IN THE UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF VIRGINIA Charlottesville Division

INNOTEC LLC, ) Plaintiff, ) ) v. ) ) Civil Action No. 3:17cv00007 VISIONTECH SALES, INC., et al., ) Defendants. ) ) REPORT & RECOMMENDATION ) VISIONTECH SALES, INC., ) Counterclaim Plaintiff, ) By: Joel C. Hoppe ) United States Magistrate Judge v. ) ) INNOTEC LLC, et al., ) Counterclaim Defendants. )

Before the Court is Innotec’s Motion to Dismiss Visiontech’s Counterclaim, ECF No.

14, and Visiontech Sales Inc. (“Visiontech”)1, Visiontech Sales Group Hong Kong, Ltd. (“VSG

HK”), and Richard Perrault’s (collectively the “Defendants”) Motion to Amend Their Answer,

Defenses, and Counterclaim, ECF No. 43. The parties have fully briefed the motions, ECF Nos.

15, 19, 23 (Innotec’s motion to dismiss); ECF Nos. 44, 49, 53 (Defendants’ and Visiontech’s motion to amend), and the Court held a hearing on February 8, 2018. For the reasons that follow,

I recommend that the presiding District Judge grant Innotec’s motion to dismiss in its entirety and deny in part and grant in part the Defendants’ motion to amend. Visiontech’s motion to amend its counterclaim should be denied as futile, but the Defendants should be permitted to amend their answer and defenses to Innotec’s complaint.

I. Factual Allegations

1 Throughout the filings and relevant documents, the parties sometimes use “VSG” to identify Visiontech. When quoting from any of these documents, this Report & Recommendation will use “Visiontech” rather than “VSG” and will not identify the substitution with the usual brackets. 1

A. Background

When assessing a motion to dismiss, I must view all well-pled facts in the complaint in the light most favorable to the plaintiff. Philips v. Pitt Cty. Mem’l Hosp., 572 F.3d 176, 180 (4th

Cir. 2009). In addition to facts pled in the complaint, I will also consider any attached relevant documents when appropriate. See Witthohn v. Fed. Ins. Co., 164 F. App’x 395, 396 (4th Cir.

2006) (per curiam); Fed. R. Civ. P. 10(c). As to exhibits and other documents, “[w]hen the plaintiff attaches or incorporates a document upon which his claim is based, or when the complaint otherwise shows that the plaintiff has adopted the contents of the document,” I will credit the contents of the document over contradictory allegations in the complaint. Goines v.

Valley Cmty. Servs. Bd., 822 F.3d 159, 167 (4th Cir. 2016). Here, this applies primarily to the relevant contracts in dispute. See id. at 166 (“[I]f a breach-of-contract plaintiff alleges a failure to perform an act required by the contract, the contract’s description of the defendant’s duties will prevail over the plaintiff’s contrary characterization.”).

On February 1, 2017, Innotec filed a complaint in this Court and named as defendants

Visiontech, VSG HK, and Perrault. Innotec Compl., ECF No. 1. The complaint alleged five counts: (1) “Breach of Contract by Visiontech – For the sale of goods pursuant to the Exclusivity

Agreement”; (2) “Breach of Contract by Visiontech – Unpaid invoices for the sale of goods and open purchase orders”; (3) “Unjust Enrichment against Visiontech”; (4) “Breach of Contract by

VSG HK”; and (5) “Personal liability against owners of Visiontech and VSG HK.” Id. ¶¶ 30–44.

Innotec identified three separate contracts upon which it based these claims: first, the Mutual

Non-Disclosure Agreement (“NDA”) between Innotec LLC and Visiontech Sales Group dated

February 14, 2013, see id. Ex. A, ECF No. 1-1, at 2–5; second, the Exclusivity Agreement between Innotec Advance Energy Systems LLC (“Innotec AES”) and Visiontech Sales, Inc.

2

(doing business as VSG Inc.) dated March 28, 2013, see id. Ex. B, ECF No. 1-2, at 2–5; and third, the agreement between Innotec LLC and VSG Inc. dated June 14, 2016 (the “June 2016

Agreement”), see id. Ex. F, ECF No. 1-6, at 2. The parties do not dispute the authenticity of the attached contracts; rather, as will be addressed below, they offer competing theories as to all

three contracts’ enforceability and applicability.

A brief discussion of these contracts and the parties’ resulting business relationship is necessary as it provides context for Visiontech’s factual allegations asserted in its counterclaim.

The NDA’s “Background” section states that the parties “have initiated discussions concerning the possibility of entering into a mutually advantageous business relationship involving the purchase and/or sale of goods and/or services.” Innotec Compl. Ex. A. In the same section, the parties acknowledge that they may need to disclose confidential information to each other, and as such, the parties entered into the NDA “[t]o facilitate the release of information between the

Parties.” Id. The language in the NDA primarily concerns each party’s ability to protect its own confidential information, but it also covers broader aspects of the parties’ potential business relationship. For example, the NDA contains a “No Circumvention” clause, which states that

“[Visiontech] shall not circumvent Innotec by purchasing product or equipment directly from the original manufacturer or supplier without the written consent of Innotec.” Id. ¶ 7. It also includes a mutual indemnification clause, id. ¶ 10; a prohibition on any amendments or waivers to the terms of the NDA “unless such amendment or waiver is in writing and is signed by each of the

Parties hereto,” id. ¶ 12; a clause binding both “the Parties and their respective representatives, successors and assigns,” id. ¶ 13; and an attorneys’ fees clause, id. ¶14.

Following execution of the NDA, the parties commenced their business relationship. In short, Innotec maintained relationships with factories and suppliers in China and agreed to

3

supply Visiontech with goods and products obtained from these contacts. Innotec would first

submit a quotation to Visiontech at Visiontech’s request; Visiontech would then submit a

“purchase order corresponding to the terms of Innotec’s quotation”; and Innotec would fill the

orders and send Visiontech the invoices. See generally Defs.’ Answer ¶ 19, ECF No. 10, at 1–34

(admitting that Innotec filled orders and that Exhibit D is a genuine and authentic sample of a

quotation, purchase order, and invoice). The goods and products were then provided to

Visiontech. See generally id. ¶ 18 (admitting that Visiontech ordered and received “electrical and

mechanical components from Innotec” during period spanning September 12, 2014, through

June 10, 2016). Through this arrangement, Innotec served as a conduit between Visiontech and

its Chinese contacts, and Visiontech used the goods and products it obtained from its relationship

with Innotec to service the needs of its own customers.

The Exclusivity Agreement provides an example of how this relationship functioned. It

reflects Innotec’s2 and Visiontech’s “desire to enter into an exclusive agreement with regard to

the purchase and sale of Vivoplay Charger Adapter with Certifications.” Innotec Compl. Ex. B.

The Exclusivity Agreement concerns the exclusive purchase and sale of one specific product:

Vivoplay Charger Adapters. In order to obtain products or goods from any of Innotec’s Chinese

contacts, Visiontech had to go through Innotec or receive Innotec’s written permission to

contract with the original manufacturer or supplier. Innotec Compl. Ex. A ¶ 7. To that end, the

Exclusivity Agreement includes terms about the purchase price and the resale price, both to be

2 The Defendants, in their proposed amended pleading, now argue that Innotec does not have standing to enforce this contract because Innotec AES, rather than Innotec, was the actual party to the agreement. See Defs.’ Mot. to Amend their Answer, Defenses & Countercl. (“Defs.’ Mot. to Amend”) ¶ 5, ECF No. 43; Innotec Compl. Ex. B. By identifying “Innotec” here, this Report and Recommendation is not weighing in on the veracity of the Defendants’ assertion. This reference to “Innotec” simply recognizes that the invoices presented to the Court, which the Defendants admit are authentic, indicate that Visiontech was to remit payment to “Innotec LLC,” not Innotec AES. See Innotec Compl. Ex. C; Defs.’ Answer & Defenses (“Defs.’ Answer”) ¶ 16, ECF No. 10, at 1–34. 4 determined by Innotec; payment methods; delivery and acceptance protocol; warranties; events of default and subsequent remedies; mandatory arbitration; the scope of the agreement; mutual amendments, which must be made in writing; the applicable law; and attorneys’ fees. Innotec

Compl. Ex. B. Visiontech placed two orders under the Exclusivity Agreement, both in February

2016, Innotec Compl. Ex. C, and it admits that the goods were shipped and received, but have not been paid for, Defs.’ Answer ¶¶ 16–17 (admitting that Exhibit C “is comprised of authentic copies of invoices sent from Innotec to Visiontech and that the goods were shipped and received”).

B. Visiontech’s Counterclaim

On March 16, 2017, Defendants answered Innotec’s complaint, Defs.’ Answer 1–34, and

Visiontech filed a counterclaim against Innotec and Allen Ting, Innotec’s owner and founder,

(“Visiontech Countercl.”), ECF No. 10, at 34–45. A key component of Visiontech’s counterclaim is an agreement that Visiontech asserts it reached with Innotec and Ting in March

2015. Visiontech avers that during March, Innotec and Ting conveyed to Visiontech that it “had been charging and would charge mark-ups of fifteen percent or less on goods which it sourced for or supplied to Visiontech.” Visiontech Countercl. ¶ 11. Visiontech refers to this understanding as the “Pricing Agreement.” Id. According to Visiontech, “[t]hese representations were knowingly false at the time they were made, and the promise and Pricing Agreement to maintain the limited mark-up in the future were made by Innotec and Mr. Ting without the intent to perform them.” Id. ¶ 12. Visiontech contends that Innotec had been charging and continued to charge “much higher” than a 15% markup both before and after the Pricing Agreement.

Id. ¶¶ 13–14. Per Visiontech’s calculation, “Innotec’s fraudulent overcharges total at least

$600,000.” Id. ¶ 15. Visiontech also notes that it “actually and reasonably relied to its detriment

5

upon the misrepresentations made by Allen Ting of Innotec and continued to place orders after

March of 2015 and to make payments [on] past orders.” Id. ¶ 37.

On May 3, 2016, Ting emailed Perrault regarding “Payment on Overdue Invoices.”

Innotec Compl. Ex. E (email timestamped May 3, 2016, at 12:44 pm); see also Defs.’ Answer ¶

21 (admitting that “Exhibit E is comprised of authentic copies of e-mails exchanged between

Innotec and Visiontech”). Ting’s email stated that “[a]s of today, we have $930K of Visiontech

open invoices and $618K are 30 to 120 days old. We have been having around $600K - $700K

of Visiontech overdue invoices persistently in the last 6 months. I need your help to bring

payments up to date and keep them within 45 days old.” Innotec Compl. Ex. E (email

timestamped May 3, 2016, at 12:44 pm). Perrault agreed to Ting’s request to “release $100K of

payment this week and another $100K next week,” id. (email from Ting timestamped May 3,

2016, at 3:15 pm; email from Perrault timestamped May 3, 2016, 1:21 pm), and Visiontech made

these payments, Innotec Compl. ¶ 22; Defs.’ Answer ¶ 22. Innotec emailed Visiontech’s VP of

Operations on May 17, 2016, requesting another payment of at least $100,000 by May 20, and

then Innotec sent another email to Visiontech on June 6, 2016, attempting to address

Visiontech’s outstanding balance. See Defs.’ Answer ¶ 23 (admitting that the “referenced e-mails

were sent”). Innotec emailed Visiontech again on June 8, 2016, to which Perrault responded with

a request for an in-person meeting at his offices in Troy, Virginia.3 Id. ¶ 24.

On June 14, 2016, Perrault and Ting met in Virginia and negotiated the June 2016

Agreement on behalf of Visiontech and Innotec, respectively. Visiontech Countercl. ¶¶ 9, 16.

The June 2016 Agreement states in full:

As of June 14, 2016, Visiontech and Innotec agree to the following:

3 The referenced emails from May 17, June 6, and June 8 have not been provided to the Court. 6

• Innotec LLC will issue a credit for $200,000 to be used against outstanding invoices. • Visiontech agrees to being Innotec [sic] to pay all past due invoices as of today’s date by wire on June 15th, 2016. • Innotec LLC will provide Visiontech with a list of parts Innotec has prepaid for in advance. • Visiontech will cancel all open Purchase orders on Innotec. • Innotec LLC will work with Alan Hu to introduce him to the factory contacts and transition all open orders placed direct on factory. • Alan Hu will work together with Allen Ting and the factories to receive credit due for prepaid parts. • Once all POs [purchase orders] are transferred to Visiontech, Visiontech will pay all outstanding invoices immediately. After June 14th, 2016, Visiontech will pay Allen Ting/Innotec LLC, 10% of the cost of existing business through the end of 2016. After 2016, Visiontech will pay 5% of the cost of existing business. Visiontech will pay Allen Ting/Innotec 10% of the cost on all new business for a duration period of two years. After the two year period Innotec will be paid 5%.

Innotec Compl. Ex. F. Allen Ting signed the contract for Innotec, and Rick Perrault signed the contract for Visiontech. Id. Visiontech alleges that

[t]he purposes of the [June 2016 Agreement] were to re-order the parties’ prior relationship and to replace the parties’ prior agreements and to resolve their open disputes by giving Visiontech a credit for the overcharges, formalizing the prior permission previously given by Innotec and by Mr. Ting for Visiontec [sic] to do business directly with the factories in China, to renegotiate and decrease the finders’ fees or sourcing commissions for Innotec moving forward, to get Innotec a payment for its open orders minus a portion of the overcharges, to settle the parties’ disputes, and to replace and supersede the parties’ prior agreements, purchase orders and invoices, including without limitation the prior nondisclosure agreement and the prior exclusivity agreement.

Visiontech Countercl. ¶ 16. Alan Hu, referenced in the contract, is an employee of Visiontech.

See Innotec Br. in Supp. of Mot. to Dismiss (“Innotec Br. in Supp.”) 20 n.7, ECF No. 15.

Additionally, the factories referenced in the contract are Innotec’s contacts in China with whom

Innotec had previously served as a conduit on behalf of Visiontech.

On June 15, Ting sent an email to Perrault regarding the Agreement reached the previous day. The email reads in full:

7

Hi Rick, The agreement we signed yesterday will not apply to batteries and chargers and cables including connectors because I have a business partner involved in the design and supply of those parts. I did not have time to review all the situation of all parts yesterday, and therefore did not raised [sic] this issue to you. Please confirm the above is agreeable to you. Attached please find the list of open invoices which I email to Jym yesterday. Total open invoices = $1,650,110.35 Overdue invoices = $1,117,215.69 Please wire the payment overdue invoice today per our agreement. Thanks, Allen Ting Innotec LLC

Visiontech Countercl. Ex. A, ECF No. 10-1, at 2–3. Jym Muller, referenced in Ting’s email, is also an employee of Visiontech. Neither Perrault nor anyone on Visiontech’s behalf replied to

Ting’s email, and Visiontech did not make payment on June 15, 2016. Defs.’ Answer ¶ 25

(admitting that Innotec sent this email and asserting that Visiontech’s “payment obligations

[were] discharged by Innotec’s prior material breaches”). On June 16, Ting sent Perrault another email informing him that Innotec was terminating the June 2016 Agreement because of

Visiontech’s multiple failures to make required payments. Id. ¶ 26. This email also demanded

that Visiontech immediately pay for all overdue balances.4 Id. Neither Perrault nor Visiontech responded, and no payment was made.

Visiontech asserts that it did not make these payments because Innotec did not hold up its end of the bargain. Particularly, Visiontech alleges that

Innotec and Allen Ting . . . fail[ed] to assist Visiontech and Alan Hu with transitioning Visiontech’s orders direct to the factories. In fact, Innotec and [Allen Ting] actually and actively interfered with Visiontech’s ability to obtain product from the relevant factories [“including those known as TTM, Powstar and Sino Mold,” Visiontech Countercl. ¶ 44] and to use the tooling, machinery and equipment paid for by and belonging to Visiontech at those factories. Innotec and

4 This email has not been presented to the Court. 8

Allen Ting threatened the factories with frivolous threats of litigation and falsely defamed and disparaged Visiontech by falsely claiming, after June 14, 2016, that Visiontech had no right to contact the factories directly, nor to obtain supplies from the factories directly, nor even to use or take possession of the tooling and molds which Visiontech had paid for and therefore owned.

Visiontech Countercl. ¶ 21; accord Visiontech Proposed Am. Countercl. ¶ 21, ECF No. 53-2.

According to Visiontech, this activity “disrupted Visiontech’s supply chain” causing lost sales and contracts—“especially [with] 3DS”—and required Visiontech to make or obtain replacement products. Id. ¶¶ 41, 44. Visiontech confirms that it was “ready, willing and able to perform its obligations under the [June 2016 Agreement] and the Pricing Agreement and did perform them to the extent its performance was not discharged or frustrated by Innotec’s and Ting’s prior material breaches.” Id. ¶ 25.

Visiontech asserts four counts against Innotec: (1) Breach of Contract; (2) Actual Fraud;

(3) Tortious Conversion of Molds and Tooling; and (4) Tortious Interference with Contracts,

Business Relationships, and Prospective Economic Advantage. Id. ¶¶ 24–45. It states that

“Innotec and Allen Ting breaching their agreements with Visiontech, fraudulently overcharging

Visiontech, converting Visiontech’s tooling and molds, and tortiously interfering with

Visiontech’s contracts and relationships with the factories in China” resulted in Visiontech paying more than $600,000 in overcharges and suffering over $2,000,000 in lost profits,

$200,000 in new mold and tooling expenses, and $185,000 in product that cannot be sold. Id. ¶

22. Visiontech further contends that Ting is the “alter ego of Innotec” because he is Innotec’s sole and dominant shareholder, Innotec is undercapitalized and does not observe corporate formalities, and Ting treats Innotec “as his mere agent or instrumentality . . . to cheat and defraud creditors, including Visiontech,” and that as such, they are “entitled to pierce Innotec’s company or corporate veil to hold Allen Ting liable for the debts of Innotec.” Id. ¶ 23. In addition to the

9

$2,985,000 in compensatory damages, Visiontech requests $350,000 in punitive damages. Id. ¶¶

31, 39, 42, 45.

C. Visiontech’s Proposed Amended Counterclaim and Answer

On October 5, 2017, the Defendants sought leave to amend their answer and defenses as

well as Visiontech’s counterclaim. Visiontech’s proposed amended counterclaim (“Visiontech

Proposed Am. Countercl.”), ECF No. 53-2, contains additional facts to bolster its claims. For

example, Visiontech now states that Ting made the statement constituting the Pricing Agreement

in September 2015. Visiontech Proposed Am. Countercl. ¶ 11. It adds that this came after “some

abortive joint venture negotiations terminated” and that “the parties [then] agreed that Visiontech

would source its new products, factories and supplies through resources other than Innotec.

While Innotec would be permitted to retain Visiontech’s existing business, it promised,

represented and agreed that its mark-ups would not exceed fifteen percent (15%).” Id.

Visiontech also provides more details regarding its dealings with eleven Chinese factories

and suppliers with whom it “had contracts and relationships for the purchase and supply of

productions, and for the use of equipment and molds paid for and owned by Visiontech.” Id. ¶

22. Visiontech adds that after the June 2016 Agreement was reached, “Innotec told these

factories and suppliers (the “Factories”) not to let Visiontech use the equipment, molds and

tooling that Visiontech had paid for and owned, and not to sell Visiontech any goods or products,

including the products which Innotec had sourced for Visiontech.” Id. ¶ 23.

Visiontech further provides an explanation for its estimate of damages, stating that “[t]he

$2 million in lost profits is calculated based on Visiontech’s sales and profit margins to its

customers of products from the Factories before and after interference from Ting and Innotec.”

Id. ¶ 25. It contends that Innotec’s and Ting’s interference with their business relationships

10

prevented Visiontech from fulfilling its obligations with its customers, including 3DS, and that

Innotec and Ting knew of these relationships. Id. Visiontech lost sales, profits, and contracts

“because [it] could no longer use the Factories and [its] molds, tooling and equipment to produce

and supply the goods and products necessary to fill [its] contracts and customers’ orders and

contracts” on account of Innotec’s breaches of the June 2016 Agreement. Id. As a result,

Visiontech asserts that it went out of business. Id. ¶ 26. Overall, Visiontech now asks for $9.3

million in compensatory damages for the conversion and tortious interference claims. Id. ¶ 48,

56.

Last, in both the Defendants’ proposed amended answer and Visiontech’s proposed

amended counterclaim, Visiontech asserts the defense that Innotec was not a party to the

Exclusivity Agreement and as such, cannot seek to recover under it. Defs.’ Proposed Am.

Answer ¶ 15; Visiontech Proposed Am. Countercl. ¶ 27. In the proposed amended counterclaim,

Visiontech identifies Innotec’s litigation argument that it was a party to the Exclusivity

Agreement “[a]s one example” in support of the alter ego theory, because, as Visiontech notes,

Ting signed the Exclusivity Agreement on behalf of Innotec AES, a separate and distinct

company. Visiontech Proposed Am. Countercl. ¶ 27; see also Innotec Compl. Ex. B, at 4.

II. Discussion

Innotec has moved to dismiss Visiontech’s entire counterclaim, ECF No. 14, on various grounds (“Innotec Br. in Supp.”), ECF No. 15. Visiontech filed a brief in opposition

(“Visiontech Br. in Opp’n”), ECF No. 19, to which Innotec replied (“Innotec Reply Br.”), ECF

No. 23. Visiontech later moved for leave to amend its counterclaim and the Defendants’ answer,

ECF No. 43, and filed a brief in support, ECF No. 44. Innotec opposes Visiontech’s motion for leave to amend its counterclaim (“Innotec Br. in Opp’n”). ECF No. 49. Both Innotec’s motion to

11

dismiss and Visiontech’s motion for leave to amend are before me by referral under 28 U.S.C. §

636(b)(1)(B). ECF Nos. 38, 60. I will consider both motions together, and, for the reasons that

follow, I recommend that Innotec’s motion to dismiss be granted in its entirety, Visiontech’s

motion for leave to amend its counterclaim be denied, and the Defendants’ motion for leave to amend their answer be granted.

A. Standard of Review

1. Motion to Dismiss under Rule 12(b)(6)

Innotec argues that Visiontech’s counterclaim fails to plead facts sufficient to state a

claim. Innotec Br. in Supp. 7–44. In order to survive a motion to dismiss under Rule 12(b)(6), a

pleading must “state[] a plausible claim for relief” that “permit[s] the court to infer more than the

mere possibility of misconduct.” Ashcroft v. Iqbal, 556 U.S. 662, 679 (2009). In making this

determination, the Court accepts as true all well-pled facts and construes those facts in the light

most favorable to the plaintiff. Philips, 572 F.3d at 180. The Court need not, however, accept

legal conclusions, formulaic recitations of the elements of a cause of action, or “bare assertions

devoid of further factual enhancements,” as those are not well-pled facts for Rule

12(b)(6)’s purposes. Nemet Chevrolet, Ltd. v. Consumeraffairs.com, Inc., 591 F.3d 250, 255 (4th

Cir. 2009) (citing Iqbal, 556 U.S. at 678). Plaintiffs must plead enough facts to “nudge[] their

claims across the line from conceivable to plausible,” and a court should dismiss a complaint that

is not “plausible on its face.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007). “The

plausibility standard is not akin to a ‘probability requirement,’ but it asks for more than a sheer

possibility that a defendant has acted unlawfully.” Iqbal, 556 U.S. at 678. Determining whether a

complaint states a plausible claim for relief is “a context-specific task that requires the reviewing

court to draw on its judicial experience and common sense.” Id. at 679.

12

2. Motion to Amend a Pleading

After the opportunity to amend as a matter of right has passed, see Fed. R. Civ. P.

15(a)(1)(A)–(B), a party may amend its pleading only with the opposing party’s written consent or the Court’s leave. Fed. R. Civ. P. 15(a)(2). Leave to amend should be freely granted when justice so requires. Id. The court should deny leave “only where good reason exists,” Franks v.

Ross, 313 F.3d 184, 189 n.15 (4th Cir. 2002), such as when amending would be futile, Laber v.

Harvey, 438 F.3d 404, 426 (4th Cir. 2006) (en banc). A proposed amendment to a complaint or counterclaim “may properly be found futile where, as a matter of law, it fails to state a claim” against the putative defendant. Cominelli v. Rector & Visitors of the Univ. of Va., 589 F. Supp.

2d 706, 712 (W.D. Va. 2008).

B. Choices of Law

Before reaching the merits of the motion to dismiss and the motion to amend, I must consider which laws to apply in evaluating the parties’ claims and defenses. In this diversity action, the Court applies federal law to determine questions of procedural law and the law of the forum state to determine questions of substantive law. Nationwide Mut. Ins. Co. v. Overlook,

LLC, 785 F. Supp. 2d 502, 511–12 (E.D. Va. 2011) (citing Erie R.R. Co. v. Tompkins, 304 U.S.

64, 78 (1938)). The Court applies the choice of law rules of the jurisdiction in which it sits, in this case, Virginia. In re Merritt Dredging Co., 839 F.2d 203, 205 (4th Cir. 1988); Elec. Motor &

Contracting Co. v. Travelers Indem. Co. of Am., 235 F. Supp. 3d 781, 787 (E.D. Va. 2017)

(citing Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487, 496 (1941)). Under Virginia’s choice of law rules for contracts, the Court will first look to the agreement itself to determine whether the parties agreed on the applicable law. See Colgan Air, Inc. v. Raytheon Aircraft Co., 507 F.3d

270, 275 (4th Cir. 2007) (“Virginia law looks favorably upon choice of law clauses in a contract,

13

giving them full effect except in unusual circumstances, none of which exist here.”). If the

agreement does not contain a choice-of-law provision, then Virginia law instructs that

“[e]verything related to the making of the contract is to be governed by the law of the place

where it was made; everything related to the performance of the contract is to be controlled by

the law of the place of performance.” Arkla Lumber & Mfg. Co. v. W. Va. Timber Co., 132 S.E.

840, 842 (Va. 1926); see also Madaus v. November Hill Farm, Inc., 630 F. Supp. 1246, 1248

(W.D. Va. 1986) (“[I]t is beyond question that under Virginia law, the law of the place of

performance governs questions concerning the performance of a contract.” (collecting cases)).

For tort claims, Virginia applies the substantive law of “the place [where] ‘the last event

necessary to make an [actor] liable for an alleged tort takes place.’” Ford Motor Co. v. Nat’l

Indem. Co., 972 F. Supp. 2d 850, 856 (E.D. Va. 2013) (second alteration in original) (quoting

Gen. Assurance of Am., Inc. v. Overby-Seawell Co., 533 F. App’x 200, 206 (4th Cir. 2013)); see

Buchanan v. Doe, 431 S.E.2d 289, 291 (Va. 1993). This rule looks to “the place where the

wrongful act occurred, even when that place differs from the place where the effects of injury are

felt.” Milton v. IIT Research Inst., 138 F.3d 519, 522 (4th Cir. 1998).

For Visiontech’s breach of contract counterclaim, the pertinent contracts are the Pricing

Agreement and the June 2016 Agreement. Visiontech has not identified the location where the

Pricing Agreement was allegedly made. This deficiency has implications beyond determining

which law to apply, see infra Pt. II.C.2, but because both parties cite to Virginia law in

addressing the Pricing Agreement, I will analyze the claims arising from it under Virginia law.

As for the June 2016 Agreement, the parties agree it was created and executed in Virginia.

Visiontech Answer ¶ 24; Visiontech Countercl. ¶ 9. Although the obligations in the contract likely would have been performed in a number of different jurisdictions, for the analysis relevant

14

to the counterclaim, Visiontech, a Virginia corporation, would have performed its obligations in

Virginia. Thus, Virginia law governs the June 2016 Agreement related to Visiontech’s

performance.

As to the tort claims, the Pricing Agreement serves as the basis for Visiontech’s “actual

fraud” claim, but, again, the place where Ting allegedly made the statements that underpin the

Pricing Agreement is not identified in Visiontech’s pleading. As both parties argue the claim

under Virginia law, for purposes of this Report and Recommendation, I will apply Virginia law

to the substance of this claim. Nonetheless, federal law, specifically Rule 9(b) of the Federal

Rules of Civil Procedure, governs the pleading requirements for this fraud claim. Both parties

also argue Visiontech’s conversion and tortious interference claims under Virginia law. A

reading of the counterclaim, however, suggests that the place of the wrong for both of these

claims was China.5 Therefore, Chinese law would likely apply to these claims. Without the

benefit of the parties’ briefing or any expert testimony on Chinese law, for the purpose of

addressing the pending motions, I will examine the claims under Virginia law to address the

parties’ arguments.

C. Analysis

1. Breach of Contract

“The elements of breach of contract in Virginia are: ‘(1) a legally enforceable obligation

of a defendant to a plaintiff; (2) the defendant’s violation or breach of that obligation; and (3)

injury or damage to the plaintiff caused by the breach of obligation.’” Jones v. Fulton Bank,

N.A., 565 F. App’x 251, 252 (4th Cir. 2014) (quoting Filak v. George, 594 S.E.2d 610, 614 (Va.

5 At the hearing, Visiontech suggested that Colorado law would govern the conversion and tortious interference claims because Ting was in Colorado when he took the actions giving rise to the alleged torts. I will briefly address Colorado law as well.

15

2004)). Visiontech’s breach of contract counterclaim is predicated on Innotec’s purported breach of both the Pricing Agreement and the June 2016 Agreement. Visiontech Countercl. ¶ 26.

Visiontech alleges that Innotec and Ting breached the Pricing Agreement by charging more than the 15% markup on the products they sourced for or supplied to Visiontech. Id. ¶ 24

(incorporating, relevantly, paragraphs 11, 12, 13, and 14). Visiontech also alleges that Innotec

and Ting breached the June 2016 Agreement by not introducing Alan Hu to the factory contacts;

by demanding payment before it was due; by repudiating the contract when Ting attempted to

remove batteries, chargers, and cables from the scope of the contract; and by failing to assist

Visiontech with transitioning orders direct to the factories. Id. ¶¶ 26–30. The proposed amended

counterclaim sets forth the same basis for Visiontech’s claim of breach of contract. See

Visiontech Proposed Am. Countercl. ¶¶ 28–34. Innotec argues that Visiontech cannot enforce

either contract and thus this claim should be dismissed. Innotec Br. in Supp. 7–19. Innotec

further contends that there are no other contracts upon which Visiontech could prove a breach.

Id. at 19–29. I find Innotec’s argument persuasive, and I recommend that Visiontech’s breach of contract claim against Innotec and Ting be dismissed.

a. Pricing Agreement

Innotec argues that the Pricing Agreement cannot be enforced because it is barred by the statute of frauds,6 the parties existing agreements barred any oral modifications,7 and Visiontech

6 Innotec’s second statute of frauds argument deserves mention. Innotec argues that the Pricing Agreement also violates the statute of frauds in § 11-2(8) of the Virginia Code. That section states, “[u]nless a promise, contract, [or] agreement . . . is in writing and signed by the party to be charged or his agent, no action shall be brought forth in any of the following cases: . . . (8) Upon any agreement that is not to be performed within a year.” Va. Code Ann. § 11-2(8). Under this section, a contract need be in writing only if it is not capable of being performed within a year. See Frazier v. Colonial Williamsburg Found., 574 F. Supp. 318, 320 (E.D. Va. 1983) (“A writing is not needed so long as the contract can be performed within a year, even if only by some improbable event.” (citing Silverman v. Bernot, 239 S.E.2d 118 (Va. 1977))). Although seemingly clear on its face, this particular determination is more nuanced than presented, and I need not address it because I find other arguments persuasive.

16 has itself asserted that the June 2016 Agreement was a novation and replaced all prior agreements. Innotec Br. in Supp. 7–11. Because Innotec properly asserts the statute of frauds as a defense to the enforceability of the Pricing Agreement, I need not address its other arguments.8

Visiontech describes the Pricing Agreement as a contract governing Innotec’s markups on goods it “sourced for or supplied to Visiontech.” Visiontech Countercl. ¶ 11. Because this contract concerns a “transaction[] in goods,” Virginia’s version of the Uniform Commercial

Code (“UCC”) applies. Va. Code Ann. § 8.2-102; see also AAF-McQuay, Inc. v. MJC, Inc., No.

5:00cv39, 2002 WL 172442, at *3 (W.D. Va. Jan. 10, 2002). The Virginia UCC states that “a contract for the sale of goods for the price of $500 or more is not enforceable . . . unless there is some writing sufficient to indicate that a contract or sale has been made between the parties and signed by the party against whom enforcement is sought.” Va. Code Ann. § 8.2-201(1).

Moreover, “[t]erms with respect to which the confirmatory memoranda of the parties agree or which are otherwise set forth in a writing intended by the parties as a final expression of their agreement with respect to such terms . . . may not be contradicted by evidence of . . . a contemporaneous oral agreement,” but these terms “may be explained or supplemented” by

7 Visiontech raises an additional argument in opposition that warrants brief discussion. Visiontech asserts that the Pricing Agreement applied to all transactions between the parties. The two existing contracts, the NDA and the Exclusivity Agreement, both require any modifications to be in writing. Innotec Compl. Ex. A ¶ 12, Ex. B, at 4. Visiontech nonetheless argues that “[t]he Supreme Court of Virginia has long recognized the enforceability of oral modifications to a written contract, even where the written contract contains a no-modifications clause.” Visiontech Br. in Opp’n 7 (citing Reid v. Boyle, 527 S.E.2d 137, 144–45 (Va. 2000)). Reid, however, instructs that courts permit oral modifications of written contracts even when the contract has a no oral modifications clause when the original contract was not required to be in writing by the statute of frauds. See 527 S.E.2d at 144–45. Because the contracts here are required to be in writing to comply with the statute of frauds, this reasoning and case is inapposite. 8 Neither party noted that the statute of frauds is an affirmative defense. Ordinarily, an affirmative defense may not be raised on a 12(b)(6) motion. Goodman v. Praxair, Inc., 494 F.3d 458, 464 (4th Cir. 2007). When the complaint sets forth facts sufficient to rule on the affirmative defense, as is the case here, a court may address the affirmative defense on a 12(b)(6) motion. See Maggard v. Essar Global Ltd., No. 2:12cv31, 2013 WL 718501, at *3 (W.D. Va. Feb. 27, 2013); see generally Greenbelt Ventures, LLC v. Wash. Metro Area Transit Auth., 481 F. App’x 833, 837-39 (4th Cir. 2012).

17 common trade usage, by the parties’ course of performance or dealing, and by “evidence of consistent additional terms unless the court finds the writing to have been intended also as a complete and exclusive statement of the terms of the agreement.” Va. Code Ann. § 8.2-202.

Delineating the Pricing Agreement, Visiontech alleges that it entered into an oral arrangement with Innotec, through Allen Ting, whereby Ting promised that Innotec had been and would continue to charge no more than 15% markup on the goods Innotec sourced for or supplied to Visiontech. Visiontech claims that Innotec breached the Pricing agreement, causing at least $600,000 in overcharges which it should be permitted to recover. See Visiontech

Countercl. ¶¶ 11, 15. Visiontech has not alleged that the Pricing Agreement was in writing, and at a hearing on the motions, its counsel confirmed that he was not aware of any writing reflecting this agreement. The absence of any writing showing or corroborating the existence of the Pricing

Agreement is fatal to Visiontech’s breach of contract claim.

The statute of frauds exists “to prevent the setting up of pretended agreements and then supporting them by perjury.” Reynolds v. Dixon, 46 S.E.2d 6, 8 (Va. 1948). In other words, it is intended “to encourage the placing of important matters in writing so that each party to the contract is certain of [its] duties and benefits.” Telecomms. Sys. Unlimited v. Comm’cns Satellite

Corp., 19 Va. Cir. 536, 537–38 (Fairfax Cty. 1988). Per Visiontech, this markup limitation was critically important to its continued relationship with Innotec, see Visiontech Br. in Opp’n 10, but no allegation or document presented to the Court shows that it was reduced to writing.

Indeed, the only documents evidencing direct transactions between the parties are the quotation, purchase order, and invoices attached as Exhibits C and D of Innotec’s complaint, and although these writings identify terms such as the item description, quantity of the goods, price per item, and the total cost, they do not mention any markup limitation. Therefore, the Pricing Agreement,

18

the existence of which relies wholly on parol evidence inconsistent with the parties’ written

agreements and subsequent conduct, runs afoul of the statute of frauds and cannot be enforced.

See, e.g., Wachovia Bank, Nat’l Ass’n v. Preston Lake Homes, LLC, 750 F. Supp. 2d 682, 689

(W.D. Va. 2010) (dismissing breach-of-contract counterclaim under Rule 12(b)(6) because

Virginia’s statute of frauds prevented the counterclaimant “from claiming an implicit modification of the” written agreement).

Nonetheless, Visiontech advances numerous explanations why the Pricing Agreement is enforceable. First, Visiontech identifies an exception to the statute of frauds detailed in Virginia

Code § 8.2-201(3)(c), which it dubs the “open account exception.” Visiontech Br. in Opp’n 8–9

(citing to Quality Foods Coop., Inc. v. New River Oils, L.L.C., 66 Va. Cir. 464, 2001 Va. Cir.

LEXIS 531 (Amherst Cty. 2001) (“Section 8.2-201(3)(c) makes an open account an exception to the writing requirement of the UCC Statute of Frauds.”)). The statute states that “[a] contract which does not satisfy the requirements of subsection (1) but which is valid in other respects is enforceable . . . with respect to goods for which payment has been made and accepted or which have been received and accepted.” Va. Code Ann. § 8.2-201(3)(c). Visiontech argues that the goods in question “were all part of an open account” and that because they “were either paid for or received and accepted . . . the contract between the parties was not subject to the statute of frauds.” Visiontech Br. in Opp’n 9. It concludes that “goods and orders which were either received and accepted or paid for under any relevant agreement are subject to Visiontech’s claims for breach of the Pricing Agreement, which are not barred by the statute of frauds.” Id.

The flaw in this argument is that the exception in § 8.2-201(3)(c) applies when there is a valid contract in all respects except that it “does not satisfy the requirements of subsection (1),” i.e., when there is no writing. See Sprague & Henwood v. Johnson, 606 F. Supp. 1564, 1565

19

(W.D. Va. 1985) (“Article 2 requires that a contract be evidenced by a writing signed by the

party against whom enforcement is sought. Va. Code § 8.2-201. However, no writing is required

where the goods have been received and accepted by the buyer. Id. at (3)(c).”). From the plain

language of the statute, it is clear that the purpose of this exception is to preclude a party to a

valid agreement concerning the sale of goods from denying that such an agreement exists when

there is part performance from either side, i.e., when the purchasing party has made payment and

it is accepted by the selling party, or when the selling party has shipped the goods and the

purchasing party has received and accepted those goods. See Delta Star, Inc. v. Michael’s Carpet

World, 666 S.E.2d 331, 335 (Va. 2008) (discussing Va. Code § 8.2-201(3)(c) and concluding that because “payment [had] been made and accepted for only the entryway flooring . . . .

enforcement of any contract based upon part performance extends only to the entryway flooring

and not to the purchase and installation of flooring in [an] office”). Here, Visiontech received

and accepted goods from Innotec. But, these transactions are evidenced by writings, specifically

the purchase orders, invoices, and quotations. Therefore, because writings covering the parties’

transactions exist, § 8.2-201(3)(c) does not provide an exception to the statute of frauds

regarding the Pricing Agreement based on either party’s part performance.9

9 The import of Visiontech’s argument regarding this exception merits further discussion. Essentially, Visiontech cites to this exception and asserts that because there were “open accounts” between Innotec and Visiontech, and that because at one point or another it received and accepted goods or Innotec received and accepted payment related to these goods, the statute of frauds does not apply to any aspect of the transactions. Visiontech then takes this a step further by arguing that the Pricing Agreement reflecting a 15% markup limitation need not be in writing because it claims the parties orally agreed that such a limitation was part of both their past and future transactions. Accepting this argument would provide Visiontech carte blanche to unilaterally impose certain terms, not supported in writing, to its relationship with Innotec and then pursue a breach of contract claim against Innotec when the transactions do not comply with these oral terms. Such a result is untenable and not supported by law. Cf. Wachovia Bank, 750 F. Supp. at 689 (“Virginia law prevents Preston Lake from now claiming that the explicit terms of the Loan Agreements did not reflect the parties’ true intentions at the time of contract formation, or that the parties later implicitly modified that contract.”). 20

Next, Visiontech contends that the purchase orders, invoices, and quotations between the

parties were written contracts for goods and sufficient to satisfy the statute of frauds. Visiontech

Br. in Opp’n 9. Visiontech then claims that “[t]he mark-up limitation would be a consistent

additional term applicable to the non-integrated oral contracts.” Id. Visiontech is correct that the

combination of purchase orders, invoices, and quotations satisfies the statute of frauds as to the

transactions of goods generally with Innotec. Cf. Howard P. Foley Co. v. Phoenix Eng’g &

Supply Co., 819 F.2d 60, 64 (4th Cir. 1987) (agreeing with the district court that a “purchase

order was a confirmatory writing effective against the sender under § 8.2-201(2)” of the Virginia

Code so as to negate the statute of frauds defense at trial). That said, the statute of frauds still operates to bar the Pricing Agreement because Visiontech has not alleged that any of the oral

Pricing Agreement’s terms are reflected in the writings that concern the sales between Innotec and Visiontech. See Va. Code Ann. § 8.2-201 cmt. 1 (“All that is required is that the writing

afford a basis for believing that the offered oral evidence rests on a real transaction.”); Drake v.

Livesay, 341 S.E.2d 186, 188 (Va. 1986) (explaining that the statute of frauds “does not require

that contracts within its purview be written. It merely imposes a bar to the enforcement of certain

oral contracts, which bar may be removed by proof of a sufficient written memorandum of the

transaction.”). Innotec submitted a sampling of purchase orders, invoices, and quotations along

with its complaint, Innotec Compl. Exs. C, D, and Visiontech admitted the authenticity of these

documents, Defs.’ Answer ¶¶ 16, 19. Visiontech does not explain, however, how the documents

reflect that Innotec and Ting agreed to limit the markup to 15% on products it sourced for or sold

to Visiontech. Nor could they. The documents make no reference to Innotec’s markups. Rather,

the documents show the quantity of goods ordered, the price charged per unit, and the entire fee to be paid by Visiontech. Innotec Compl. Exs. C, D. Thus, these documents do not support the

21

existence of the Pricing Agreement, and they do not operate to remove the “bar to the

enforcement of certain oral contracts” imposed by the statute of frauds. Drake, 341 S.E.2d at

188.

Similarly, Visiontech argues that the parties’ customary dealings support the existence of

the Pricing Agreement, thereby providing an exception to the statute of frauds. Visiontech Br. in

Opp’n 10 (“Virginia law also recognizes the customary dealing between the parties as sufficient evident of a contract or modification to supersede the statute of frauds.”). Virginia’s UCC forbids

“evidence of any prior agreement or of a contemporaneous oral agreement” from contradicting written terms, but it permits the parties’ course of dealing to nonetheless supplement or explain those written terms. Va. Code Ann. § 8.2-202(a). Consequently, “the parties’ course of dealing is relevant only to explain or supplement the terms of the parties’ contract. The parties’ course of dealing cannot establish the existence of a contract.” Delta Star, 666 S.E.2d at 335. As it stands, the parties’ course of dealing could not establish the Pricing Agreement as either an independent contract or an additional term to their written agreements so as to remove the Pricing Agreement from the purview of the statute of frauds. To the extent Visiontech argues that the Pricing

Agreement is a consistent additional term to written agreements with Innotec and that the parties’ course of dealing supports the Pricing Agreement, this argument is belied by Visiontech’s own allegations. It asserts that Innotec consistently violated the Pricing Agreement by charging more than 15% on its markups. Assuming the truth of this allegation, Innotec acted contrary to, rather than in conformity with, the Pricing Agreement, thereby undermining Visiontech’s reliance on the “customary dealings” exception to support the existence of the Pricing Agreement.

Visiontech has not alleged or identified a single instance of Innotec acting in conformity with the

Pricing Agreement. Because Visiontech alleges that Innotec did not adhere to the Pricing

22

Agreement, the 15% markup limitation could not be an additional term that was consistent with

their course of dealing.

Visiontech next asserts that the statute of frauds should not be used to perpetuate a wrong. Visiontech Br. in Opp’n 9–10. As a general statement of law, this is correct. See T. v. T.,

224 S.E.2d 148, 151 (Va. 1976) (“The object of the statute of frauds is to prevent frauds and

perjuries, and not to perpetrate them, so that the statute is not enforced when to do so would

cause a fraud or a wrong to be perpetrated.”). But, that proposition does not support Visiontech’s

insistence that it can enforce the Pricing Agreement. Visiontech argues that not enforcing the

Pricing Agreement will allow Ting and Innotec to have perpetuated a fraud against Visiontech to

the tune of at least $600,000 in overcharges in contravention of a contract limiting markups. In

other words, Visiontech contends that Ting and Innotec cannot use the statute of frauds as a

shield against their otherwise unlawful conduct.

The case Visiontech cites in support of this theory, Prospect Development Co. v.

Bershader, 515 S.E.2d 291 (Va. 1999), is distinguishable from this case. In Bershader, the

defendants argued that “the creation of an easement by estoppel under the facts and

circumstances of [that] case [was] violative of the statute of frauds,” id. at 299. The court

rejected this argument in light of its holding that “the Bershaders have established that they have

a negative easement . . . created by principles of estoppel arising from the representations and

inducements of Prospect Development’s agents.” Id. at 299–300. In other words, the Bershader

court had evidence before it that the defendants’ actions created an easement by estoppel, and it

thus concluded that accepting the defendants’ invocation of the statute of frauds to defeat the

establishment of such an easement would permit the defendants to “cause a fraud or perpetrate a

wrong” in contravention of the purpose behind the statute of frauds. Id. Here, however,

23

Visiontech simply offers its conclusory allegations that Innotec and Ting violated the Pricing

Agreement—essentially a run of the mill breach of contract allegation—but it makes no

reference to other conduct that reasonably could lead the Court to conclude that enforcing the

statute of frauds would allow Innotec and Ting to “perpetuate a wrong,” Visiontech Br. in Opp’n

9. Additionally, as discussed below, Visiontech’s allegations fail to state a claim for fraud.

Bershader is thus distinguishable and does not undermine Innotec and Ting’s assertion of the

statute of frauds as a defense to the Pricing Agreement as described in Visiontech’s

counterclaim.

Last, Visiontech asserts that “the doctrine of estoppel in cases of detrimental reliance on

oral modifications” should apply here. Visiontech Br. in Opp’n 10. Visiontech claims that it

relied to its detriment on Ting and Innotec’s “promise” or “representation” to limit markups to

15% and that this promise was a reason Visiontech continued its relationship with Innotec. Id. at

11. It is true that “Virginia recognizes the doctrine of equitable estoppel as a bar to the assertion

of the statute of frauds defense.” Lance J. Marchiafava, Inc. v. Haft, 777 F.2d 942, 945 (4th Cir.

1985) (citing T v. T., 224 S.E.2d at 151–52). “It is well established, however, that the doctrine of equitable estoppel does not apply to situations in which the party asserting the estoppel has suffered detriment resulting solely from another party’s failure to perform an obligation under the oral agreement.” Id. Here, Visiontech claims that it suffered at least $600,000 in overcharges solely as a result of Innotec’s breach of the oral Pricing Agreement. Therefore, it cannot assert estoppel and detrimental reliance as a means of enforcing a contract or additional term that does not comply with the statute of frauds.10

10 To the extent the court in Marchiafava allowed for a party to assert estoppel when it also makes a claim of fraud, rather than a mere breach of an oral agreement, such an allowance does not change the outcome here. Id. at 946 (explaining that plaintiff could not assert estoppel in part because there was no “claim that [defendant] did not intend to carry out the promise when made, sometimes considered a species of 24

As to the proposed amended counterclaim, the change most relevant to the breach of

contract claim relates to Visiontech now asserting that the Pricing Agreement was made in

September 2015, as opposed to March of the same year. Visiontech Proposed Am. Countercl. ¶¶

11–15, 35. Visiontech also adds some additional context about how the discussions leading to the

Pricing Agreement “occurred after some abortive joint venture negotiations terminated.” Id. ¶ 11.

Visiontech’s proposed amendments would not change the above analysis, however. Visiontech

still fails to identify any writings reflecting the 15% markup limitation, which constitutes the entirety of the Pricing Agreement described in Visiontech’s pleading. Instead, it continues to assert that Innotec and Ting made these representations and that Visiontech relied on them to its detriment. These conclusory allegations do not constitute well-pled facts, and, as explained above, they do not overcome Innotec’s statute of frauds defense concerning enforcement of the

Pricing Agreement. Without more, Visiontech cannot enforce the Pricing Agreement, which is subject to the statute of frauds regardless of whether it is construed as an independent contract or as an additional term to the parties’ written agreements. Thus, Innotec’s motion to dismiss

Visiontech’s counterclaim for breach of contract of the Pricing Agreement should be granted, and Visiontech’s motion to amend its counterclaim should be denied as futile. Cf. Greenbelt

Ventures, 481 F. App’x at 837 (affirming dismissal of breach-of-contract claim under Rule

12(b)(6) where it was clear from the face of the complaint that the underlying contractual relationship was governed by Maryland’s statute of frauds and the plaintiff “failed to allege the existence of any written agreement signed by” the defendant).

b. June 2016 Agreement

fraud”). As discussed below, Visiontech’s fraud count fails to state a claim both because it fails to meet the heightened pleading standard for fraud claims and because the underlying facts require it to be brought as a breach of contract claim. See infra Pt. II.C.2. Therefore, Visiontech’s conclusory allegations that Innotec did not intend to comply with the Pricing Agreement does not enable it to assert estoppel. 25

Innotec primarily argues that Visiontech cannot establish Innotec’s breach of the June

2016 Agreement because Visiontech materially breached first, and as such, Visiontech cannot enforce any claims it may have against Innotec pursuant to this contract. Innotec Br. in Supp.

11–19. In Virginia, “[a] ‘breach of contract’ is defined as a ‘failure, without legal excuse, to perform any promise which forms the whole or part of a contract.’” Clevert v. Jeff W. Soden,

Inc., 400 S.E.2d 181, 183 (Va. 1991) (emphasis added) (quoting Black’s Law Dictionary 188

(6th ed. 1990)). To establish a breach of contract, a party must show “(1) a legally enforceable obligation of a defendant to a plaintiff; (2) the defendant’s violation or breach of that obligation; and (3) injury or damage to the plaintiff caused by the breach of the obligation.” Filak v. George,

594 S.E.2d 610, 614 (Va. 2004). “A material breach is a failure to do something that is so fundamental to the contract that the failure to perform that obligation defeats an essential purpose of the contract.” Horton v. Horton, 487 S.E.2d 200, 204 (Va. 1997). “If the first breaching party committed a material breach . . . that party cannot enforce the contract,” and “[i]f the initial breach is material, the other party to the contract is excused from performing [its] contractual obligations.” Id.

The history of the parties’ dealings shows that Visiontech had not paid numerous invoices for goods sourced or provided by Innotec. The second term in the June 2016 Agreement required Visiontech “to pay [Innotec] all past due invoices as of today’s date by wire on June

15th, 2016.” Innotec Compl. Ex. F. Visiontech admits that it did not make this payment.

Visiontech Answer ¶ 25. It is well-settled under Virginia law “that failure to make timely payment constitutes a material breach.” Tandberg, Inc. v. Advanced Media Design, Inc., No.

1:09cv863, 2009 WL 4067717, at *4 (E.D. Va. Nov. 23, 2009) (collecting cases). Looking to the terms of the June 2016 Agreement, then, it is clear that Visiontech committed the first breach and

26

that its breach was material. Thus, Visiontech cannot enforce the June 2016 Agreement against

Innotec, Innotec was excused from performing its duties under the contract, and Visiontech’s

counterclaim on this issue must be dismissed.11

Visiontech nevertheless presents numerous explanations for why its failure to make this

payment should be excused. None of these positions, however, is persuasive. First, Visiontech

claims that Innotec committed the first material breach of the June 2016 Agreement. Visiontech

Br. in Opp’n 14–18. Visiontech contends that Innotec never issued the “credit memo” as required

by the contract, which provided Visiontech with sufficient justification not to perform its

obligations to pay past due invoices. Id. at 14–16. Visiontech also states that this “credit memo”

was a condition precedent for its payment to Innotec. Id. at 15. I disagree.

For one, the June 2016 Agreement simply does not reference a “credit memo,” and it

would be inappropriate to read in such a requirement. Courts interpret contracts by looking to the

plain language of the contract as a whole, and they must adopt a reasonable and just

interpretation. See generally Am. Realty Tr. v. Chase Manhattan Bank, N.A., 281 S.E.2d 825, 831

11 Visiontech argues that “even if non-payment is considered a material breach for other purposes, non- payment is not necessarily a breach as applied to establishing application of the first to breach doctrine.” Visiontech Br. in Opp’n 18. The cases it cites in support of this proposition, however, do not alter the outcome here. In Mathews v. PHH Mortgage Corp., the Supreme Court of Virginia recognized that although the first party to breach a contract generally cannot enforce it, “[a]n exception to this rule arises when the breach did not go to the ‘root of the contract’ but only to a minor part of the consideration.” 724 S.E.2d 196, 198 (Va. 2012). In Mathews, “[t]he threshold question [was] whether the Mathewses’ failure to pay under the Note preclude[d] them from enforcing the conditions precedent to foreclosure in the Deed of Trust” to the parcel of land they owned and which PHH had instituted foreclosure proceedings on once the Mathewses fell into arrears on payments on the Note. Id. The court stated that “by its nature, the deed of trust is a contract in which the parties have agreed that material breach of the note by nonpayment will not deprive borrowers of their rights to enforce the conditions precedent” and that “[a]ccordingly, non-payment of a note is not a material breach of a deed of trust” because it did not “defeat an essential purpose of the contract.” Id. at 200. In other words, Mathews applies to a specific set of facts, deeds of trust on real property, and it does not change the general rule that a failure to make timely payment is a material breach when the payment was for the sale of goods. Likewise, the other two cited cases— Bayview Loan Servicing, LLC v. Simmons, 654 S.E.2d 898 (Va. 2008), and Land & Marine Remediation, Inc. v. BASF Corp., No. 2:11cv239, 2012 WL 2415552 (E.D. Va. June 26, 2012)—also deal with real property and are thus distinguishable. 27

(Va. 1981) (“[A]ny interpretation adopted by the court must be reasonable and just.”); Traylor v.

Holloway, 142 S.E.2d 521, 523 (Va. 1965) (“It is an elementary rule of construction that the purpose or intent of a written instrument must be determined from the language used in the light of the circumstances under which it was written.”); Sw. Va. Hosps. v. Lipps, 68 S.E.2d 82, 90

(Va. 1951) (“[T]he contract should be considered as a whole and its construction should be reasonable and just.”); Worrie v. Boze, 62 S.E.2d 876, 880 (Va. 1951) (“In the construction of a contract the whole instrument is to be considered; not any one provision only, but all its provisions; not the words merely in which they were expressed, but their object and purpose, as disclosed by the language, by the subject matter, and the condition and relation of the parties.”).

Here, the language of the contract does not contemplate any additional writing, such as a “credit memo,” that Innotec needed to provide before Visiontech would be obligated to pay its past due invoices; rather, the first term states in full, “Innotec LLC will issue a credit for $200,000 to be used against outstanding invoices.” Innotec Compl. Ex. F (emphasis added). Given this plain language, it would not be reasonable to read in the requirement that Visiontech urges.

Moreover, considering the contract in its entirety, the June 2016 Agreement makes clear that the $200,000 credit is “to be used against outstanding invoices.” Id. (emphasis added). A reasonable construction shows that Visiontech was required to pay its past due invoices on June

15, 2016, whereas it would “pay all outstanding invoices,” minus the $200,000 credit,

“immediately” after all purchase orders had been transferred to Visiontech. Id. Both parties agreed at the hearing that “outstanding invoices” referenced a different sum than “past due invoices,” although they have different interpretations of what would constitute that sum.

Therefore, the issuance of a credit for outstanding invoices did not alter Visiontech’s obligation to make payment on past due invoices the day after entering the June 2016 Agreement.

28

Moreover, the issuance of a “credit memo” was not a condition precedent to Visiontech’s

obligation to make payment on June 15, 2016, and even if it were, it would not give rise to a

breach of contract claim against Innotec. “A condition precedent calls for the performance of some act, or the happening of some event after the terms of the contract have been agreed upon, before the contract shall take effect.” Smith v. McGregor, 376 S.E.2d 60, 65 (Va. 1989). “In

other words, the contract is made in form, but does not become operative as a contract until some

future specified act is performed, or some subsequent event occurs.” Id. Here, Visiontech’s

argument is belied by the plain language and reasonable interpretation of the contract.

Considering the contract as a whole, the June 2016 Agreement required Visiontech to pay all its

past due invoices to Innotec by wire on June 15, 2016, and contemplated that Innotec would

issue a $200,000 credit for all outstanding invoices, for which payment was due after all

purchase orders had been transferred to Visiontech. Innotec Compl. Ex. F. Simply put, nothing in

the June 2016 Agreement indicates that the issuance of this credit—regardless of whether it was required to be in the form of a “credit memo” or not—was a condition precedent to the entire contract taking effect or to Visiontech making timely (i.e., on June 15, 2016) payment on the past due, rather than outstanding, invoices. Indeed, Visiontech’s insistence that issuance of the credit

was a condition precedent to the June 2016 Agreement taking effect does not make sense given

that it agreed to pay the past due invoices before it agreed to pay the outstanding invoices to

which the $200,000 credit applied. Moreover, even assuming that issuing a credit memo was a

condition precedent, Innotec’s failure to do so would not enable Visiontech to make a breach of

contract claim as “[g]enerally, the ‘non-occurrence of a condition is not a breach by a party.’”

Cox v. Snap, Inc., No. 1:16cv9, 2016 WL 5109518, at *3 (E.D. Va. Sept. 20, 2016) (quoting

Restatement (Second) of Contracts § 225), aff’d, 859 F.3d 304 (4th Cir. 2017).12

12 It is also worth mentioning that Innotec’s issuance of a credit is more accurately considered a promise 29

As part of its breach of contract counterclaim, Visiontech asserts that Innotec and Ting

breached the June 2016 Agreement by “failing to assist Visiontech and Alan Hu with

transitioning Visiontech’s orders direct to the factories.” Visiontech Br. in Opp’n 16–17; see also

Visiontech Countercl. ¶ 30. The June 2016 Agreement did require Innotec to “work with Alan

Hu to introduce him to the factory contacts and transition all open orders placed direct on

factory.” Innotec Compl. Ex. F. This argument, however, also fails because Visiontech

committed the first material breach of the June 2016 Agreement, thereby relieving Innotec of its

obligations under the contract. Nothing in the contract indicates the time for Innotec to complete

this obligation, and it would be wholly unreasonable to conclude, given the other terms of the

June 2016 Agreement, that Innotec had a duty to introduce Alan Hu to its factory contacts before

Visiontech was required to make payment on its past due invoices. In Virginia, “time is not of

the essence of a contract unless made so by its terms or unless it is an element of a mere

condition precedent.” Dziarnowski v. Dziarnowski, 418 S.E.2d 724, 726 (Va. App. 1992)

(quoting 4B Michie’s Jurisprudence Contracts § 59 (1986)). Here, only Visiontech’s obligation

to make payment on all invoices past due as of June 14, 2016, was subject to an explicit

deadline, notably the very next day after the agreement was reached. Innotec’s obligation to

introduce Alan Hu to Innotec’s factory contacts was therefore subject to the general rule in

rather than a condition precedent. “A promise is a manifestation of intention to act or refrain from acting in a specified way, so made as to justify a promise in understanding that a commitment has been made.” Restatement (Second) of Contracts § 2 (1981). In Virginia, courts use “[g]eneral rules of contract interpretation to govern whether the parties intended a provision to be a condition or a promise, and “it must be the case that the plain language [of the contract] compels” the determination that the parties intended for a specific term to be a condition precedent. Cox, 2016 WL 5109518, at *3–4. Here, the plain language of the contract does not compel this conclusion. For example, the June 2016 Agreement does not contain any of the “certain words and phrases [that] are often used to signal the intent to make an event or act a condition.” Id. at *4 (identifying language such as “on the condition that,” “provided that,” “if,” “when,” “after,” “as soon as,” or “subject to”). Rather, the June 2016 Agreement states that Innotec “will issue” the credit. Innotec Compl. Ex. F. Such language is similar to that in Cox, where the court found that a contract in which Snap agreed that it “will issue” shares to Cox constituted a promise, not a condition precedent. 2016 WL 5109518, at *5. 30

Virginia that “when a contract is silent as to the time within which an act is to be performed, the

law implies a reasonable time.” MP Leasing Corp. v. Colonna’s Shipyard, No. 2:07cv273, 2009

WL 2581575, at *5 (E.D. Va. May 8, 2009) (quoting Grossman v. Saunders, 176 S.E.2d 66, 70

(Va. 1989)). For Visiontech’s argument to hold water, I would have to conclude that the contract

required Innotec to make these introductions within one day, before Visiontech’s payment was

due. Such a result is simply not a reasonable construction of the agreement.

Visiontech also asserts that the email sent by Allen Ting on June 15, 2016, constituted a repudiation of the June 2016 Agreement and thereby negated Visiontech’s responsibility to make any payments. Visiontech Br. in Opp’n 16. As explained above, Ting emailed Perrault on June

15 and expressed his intention that the June 2016 Agreement would not cover three specific categories of products. Ting explained that he did not have time to review the status of all products the prior day, and he requested that Perrault “confirm the above is agreeable to you.”

Visiontech Countercl. Ex. A. Ting also referenced a list of the open invoices attached to the email13 and detailed that “Total open invoices = $1,650,110.35” and “Overdue invoices =

$1,117,215.69.” Id. Ting concluded his email by asking Perrault to “[p]lease wire the payment

overdue invoice today per our agreement.” Id. Visiontech argues that Ting’s email was sent

“before the payment was due” and was “an anticipatory repudiation [because it was] an ‘overt

communication of intention which . . . demonstrate[d] a clear determination not to continue with

performance.’” Visiontech Br. in Opp’n 16 (quoting Va. Code Ann. § 8.2-610, cmt. 1). Innotec,

conversely, characterizes Ting’s email as “a proposal to amend the scope of their discussion the

day before, literally asking for [Visiontech’s] agreement.” Innotec Reply Br. 21. Innotec has the

better position.

13 This attachment has not been included in any filings or otherwise provided to the Court. 31

In Virginia, a repudiation can be defined as either “(a) a statement by the obligor to the

obligee indicating that the obligor will commit a breach that would of itself give the obligee a claim for damages for total breach . . . or (b) a voluntary affirmative act which renders the obligor unable or apparently unable to perform without such a breach.” Bennett v. Sage Payment

Sols., Inc., 710 S.E.2d 736, 741 (Va. 2011) (quoting Restatement (Second) of Contracts § 250

(1981)). Virginia law also “characterizes repudiation before performance is due under a contract as an anticipatory breach.” Id. at 740. “In order to maintain a cause of action for an anticipatory breach of contract, it is not necessary that there be an unequivocal or positive expression of abandonment if the acts and conduct of the obligor evince an intent wholly inconsistent with the intention to perform its contract.” Bd. of Supervisors of Fairfax Cty. v. Ecology One, Inc., 245

S.E.2d 425, 427–28 (Va. 1978). It must be the case, however, that the “repudiation [goes to] the very essence of the contract” to give rise to a claim for breach of contract based on an anticipatory breach. City of Fairfax v. Wash. Metro. Area Transit Auth., 582 F.2d 1321, 1327

(4th Cir. 1978).

Although the question of “whether the repudiation of a contract is sufficiently positive or unequivocal to give rise to a cause of action for anticipatory breach is [generally] a factual question for the jury’s determination,” Ecology One, 245 S.E.2d at 428, Visiontech’s counterclaim does not plead sufficient facts to support its contention that this email was a repudiation giving rise to a breach of contract claim, and the plain language of Ting’s email shows that such a reading is implausible. For one, Ting merely asked Perrault to pay the past due invoices on the agreed date as stated under the contract; this is far from a repudiation of the deal.

The contract required Visiontech to make the payment on June 15, 2016, which was the same

32 day as Ting’s email, so there is no merit to Visiontech’s position that Ting demanded payment before it was due.

Additionally, Visiontech asserts that Ting repudiated the June 2016 Agreement by unilaterally “attempting to remove batteries, chargers and cables” from its scope. Visiontech

Countercl. ¶ 29 (emphasis added). Ting’s request for confirmation that certain items would be excluded from the contract if “agreeable” to Visiontech was a proposal to amend the June 2016

Agreement, which Visiontech was free to accept or, as it did, reject. But it was not a repudiation that freed Visiontech from its obligation to pay Innotec for the overdue invoices on June 15.

The facts in Bennett v. Sage Payment Solutions, Inc., further illustrate this point. In that case, Bennett entered into a contract with his employer, Sage, in February 2008 regarding his promotion to president of the company. 710 S.E.2d at 738. The original agreement, which was for a term of one year with automatic renewal, set his yearly salary at $360,000; contemplated that Sage would provide a severance package unless Bennett resigned without good reason or

Sage terminated Bennett for cause; and imposed on Bennett a covenant not to compete for twelve months after his employment ended. Id. On June 7, 2008, after engaging in oral negotiations with Sage about his salary, “Bennett wrote in an email to Sage that he would require increased compensation to the $1 million range, ‘or we could agree to my transition out of the company.’” Id. at 739. Bennett stated that if Sage did not meet his compensation demands, then the parties could “work out a mutually agreeable transition plan,” which Bennett suggested could involve him continuing in his duties while Sage searched for his replacement, but that “[i]n either event, I will want the clock running on any post termination restrictions listed in my employment agreement.” Id. Sage construed this email as a repudiation, whereas Bennett interpreted Sage’s refusal to meet his compensation demands as a termination of his employment without cause. Id.

33

After Sage did in fact terminate his employment on September 30, 2008, Bennett filed suit

seeking the severance payments contemplated by the contract. Id. At trial, the jury found for

Sage. Id. On appeal, the Supreme Court of Virginia determined that Bennett’s email constituted a

repudiation of his employment contract. It stated that “when Bennett declared he would leave his

position as president unless his compensation was increased, Sage was entitled to rely on

Bennett’s repudiation and treat it as a breach.” Id. at 742.

In this case, Ting’s email does not go nearly as far as did Bennett’s. Bennett’s email

clearly indicated that he did not plan to act consistently with the existing contract and presented

Sage with a binary scenario: either Sage would agree to increase his salary or Bennett would

leave the company before his contract ended. Ting, however, did not threaten to act

inconsistently with the entire June 2016 Agreement if Visiontech did not accede to his terms.

Rather, he merely proposed to amend or clarify the agreed upon contract, and Visiontech did not

accept. This conduct simply does not support Visiontech’s breach of contract claim based on

what it construes as a repudiation of the June 2016 Agreement.

Last, Visiontech argues that the June 2016 Agreement was a novation and intended to replace and supersede the parties’ prior agreements.14 Visiontech Br. in Opp’n 11–13. In

Virginia,

14 Additionally, Visiontech argued at the hearing that because this June 2016 Agreement was a “settlement” of all the parties’ disputes, Innotec should be barred from asserting claims or defenses founded in any previous agreements, e.g., the NDA and Exclusivity Agreement. Visiontech cites Noland Co. v. Holsapple, 20 Va. Cir. 265, 1990 WL 751409 (City of Charlottesville 1990), in support of its assertion that “Virginia law provides that a settlement agreement is a merger and bar of all the original claims, which may not thereafter be pursued or reinstated even after a material breach by the released party.” Visiontech Resp. to Mot. to Compel Disc. and Renewed Mot. for a Protective Order 5, ECF No. 79. Not only is Holsapple a Virginia circuit court case and therefore not binding authority on this Court, but it also concerned a breach of a settlement agreement of the parties’ claims in pending litigation whereby one party failed to perform in accordance with the settlement agreement. 1990 WL 751409, at *2. Here, the alleged breach in question related to a contract formed outside litigation between parties in an existing business relationship and was not a settlement of all claims between the parties. Thus, Holsapple is distinguishable. 34

novation is defined as a mutual agreement among all parties concerned for discharge of a valid existing obligation by the substitution of a new valid obligation on the part of the debtor or another. To effect a novation there must be a clear and definite intention on the part of all concerned that such is the purpose of the agreement, for it is a well settled principle that novation is never to be presumed. To establish novation the proof must be clear and satisfactory. Its essential requisites are a previous valid obligation, the agreement of all parties to the new contract, the extinguishment of the old contract, and the validity of the new contract. If any of these essentials be absent there can be no novation.

Honeywell, Inc. v. Elliot, 189 S.E.2d 331, 334 (Va. 1972). “The party claiming a novation bears the burden of proving every essential element of the claim.” Dere v. Montgomery Ward & Co.,

295 S.E.2d 794, 796 (Va. 1982). If “the parties continue[] to act on the basis of the original agreement,” however, then there is no novation. State Bank of Va. v. Domestic Sewing Mach.

Co., 39 S.E. 141, 143 (Va. 1901).

Visiontech alleges that the June 2016 Agreement provided for it to pay Innotec the outstanding balances minus the $200,000 credit to account for Innotec’s recognized overcharges related to the Pricing Agreement, formalized Innotec’s prior grant of permission for Visiontech to do business directly with Innotec’s factories in China, reflected renegotiated commission percentages that Visiontech would owe Innotec in the future, and was intended “to settle the parties’ disputes, and to replace and supersede the parties’ prior agreements, purchase orders and invoices, including without limitation the prior nondisclosure agreement and the prior exclusivity agreement.”15 Visiontech Countercl. ¶ 16. After explaining that this contract was intended as a novation, Visiontech concludes that “the [June 2016 Agreement] is a valid and enforceable contract between the parties.” Visiontech Br. in Opp’n 13. Presumably, Visiontech articulates this argument in further support of its position that it had permission to contact the factories in

15 In the proposed amended counterclaim, Visiontech would eliminate “exclusivity agreement” consistent with its argument that Innotec was not a party to this contract, and would replace it with “purchase orders.” Visiontech Proposed Am. Countercl. ¶ 16. This proposed change does not alter the analysis.

35

China and that Innotec’s actions stymieing those contacts violated this contract, whereas Innotec

contends that the NDA and Exclusivity Agreements remained in force—even absent

Visiontech’s breach of the June 2016 Agreement—and precluded Visiontech’s conduct after the

June 15, 2016. I need not decide this apparent disagreement as it pertains to Visiontech’s breach of contract claim, however. Both parties are in accord that the June 2016 Agreement was enforceable. Whether Visiontech could prove that this contract was a novation is irrelevant to its breach of contract claim because, as stated above, it is clear that Visiontech committed the first material breach of this contract by not paying Innotec on June 15. Cf. Goines, 822 F.3d at 166

(“[I]f a breach-of-contract plaintiff alleges a failure to perform an act required by the contract, the contract’s description of the defendant’s duties will prevail over the plaintiff’s contrary characterization.”). This material breach eliminated Visiontech’s ability to enforce or recover on the June 2016 Agreement, and it relieved Innotec of its duties to make good on its performance under the same.

As to the motion to amend, Visiontech does not add any facts relevant to its original counterclaim that Innotec and Ting breached the June 2016 Agreement first, and thus the analysis of this claim remains the same. Visiontech added further details about its lost profits,

Visiontech Proposed Am. Countercl. ¶ 36, but that calculation does not make up for the deficiencies in the claim given the conclusion that Visiontech materially breached the June 2016

Agreement first and is not entitled to recover under it.

c. Remaining Breach of Contract Issues

As part of its breach of contract counterclaim, Visiontech states that it is entitled to

“judgment against Innotec and Ting, jointly and severally, for breach of contract in the amount of $2,985,000.00 plus pre-judgment and post-judgment interest, plus attorneys’ fees and

36

litigation expenses incurred in defending Innotec’s meritless claims under the exclusivity and

nondisclosure agreement.” Visiontech Countercl. ¶ 32.16 Innotec argues that because Visiontech did not assert a proper claim for lost profits and failed to plead facts which would establish liability against Ting as a matter of law, it cannot recover on its breach of contract claims.

Innotec Br. in Supp. 25–28. Such an argument, in isolation, is misplaced because Rule 12(b)(6)

“does not provide a vehicle to dismiss a portion of relief sought or a specific remedy, but only to

dismiss a claim in its entirety.” Bocock v. Specialized Youth Servs. of Va., Inc., No. 5:14cv50,

2015 WL 1611387, at *2 (W.D. Va. Apr. 10, 2015). Nevertheless, because I conclude that

Visiontech has not plausibly alleged that it can enforce either the Pricing Agreement or the June

2016 Agreement, I recommend dismissing Count I in its entirety, which necessarily precludes

any relief Visiontech may seek under this claim.

2. Actual Fraud

Visiontech bases its actual fraud counterclaim on essentially the same facts as its breach of contract claim related to the Pricing Agreement. Visiontech Countercl. ¶¶ 33–38. Visiontech asserts that because Ting misrepresented the applicability of the 15% markup, which Visiontech relied on to its detriment in continuing the relationship, Innotec and Ting are liable to Visiontech for actual fraud. Id. In moving to dismiss this count, Innotec argues that Visiontech’s counterclaim does not meet the heightened pleading requirements for actual fraud articulated in

Rule 9(b) of the Federal Rules of Civil Procedure. See Innotec Br. in Supp. 29–34. It also contends that this claim violates Virginia’s source of duty rule. Id. at 32–34. Visiontech counters

16 Visiontech also initially requested $350,000 for punitive damages related to this claim. Visiontech Countercl. ¶ 32. In the proposed amended counterclaim, Visiontech withdrew this request. Visiontech Proposed Am. Countercl. ¶ 35. This withdrawal was proper as Virginia law requires “proof of an independent, wilful [sic] tort, beyond the mere breach of a duty imposed by contract, as a predicate for an award of punitive damages, regardless of the motives underlying the breach.” Kamlar Corp. v. Haley, 299 S.E.2d 514, 518 (Va. 1983). 37 that it sufficiently pled its fraud claim under Rule 9(b), but it does not address the source of duty argument.17 Visiontech Br. in Opp’n 29–34. Both of Innotec’s arguments are persuasive.

Accordingly, Visiontech’s fraud claim should be dismissed.

In Virginia, “a litigant who prosecutes a cause of action for actual fraud must prove by clear and convincing evidence: (1) a false representation, (2) of a material fact, (3) made intentionally and knowingly, (4) with intent to mislead, (5) reliance by the party mislead, and (6) resulting damage to the party misled.” State Farm Mut. Auto. Ins. Co. v. Remley, 618 S.E.2d 316,

321 (Va. 2005); see also Branin v. TMC Enters., LLC, 832 F. Supp. 2d 646, 652 (W.D. Va.

2011). Rule 9(b) instructs that “[i]n alleging fraud or mistake, a party must state with particularity the circumstances constituting fraud or mistake. Malice, intent, knowledge, and other conditions of a person’s mind may be alleged generally.” Fed. R. Civ. P. 9(b). To meet this level of particularity, the Fourth Circuit has instructed that “the ‘circumstances’ required to be pled . . . are ‘the time, place, and contents of the false representations, as well as the identity of the person making the misrepresentation and what he obtained thereby.’” Harrison v.

Westinghouse Savannah River Co., 176 F.3d 776, 784 (4th Cir. 1999) (quoting 5 Charles Alan

Wright & Arthur R. Miller, Federal Practice and Procedure: Civil § 1297, at 590 (2d ed. 1990)).

Put differently, “[t]he minimum type of circumstances that must be pleaded include the time, place, content, and identity of authorship of any alleged misrepresentation.” Goldstein v.

Malcolm G. Fries & Assocs., Inc., 72 F. Supp. 2d 620, 627 (E.D. Va. 1999) (collecting cases); see also Kindred v. McLeod, No. 3:08cv19, 2010 WL 4814360, at *5 n.6 (W.D. Va. Nov. 19,

17 Visiontech did invoke the economic loss doctrine in its reply, Visiontech Br. in Opp’n 31–34, and at the hearing, its counsel explained that he construed the economic loss doctrine as one in the same with the source of duty rule. The Supreme Court of Virginia has stated, however, that “the question of whether the economic loss doctrine applies requires a court to first determine whether a cause of action sounds in contract or tort, ultimately by ascertaining the source of the duty violated.” Abi-Najm v. Concord Condominium, LLC, 699 S.E.2d 483, at 489 (Va. 2010). 38

2010) (same). A “lack of compliance with Rule 9(b)’s pleading requirements is treated as a failure to state a claim under Rule 12(b)(6).” Harrison, 176 F.3d at 783 n.5. But, “[a] court should hesitate to dismiss a complaint under Rule 9(b) if the court is satisfied (1) that the defendant has been made aware of the particular circumstances for which [it] will have to prepare a defense at trial, and (2) that plaintiff has substantial prediscovery evidence of those facts.” Id. at 784.

Visiontech does not meet this heightened pleading standard. Visiontech generally alleged that it relied on Ting’s promise, made in “March 2015,” that Innotec would not charge more than a 15% markup on products it “sourced for or supplied to Visiontech.” Visiontech Countercl.

¶ 33. This covers the identity of the person making the misrepresentation (Ting), the contents of the false representation (that Innotec would not charge more than a 15% markup), and, implicitly, what the person making the false statement obtained thereby (profiting off overcharging Visiontech). On the other hand, Visiontech merely asserts that this misrepresentation took place in March 2015, but it does not identify the specific day on which it occurred. And at no point does Visiontech note where the misrepresentation took place.18 See

Lasercomb Am., Inc. v. Reynolds, 911 F.2d 970, 980 (4th Cir. 1990) (“[A] complaint which fails to specifically allege the time [and] place . . . of the fraud is subject to dismissal on a Rule

12(b)(6) motion.”).

The proposed amended counterclaim does not address these deficiencies. In the proposed amendment, Visiontech asserts that this alleged misrepresentation took place in September— rather than March—2015. Visiontech Proposed Am. Countercl. ¶ 11. Visiontech adds that the agreement “occurred after the termination of some failed joint venture negotiations, after which

18 Notably, this omission inhibits the Court’s ability to determine the proper law to apply as well.

39

the parties discussed and decided that [Visiontech] would use other resources to source its new

products, factories and suppliers.” Id. ¶ 39. Visiontech further asserts that it maintained its existing business with Innotec based on the promise not to charge more than a 15% markup, but that this assurance was hollow because “Innotec and Ting falsely represented that they would charge and had been charging no more than a fifteen percent mark-up all along.” Id. Again,

Visiontech does not identify where the alleged agreement was made, and Visiontech does not acknowledge this omission. Visiontech Br. in Opp’n 29–30. As such, its counterclaim, even with the proposed amendment, does not meet the pleading standard for Rule 9(b).

Moreover, Visiontech’s fraud claim runs afoul of Virginia’s source of the duty rule. In

Richmond Metropolitan Authority v. McDevitt Street Bovis, Inc., the Supreme Court of Virginia addressed the plaintiff’s contentions that certain misrepresentations by the defendant gave rise to claims for actual and constructive fraud. 507 S.E.2d 344 (Va. 1998). The court stated that “[i]n determining whether a cause of action sounds in contract or tort, the source of the duty violated must be ascertained.” Id. at 347. It went on to instruct that

if 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 exists) then the action is founded upon contract, and not upon tort. If, on the other hand, the relation of the plaintiff and the defendants be such that a duty arises from that relationship, irrespective of the contract, to take due care, and the defendants are negligent, then the action is one of tort.

Id. Thus, to bring a tort claim, “the duty tortiously or negligently breached must be a common law duty, not one existing between the parties solely by virtue of the contract.” Id. The court then concluded that the plaintiff could not maintain a claim for either constructive or actual fraud because any breach of duty by the defendant stemmed solely from a duty imposed by contract.

Id. The court explained that, “[i]n ruling as we do today, we safeguard against turning every

40

breach of contract into an actionable claim for fraud. The appropriate remedy in this case is a

cause of action for breach of contract. . . .” Id. at 348.

The same analysis holds true here. Visiontech alleges fraud based on Innotec’s promise

that it would not charge more than 15% markup on the products it sourced for or sold to

Visiontech. Visiontech claims that this oral arrangement constituted an enforceable contract. As

explained above, this interpretation is incorrect because the Pricing Agreement as described in

Visiontech’s counterclaim does not comply with the statute of frauds. Nevertheless, it is abundantly clear that Innotec did not owe Visiontech any common-law duty to limit its markup on the goods that were part of their transactions. Accordingly, the only duty Innotec could have owed Visiontech not to exceed a 15% markup limitation would arise, if at all, by contract, and this conclusion bars Visiontech from pursuing an actionable tort claim of actual fraud. See

Sensenbrenner v. Rust, Orling & Neale, Architects, Inc., 374 S.E.2d 55, 58 (Va. 1988) (“Tort law

is not designed . . . to compensate parties for losses suffered as a result of a breach of duties

assumed only by agreement.”).

In sum, Visiontech’s counterclaim and its proposed amended counterclaim do not satisfy

the heightened pleading standard set out in Rule 9(b). Even if they did, the facts underlying

Visiontech’s claim for actual fraud could only be brought as a breach of contract claim, which in this case is not enforceable because of the statute of frauds. Therefore, Innotec’s motion to dismiss Visiontech’s fraud claim should be granted, and Visiontech’s motion to amend its counterclaim should be denied as futile.

3. Conversion of Molds and Toolings

In support of its conversion counterclaim, Visiontech alleges that Innotec and Ting falsely claimed to three of its factories that Visiontech did not have a right to possess the molds

41 and toolings in those factories. Visiontech Countercl. ¶ 41. Specifically, Visiontech states that

“Innotec and Allen Ting exerted wrongful dominion and control over Visiontech’s molds and tooling which Visiontech paid for and stored in its factories located in China.” Id. Visiontech adds that Innotec and Ting “further converted and denied Visiontech access to product inventory at the Factories and in process at the Factories. The conversion and interference by Ting and

Innotec were inconsistent with Visiontech’s ownership of and rights to its molds, tooling, inventory and supplies.” Id. Visiontech explains that Innotec accomplished this conversion by

“making baseless, frivolous, false and disparaging statements and frivolous threats of legal action to the Factories, by falsely claiming to own the molds, tooling and product supply, and by falsely claiming to the Factories that Innotec and Mr. Ting had the right to deny Visiontech access to the molds, tooling and product supply.” Id. As a result, “Innotec’s conversion and interference disrupted Visiontech’s supply chain and caused Visiontech damages in the form [of] lost sales revenues, profits and contracts in addition the financial burdens of making new molds and tooling [worth $200,000], $2 million in lost profits, and $85,000 in product that cannot be sold.”

Id. Visiontech also seeks $350,000 in punitive damages because “[t]he tortious conversion by

Ting and Innotec was committed with a reckless disregard for the rights of Visiontech and for the purpose of harming and injuring Visiontech for the pecuniary benefit of Ting and Innotec.” Id. ¶

42.

In moving to dismiss this count, Innotec argues that Visiontech’s counterclaim fails to state a claim for conversion, primarily because Visiontech does not “allege how it was denied access to its own equipment in its own factories.” Innotec Br. in Supp. 35. Visiontech responds that its counterclaim makes clear that Ting and Innotec’s false claims of ownership, disparaging statements, and frivolous threats of litigation made to Visiontech’s factories caused these

42

factories to deny Visiontech access to their molds and toolings, thereby depriving Visiontech of

possession. Visiontech Br. in Opp’n 35. Innotec has the more convincing position.

In Virginia, “[c]onversion is the wrongful assumption or exercise of the right of

ownership over goods or chattels belonging to another in denial of or inconsistent with the

owner’s rights.” Economopoulos v. Kolaitis, 528 S.E.2d 714, 719 (Va. 2000); accord Hartzell

Fan, Inc. v. Waco, Inc., 505 S.E.2d 196, 201 (Va. 1998) (“Conversion includes any distinct act of

dominion wrongfully exerted over property that is in denial of, or inconsistent with, the owner’s

rights.”). To prevail on a conversion claim, a plaintiff ultimately must “prove by a preponderance

of the evidence (i) the ownership or right to possession of the property at the time of the

conversion and (ii) the wrongful exercise of dominion or control by defendant over the plaintiff’s

property, thus depriving plaintiff of possession.” Airlines Reporting Corp. v. Pishvaian, 155 F.

Supp. 2d 659, 664 (E.D. Va. 2001). Additionally, only a person or entity “having a property

interest in and entitled to the immediate possession of the item alleged to have been wrongfully

converted” can maintain a conversion claim under Virginia law. Economopoulos, 528 S.E.2d at

719.19

Here, Visiontech’s counterclaim is almost completely devoid of assertions of fact. It

contends that Innotec’s actions of making frivolous threats, inaccurate statements, and false

claims of ownership of the product to the factories influenced the factories to deny Visiontech

access to the molds and tooling that it owned. Then it asserts that after this denial of access, its

19 In Colorado, the elements of conversion require that “(i) a defendant exercise dominion or control over property; (ii) that property belonged to [the plaintiff]; (iii) the defendant’s exercise of control was unauthorized; (iv) [the plaintiff] demanded return of the property; and (v) the defendant refused to return it.” L-3 Commc’ns Corp. v. Jaxon Eng’g & Maint., Inc., 863 F. Supp. 2d 1066, 1081 (D. Colo. 2012) (citing Glenn Arms Assocs. v. Century Mortg. & Inv. Corp., 680 P.2d 1315, 1317 (Colo. App. 1984)). Were Colorado law to apply—as Visiontech suggested at the hearing that it might—Visiontech’s counterclaim would fail for the additional reasons that Visiontech has not alleged it demanded the return of its property or that Innotec refused to return it. 43 supply chain was disrupted. These allegations, taken as true, do not state a claim for conversion because they do not support a reasonable inference that Innotec wrongfully exerted dominion or control over the molds and tooling to Visiontech’s detriment. For one, Visiontech does not explain how Innotec’s representations to the Factories precluded Visiontech from possessing the goods. Visiontech itself pled that it had paid for the goods, owned the goods, and stored the goods in its supplier factories. Furthermore, it is unclear from Visiontech’s counterclaim how this denial of access even materialized. Visiontech pleads no facts, for example, about the specifics of the statements made by Innotec and Ting to the factories, how it learned it had been denied access, how its factories that actually possessed the molds and toolings thwarted

Vistiontech’s rights at Innotec’s urging, what it did in response to the purported denial of access, or even when all of these events transpired. Such facts, while not necessarily required to state a claim of conversion in every instance, are nonetheless necessary in this unusual scenario to shed light on Visiontech’s otherwise conclusory allegations that Innotec and Ting’s actions rose to the level of conversion. Given these deficiencies, I find that Visiontech’s factual allegations do not plausibly state a claim for conversion against Innotec and Ting. See generally Woods v. City of

Greensboro, 855 F.3d 639, 647 (4th Cir. 2017) (explaining that a plaintiff must “do more than

‘plead[] facts that are merely consistent with a defendant’s liability;’ the facts alleged must

‘allow[] the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.’” (quoting Iqbal, 556 U.S. at 678)).

Furthermore, the remainder of Visiontech’s claim consists of “labels and conclusions,”

“formulaic recitation of the elements of [the] cause of action,” or “naked assertions devoid of further factual enhancement.” Iqbal, 556 U.S. at 678. For example, Visiontech alleges that

“Innotec and Allen Ting exerted wrongful dominion and control over Visiontech’s molds and

44

tooling.” Visiontech Countercl. ¶41. Additionally, Visiontech claims that Innotec and Ting

“converted and denied Visiontech access to product inventory at the Factories and in process at

the Factories” and that this “conversion and interference by Ting and Innotec [was] inconsistent

with Visiontech’s ownership of and rights to its molds, tooling, inventory and supplies.” Id.

These statements are merely recitations of the elements of conversion, and as such, are legal conclusions devoid of any factual enhancement. Even at this stage, the Court need not credit these kinds of allegations.

In its proposed amended counterclaim, Visiontech does add some relevant facts. Notably, it identified eleven factories and suppliers “with whom Visiontech had contracts and relationships for the purchase and supply of productions, and for the use of equipment and molds paid for and owned by Visiontech.” Visiontech Proposed Am. Countercl. ¶ 22. Visiontech alleges that after forming the June 2016 Agreement, “Innotec told these factories and suppliers . .

. not to let Visiontech use the equipment, molds and tooling that Visiontech had paid for and owned, and not to sell Visiontech any goods or products, including the products which Innotec had sourced for Visiontech.” Id. ¶ 23. Put another way, Visiontech contends that “Ting and

Innotec exercised wrongful dominion and control over Visiontech’s goods, products, molds, equipment and tooling by falsely claiming to the Factories that Visiontech had no right to use, access or receive them.” Id. ¶ 48. Visiontech also provided further explanation regarding the calculation of its damages, which is similar to its breach of contract claim, and further identified, in some respects, how its supply chain was disrupted. See id. ¶¶ 36, 48.

These additional facts address some of the deficiencies articulated above—such as coming closer to the subject of Ting and Innotec’s statements to the Factories and identifying one customer with whom Visiontech lost sales—but they still do not resuscitate the

45

counterclaim. Indeed, these additions still are conclusory statements that are merely consistent

with Innotec’s and Ting’s liability, but they have not “nudged [Visiontech’s] claims of

[conversion] across the line from conceivable to plausible.” Iqbal, 556 U.S. at 680. Therefore,

Visiontech’s counterclaim, as originally pled and in the proposed amended counterclaim, fails to state a cause of action for conversion.

4. Tortious Interference

Visiontech bases its counterclaim of tortious interference on largely the same facts as its claim for conversion. It contends that after forming the June 2016 Agreement, “Innotec and

Allen Ting tortiously interfered with Visiontech’s contracts, business relationships, and prospective economic advantage with respect to customers and its factories located in China.”

Visiontech Countercl. ¶ 44. Visiontech states that Innotec and Ting hindered Visiontech’s ability to access and use its molds and tooling and

intentionally caused it to be unable to fill large contracts and orders of which Ting and Innotec knew and had been made aware of (especially with 3DS) by making baseless, frivolous, false and disparaging statements and frivolous threats of legal action to the Factories, by falsely claiming to own the molds and tooling, and by falsely claiming to the Factories that Innotec and Mr. Ting had the right to deny Visiontech access to the molds and tooling and to supplies of product being held by or in process by the Factories.

Id. Visiontech claims that “Innotec’s tortious interference disrupted Visiontech’s supply chain and caused Visiontech damages in the form [of] lost sales revenues, profits and contracts (all of which Ting and Innotec knew about, had been informed about, and intended to interfere with – especially 3DS).” Id. Visiontech identifies the same damages as it did for its conversion claim.

Id. ¶¶44–45. In moving to dismiss this count, Innotec asserts that Visiontech’s counterclaim fails to address numerous elements of the claim. Innotec Br. in Supp. 37–39. Visiontech contends that

Innotec conflates the pleading standard with a proof standard and argues that it did sufficiently

46 plead facts which, taken as true, meet the elements of a tortious interference claim. Visiontech

Br. in Opp’n 36–41. Again, Innotec has the more convincing position.

In Virginia, to establish a claim for tortious interference with a business relationship, a plaintiff must demonstrate

(1) the existence of a valid contractual relationship or business expectancy; (2) knowledge of the relationship or expectancy on the part of the interferer; (3) intentional interference inducing or causing a breach or termination of the relationship or expectancy; and (4) resultant damage to the party whose relationship or expectancy has been disrupted.

Warner v. Buck Creek Nursery, Inc., 149 F. Supp. 2d 246, 265 (W.D. Va. 2001); see also

Caperton v. A.T. Massey Coal Co., 740 S.E.2d 1, 9 (Va. 2013).20 In cases involving a business expectancy, rather than an existing contract or relationship, “a plaintiff must also demonstrate that the defendant employed ‘improper methods’” in its interference. Commerce Funding Corp. v. Worldwide Sec. Servs. Corp., 249 F.3d 204, 214 (4th Cir. 2001) (citing Maximus, Inc. v.

Lockheed Info. Sys., Inc., 493 S.E.2d 375, 378–79 (Va. 1997)). This additional requirement of showing improper methods also applies when the relevant contracts affected by the defendant’s interference are terminable at will. Perk v. Vector Res. Grp., Ltd., 485 S.E.2d 140, 143 (Va.

1997). Improper methods include “those means that are illegal or independently tortious, such as violations of statutes, regulations, or recognized common-law rules. . . . [And] violence, threats or intimidation, bribery, unfounded litigation, fraud, misrepresentation or deceit, defamation, duress, undue influence, misuse of inside or confidential information, or breach of a fiduciary relationship.” Duggin v. Adams, 360 S.E.2d 832, 836 (Va. 1987). Moreover, “proof of the

20 In Colorado, “to establish a claim for tortious interference with prospective business advantage, a plaintiff must show that defendant engaged in (1) improper conduct with (2) the intention to induce or cause a third party not to enter into or continue business relations with the plaintiff, and (3) defendant actually induced or caused such a result.” Nobody in Particular Presents, Inc. v. Clear Channel Commc’ns, Inc., 311 F. Supp. 2d 1048, 1118 (D. Colo. 2004) (citing Dolton v. Capitol Fed. Sav. & Loan Ass’n, 642 P.2d 21, 23 (Colo. App. 1981)). 47

existence of the first and third elements of the tort must meet an objective test; proof of

subjective expectations will not suffice. In other words, mere proof of a plaintiff’s belief and

hope that a business relationship will continue is inadequate to sustain the cause of action.”

Commercial Bus. Sys., Inc. v. Halifax Corp., 484 S.E.2d 892, 897 (Va. 1997); see also Williams

v. Reynolds, No. 4:06cv20, 2006 WL 3198968, at *5 (W.D. Va. Oct. 31, 2006) (“Proof of the

business relationship/contractual expectancy and the intentional interference must meet an

objective test, and mere subjective expectations that a business relationship will continue or

appear are not enough to make a case for tortious interference.”).

Visiontech’s counterclaim must be dismissed because its allegations merely constitute

generalized allegations and “bare assertions devoid of further factual enhancements.” Nemet

Chevrolet, 591 F.3d at 255. Similarly deficient allegations in another case illustrate this point. In

Bay Tobacco, LLC v. Bell Quality Tobacco Products, LLC, 261 F. Supp. 2d 483, 500–01 (E.D.

Va. 2003), the court granted defendant Continental’s motion to dismiss Bay’s tortious interference with business claim under Rule 12(b)(6). In its complaint, Bay first made a

“generalized assertion that Continental knew ‘of Bay’s contracts and substantial business expectancies’ and that Continental knew about Bay’s contract with Bell [a second defendant].”

Id. at 500. Bay subsequently “allege[d] that Continental interfered with Bay’s ‘contracts and business expectancies’ by making an allegedly defamatory statement and ‘intentionally and illegally interfered with [Bay’s] manufacturing contract [] with Bell.’” Id. The court stated that as to its first allegation, “Bay neither identifies with which of its customer contracts Continental meddled, presuming for the purposes of argument that customer contracts are those to which it refers, nor does it provide any support for its contention that this interference-by-defamatory statement induced or caused a breach of any particular business expectancy.” Id. at 500–01.

48

Next, as to the second allegation, the court explained that “Bay fails to mention how, when,

and/or where Continental is alleged to have interfered.” Id. at 501. The court concluded that

“[b]ecause Bay cannot prove facts it does not allege . . . Bay’s [pleading] fails to state a claim

upon which relief may be granted.” Id.

Visiontech’s counterclaim suffers from the same deficiencies. It identifies one customer

with whom it lost sales (3DS), as well as the other relationships (the factories and suppliers in

China) with which Innotec purportedly interfered. It claims this interference happened at some

point after June 14, 2016. Visiontech alleges that Innotec and Ting interfered with its business

relationship with at least three Chinese factories by making false claims to the factories,

specifically that Innotec and Ting owned the products, would sue the factories if they allowed

Visiontech access, and had the right to deny Visiontech this access. Visiontech Countercl. ¶ 44.

This merely recites conduct that Virginia courts have labeled as improper methods, see Duggin,

360 S.E.2d at 836 (noting that means such as “threats or intimidation, . . . unfounded litigation,

fraud, misrepresentation or deceit, [and] defamation” constituted improper methods under

Virginia law), but it in no way pleads any facts to support the labels Visiontech assigned Innotec

and Ting’s alleged misconduct. As to the third element of the claim, see Chaves v. Johnson, 335

S.E.2d 97, 102 (Va. 1985) (explaining that “[o]ne who intentionally and improperly interferes

with the performance of a contract . . . between another and a third person by inducing or

otherwise causing the third person not to perform the contract, is subject to liability to the other”

for monetary loss stemming from the third party’s nonperformance (emphasis added) (quoting

Restatement (Second) of Torts § 766 (1977)), Visiontech does not identify any facts describing how or why its business contacts, i.e., the factories in China scaled back their relationships with

Visiontech on account of Innotec’s conduct, Visiontech Countercl. ¶ 44. Thus, without more, like

49

the plaintiff in Bay Tobacco, Visiontech’s counterclaim fails to state a claim for tortious

interference.

Additionally, Visiontech’s counterclaim for tortious interference fails on another ground,

specifically, that the NDA’s non-circumvention clause expressly permitted the actions that

Visiontech identified as Innotec’s alleged misconduct. Visiontech claimed, albeit in a separate

part of its brief, that the June 2016 Agreement was a novation of the parties’ existing contracts.

As articulated above, a novation is “a substitution by mutual agreement . . . of a new valid

obligation for an existing one, which is thereby extinguished.” Dillenberg v. Thott, 229 S.E.2d

866, 868 (Va. 1976). Because “there must be a clear and definite intention on the part of all

concerned” that an agreement is meant to be a novation, “it is a well settled principle that

novation is never to be presumed.” Honeywell, 189 S.E.2d at 334. Additionally, the party claiming the novation has the burden of proving it. See Dere, 295 S.E.2d at 796. Per Visiontech’s

argument, the June 2016 Agreement was a novation, which extinguished all prior agreements,

including the NDA and Exclusivity Agreement. Visiontech Br. in Opp’n 11–14. Under that

theory, Innotec would have no recourse under the NDA or Exclusivity Agreement and indeed

could not enforce any provision of either contract. Absent the conclusion that the June 2016

Agreement is a novation, however, the NDA and Exclusivity Agreements would remain in effect

as no party has alleged that it took steps to terminate either agreement as contemplated by the contracts. And absent termination, the non-circumvention provision of the NDA would still

apply. Visiontech has not offered a contrary theory, and the Court is not aware of any.

Whether the June 2016 Agreement is a novation is a legal conclusion, which the Court is not obliged to accept, and I do not find that Visiontech has pled sufficient facts to support this contention. This analysis does not change even when accepting as true Visiontech’s factual

50 allegations that the June 2016 Agreement was a reordering of the parties’ relationship, which included formalizing Innotec and Ting’s prior grant of permission for Visiontech to do business directly with the factories in China. Visiontech Countercl. ¶ 16. Indeed, this theory is entirely consistent with the language of the non-circumvention provision, which states that Visiontech

“shall not circumvent Innotec by purchasing product or equipment directly from the original manufacturer or supplier without the written consent of Innotec.” Innotec Compl. Ex. A. ¶ 7

(emphasis added). The June 2016 Agreement provided Visiontech with Innotec’s written consent to eventually work directly with the factories in China. Innotec Compl. Ex. F. Nothing in the

June 2016 Agreement, however, provides a clear and definite intention that it would supersede, replace, or otherwise invalidate the NDA’s non-circumvention provision, or, for that matter, the entirety of either of the parties’ existing contracts.21

At the hearing on the motions, Visiontech conceded that the tortious interference claim related to factories Innotec had used to source or provide products to Visiontech. Accordingly,

Vistiontech’s attempts to obtain products directly from these factories contravened the non- circumvention clause of the NDA. See Innotec Compl. Ex. A, ¶ 7. Once Visiontech materially breached the June 2016 Agreement, and Innotec terminated it, Visiontech could not avail itself of the terms allowing it to establish business relationships with the factories and inconsistent with the non-circumvention provision of the NDA. Thus, Innotec could assert its contractual rights

21 A further discussion of the import of Visiontech’s novation argument is warranted. Visiontech contends in a conclusory fashion that the June 2016 Agreement was a novation of all previous contracts and thus was the only contract between the parties that Innotec could enforce. In other words, Visiontech asserts that after June 14, 2016, Innotec could derive no protections from any of the provisions in either the NDA or the Exclusivity Agreement. Accepting this argument, however, would allow Visiontech to essentially renegotiate two existing contracts and replace them with a new agreement, immediately breach the new contract, and then reap the benefits of this renegotiation by avoiding any unfavorable terms in the older contracts. Such an outcome is unjust and simply not supported by law. 51

under the NDA to exclude Visiontech from obtaining products from the factories. Nothing in

Visiontech’s allegations show that Innotec’s assertion of its contractual rights was improper.

The proposed amendments do not revive the counterclaim. Rather, they simply clarify

that Innotec and Ting’s actions extended to all eleven factories and suppliers identified and

provide the same revised calculation of damages. Visiontech Proposed Am. Countercl. ¶¶ 22,

52–53. Visiontech identifies more factories with which it had business relationships, and it

explained the calculation behind its lost damages claim, but it does not expand on how Innotec’s

actions constituted tortious interference with these relationships. Visiontech also does not

provide any further factual allegations supporting a reasonable inference that the June 2016

Agreement was a novation or that the NDA ceased to apply to its relationship with Innotec.

Rather, it continues to rely on a conclusory recitation of the elements of tortious interference,

which does not state a claim. As such, the proposed amended counterclaim must be denied as

futile.

D. Proposed Amended Answer & Defenses

As discussed above, Visiontech’s proposed amended counterclaim should be denied as

futile because it does not remedy the deficiencies Innotec identified in the original counterclaim,

and thus it would still fail to state a claim. Cominelli, 589 F. Supp. 2d at 712. That said, the

Defendants also seek to amend their answer and defenses to Innotec’s complaint. Defs.’

Proposed Am. Answer & Defenses, ECF No. 53-2, at 1–35. In particular, they wish to amend their answer to reflect their position that Innotec is not a party to the Exclusivity Agreement, which also contains a mandatory arbitration clause. See, e.g., id. at 2, 9–12, 35. The Defendants also allege that the Pricing Agreement was reached in September 2015, rather than March 2015, see, e.g., id. at 13, 15, 26, and add that VSG HK had not yet been formed when the NDA was

52

signed and is not a party to that contract, see, e.g., id. at 7–8, 26–29. The rest of the proposed

amendments are simply cosmetic fixes designed to provide more clarity.

I find that the Defendants should be permitted to amend their answer and defenses

primarily because Innotec will not be prejudiced by the proposed amendments. See Ward Elecs.

Serv., Inc. v. First Commercial Bank, 819 F.2d 496, 497 (4th Cir. 1987) (“[W]e [have] noted that under Foman [v. Davis, 371 U.S. 178 (1962)] a lack of prejudice alone would ordinarily warrant granting leave to amend and that mere delay absent any resulting prejudice or evidence of dilatoriness was not sufficient justification for denial.”); Davis v. Piper Aircraft Corp., 615 F.2d

606, 613 (4th Cir. 1980) (“[A]bsence of prejudice, though not alone determinative, will normally warrant granting leave to amend.”).

As to the three major amendments the Defendants desire to make, first, the Defendants are correct that the parties identified in the Exclusivity Agreement are Visiontech and Innotec

AES, Innotec Compl. Ex. B, the latter of which is a different entity than Innotec, see Defs.’ Mot. to Am. Ex. C, ECF No. 44-3, at 3–10, and is not a party to this litigation. The Exclusivity

Agreement also contains a mandatory arbitration clause. See Innotec Compl. Ex. B (“Any controversies or disputes arising out of or relating to this Agreement shall be resolved by binding arbitration in accordance with the then-current Commercial Arbitration Rules of the American

Arbitration Association.”). The Defendants note that although they made a similar argument in responding to the motion to dismiss its counterclaim, they were not certain that Innotec and

Innotec AES were separate entities until they obtained corporate documents from the Colorado

Secretary of State’s office in August 2017. During the hearing on the motion to dismiss on

September 21, 2017, the Defendants, through counsel, expressed interest in amending their

answer and counterclaims, and the presiding District Judge ordered that any such motion be filed

53

within fourteen days. ECF No. 38. The Defendants moved to amend within this time frame,

filing their motion on October 5, 2017. Furthermore, the delay from the filing of the motion to

dismiss until the Defendants moved to amend does not show a lack of diligence or bad faith that

would warrant deny their motion. See Deasy v. Hill, 833 F.2d 38 (4th Cir. 1987) (denying leave

to amend when plaintiff moved to amend after the close of discovery—and right before the start

of trial—and “failed to offer to the trial court, and [did] not offer [the appellate court], any reason for his delay” in making the motion); Burns v. AAF-McQuay, Inc., 980 F. Supp. 175, 177 (W.D.

Va. 1997) (denying leave to amend when the plaintiff presented “no justifiable excuse for why she waited twenty-eight months . . . to attempt to now plead as pendent claims causes of action” that Virginia had recognized for over twenty years).

Second, the Defendants desire to amend the date of the Pricing Agreement to September

2015. As discussed above, the statute of frauds precludes enforcement of the Pricing Agreement, and the same reasoning would apply to the Defendants’ attempt to raise the Pricing Agreement in its answer as a defense to Innotec’s claims. That said, the current answer still contains this defense, and changing only the date of the alleged agreement would not prejudice Innotec’s ability to defend its complaint.

Third, the Defendants are also correct that VSG HK did not sign the NDA. Innotec

Compl. Ex. A. Innotec’s complaint does not allege that VSG HK was a party to the NDA; rather, it contends that VSG HK could be bound by the contract through other means, specifically as an affiliate or subsidiary of Visiontech or as an alter ego. Innotec Compl. ¶¶ 4–5, 14–17. Thus, the

proposed amendment to the Defendants’ answer does not affect Innotec’s theories espoused in its

complaint, and it would not be prejudiced by the amendment.

54

“Rule 15(a) declares that leave to amend ‘shall be freely given when justice so requires’” and the Supreme Court has stated that “this mandate is to be heeded.” Foman v. Davis, 371 U.S.

178, 182 (1962). Here, there does not exist any sufficient reason, “such as undue delay, bad faith or dilatory motive on the part of the movant, repeated failure to cure deficiencies by amendments previously allowed, undue prejudice to the opposing party by virtue of the allowance of the amendment, futility of the amendment, etc.,” id., for denying the Defendants’ motion as it relates to their answer and defenses. As the Fourth Circuit has stated, “[w]hile Foman’s enumeration of factors cannot be thought exclusive, they do embody a principle which focuses on prejudice or futility or bad faith as the only legitimate concerns in denying leave to amend, since only these truly relate to protection of the judicial system or other litigants.” Davis, 615 F.2d at 613.

Accordingly, the Defendants should be permitted to amend their answer and defenses as proposed.

III. Conclusion

For the foregoing reasons, I find that Innotec’s Motion to Dismiss Visiontech’s counterclaim, ECF No. 14, should be GRANTED and the Defendants’ Motion to Amend the

Answer, Defenses, and Counterclaim, ECF No. 43, should be GRANTED IN PART and

DENIED IN PART. Specifically, the Defendants should be permitted to amend their answer and defenses, but Visiontech’s motion to amend its counterclaim should be denied as futile.

Notice to Parties

Notice is hereby given to the parties of the provisions of 28 U.S.C. § 636(b)(1)(C):

Within fourteen days after being served with a copy [of this Report and Recommendation], any party may serve and file written objections to such proposed findings and recommendations as provided by rules of court. A judge of the court shall make a de novo determination of those portions of the report or specified proposed findings or recommendations to which objection is made. A judge of the court may accept, reject, or modify, in whole or in part, the findings

55

or recommendations made by the magistrate judge. The judge may also receive further evidence or recommit the matter to the magistrate judge with instructions.

Failure to file timely written objections to these proposed findings and recommendations

within 14 days could waive appellate review. At the conclusion of the 14 day period, the Clerk is directed to transmit the record in this matter to the Honorable Glen E. Conrad, Senior United

States District Judge.

The Clerk shall send a copy of this Report and Recommendation to the parties.

ENTER: March 16, 2018

Joel C. Hoppe United States Magistrate Judge

56