7(F)(1) substitute 14 days and three days as the new response and reply dates.  This Local Rule change was issued on extreme short notice—on November 17, 2016, only two weeks ago.  So we are essentially back where we started.  The major difference is that we have eliminated a provision appropriate to the time when nearly all pleadings traveled by snail mail.

When practicing in other Districts, be sure to check the Local Rules to see whether the EDVa changes have been adopted in the other District.   Failure to check could potentially result in painful consequences.

The Sprint Option and the Alexandria Division’s Rule 16(b) Scheduling Order

The give/take changes described above are not entirely neutral.  One difference is that the combined new F.R.C.P. and Local Rule amendments provide added coverage for the Sprint Option.

What we refer to as the “Sprint Option” is a creature of the standard Alexandria Division Rule 16(b) Scheduling Order, and it is not a Local Rules provision.   The standard Scheduling Order issued by the Alexandria magistrate judges includes this language:

In order to provide for the prompt resolution of non-dispositive matters, a non-dispositive motion may be filed and served by no later than 5:00 p.m. on a Friday and noticed for a hearing at 10:00 a.m. on the following Friday. Under this expedited schedule, a response must be filed and served by no later than 5:00 p.m. the Wednesday before the hearing and any reply should be filed and served as early as possible on Thursday to give the Court time to review all pleadings before the hearing. At the moving party’s discretion, a non-dispositive motion may also be filed and noticed for a hearing in accordance with the briefing schedule provided in Local Civil 7(F)(1) discussed above in order to provide additional time for briefing and consideration by the Court. [emphasis added]

In short, file and serve by 5 PM on Friday, and you can be before the Court the next Friday morning.

This is a key provision that greatly disturbs lawyers from other districts, but also one that keep the Rocket Docket roaring forward.  The 3-day cushion, however, had the potential to disrupt this process.  To stay on the Sprint Option track, a party had to avoid the 3-day cushion in prior F.R.C.P. Rule 6(d).  This required service of the pleading by “handing it to the person” to be served, or by leaving the pleading at the person’s home or office.   For practice in the Alexandria Division, this was a major impediment if the opposing counsel (or local counsel) was anywhere outside of Alexandria.

The above-describe challenge goes away with the combined F.R.C.P. Rule 6(d) and EDVa Local Rule 7(F)(1) amendments.  ECF service by 5:00 PM on Friday (with the NEF returned—service time is when the NEF issues, and not when you hit the last ECF button) suffices, and the Sprint Option is now more widely available without concerns about the in person service and the 3-day cushion.  The same applies to the Sprint Option responses and replies—ECF filing is adequate service without adding the 3-day cushion.

Handling Overlapping and Duplicative Damages

In a recent case, Judge Liam O’Grady astutely handled in his Jury Instructions and a Special Verdict Form the prospect of a jury’s duplicative and overlapping damage determinations.  He then resolved the parties’ dispute on overlapping damages when he decided post-verdict remittitur motion.  This case provides a roadmap for practitioners on how to handle similar problems in future cases.

Multi-count Complaint and Overlapping Damages

The case of Hair Club for Men, LLC v. Ehson et al, Civil Action No. 1:16cv236–LO/JFA involved a two-year covenant not-to-compete.  Plaintiff (a former employer) sued to enforce the covenant against a departing employee and her new employer.  Plaintiff sought not only an injunction but also considerable damages.

The Complaint alleged the usual suite of claims found in covenant-not-to-compete cases. The leading claim was for Breach of Contract, followed by claims for Trade Secrets Misappropriation, Tortious Interference, Unjust Enrichment, and Breach of Fiduciary Duty.

The case narrowed at summary judgment when the Court held that the defendants were liable on certain counts.  Judge O’Grady ruled that the non-compete covenant was enforceable, and that, as a matter of law, the ex-employee breached her fiduciary duty.  But still the Trade Secrets and Tortious Interference claims had to be tried, and the measure of damages for all claims was left open for trial.  Perhaps surprisingly, the case did not settle after these rulings.

Seven months after filing of the Complaint, the case went to a jury trial for four days.  The jury’s Special Verdict Form awarded Breach of Contract damages of $156,096, and then awarded damages of $258,330 on each of the three remaining counts.  Additionally, the jury responded to the question of whether the damages awarded were duplicative by circling “Yes.”

Jury Instructions and Special Verdict Form

Judge O’Grady’s jury instructions navigated through the duplicative damages issue, and the Special Verdict Form focused the jury on the key question of duplication.  Jury Instruction No. 39 addressed the possibility of overlapping damage awards:

In this case, Hair Club seeks to recover the same type of damages for lost profits on its breach of contract, breach of fiduciary duty of loyalty, misappropriation of trade secrets and tortious interference with contract and business advantage claims. A party is not entitled to multiple recovery for its losses. However, if you find that Hair Club has proved every element of each of its damages, and is entitled to recover for its claimed losses, you will be asked whether the recovery is duplicative, so that Hair Club does not recover more than it is entitled.

On the Special Verdict Form, Question No. 7 asked “Are any of the answers to questions 1, 3, 5, or 6 duplicative?”, followed by a simple “Yes/No” option.  (The four identified questions corresponded to Plaintiff’s four separate remaining counts.)

Dealing with Duplicative Damages

Despite the simple “Yes/No” question, the jury’s verdict left uncertainty as to the overall damages.  If the Court simply added all of the multiple damage awards, then the result would be a judgment for $934,086.  Plaintiff agreed that the jury intended that the three awards of $258,330 were for the same conduct and damage.  But Plaintiff also argued that the Breach of Contract damages should be added to the common damages, for a total damage award of $414,426.  Judge O’Grady, however, concluded that the appropriate total damage award was $258,330.

Virginia law prohibits the award of duplicative damages “when the claims, duties, and injuries are the same.” Wilkins v. Peninsula Motorcars, Inc., 266 Va. 558, 587 S.E.2d 581 (2003).  Judge O’Grady added that the “two claims are not duplicative if the conduct underlying the claims is different.”  For this, he cited Advance Marine Enterprises, Inc. v. PRC Inc., 256 Va. 106, 501 S.E.2d 148 (1998), and his analysis tracks the Wilkins opinion.  The trial court must “evaluate whether multiple damage awards constitute impermissible double recovery” and that under Virginia law it is the responsibility of the trial court in reviewing a verdict to supervise “the damage awards to avoid double recovery.”

Plaintiff relied on Advanced Marine to argue that the damages were in part separate and therefore should be added to yield the aggregate damage award, but Judge O’Grady distinguished Advance Marine.   In that case, the plaintiff proved a common set of compensatory damages under separate claims for Trade Secrets Misappropriation and Business Conspiracy.  While the plaintiff was limited to only one set of compensatory damages, the plaintiff was allowed to recover both punitive damages under the Trade Secrets claim and to treble the compensatory damages under the Business Conspiracy claim.

Judge O’Grady summed his conclusion by stating that “compensatory damages for the same injury, based on the same evidence, should be awarded only once.  This was consistent with Advance Marine.  This rule holds even if the injury is articulated in multiple causes of action with separate burdens of proof.”  But equally important, the judge ruled that it was his responsibility to make the determination using the jury’s answers on the Special Verdict Form.

Summary

The dilemma of overlapping and repetitive damages arises frequently.  In the case before Judge O’Grady, the jury considered damages on four separate counts.  The trial evidence, however, addressed the damages as a single compensatory loss.  When the jury answered that the damages were duplicative, it was then the trial judge’s responsibility to resolve the parties’ disagreement on the extent of the duplication.

Too often, a jury’s verdict states only its liability findings and separate awards on multiple counts.  In this situation, a judge ventures into potentially dangerous territory if he or she imputes that the damages are duplicative.

A question for both trial lawyers and judges is how best to manage this issue to steer away from the quagmire.  Judge O’Grady’s jury instruction in Hair Club cleanly instructs on duplicative damages.  He coupled his Instructions with the simple Special Verdict Form question about duplication.  In Hair Club, this seems to have worked well, and perhaps is the model for multi-count cases where the claimed damages overlap.