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Innotec, LLC v. Visiontech Sales, Inc., 2018 U.S. Dist. 43833 (W.D. Va. March 16, 2018)

Innotec, LLC v. Visiontech Sales, Inc., 2018 U.S. Dist. LEXIS 84287, 2018 WL 2293969 (W.D. Va. May 18, 2018)

Innotec, LLC v. Visiontech Sales, Inc., 2018 U.S. Dist. LEXIS 121702 (W.D. Va. July 20, 2018)

Innotec, LLC v. Visiontech Sales, Inc., 2018 U.S. Dist. LEXIS 156793, 2018 WL 4387639 (W.D. Va. Sep. 14, 2018)

On February 14, 2013, Innotec, LLC (“Innotec”) and Visiontech Sales Group Hong Kong, Ltd. (“VSG HK”) entered into a Mutual Non-Disclosure Agreement (“NDA”), which primarily concerned each parties’ ability to protect its information shared with the other party to facilitate discussions regarding a business relationship, but also covered broader aspects of the parties’ potential business relationship. Innotec maintained relationships with factories and suppliers in China and agreed to supply Visiontech with goods and products obtained from these contacts. On March 28, 2013, Innotec Advance Energy Systems, LLC (“Innotec AES”) and Visiontech Sales, Inc. (“Visiontech”) entered into an Exclusivity Agreement (“EA”), which concerns the exclusive purchase and sale of one product, Vivoplay Charger Adapters. The EA contained an arbitration provision that provided, in pertinent part, that “[a]ny controversies or disputes arising out of or relating to [the EA] shall be resolved by binding arbitration in accordance with the then-current Commercial Arbitration Rules of the American Arbitration Association.” To obtain the product or goods from Innotec’s Chinese contacts, Visiontech had to go through Innotec or receive Innotec’s written permission to contract with the original manufacturer or supplier. Visiontech placed two orders under the EA in February 2016. The goods were shipped to and received by Visiontech, but were not paid for by Visiontech.

Visiontech alleged that an oral agreement in 2015 with Allen Ting, Innotec’s owner and founder, limited Innotec’s mark-up charge to 15 percent or less (“Pricing Agreement”). Visiontech alleged fraud in that Ting’s statements were false when made and that Visiontech was fraudulently overcharged $600,000.00. Negotiations occurred in 2016 to settle Visiontech’s open invoices with Innotec in the amount of $930,000.00. However, Innotec sued and Visiontech counterclaimed and sought to pierce the corporate veil and hold Ting personally liable.

After determining that Virginia law governed the parties’ claims, despite some aspects of Visiontech’s actual fraud claim relating to China, the Court held that the Pricing Agreement was barred by the statute of frauds, because it was a contract for the sale of goods for $500.00 or more, pursuant to Code § 8.2-201(1). The parties’ course of dealing could not save Visiontech’s claim, because it alleged that Innotec consistently violated the Pricing Agreement.

Regarding the June 2016 negotiations, the Court held that Visiontech could not enforce an alleged agreement reached, having been the party who first materially breached the agreement. Visiontech failed to make initial payments per the June Agreement, and the Court held that its assertion that Innotec was required to provide credit memos applies to a separate category of invoices than those covered by the June Agreement. 

Regarding Visiontech’s fraud claims, the court held that Visiontech did not satisfy Rule 9(b)’s pleading standard because it failed to allege the date or place where the alleged false representations occurred. These fraud claims also ran afoul of Virginia’s source of duty rule, which requires a tort claim to be founded upon a duty separate from any contract between the parties. The mark-up at the center of this claim is contractual in nature and does not support a tort claim by Visiontech. The Court also dismissed conversion and tortious interference claims by Visiontech.

In addition to the foregoing, the defendants filed a motion for partial summary judgment on the pleadings, partial summary judgment, or, in the alternative, to compel arbitration. The defendants argued that Innotec did not have standing to sue under the EA because it was not a party to the EA. Alternatively, the defendants argued that Innotec could not seek to enforce the contractual obligations arising from the EA without complying with the EA’s arbitration provision.

The Court rejected Innotec’s argument that the defendants’ assertion that Innotec lacks standing to sue under the EA barred the defendants from enforcing the EA’s arbitration provision against Innotec. Under the circumstances presented, the fact that Innotec is not a signatory to the EA did not preclude Visiontech from enforcing the arbitration clause against Innotec. A non-signatory is estopped from refusing to comply with an arbitration clause when it is seeking or receives a direct benefit from a contract containing an arbitration clause. Here Innotec’s claims for breach of contract arise from the EA containing the arbitration provision. 

Alone, delay and participation in litigation will not constitute default. As to the amount of delay, the defendants filed their motion to compel arbitration 13 months after Innotec filed its complaint. Although the delay is longer than in most cases, the defendants’ delay was significantly shorter than the length of delay in the following Fourth Circuit cases: (i) Forrester v. Penn Lyon Homes, Inc., 553 F.3d 340 (4th Cir. 2009); and (ii) Fraser v. Merrill Lynch Pierce, Fenner & Smith, Inc., 817 F.2d 250 (4th Cir. 1987). Moreover, the delay did not cause Innotec to suffer actual prejudice.

As to the second factor, a movant’s participation in litigation activity alone will not suffice, as the dispositive question is whether the party objecting to arbitration has suffered actual prejudice. Although the parties have engaged in extensive written discovery and litigated a number of discovery disputes, mere participation in discovery is not sufficient to indicate default. Furthermore, the requested discovery includes issues other than those related to the EA. Finally, the fact that the nonmoving party was required to respond to a dispositive motion (i.e. the dispositive motion previously filed by the defendants’ involving alleged oral settlement agreement) may factor into the prejudice analysis, the Fourth Circuit has counseled against adopting a bright-line rule that the mere filing of a dispositive motion is inherently prejudicial. Instead, the non-moving party must show that actual prejudice resulted therefrom. Here, Innotec offered no explanation as to how it was actually prejudiced by the potentially dispositive motion previously filed by the defendants.

For the above reasons, the Court concluded that the arbitration provision in the EA was enforceable against Innotec, that Innotec’s claims related to the EA fell within the scope of the EA’s arbitration clause, and the defendants had not waived the right to compel arbitration. Although the Court granted the defendants’ Motion to Compel arbitration as to Count I (breach of contract) on July 20, 2018, neither side addressed how the remaining claims should proceed. Therefore, the Court permitted the parties to submit additional briefing on that issue, which the parties submitted on August 3, 2018. On August 2, 2018, Innotec, LLC (“Innotec”) renewed its Motion for Sanctions for alleged discovery violations by the defendants. On August 7, 2018, the defendants moved to refer the entire case to a neutral magistrate judge for mediation.

In light of the parties’ disagreement and given the Court’s prior decision to compel arbitration in accordance with the mandatory language in the March 28, 2013 Exclusivity Agreement (“EA”) between Innotec Advance Energy Systems, LLC (“Innotec AES”) and Visiontech Sales, Inc. (“Visiontech”), the Court denied the defendants’ motion to refer the case to mediation.

The Court stayed the court proceedings for 120 days because it concluded that arbitration proceedings would likely resolve factual questions relevant to most, if not all, of the parties’ claims. In exercising such discretion to stay proceedings, a court must weigh competing interests and maintain an even balance. When arbitration is likely to settle questions of fact pertinent to nonarbitrable claims, consideration of judicial economy and avoidance of confusion and possible inconsistent results militates in favor of staying the entire action. In such cases, the stay can apply to parties who may play no role in the arbitration. The defendants maintain that all of Innotec’s claims are barred by what they refer to as the “June 14, 2016 Agreement between Innotec and Visiontech Sales, Inc. (“Visiontech”) because it supersedes the EA, constitutes a novation and settlement of amounts due under the EA and other existing invoices, and Innotec committed the first and prior breach of the June 14, 2016 Agreement. Thus, factual questions surrounding the June 14, 2016 Agreement are central to the resolution of the case and, therefore, militated in favor of staying further proceedings on the remaining claims.

The Court, however, did retain jurisdiction over Innotec’s pending motion for sanctions regarding alleged discovery violations by the defendants and the enforcement of the parties’ existing discovery obligations.

PLDR Law Mark Burgin 1 PLDR Law Scott Kowalski 1 Wolf Tom v2 Stout Kenneth 2016

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