Virginia Business Law Blog

A new opinion by the U.S. Court of Appeals for the Fourth Circuit reaffirms that when parties go to arbitration, the arbitrator’s decision in a contract dispute, good or bad, will not be touched by the courts unless it goes against the very text of the contract itself.  In PPG Industries, Inc. v. Int’l Chemical Workers Union Council of the United Food and Commercial Workers, et al., the issue was whether workers who were on strike qualified as “Actively Employed” for eligibility to receive a bonus under the company’s bonus plan.  The bonus plan contained an arbitration clause, so the parties took their dispute there.  The bonus plan did not specifically address whether striking workers were “Actively Employed.”  The arbitrator ultimately decided, based on statements made by the company, that the striking workers were Actively Employed, and thus entitled to their bonuses.  The company believed that the arbitrator effectively added provisions to the bonus plan that did not exist, and petitioned the federal courts to overturn.  The district court did so, and the workers appealed.

The Fourth Circuit, in an opinion by Judge Diana Gribbon Motz on behalf of a unanimous panel, reversed.  Noting that an arbitrator’s decision must be upheld unless it “ignore[s] the plain language of the contract,” Judge Motz held that the arbitrator here did not ignore the contract at all, and in fact went to great lengths to seek evidence for how the bonus plan’s terms should be construed.  Thus, “as long as the arbitrator is even arguably construing or applying the contract and acting within the scope of his authority, that a court is convinced he committed a serious error does not suffice to overturn his decision.”  As much as the company (and at least one federal trial court judge) believed the arbitrator got it wrong, the Fourth Circuit has made clear that as long as the arbitrator is at least trying to construe the contract at issue, even a bad decision will be upheld.

This is something of a warning to those who rely on arbitration provisions in their contracts – bad results are notoriously hard to overturn.

On November 10, 2009, the U.S. Supreme Court will hear argument in Hertz Corp. v. Friend, a case that asks a very simple question: Where is a corporation’s “principal place of business?”  This question is important because federal courts can hear only two kinds of cases: cases raising an issue of federal law, and cases between parties that reside in different states.  Under federal civil procedure, a corporation is deemed to “reside” in the state where it is incorporated as well as its “principal place of business.”  Hertz is a Delaware corporation with its corporate headquarters located in New Jersey, but it does more business in California than in any other state.  When it was sued in California state court by Californian residents, Hertz sought to remove the case to federal court.  The residents objected because if Hertz’s “primary place of business” is California, there is no diversity and thus no federal court jurisdiction. 

Interestingly, the courts of appeal are all over the place on this.  In the Ninth Circuit, the courts use several factors to determine whether a corporation does more business in one state than others, and on that basis held that Hertz was primarily doing business in California.  The Seventh Circuit looks for a “nerve center,” or corporate brain of the company, generally the headquarters.  The Third Circuit looks at the company’s center of activity, while the Fifth, Sixth, Eighth, Tenth, and Eleventh Circuits consider the totality of the company’s activities.  Obviously, companies that operate nationwide would like a single rule for determining the principal place of business so that they can predict more readily where they can expect to be hauled into court.

Hertz favors the Seventh Circuit’s “nerve center” test.  The respondents, however, seem to favor allowing the courts of appeal to consider the totality of a company’s business operations in determining the “principal place of business.” 

SCOTUSblog has a more detailed preview of this interesting and important case.

The Virginia Supreme Court gave a strong indication that slip-and-fall cases should go to a jury instead of being stricken by a trial judge in Garlick v. Safeway, Inc., when the Court issued an unpublished order reinstating a plaintiff’s case.  In her complaint, Garlick claimed that she fell and hurt herself at a Safeway supermarket because of water negligently left on the floor.  At trial she offered evidence that a Safeway employee had been unloading refrigerated cheese from a cart in that same area shortly before the fall, that it took between 30 and 120 minutes to stock the cheese, that another Safeway employee noticed water dripping from the carts for refrigerated products on occasion, and that the manager apologized to her after the fall and said that it was store policy for employees to clean up after themselves after stocking products.  Given that Garlick presented no evidence of Safeway’s actual notice of the water, Safeway argued that Garlick had also failed to present any evidence of constructive notice of the condition, and thus could not prove negligence against Safeway.  The trial court agreed and struck Garlick’s evidence at trial, but the Supreme Court reversed and sent the case back for a jury’s consideration, stating, “Garlick’s evidence was sufficient for a jury to reasonably conclude that Safeway’s employee either allowed the water to accumulate on the floor or was standing in or so near water of a sufficient quantity that the employee should have recognized the danger posed by the water and either removed it or warned Safeway’s customers of the danger.”

The underlying point appears to be the Supreme Court’s preference that slip-and-fall cases go to a jury rather than be decided by the trial judge.  Only where the plaintiff fails to show that any of the defendant’s employees could have reasonably known of the danger should the case be cut short.

The Virginia Supreme Court handed down fifteen new opinions today.  One in particular may be of interest to construction companies.

In Dunn Construction Co. v. Cloney, the Court reversed the trial court’s award of punitive damages against a defendant construction company.  The parties had agreed via written contract that Dunn would complete all of the major construction of a house in Mecklenberg County “in a workmanlike manner according to standard practices.”  Dunn’s original construction of a front foundation wall was poor, and the wall began to buckle.  Dunn thereupon engaged to repair the wall by inserting rebars and concrete, but only in roughly half of the available places.  Dunn thereupon represented to Cloney that it had inserted the rebars and concrete in all of the available places.  On the basis of that representation and a written promise by Dunn of the wall’s stability for ten years, Cloney paid Dunn pursuant to the contract.  Cloney later discovered that Dunn had not performed the promised repairs, and learned that the wall was a catastrophe waiting to happen.  Cloney sued, both under contract and for fraud.  At trial, the jury awarded Cloney almost all of its compensatory damages plus $25,000 in punitive damages under the fraud count.  Dunn appealed the punitive damage award on the basis that Dunn’s actions did not create a tort action separate from the breach of contract action, and since punitive damages are not available for breaches of contract, those damages were improperly awarded.

In an opinion by Justice Lawrence L. Koontz, Jr., the Court unanimously agreed with Dunn.  “Dunn’s false representation that he had made adequate repairs . . . related to a duty that arose under the contract,” the Court held.  “The fact that the representation was made in order to obtain payment from Cloney does not take the fraud outside of the contract relationship, because the payment obtained was also due under the original terms of the contract.”  As a result, since Dunn’s false representations did not violate a common law duty outside of the terms of the written contract itself, Cloney was only eligible for damages under the breach of contract theory of recovery, and could not receive punitive damages.  So Dunn saved $25,000, but it is not known how much Dunn spent on appeal seeking that reversal — it may well have been a Pyrrhic victory.