The news lately is peppered by the federal governments’ (lack of?) regulation of businesses, but how do state statutes and the common law regulate businesses? That is the question addressed in the article The Use of State Statutes and Common Law Tort Theories to Regulate Business Conduct which can be found here.
The article “examine[s] how differences in state law can shape and influence what constitutes the appropriate bounds of business competition in a particular state.” It focuses on the common law claims of intentional interference with contract or business expectancy and certain state statutory private rights of actions, such as the Massachusetts’ Unfair and Deceptive Trade Practices Statute, North Carolina’s unfair methods of competition statute or “little FTC act”, and Virginia’s statutory business conspiracy statute.
If you are a parent with a child in daycare, like me, or private school, you know all too well the difficult choice of selecting the perfect provider. Many providers require you to pay a substantial deposit to secure your child’s place with only a short cancellation window. But, what happens if you cancel after the deadline passes? And, if the provider already is capacity-filled or can place another child in your child’s stead, should the law allow the provider to keep your deposit?
That question was presented to the Court of Appeals of Maryland in Barrie School v. Andrew Patch, et al., 401 Md. 497, 933 A.2d 382 (2007), found here. There, the Court held that when a contract contains an enforceable liquidated damage, the non-breaching party has no obligation to mitigate his damages. As we mentioned in our prior blog entry, http://unfairbusinesspractices.blogspot.com/2008/02/when-is-breach-of-contract-unfair.html, parties should consider negotiating a liquidated damages provision to avoid having to prove complicated damage questions. Liquidated damages are defined as a “specific sum stipulated to and agreed upon by the parties at the time they entered into a contract, to be paid to compensate for injuries in the event of a breach of that contract.” Id. at 507, 933 A.2d at 388.
Before addressing the duty to mitigate issue, the Court first examined the rules pertaining to liquidated damages. The Court embraced a three-part test to determine whether a contract clause constitutes a liquidated damages provision: “First, such a clause must provide in clear and unambiguous terms for a certain sum. Secondly, the liquidated damages must reasonably be compensation for the damages anticipated by the breach. Thirdly, liquidated damage clauses are by their nature mandatory binding agreements before the fact which may not be altered to correspond to actual damages determined after the fact.” Id. at 509, 933 A.2d at 389 (internal citation omitted).
In addition, a liquidated damages provision may not be “grossly excessive and out of all proportion to the damages that might reasonably have been expected to result from such breach of the contract.” Id. at 509, 933 A.2d at 389-90 (internal citations and quotations omitted). And, the Court adopoted the following analysis: “a liquidated damages provision will be held to vioate public policy, and hence will not be enforced, when it is intended to punish, or has the effect of punishing, a party for breaching the contract, or when there is a large disparity between the amount payable under the provision and the actual damages likely to be caused by a breach, so that it in effect seeks to coerce performance of the underlying agreement by penalizing nonperformance and making a breach prohibitively and unreasonably costly.” Id. at 510, 933 A.2d at 390 (internal citations and quotations omitted).
The Court then used a two-part test to determine whether a liquidated damages provision should be treated as an enforceable penalty: “First, the clause must provide a fair estimate of potential damages at the time the parties entered into the contract.” Id. at 510, 933 A.2d at 390. “Second, the damages must have been incapable of estimation, or very difficult to estimate, at the time of contracting.” Id. Using that test, the Court held that the school’s one-year tuition liquidated damage provision was “enforceable because [the damages] were neither grossly excessive nor out of proportion of those which might have been expected at the time of contracting.” Id. at 512, 933 A.2d at 391.
After determining that the provision was enforceable, the Court held that the non-breaching party has no duty to mitigate its actual damages “[b]ecause mitigation of damages is [only] part of a post-breach calculation of actual damages….” Id. at 514-15, 933 A.2d at 392-93. And, such an analysis would “blunt” the purpose of having a liquidated damages provision. Id.
Courts in many jurisdictions work hard to prevent parties from turning every breach of contract, no matter how egregious, into a tort claim. Plaintiffs often want to add tort claims because they may be able to recover additional compensatory damages that would not be available in a vanilla breach of contract situation. In addition, a tort claim may allow the plaintiff to recover exemplary or punitive damages, or a multiple of the compensatory damages, as well as attorneys’ fees.
In Virginia, a party’s conduct gives rise to both a contract and tort claim only in limited circumstances. In a recent case, the Virginia Supreme Court explained that to “recover in tort, the duty tortiously or negligently breached must be a common law duty, not one existing between the parties solely by virtue of the contract.” Augusta Mut. Ins. Co. v. Mason, 645 S.E.2d 290, 293 (Va. 2007) (internal quotes omitted). Click here for PDF. A tort claim only occurs when there is a “violation of certain common law and statutory duties involving the safety of persons and property, which are imposed to protect the broad interests of society.” Id. at 295, citing Filak v. George, 267 Va. 612, 618, 594 S.E.2d 610, 613 (2004). Click here for PDF.
On the other hand, a contract claim is the only method of redress “[i]f the cause of complaint be for an act of omission or non-feasance which, without proof of a contract to do what was left undone, would not give rise to any cause of action (because no duty apart from contract to do what is complained of exits) . . . .” Id., citing O’Connell v. Bean, 263 Va. 176, 181, 556 S.E.2d 741, 743 (2002). http://www.courts.state.va.us/opinions/opnscvwp/1002900.doc.
In Augusta, the issue was whether a fraud claim existed when an insurance agent allegedly made false statements in a prospective insurance report in order to convince the homeowner’s insurance company to insure the house. The Court dismissed the fraud claim because the insurance company “failed to identify the breach of any duty arising from a source other than its contractual relationship . . . .” Id. at 294. The court relied on its prior decision in Richmond Metropolitan Authority v. McDevitt Street Bovis, Inc., 507 S.E.2d 344, 256 Va. 553 (1998), http://www.courts.state.va.us/opinions/opnscvwp/1980081.doc, where it held that even the false representations of a construction company that it completed certain phased work to secure payments did not give rise to tort claim.
A different outcome may result, however, if the breaching party fraudulently induced the other party to enter into the contract. This is because “the promisor’s intention-his state of mind-is a matter of fact. When he makes the promise, intending not to perform, his promise is a misrepresentation of present fact, and if made to induce the promisee to act to his detriment, is actionable as an actual fraud.” Id., citing Colonial Ford Truck Sales, Inc. v. Schneider, 228 Va. 671, 325 S.E.2d 91 (1985) (link unavailable). In some cases, courts have found that a party’s breach immediately after signing the contract to be indicative the party’s intent to never perform the contract. See Flip Mortgage Corp. v. McElhone, 841 F.2d 531 (4th Cir. 1988) (link unavailable).
The lesson behind these cases is that contracting parties should carefully consider the available remedies if the contract is breached. These remedies could include negotiating a reasonable liquidated damages provision, whereby the breaching party would be liable for a specified amount of damages
But, somewhat surprisingly, there are far fewer cases and secondary sources discussing the standards for admitting electronic documents into evidence. The Court in Lorraine v. Markel American Ins. Co., 241 F.R.D. 534 (D.Md. 2007), recognized both the relative scarcity of court opinions addressing admissibility standards and the different approaches taken by those courts. See here.
Lorraine drives home the point that parties cannot assume that a jury or trial judge will ever see the proverbial smoking gun e-mail or other electronic document. In state courts, in particular, litigants may not be able to cite any jurisdictional rules or cases that provide the judge with an admissibility test. In business conspiracy and other unfair business practices cases, this uncertainty can be particularly challenging. This is because e-mails and user-files oftentimes store the majority of a company’s communications and knowledge. Thus, litigants who are unprepared to meet the most exacting admissibility standards may find themselves unable to counter their opponent’s evidence. This creates a powerful incentive for opposing parties to stipulate to a protocol governing the admissibility of electronic evidence to remove the uncertainty.
Counsel is well advised to focus on admissibility issues early in discovery. By doing so, counsel can establish the foundational requirements needed to authenticate electronic documents and overcome any hearsay objections. It also stimulates dialogue between counsel regarding whether counsel can stipulate early-on to certain evidentiary issues
There are no set guidelines explaining everything that could constitute an unfair business practice. Certainly, people agree that some actions, such as fraud, qualify. But, agreeing that an abstract term like “fraud” is wrong is markedly different than agreeing that a set of actions or words equal fraud. Peoples’ opinions are often shaped by “whose ox is being gored.” Thus, what to some may be considered a corporate raid, others may call a strategic acquisition (particularly, the acquirer). Even wikipedia offers only a brief description of unfair business practices. http://en.wikipedia.org/wiki/Unfair_business_practices.
Courts and legislators have tried to define the boundaries where healthy competition crosses the line to become unfair. One of the more powerful weapons against unfair practices are business conspiracy statutes. For instance, Virginia’s law, § 18.2-499 (http://leg1.state.va.us/cgi-bin/legp504.exe?000+cod+18.2-499), makes it illegal for two or more persons to “combine, associate, agree, mutually undertake or concert together for the purpose of . . . willfully and maliciously injuring another in his reputation, trade, business or profession by any means whatever . . . .” An party injured by such conduct can file a civil action and may “recover three-fold the damages by him sustained, and the costs of suit, including a reasonable fee to plaintiff’s counsel . . . .” Virginia Code § 18.2-500 (http://leg1.state.va.us/cgi-bin/legp504.exe?000+cod+18.2-500).
But, quoting the above language hardly tells the reader what is meant by it. What if two people agree to advertise a new widget business with the expressed purpose of taking customers away from the one local widget maker? Does the answer change if the new company hired 20% of the existing company’s specially trained employees? Or, 50%? What if those hired employees brought with them some widget designs used by the existing company? Or, what if those borrowed designs were discussed but rejected by the existing company? And, does the answer change depending on whether the employees had noncompete or other contractual limitations. It is these questions and the many gray lines presented in them that cause courts to struggle to define a business conspiracy and other unfair business practices. To define the contours of unfair competition, Maryland courts have virtually reached back to the Golden Rule, stating “The legal principles which are controlling here are simply the principles of old-fashioned honesty. One man may not reap where another has sown, nor gather where another has strewn.” click here for the opinion.
Compare two Virginia Supreme Court cases Feddeman and Co. v. Langan Associates (http://www.courts.state.va.us/opinions/opnscvtx/1991996.txt) and Peace v. Conway, 246 Va. 278, 435 S.E.2d 133 (1993) (unavailable via internet). In Conway, two employees simultaneous left their employer to establish a competing business. After leaving, they contacted over a hundred of their former employer’s customers. They identified those customers solely from their memories. Neither of them had signed a noncompete or nonsolicit agreement with their former employer. The court found that the former employees did not employ improper methods in obtaining their former employer’s customers.
In Feddeman, the plaintiff accounting firm sued its former directors and employees, and a competitor. The court found that the defendants were liable under Virginia’s conspiracy statute for coordinating a mass resignation of the plaintiff’s employees (25 out of 31) and the solicitation of all its customers, 50% of whom transferred their business to the competitor defendant. While the court agreed that employees have a right to make plans to compete with their employer, that right is not absolute. The court focused on the employee and director defendants’ formulation of plan to resign en masse if the plaintiff firm did not accept their buy-out proposal, their statements to other employees informing them of the resignation plan and offering them the option to work for the competitor.
Ironically, the Virginia Supreme Court reversed the trial judge in both cases: ruling in Feddeman that the trial court improperly set aside the jury verdict awarding the plaintiff damages; and ruling in Peace that the trial court’s erred in awarding damages to the plaintiff because there was no legal wrongdoing. Thus, even judges disagree as what constitutes an unlawful business practice. This makes it especially difficult for companies looking to aggressively expand to find a safe harbor.
