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The Supreme Court of Virginia Addresses Commonwealth’s Use of the Defense of Sovereign Immunity When a Contract is at the Center of the Dispute

Wednesday, June 12th, 2024

Article co-written by Andrew Gay, Jeff Southard, and Summer Associate Carter Leverette

In early May, the Supreme Court of Virginia’s decision in Montalla, LLC v. Commonwealth, established some favorable legal precedent for contractors doing business with the Commonwealth of Virginia.[1] Specifically, the Court noted that the Doctrine of Sovereign Immunity cannot be used as a defense by the Commonwealth when a party brings a claim against it based upon a valid contract entered into by a duly authorized government agent.[2] Traditionally, the doctrine of sovereign immunity prevents parties from being able to sue federal or state governments when they are acting within the scope of their governmental authority unless the government consents to being sued. The Court’s finding in Montalla is critical as it clarifies that actions based upon a valid contract renders sovereign immunity inapplicable, making the government liable to suit even without their consent. Additionally, remedies usually barred by sovereign immunity are now available to parties bringing contract claims against the Commonwealth. In this case, the Court held that the plaintiff could seek an equitable remedy against the government (e.g., to seek equitable recission of a settlement agreement)[3] and a statutorily provided remedy even though the statute itself did not expressly waive sovereign immunity.[4]

Montalla, LLC acquired the rights to service contracts that a previous company (NXL) had entered into with the Virginia Department of Transportation (VDOT). During NXL’s dealing with VDOT, VDOT refused to reimburse NXL for overhead costs that the service contracts had initially obligated VDOT to reimburse due to conflicting interpretations of the Federal Acquisition Regulations (FAR). VDOT’s position was that VDOT did not have to reimburse NXL for overhead costs that were not eligible for federal reimbursement. NXL’s position was that although certain overhead costs may not have been eligible for federal reimbursement, the FAR did not forbid VDOT from still reimbursing NXL under the service contracts. Ultimately, NXL began to lose money on the service contracts and was forced into a position where NXL agreed to settle with VDOT for reimbursements far below the original agreed-upon percentage.

During the settlement negotiations, VDOT sought guidance from the Federal Highway Administration (FHWA) on how the FAR provisions in question should be interpreted. The FHWA sided with NXL’s interpretation of the FAR provisions. VDOT planned to adopt the FHWA and NXL’s position as VDOT’s official policy moving forward but intentionally chose to hold off on doing so until it entered a favorable VDOT settlement with NXL. However, VDOT was not forthcoming about this development with NXL and used NXL’s deteriorating financial situation to its advantage. Once NXL caught wind of the FHWA interpretation and VDOT’s policy maneuvering VDOT was unwilling to revisit settlement discussions.

Montalla filed a five count lawsuit against the Commonwealth of Virginia, VDOT, and the Comptroller of Virginia. Montalla sought to rescind the settlement agreement on two claims due to VDOT’s use of its self-induced economic leverage and less than candid dealings with NXL during the settlement negotiations. These first two counts became the focus of the litigation, and the Supreme Court of Virginia’s decision. The first count sought a declaratory judgment that the settlement agreement entered into by NXL was void due to economic duress. Montalla’s second count sought to vacate the settlement agreement pursuant to a Virginia statute, which provided that a court shall vacate any agreement “reached in a mediation … where … [t]he agreement was procured by fraud or duress, or is unconscionable[.]”[5] The third, fourth, and fifth counts were claims that VDOT breached its duty of good faith and fair dealing, material breach of the service contracts, and that VDOT’s actions constituted a regulatory taking without just compensation in violation of Article I, Section 11 of the Constitution of Virginia.

At the trial, the circuit court dismissed the entire complaint, with prejudice, on the grounds that sovereign immunity barred all five counts. Montalla appealed the trial court’s ruling to the Court of Appeals, but its luck didn’t change. The Court of Appeals affirmed the circuit court’s ruling, “concluding that Counts I-III of the complaint were barred by sovereign immunity and that Counts IV-V were barred by the entry of a settlement agreement entered into by the pertinent parties.”[6]

Montalla then appealed its claims to the Supreme Court of Virginia, which stated that the lower courts were correct in that the doctrine of sovereign immunity “is alive and well in Virginia.”[7] However, the court of appeals erred on the basis that “Virginia has ‘never extended th[e] defense [of sovereign immunity] to actions based upon valid contracts entered into by duly authorized agents of the government.’”[8] The Court then reasoned that “ the sole remaining question regarding the Commonwealth’s claim of sovereign immunity is whether Montalla’s claims are ‘based upon valid contracts[.]’”[9] Further reasoning that “it is the nature of the dispute and not the remedy sought that determines whether an action is based upon [a] contract.”[10] If the court must focus on a “duty or obligation” that the plaintiff claims has been breached, then “the nature of the dispute” is based upon a contract.[11]

Diving deeper, the Supreme Court held that the court of appeals erred in applying sovereign immunity to count one (equitable rescission of the settlement agreement) because it did not limit “its focus to the source of the duty allegedly breached, but rather, focused on the nature of the remedy sought.”[12] The Court discussed that while equitable remedies are usually unavailable against the Commonwealth, “equitable contract remedies” must be available against the Commonwealth to prevent it from avoiding “obligations it undertook in validly entered contracts.”[13] As to count two (recission of the settlement agreement pursuant to Va. Code § 8.01-581.26), the Supreme Court once again held that the court of appeals erred in applying sovereign immunity because it “[f]ocused on the remedy sought as opposed to the basis of the action itself[.]” The Court agreed with the appellate court’s reasoning that indeed, “a general statute that does not contain an express waiver of sovereign immunity does not waive the Commonwealth’s immunity.”[14] However, the Supreme Court reasoned that this principle is only applicable if sovereign immunity applies in the first place, which, in a contract dispute, it is not. The Court finally held that the viability of counts three, four, and five would now depend upon the success of counts one and two on remand, which were no longer barred by sovereign immunity.

In conclusion, contractors dealing with the Commonwealth should be aware that when they enter into valid contracts with the Commonwealth, they can hold it accountable for those contracts and seek lawful remedies that may otherwise be unavailable due to sovereign immunity.


[1] Montalla, LLC v. Commonwealth, No. 230364, 2024 Va. LEXIS 28 (2024).
[2] Id. at 15.
[3] Id. at 19.
[4] Id. at 21­­­­­­–22.
[5] Id. at 21 (quoting VA. Code § 8.01-581.26).
[6] Id. at 1.
[7] Id. at 13 (quoting Fines v. Rappahannock Area Cmty. Servs. Bd., 301 Va. 305, 313 (2022)).
[8] Id. at 15 (quoting Wiecking v. Allied Medical Supply Corp., 239 Va. 548, 551 (1990)) (alterations in original). Still, the Court noted that “[t]his is not to say that a party seeking to raise a contractual claim against the Commonwealth or one of its agencies simply may file suit in a circuit court as it would against any other litigant,” a party must follow the procedures established in Va. Code § 8.01-192. Id.
[9] Id. at 17.
[10] Id. at 18.
[11] Id.
[12] Id.
[13] Id. at 19.
[14] Id. at 21–22.

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Confessions of an Oral Argument Junkie: Lessons Learned from Listening to Recordings of Appellate Arguments

Monday, April 8th, 2024

I admit it. I am an appellate argument junkie. This has been a long-standing problem, but one that took on new dimensions when the Supreme Court of Virginia began releasing audio recordings of oral arguments about ten years ago. I then began listening to the Court’s arguments in earnest. Now, of course, the availability of audio recordings of appellate arguments is ubiquitous. This means that anyone can hear an appellate argument without their leaving the house, car, or office. I don’t know about anyone else, but I’m hooked.

So is this a good habit or a bad one? Because I am an appellate lawyer, I think I can claim this habit as a good one. Supreme Court of Virginia recordings provide a look at the Court as a whole, how each of the seven justices approach the decision-making process, and how the justices interact with each other. Perhaps the same is true of appellate courts that sit in panels of three for argument, but a study of those courts as a whole are limited to the infrequent times when those courts sit en banc.

My habitual listening to appellate arguments for a decade has reinforced some suspicions I have had about the Supreme Court of Virginia, and about appellate arguments in general. And, they provide some valuable insight for appellate lawyers

First, the justices are often talking to each other when they ask questions.

This is something that is hard to follow during the heat of oral argument. After listening to the argument after the fact, though, it is clear that many questions are not really for the advocate, but are directed towards another justice, or the entire Court. The justices are really discussing the case with each other and trying to convince their colleagues on the bench of their position. This provides a view into what an individual justice is thinking or how she might approach or decide the case. 

So does this mean that the advocate’s answers don’t matter? Are we just pawns on the Court’s chess board? Not at all. Our answers to those questions can influence the judicial discussion that is playing out during the argument. And, equally important, those answers could affect the outcome of the case by showing why our position is right.

Second, some questions are not what they sounded like when asked. 

During the argument, it can be difficult to really listen to the Court’s questions when you are focused on delivering a prepared argument and fielding a barrage of questions. Things become clearer with the luxury of hearing the argument again without the stress of being in the middle of it. In a post-hoc review, I have noticed that some questions were not exactly what I thought they were at the time; rather, the Court was asking something slightly different.

Good listening at oral argument is hard. It requires us to focus on the Court first, and our prepared argument second. Because the Court is the decision-maker, though, we must understand its concerns and questions so we can respond meaningfully. If we haven’t answered the Court’s questions, then we have not done our jobs as advocates. So, be flexible during oral argument. Weave the important points of the argument into your answers, but make sure you are addressing the issues the Court wants to discuss. Responding effectively and fully to the Court’s questions is a necessary step on the path to victory. 

Third, the Court genuinely wants to understand the argument and its ramifications.

This is why the justices ask hypothetical questions. They want to test the boundaries and effect of a ruling in your favor in future cases involving different facts. And this is why a justice may press the advocate to define the scope of the ruling that is sought and to explain the effect of that ruling. Concisely explaining the scope and limiting principles of your position will greatly assist the Court in understanding the effect of adopting your position and becoming comfortable with it. 

Embrace the opportunity to help the Court do its job well. Before you arrive at the courthouse steps, know the rule you are asking the Court to adopt, the limiting principles of that rule, and how it would apply in future cases involving different facts. 

Sound Recording

Finally, audio recordings only tell you half the story. 

Listening to an audio recording of an argument I heard – or delivered – is a different experience than being there live. The visual, relational, and intangible aspects of a live argument cannot be captured in a recording. Many essential ingredients to an effective oral argument, such as genuineness, credibility, enthusiasm, engagement, and rapport with the Court are not fully experienced in an audio recording. Therefore, being there in person is the only way to fully appreciate an argument, although that won’t stop me from listening to recordings. 

Because an effective argument needs the intangibles that are only possible with live engagement with the Court, you should not agree to argue your case by phone unless you have to. A live appearance is better. 

You may access audio recordings of the Supreme Court of Virginia’s merits arguments since January 7, 2014, at http://courts.state.va.us/courts/scv/oral_arguments/home.html. Audio recordings of the Court of Appeals of Virginia’s arguments since May 20, 2014, are available at Court of Appeals Oral Arguments (vacourts.gov). To listen to audio recordings for arguments before the United States Court of Appeals for the Fourth Circuit since May 2011, click on this link: Listen to Oral Arguments (uscourts.gov)

Contact us today if you have any questions.

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Criminal Discovery

Tuesday, March 5th, 2024

Having now had the privilege (or pain) of practicing criminal law in three different states, I can safely say that not all criminal discovery rules and practices are even remotely equal.

In law school, we all read Brady and Giglio and know well that a criminal defendant is entitled to certain information, namely exculpatory and impeachment evidence. However, I am sure more than one state criminal practitioner has had a state court judge or prosecuting attorney look at them as if they are speaking Greek whenever either Brady or Giglio is mentioned, and unfortunately, more than once in this last year, I have seen Virginia prosecutors hesitate or even refuse to turn over exculpatory or impeachment evidence without direct court involvement.

Virginia’s Discovery History

Virginia’s discovery rules are historically limited and have prevented justice for citizens of the Commonwealth, and discovery reform has been a contentious topic for Virginia. Access to discovery is essential to ensure defendants receive their right to due process. By 2021, the Virginia Supreme Court expanded criminal defendant’s access to police reports, witness statements, and witness lists. Despite being years late on this reform and still behind many states on the expanse of criminal law discovery rules, it was a welcome change in Virginia.

Virginia amended Rule 3A:11, the protocol for producing discovery in criminal matters for both the defense and the Commonwealth. The Supreme Court of Virginia states the “constitutional and statutory duties of the Commonwealth’s attorney to provide exculpatory and/or impeachment evidence to an accused supersede any limitation or restriction on discovery provided pursuant to this Rule.” While Rule 3A:11 mirrors some of the ideals of Brady and Giglio, such as the requirement to disclose exculpatory evidence to the criminal defense attorneys and the extension to include impeachment material for any prosecution witness, it can be read to allow the Commonwealth’s Attorney too much discretion, which was the hallmark of the prior discovery rules.

Often criminal defense counsel is left arguing constitutional case law in a motion to compel the production of information that clearly falls within the definitions of exculpatory or impeachment material in Brady and Giglio jurisprudence, while the prosecutor remains hyper-focused on Rule 3A:11. At other times, criminal defense counsel face a prosecutor arguing they do not have to turn over any information unless it is “exculpatory.” “Proving” exculpatory or impeachment material exists in records the defendant has never seen is nearly impossible, and I have encountered many prosecutors who insist such a threshold showing is necessary to require the government to disclose their records.

Virginia Discovery Compared to Other States

In the federal system and for states like Colorado and Maryland (where I have also practiced), criminal discovery rules are much more expansive, and the failure to provide discovery can result in sanctions or even the outright dismissal of a case. In Virginia, however, there is little recourse for criminal defendants who find themselves on the wrong side of a prosecutor with a very narrow view of their discovery obligations.

Our neighbor Maryland’s hearty criminal discovery rules not only require the prosecuting attorney to produce more, but Maryland’s rules require the prosecutor to affirmatively provide discovery without a request from the defense. “Without the necessity of request, the State’s Attorney shall provide to the defense: statements, criminal records, state’s witnesses, prior conduct, exculpatory information, impeachment information, including any relationship the witness has with the prosecutor, prior convictions, medical or psychiatric conditions of the witness, etc.” (paraphrasing Md. Crim. Rule 4-263). In Virginia, a criminal defendant must move the court to order the Commonwealth to produce discovery, and even then, Rule 3A:11 does not even require the Commonwealth to turn over police reports or witness statements. The Commonwealth can satisfy its burden by allowing “inspection and review,” leaving the defendant’s right to access discovery entirely dependent on the responsiveness and personal schedule of the individual prosecutor assigned to the case. In my experience, some Virginia prosecutors simply refuse to return the calls and emails of defense counsel, making such scheduling nearly impossible.  

Thousands of miles away, Colorado adopted criminal procedure rules that more closely mirror the federal rules. On more than one occasion, I watched the Court strongly chastise a District Attorney (DA) if there was even a hint of a discovery violation, and on the first day of one of my trials, a DA dismissed an entire case when we all discovered that law enforcement failed to provide dash camera footage to the DA. Colorado Rule of Criminal Procedure 16, like Maryland’s Rule 4-263, is more expansive than Virginia’s Rule 3A:11. It requires that the prosecuting attorney ensures a flow of information between investigative personnel and disclose any information and material relevant to the charges against the accused, and it requires shorter timeframes for when discovery must be turned over to the defense.

While certainly these rules are not followed perfectly in every county in Maryland and Colorado by every practitioner, the mere fact that the rules recognize these disclosure obligations to a criminal defendant puts those defendants in a very different place compared to those in Virginia.

Conclusion

While updates to Rule 3A:11 improved on its predecessor and attempted to promote justice, it fell short of doing just that. Virginia needs to either adopt by rule or in practice more explicit discovery policies and disclosure obligations, which would require the exchange of all evidence possessed by the government to the defense, an obligation for prosecutors to seek out that information from law enforcement agencies, and an obligation to produce copies to the defense. This change would remove the burden from the prosecutor to decide which evidence is exculpatory or has impeachment value, a heavy burden that they are in a poor position to determine without insight into trial strategy from the defense.  Fair access to all evidence is crucial to a fair trial in the case and is the bare minimum of what is needed to promote justice in Virginia’s criminal system.

The criminal justice system should be about due process, justice, and even public safety.  

Liberal pre-trial and pre-plea discovery also does not impose undue logistical burdens on prosecutors. Trial by surprise has never been a tenet of the American justice system. If a prosecutor is confident about their case, there should be no issue with handing over all discovery, whether that is in the pre-indictment or post-indictment phase. Failure to provide discovery and sometimes a straight refusal to provide discovery does not express the values enshrined in Giglio or Brady. Without full, open discovery, more criminal defendants, including white-collar investigation defendants, will feel unjustly targeted, railroaded by the process, and victimized by their prosecution. Nothing poses a greater risk to the public trust in our justice system.

If you are in need of a white collar law firm and experienced white collar defense attorneys, please don’t hesitate to Contact Us at Gentry Locke today! Even for clients or individuals not yet suspected or accused of misconduct, we provide compliance advice and proactively identify issues for corporate and individual clients to avoid violating the law, especially newly enacted legislation or regulations.

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Appellate Mediation Comes to Virginia

Wednesday, February 14th, 2024

Published with the permission of the Virginia State Bar. Originally published in the Virginia Lawyer, Vol. 67/No. 3.

The Supreme Court of Virginia has approved a pilot program for limited appellate mediation in the Court of Appeals of Virginia and Supreme Court of Virginia beginning January 1, 2019. The Court’s announcement recognizes the importance of expanding the availability of alternative dispute resolution to all levels of Virginia’s court system.

The pilot program will run for two years. It is designed to support mediation in Virginia’s appellate courts so litigants may make informed decisions about resolution of their disputes and fashion creative solutions, even after entry of a final or appealable order.

Appellate mediation will be available in certain civil cases where both parties are represented by counsel. Appeals where one or both parties are pro se are not eligible for appellate mediation through the pilot program. In the Court of Appeals, mediation will be available in equitable distribution and/or related attorney fee disputes. In the Supreme Court, mediation will be available only where a petition for appeal has been granted; motions to vacate criminal convictions and petitions for actual innocence are not be eligible for appellate mediation.

How appellate mediation will work

Appellate mediation is entirely voluntary. In the Supreme Court of Virginia, the parties will be informed of the availability of appellate mediation when a writ is granted. At that time, the clerk of the Supreme Court will send a letter to the parties describing mediation and explaining that if all parties agree to mediation and notify the clerk in writing of their agreement within 14 days, any further appellate deadlines (except the statutorily-required bond deadline) will be stayed for a period of 30 days to allow the parties an opportunity to mediate. The clerk’s letter will attach a list of certified appellate mediators but will explain that the parties may choose any mediator, whether or not the mediator is on the list.

In the Court of Appeals, appellate mediation is not available until the Court receives the record in a domestic relations case. At that time, the clerk of the Court of Appeals will send the parties a letter similar to that sent by the Supreme Court clerk. As in the Supreme Court, if the parties agree to mediate, there will be an automatic stay of the proceedings for 30 days to provide an opportunity to mediate. If the Court of Appeals issues a stay, the clerk will notify the parties of the deadline for filing the next document.

Appellate mediation will promote access to justice

Chief Justice Donald W. Lemons initiated the study of mediation in the appellate courts last year when he asked the Joint Alternative Dispute Resolution Committee to appoint a group to consider the issue. The Joint ADR Committee appointed the Special Committee to Study Appellate Mediation, which includes members of the appellate bench, appellate litigators from the Virginia Bar Association and VSB, and members of the Joint ADR Committee.

Following months of study, the special committee issued a report in June 2018, recommending that the Supreme Court and Court of Appeals undertake the pilot program. According to the special committee’s report, appellate mediation is “a vehicle” to provide “viable appellate mediation for economically disadvantaged litigants” in an effort to promote access to justice at the appellate level of the commonwealth’s court system.

Training and certification of appellate mediators

The special committee also recommended that the Judicial Council of Virginia approve specific training and certification for appellate mediators during the pilot projects. To date, there is no special training in Virginia for mediators regarding the unique aspects of appeals in Virginia’s courts. The special committee hopes to close this gap by offering a new two-hour course focusing exclusively on appellate litigation in Virginia. This course will be required for individuals (except those who have served on the Supreme Court and Court of Appeals) who seek to be certified as appellate mediators.

To become a certified appellate mediator in Virginia, one must be certified as a mediator in Virginia or complete the 20-hour basic mediation course. The special committee has also recommended additional minimum qualifications for certification of appellate mediators in each appellate court to ensure that mediators have the skills necessary to effectively mediate disputes at the appellate level.

The Joint ADR Committee is holding a training program for interested appellate mediators on November 14-16, 2018, in Richmond. For information about the training course, go to the events section of the VSB website. The report of the special committee can be found at: https://cdn.ymaws.com/www.vba.org/resource/resmgr/adr/report-special_cmte_to_study.pdf.

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Supreme Court of Virginia’s Vlaming Decision is a Legal Earthquake with Major Implications for Virginia Businesses, Organizations, and Government Entities

Monday, February 12th, 2024

I. Introduction and Executive Summary

On December 14, 2023, a legal earthquake hit Virginia when the Supreme Court of Virginia issued its decision in Vlaming v. West Point School Board, 895 S.E.2d 705 (Va. 2023).  But, to the extent there is a “legal” Richter scale, that earthquake has yet to register.  Headlines covering the decision noted the result dealing with a hot-button social issue: a teacher fired for refusing to use a student’s preferred pronouns on religious grounds could continue to pursue his case against the school board for alleged violations of constitutionally protected religious rights.  But that context has left under-appreciated the dramatic change that occurred to Virginia law, and the potential implications.

The upshot is that Virginia is likely now the most protective state for religious liberty and expression, protecting it more strongly than any other constitutional right.  To do so, Virginia will now apply a “super” strict scrutiny to any burdens on religious practice, in what will be a novel framework.

Under this heightened test, the state cannot justify burdening religious expression or practices based on any legitimate or even compelling state interest.  Virginia state and local governments may burden religious expression or practice (even if not the aim of the law or policy) only if it is for the purpose of public safety.  And, that burdening law or policy must be narrowly tailored to advance that narrow public-safety objective.  Otherwise, a religious accommodation or exception must be made, even for generally applicable laws.

This article is not aimed at evaluating the merits of the Vlaming decision.  Instead, we address what its implications may be for Virginia law—and Virginia citizens, businesses, and organizations—going forward.  Among those implications, described in more detail below:

1.) The strong protection of religious liberty in Vlaming may influence how the Virginia Human Rights Act’s religious discrimination protections are interpreted, creating even more demands on employers than exist under federal law. It is not hard to see—as the Vlaming case itself demonstrates—how an employer’s legal requirement to prevent sex or gender-based discrimination could conflict with its obligations to other employees to accommodate their religious beliefs regarding, for instance, use of preferred pronouns.

2.) More laws and policies will be subject to challenge or a defense based on religious objection than ever before, and with uncertain outcomes. The Vlaming decision throws into question whether Virginia may soon have to recognize plural marriage, excuse certain religiously based practices from criminal prosecution, or how zoning and environmental laws may apply to businesses or organizations claiming a religious objection or burden.  If the standard is as strict as Vlaming indicates, governments may have a hard time defending against such religiously based claims or defenses.

3.) By departing from federal precedent on religious liberty protections and embracing a more protective interpretation under the Virginia Constitution, Virginia may find itself in intractable conflict with federal law. There could no doubt be tensions (as the Vlaming case demonstrates) between protecting religious practices and protecting against other types of discrimination, including based on sex, sexual orientation, or gender identity.  The Vlaming decision offers few options for entities trying to navigate those tensions that may run headlong into what, for instance, the U.S. Department of Education may contend is required under Title IX to protect LGBTQ students from discrimination.

Because of these significant legal implications, among others, all must consider how the Vlaming decision will impact them.

For citizens, businesses, and other organizations, Vlaming may provide additional protections that should not be ignored.  Today, you have a much stronger constitutional right to religious liberty than you had on December 13, 2023—so use it in appropriate cases.

For employers, get ready for these religious-discrimination issues to be front and center in your HR compliance discussions and decisions.

For state and local governments, be prepared to defend even long-standing laws, ordinances, permitting decisions, etc. against challenges or defenses based on religious beliefs and practices.

The change in Virginia law signaled by Vlaming opens an entirely new chapter of rights-based litigation in Virginia, with almost all of it yet to be written.  The decision is important, and it’s here to stay for the foreseeable future—and, given the recent trends at the U.S. Supreme Court, may presage a major change coming in U.S. Constitutional law before too long.

II. The Decision Itself

First, what did the Court actually decide in Vlaming?

A. The Alleged Facts

The School Board moved to dismiss Mr. Vlaming’s lawsuit.  This is important because the trial court decided the case without hearing any evidence.  Under well-settled legal standards, the Supreme Court of Virginia was required to assume that the factual allegations in Mr. Vlaming’s Complaint were true.

According to his complaint, Peter Vlaming was a public high school French teacher, employed by the West Point School Board.  During the end of the 2017-2018 school year, Mr. Vlaming became aware that a student he had previously taught and who was biologically female, intended to transition to a male identity and wished to be referred to using male pronouns.  Mr. Vlaming alleged that, for him, “this request asked him to violate his conscience.  He holds religious and philosophical convictions that reject the idea that ‘gender identity, rather than biological reality, fundamentally shapes and defines who we truly are as humans’ and instead accept as verity that ‘sex is fixed in each person, and that it cannot be changed, regardless of our feelings or desires.’”  Vlaming v. West Point School Board, No. 211061, slip. op. at 2-3 (Va. Dec. 14, 2023) (quoting Mr. Vlaming’s complaint) (hereinafter, the “Decision”).[1]  Mr. Vlaming further alleged that his conscience and religious practice “‘prohibits him from intentionally lying, and he sincerely believes that referring to a female as a male by using an objectively male pronoun is telling a lie.”’  Id. at 3 (quoting Mr. Vlaming’s complaint).

Mr. Vlaming alleged that the student, referred to as “John Doe” in the litigation, enrolled in Mr. Vlaming’s French II class for the 2018-2019 schoolyear.  To avoid issues, Mr. Vlaming asked all the students to pick new French-language names to be used in the class.  He then would use Doe’s chosen French name, and limit use of any pronouns in class discussions.  This seemed to Mr. Vlaming to accommodate Doe while maintaining his religious belief and practice.  Id. at 2-3.

Mr. Vlaming alleged that the student—Doe—seemed comfortable with his approach, but that when he explained his reasons (his religious beliefs) to Doe’s parents, they complained to school administration.  This led to escalating conflict with the school’s principal, who insisted that Mr. Vlaming use the student’s preferred pronouns or face discipline.

Mr. Vlaming alleges that during one class, when it appeared that Doe was at risk of injury during a class exercise, Mr. Vlaming inadvertently referred to Doe as “her” rather than “him,” for which he later apologized.  Doe withdrew from the class that day.  Id. at 5.  Mr. Vlaming reported the incident to a school administrator.  Mr. Vlaming was placed on administrative leave pending an official review, and ultimately—after refusing to use Doe’s preferred masculine pronoun due to his religious beliefs—Doe was fired by the West Point School Board for violating its policies against discrimination and harassment based on gender identity.  Id. at 6.

Mr. Vlaming filed suit asserting free-exercise, free-speech, due-process, and breach-of-contract claims exclusively under Virginia law, including the Virginia Constitution.  The trial court dismissed the case on purely legal grounds, finding that Mr. Vlaming had not stated valid legal claims under Virginia law.  Mr. Vlaming appealed.

B. The Majority Opinion 

The heart of the Vlaming decision is the Court’s interpretation of Article I, § 16 of the Virginia Constitution, which is Virginia’s enshrinement of religious liberty in its constitution.  The Decision has three opinions—the majority opinion (Justice Kelsey, joined by Justices McCullough, Chafin, and Russell); a concurring opinion (Justice Powell, joined by Chief Justice Goodwyn); and a dissenting and concurring opinion (Justice Mann, joined in part by Justice Powell and Chief Justice Goodwyn).  But all of the Justices agreed that Mr. Vlaming had validly pled a case for violation of Article I, § 16—based on his allegations—but would use very different tests for evaluating the case on the merits.

Free Exercise of Religion Claim

The Court begins by plainly declaring that the Decision interprets the scope of the Virginia Constitution, not the First Amendment of the U.S. Constitution.  This furthers the development of Virginia’s own constitutional law which is informed, but not necessarily coterminous with the U.S. Constitution.  Decision at 8-9.

Indeed, the text of Article I, § 16 is markedly different from the much shorter Free Exercise Clause of the First Amendment.[2]  Because of this difference, the Majority held that federal authorities on the Free Exercise Clause could “inform but do not necessarily govern the construction” of Article I, § 16.  Decision at 11.

Indeed, the Decision criticized sharply the controlling U.S. Supreme Court precedent on the scope of the Free Exercise Clause, Employment Division v. Smith, 494 U.S. 872, 878-79 (1990).  See Decision at 11.  Understanding that case helps explain how Vlaming departs from it.[3]

In Smith, Justice Scalia wrote for a 5-4 majority holding that the Free Exercise Clause of the First Amendment “does not relieve an individual of the obligation to comply with a valid and neutral law of general applicability on the ground that this law proscribes (or prescribes) conduct that his religion prescribes (or proscribes).”  Id. at 879 (quotation omitted).  There, the petitioners had been denied unemployment benefits because they were fired for violating Oregon’s criminal prohibition against use of peyote.  The petitioners claimed—and it was undisputed—that their religious beliefs required sacramental use of peyote, and so claimed that the Free Exercise Clause prohibited Oregon from penalizing them for abiding by their religious beliefs.  Id. at 874-75.  The Court found that strict scrutiny did not apply in the case because the criminal law was religiously neutral and of general applicability.  Id. at 878-80.

Thus, if Virginia law applied Smith, Mr. Vlaming likely would have no legal cause of action, as the West Point School Board was enforcing a neutral and generally applicable policy for all teachers.  But the Decision explicitly departs from Smith, stating that “[i]n our opinion, the federal Smith doctrine is not and never has been the law in Virginia, and its shelf life in the federal courts remains uncertain.”  Decision at 13 (citing recent federal precedent questioning but abiding by Smith) (emphasis added).

The Decision then applies a doctrinally originalist approach to interpret Article I, § 16, looking first to the text, historical developments, and the original intent of the framers of the 1776 Virginia Constitution.  Decision at 13-20.  Based on that, the Court concludes that Article I, § 16 explicitly does contemplate religious exemption from generally applicable laws, and that such exemption applies unless there is some heightened societal interest.  The question, then, is what types of state interests can justify the burden on religious freedom.

Filling in some gaps based on Jefferson’s Virginia Statute for Religious Freedom and other founding-father writings on the subject, the Court embraces a broadly protective view of religious liberty under the Virginia Constitution.  The Court concludes that, in the Vlaming case, the question for his free exercise claim is:

[W]hether Vlaming’s sincerely held religious beliefs caused him to commit overt acts that invariably posed some substantial threat to public safety, peace or order . . . and if so, whether the government’s compelling state interest in protecting the public from that threat, when examined under the rigors of strict scrutiny, could be satisfied by less restrictive means.

Decision at 23 (quotations omitted).

The Court declined to go into detail to extrapolate what this limitation means in terms of other hypothetical applications.  But the Court did make clear that the limitation of “public safety, peace or order” had teeth, creating an even stricter test from what typically applies in applying judicial scrutiny.  See Decision at 20.

Applying that rule, the Court concluded that Mr. Vlaming had alleged a valid claim, and therefore the court would proceed to a trial on the merits – to apply the new test under Article I, § 16.

Free Speech Claims

The Decision also broke notable ground in applying Virginia’s free-speech protections, under Article 1, § 12 of the Virginia Constitution.[4]  The Court concluded that Mr. Vlaming had alleged a valid compelled-speech claim.  He alleged that the use of preferred pronouns was not related to his curricular topic, French, and argued that it was simply a “compelled-speech mandate seeking to use him as an instrument for fostering public adherence to an ideological point of view he finds unacceptable.”  Decision at 55 (quotation omitted).

The Court found that speech regarding gender identity received the highest protection under Article I, § 12 because it involved ideological disagreement about which the state cannot compel speech without ample justification.  Id. at 56.  It distinguished “official-duty” or “government-speech” exceptions (which allow the government to punish employees for unapproved speech) because, here, it involved forcing Mr. Vlaming to express ideological views with which he disagreed.  Id. at 58-60.

C. The Concurring and Dissenting Opinions

As noted above, both the concurring and dissenting opinions in Vlaming would have held that Mr. Vlaming pled a valid free-exercise claim under the Virginia Constitution.

The concurrence noted that it would apply a traditional strict scrutiny test—such that the state could justify a burden on religious practice if it could show any “compelling state interest.”  Decision at 74.  The dissenting opinion took a very different view that would have applied a more Smith-like approach to free exercise claims under the Virginia Constitution, but thought the allegations were sufficient to raise issues as to whether the policies were neutral on religion.  Id. at 80.

The opinions are worthy of review; however, this article focuses on the practical impact of the majority decision.

III. Legal Implications

So what does this all mean?

Vlaming Decision is Not Just for Government Lawyers – It Will Impact Private Organizations and Businesses

Constitutional rights are generally enforceable against the Government, not private actors.  But this decision will affect private actors as well.

First, private businesses or organizations may well consider whether the new protections under Vlaming allow them to be exempt from certain disfavored requirements.  It appears clear that, while religious beliefs are personal, organizations also are protected and can have religious beliefs or practices.  See, e.g. Burwell v. Hobby Lobby Stores, Inc., 573 U.S. 682 (2014) (holding that corporations can exercise religion).  Thus, and as suggested further below, there could be opportunities to use the expansion of religious liberty protections in Virginia to the benefit of multiple private persons (from individuals to corporations).

Second, it is likely Vlaming will influence interpretation of the Virginia Human Rights Act (VHRA) and how employers must accommodate religious beliefs and practice.

Under the VHRA, it is unlawful for a business to discriminate, either in employment or public accommodation, based on an individual’s “race, color, religion, sex, sexual orientation, gender identity, marital status, pregnancy, childbirth or related medical conditions including lactation, age, military status, disability, or national origin.”  Va. Code § 2.2-3905(B)(1) (banning employment discrimination); see also 2.2-3904(B) (similar protected classes for public accommodation).

As you may recall, Virginia enacted the Virginia Values Act in July 2020.  This law provided new remedies and claims that did not previously exist under Virginia law.[5]  Because these laws are relatively new, the reality is that there is little settled law or jurisprudence in the Virginia state courts interpreting the VHRA.

Vlaming’s expansive view of religious practice—including performance of work duties according to the dictates of religious conscience—begs whether that same understanding applies in the VHRA context?  While the history and text of Article I, § 16 and the VHRA are quite different, there will no doubt be litigation to define whether there is a practical difference in discrimination based on religion (under VHRA) and burdening religious practice (under the Virginia Constitution).

If the same interpretation applies, private businesses may find themselves between a rock and a hard place in complying with state and federal anti-discrimination laws.  If, for instance, a conflict arises between an employee’s desire to be referred to by certain pronouns and another employee’s refusal to do so based on sincerely held religious beliefs, what is an employer to do?  If some informal resolution is not possible, the employer could conceivably face liability under the VHRA no matter what it does.

Moreover, the broad nature of the religious-rights protection provided under the Virginia Constitution may influence how the VHRA is applied.  Bear in mind that in the summer of 2023, the U.S. Supreme Court modified the test regarding when an employer could deny an employee’s request for a reasonable religious accommodation, making it more difficult for an employer to deny such a request.  See Groff v. DeJoy, 143 S. Ct. 2279 (2023) (to deny request for religious accommodation under Title VII, employer must show burden of granting request would result in “substantial increased costs” in relation to the “conduct of its particular business.”)[6]  But it remains the case that, under federal law, businesses do not have an inflexible obligation to accommodate religiously based practices.  Given Vlaming’s strong requirement that governments yield to religious practices unless there is a narrow, compelling interest, Virginia courts may be persuaded that, under the VHRA, employers also must provide more robust protection for religiously based practices and beliefs.

More Laws and Government Actions are Subject to Religious Objection Now than Before

Immediate implications also come on the operation of general state and local laws, regulations, and ordinances.  Under Vlaming , it is now a potential defense to any enforcement of those laws that they burden religious belief and practice.  That can mean any criminal law, any civil regulation, or even a zoning ordinance—really any government action taken.

Here are just a few hypotheticals for consideration:

  • If, like in Smith, a defendant claims that use of heroin is necessitated by religious practice, can the defendant be legally prosecuted in Virginia or denied certain benefits due to violating the criminal law?
  • If a person’s religious faith requires plural marriage, must Virginia law recognize the marriages?
  • If a person’s religion requires ritualistic sacrifice of animals, can that be prosecuted as animal cruelty?
  • If the state is considering a major infrastructure project and the areas affected by it are worshiped by some as sacred, can the state proceed? Does it matter if public safety is the justification for the project?  Or if the state is approving a private project versus building it, itself?
  • If a religiously affiliated school wants to use property in a non-conforming use under the zoning code, can the locality deny the special use permit on grounds other than public safety?
  • If a person’s religion forbids support of government social welfare programs, can they be forced to pay Virginia taxes in support of them?

Under Smith, those and other hypotheticals were settled, and the answer was clear: religious belief or practice would not impact how religiously neutral, general laws apply.  Under Vlaming, the door is swung open in Virginia, and these and similar issues may well need to be decided under the new “super” strict scrutiny test.

Vlaming’s “Super” Strict Scrutiny will be Difficult to Satisfy

One facet of Vlaming that garnered strong disagreement from the concurring and dissenting justices is its narrowing of the types of justifications that can pass judicial scrutiny.  The state must show both that its interest is in protecting against some threat to public safety and that it is narrowly tailored to meet that objective.  By erecting a “super” strict scrutiny standard, Vlaming makes it difficult for the government to overcome a valid religious objection by a particular individual or organization.

First, what is necessary for public safety, and how is that to be measured?  Are health and environmental laws necessary for public safety?  Taxation laws?  Educational laws?  Zoning ordinances?  Noise ordinances?  Consumer protection laws?  Anti-discrimination laws?  Property laws?  Domestic relations laws?

Second, how are the courts to assess whether something is narrowly tailored when the object is “public safety”?  For instance, is public safety implicated by exempting a handful of adherents to use sacramental-heroin?  What evidence would the government need to show that its broad, general prohibition could not allow for some exception without impacting public safety?

Thus, cases where there are religious objections will no doubt put state and local government attorneys to the test.  This, in itself, may force governments to think long and hard before picking an enforcement fight with someone claiming a burden on religious belief or practice.

Virginia May Find Itself in Intractable Conflict with Federal Law

By extending the right to free exercise of religion under the Virginia Constitution beyond the First Amendment’s bounds, the Vlaming decision may also create imbalance with federal laws.

For instance, much funding for Virginia schools, transportation, other infrastructure, and health care comes from the federal government.  The vast majority of that funding is not through federally-mandated laws, in which federal law would preempt Virginia law, but through Congress’s general spending power, which states abide by consensually in order to obtain the federal largesse.  The underlying facts of Vlaming itself provide a not unlikely example of how an intractable conflict might arise.

Suppose the federal Department of Education determines that the School Board in Vlaming needs to maintain its policy in order to comply with Title IX, which requires certain non-discrimination standards for the receipt of federal funding.  But the School Board cannot, under Vlaming, agree to enforce the policy without violating Mr. Vlaming’s rights under the Virginia Constitution.  And, moreover, because mere compliance with federal law is not a valid basis under Vlaming to burden religious practice in Virginia, the School Board would be unable to comply with federal law.  And that could jeopardize federal funding.

Other examples could also arise, particularly if the federal government is willing to push states to adhere to its standards—under the Medicaid program, in building federally-funded transportation projects, and so on.

The potential conflict with federal law could also impact not just government entities, but also private employers.  As another example, it is now settled law under Title VII that discrimination “because of sex” encompasses claims of discrimination based on a person’s “sexual orientation or gender identity.”  Bostock v. Clayton Cnty., 140 S. Ct. 1731 (2020).  This past fall, the Equal Employment Opportunity Commission (“EEOC”) published proposed Enforcement Guidance on Harassment in the Workplace.  In its guidance, the EEOC cites cases for the proposition that the alleged failure by a supervisor to use an employee’s preferred name or pronoun is a form of sexual harassment that could subject the employer to liability under Title VII.[7]  What is an employer in Virginia to do when a supervisor refuses to refer to an employee by a preferred pronoun on religious grounds, and the employee contends this constitutes sexual harassment under Title VII or the VHRA?  And what if, under Virginia law and as informed by Vlaming, the employer has different obligations with respect to religious accommodation?

Religious Beliefs and Practices will Need to be Litigated

A further implication of Vlaming will be the need for Virginia courts to adjudicate whether a litigant sincerely holds the allegedly burdened religious beliefs and practices—and even whether they are religious beliefs and practices in the first place.

While all can hope that only the most sincerely-held beliefs will form the basis of any legal defense based on the free exercise of religion, it is not hard to imagine that creative litigants may attempt to fashion any number of things into a religious practice dictated by conscience.  Those issues would likely be incapable of resolution except through litigation.

The U.S. Supreme Court, in the Hobby Lobby decision, reiterated that “it is not for us to say that their religious beliefs are mistaken or insubstantial.  Instead, our ‘narrow function . . . in this context is to determine’” whether the belief “reflects ‘an honest conviction”’ held.  Hobby Lobby, 573 U.S. at 725 (quoting Thomas v. Review Bd. of Ind. Employment Security Div., 450 U.S. 707, 716 (1981)).  But litigating that question, because of the prevailing Free-Exercise standard under Smith, was rarely necessary because many cases could be handled at the pleading stage.  But under Vlaming, the credibility of the religious claim by the litigant will become more closely scrutinized, and this issue will be fodder for discovery and trial.

Recently, the EEOC, driven in large part due to religious objections to COVID-19 vaccine requirements by employers, issued updated guidance that suggested employers should generally accept the sincerity of employees’ claimed religious beliefs.[8]  Indeed, inconsistent practices or newly adopted beliefs are not necessarily disqualifying, nor is there any requirement that the religious belief be held by a traditionally recognized religion—or even by anyone else at all.  This guidance may well become persuasive authority for Virginia courts, though the question remains unclear under the VHRA or for free-exercise claims under the Virginia Constitution.

IV. Conclusion

Vlaming is the law in Virginia for the foreseeable future.  Because it is of constitutional dimension and interpreting the Virginia and not U.S. Constitution, it will not be modified unless there is (1) a decisional change by the Supreme Court of Virginia, or (2) a constitutional amendment.

As discussed above, for citizens, businesses, organizations, and government entities, this decision has significant implications.

Fundamentally, the Supreme Court of Virginia established a super strong and protective right for religious belief and practice—in a way largely untested in Virginia—and so it opens a new chapter for Virginia rights-based litigation.

For employers, look closely at your policies for handling religious accommodation requests and make sure they are updated (this is also true as a result the U.S. Supreme Court’s decision in Groff).  Having updated written procedures whereby an employee documents a particular religious-based request will be important to evaluate requests and to protect against potential claims of religious-based discrimination.

Businesses, organizations, and individuals should also consider whether there are opportunities to use Vlaming to their advantage.  Few may want to go out and test the waters themselves, but a big tool to limit government authority in Virginia has been provided—it is worth considering how to use it to best advantage.

For state and local government entities, get ready for this issue to be at your doorstep soon.  Consider now your process for religious-accommodation requests.

Finally, Vlaming may indicate a Supreme Court of Virginia that is less deferential to the elected branches and embracing a more active role in deciding cases with policy implications.  Vlaming is a bold decision that pulls no punches.  The ideological split on the Court is exposed in this decision, and there could be more 4-3(ish) decisions ahead on other issues implicating the Virginia Constitution.  And if the decision signals a larger willingness to wade into the culture wars, the Court may find itself as counter-weight to the elected branches that are becoming more liberal politically.  That is not a role the Supreme Court of Virginia has typically played, but is one it may find itself in, in applying the Vlaming test to numerous laws and policies by state and local governments.

Those cases are on the way, no doubt.


[1] The exact pagination of the case in the Southeast Reporter was not available at the time of publication; therefore, citations to the case are to the slip opinion available here.
[2] Compare:

Va. Const. art. I, § 16 U.S. Const., amend. I
That religion or the duty which we owe to our Creator, and the manner of discharging it, can be directed only by reason and conviction, not by force or violence; and, therefore, all men are equally entitled to the free exercise of religion, according to the dictates of conscience; and that it is the mutual duty of all to practice Christian forbearance, love, and charity towards each other. No man shall be compelled to frequent or support any religious worship, place, or ministry whatsoever, nor shall be enforced, restrained, molested, or burthened in his body or goods, nor shall otherwise suffer on account of his religious opinions or belief; but all men shall be free to profess and by argument to maintain their opinions in matters of religion, and the same shall in nowise diminish, enlarge, or affect their civil capacities. And the General Assembly shall not prescribe any religious test whatever, or confer any peculiar privileges or advantages on any sect or denomination, or pass any law requiring or authorizing any religious society, or the people of any district within this Commonwealth, to levy on themselves or others, any tax for the erection or repair of any house of public worship, or for the support of any church or ministry; but it shall be left free to every person to select his religious instructor, and to make for his support such private contract as he shall please. Congress shall make no law respecting an establishment of religion, or prohibiting the free exercise thereof; or abridging the freedom of speech, or of the press; or the right of the people peaceably to assemble, and to petition the Government for a redress of grievances.

(Free Exercise Clause in bold).

[3] As the Decision points out, Smith was an incredibly controversial decision, prompting rebuke from Left and Right, at the time, and leading to the Religious Freedom Restoration Act.  Decision at 11-12.
[4] The focus of this article is on the implications of the free-exercise part of the Decision.  While the free-speech analysis is also important to the case, it will likely not have as broad an impact since “free speech” is generally only applied as against government actors and not private businesses or organizations.  As explained below, there are more implications where religious practice is involved given the protections of various antidiscrimination laws against religious-based discrimination.
[5] See https://www.gentrylocke.com/article/virginia-values-act-poses-significant-legal-risks-to-virginia-employers/.
[6] An interesting case to watch is Kluge v. Brownsburg Community School Corporation, a case in Federal Court in Indiana with similar factual allegations as the Vlaming case.  The Seventh Circuit has sent the case back to the Southern District Court in Indiana to evaluate following the new test announced by the Court in Groff.
[7] See FN 33 of proposed Guidance.
[8] See What You Should Know About COVID-19 and the ADA, Rehabilitation Act, and Other EEO Laws, EEOC (Updated May 15, 2023), available at What You Should Know About COVID-19 and the ADA, the Rehabilitation Act, and Other EEO Laws | U.S. Equal Employment Opportunity Commission (eeoc.gov)(Answer to Question L.2. provides guidance on evaluating whether a particularly belief qualifies as a sincerely held religious belief).

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The Executive View: Virginia Regulatory Process, Appeals, and Lessons Learned from the Inside

Friday, January 5th, 2024

My law professor once said that administrative law is “electrical engineering for lawyers.”  I did not fully appreciate what this meant, other than that it sounded complicated.  That was until I had the opportunity to spend years watching the regulatory and appellate process up-close.  

I had the honor and privilege of coordinating review of Virginia’s regulatory process on behalf of the Virginia Governor.  As Deputy Counsel and then Counsel to Governor Terry McAuliffe, I reviewed more regulations than, I suspect, most any other lawyer in the state. More importantly, I saw the process work and not work.  And I watched how appeals progressed to the Supreme Court of Virginia through judicial review of agency action.

From this experience, I understand more how administrative law parallels the intricacies of electrical engineering. There are so many factors at play, all of which must align, for things to work—law, policy, politics, science, data, and the inexorable ticking of the clock.  This article attempts to provide some lessons learned from that experience.

Lesson One: The Process is a Gauntlet, so Know Your Goal Up Front

Whether your regulatory issue involves a general regulation or a case-specific decision (such as obtaining a permit or license or other regulatory approval), they both share important similarities.  The Virginia Administrative Process Act (“VAPA” at Va. Code § 2.2-4000, et seq.) defines separately procedures for rulemaking and case decisions, with strict procedures for adopting regulations, making case decisions, and judicial review.

Because agencies act only under statutory authority, they have to follow those rules.  So the process matters immensely.  Thus, know what you want from the beginning.  

For instance, say you want to stop a regulatory change at all costs.  That means you want to make the process harder for the agency.  If the agency messes up along the way, and even if you lose before the agency, you might win an appeal of the decision, and as discussed below, time is your friend.

If, on the other hand, you need the agency to grant a license or permit, then your fate is not only in convincing the agency, but also having that decision survive appeals and judicial review.  Time is your enemy, and so you want to be a helping hand to get things wrapped up quickly and effectively.

Lesson Two: Many Calendars and Actors Impact Timing of Regulatory Process

The process for enacting or amending a regulation is defined by statute, and it takes time—but that statutory calendar is not the only one at play.  

On paper, the Virginia regulatory process goes through three phases—the Notice of Intended Regulatory Action (“NOIRA”), the Proposed phase, and the Final phase.  Public comment periods are required between each phase, with a 30-day period before a Final regulation becomes effective after it is published in the Virginia Register of Regulations.  Thus, in general, the process cannot be faster than 120-180 days.  But it never goes that fast, and the timeline is far more complicated and impacted by multiple different actors:

  • Executive Branch Review Calendar — This process is layered atop the statutory process by Governors’ Executive Orders.  Every modern Governor has imposed some review process (partially required also under VAPA) through which the Attorney General, the Department of Planning and Budget, the Cabinet Secretary, and the Governor all review regulations as they advance through the regulatory process.  This process has few enforceable deadlines, so it can become a regulatory purgatory.
  • Legislative Calendar – The General Assembly session occupies an immense amount of agencies’ time.  So in the month before and during the legislative session (say December to April), good luck getting any agency to do anything.
  • Board’s Calendar – If the regulatory action is controlled by a Board (and not a full-time agency head), then that Board’s calendar becomes relevant.  Most regulatory boards do not meet every day or even week.  They might meet every month or perhaps even less frequently.  So, if your action misses March’s meeting, it might be another month or more before action can be taken.

Accordingly, the Virginia Registrar estimates that actions generally take between 18 and 24 months.  Even when the action is a high priority for the Virginia Governor (and thus the Executive Branch), it will take around one year.  For instance, Governor Youngkin made exiting the Regional Greenhouse Gas Initiative a high priority.  That regulatory action, through the State Air Pollution Control Board, took just under one year from the publication of the NOIRA to it becoming finally effective.   

But of course, the regulatory process is not “over” at the Final stage.  There is the calendar for appeals and judicial review of regulatory action, if a stakeholder pursues it.  That can take years to wind through the Circuit Court, the Court of Appeals of Virginia, and the Supreme Court of Virginia.

Supreme Court of VA

Lesson Three: The Passage of Time is Not Neutral

A related lesson is that timing is not neutral.  Since the regulatory process occurs within a dynamic political system, delay tends to favor the status quo.  Thus, generally speaking, proponents of a regulatory action need to get things done ASAP; opponents (a/k/a proponents of the status quo) generally benefit from time.

The reason returns us to my law professor: the regulatory process requires alignment, just like an electrical circuit.  And, over time, something will undoubtedly change that could mean the required alignment no longer exists.  For instance, there may be a new Governor with a different policy view (which is guaranteed every four years under the Virginia Constitution).  There may be a new General Assembly, with different priorities (possible every two years).  The underlying policy issues (or public perception of them) may shift in one direction or another.  Once the regulatory “circuits” are no longer aligned, the regulatory process stalls, and the status quo is maintained.  

Accordingly, proponents of a particular regulatory action—particularly if it is politically contentious—have a limited window, which makes perfecting the regulatory process all the more important.

Lesson Four: Proponents Should Help the Agency Get it Right; Opponents Should Make it Harder

Because of this “alignment” dynamic, and pulling together Lessons 1-3, there are certain takeaways for stakeholders.  Let’s accept that a given regulatory process takes 1.5-2 years, and, let’s assume that judicial review will take 2-3 years.  Thus, generally speaking, if an agency action fails to pass judicial review, there will almost certainly be a new Governor, with a new administration, before the agency can reconsider the issue.  So the “alignment” is fleeting.  

Thus, proponents should see their fate as tied to the agency getting it right the first time.  Under administrative law, agencies generally get deference from the appellate courts; however, errors in the process or in considering the issues can be fatal.  Thus, to win an appeal, proponents need to act as allies to the agency—help it get things right and be vigilant:  

  1. Do not let errors fester—if the agency didn’t do something right, advocate for getting it right then, rather than waiting for judicial review to set things back years after the fact.
  2. Be engaged and provide evidentiary support for the regulatory action. 

The same lessons teach opponents to make things harder.  And, here, opponents need to be equally vigilant:

  1. Demand more process to draw things out—delay is your friend.
  2. Submit contrary evidence on the record—and know that substantive evidence (such as studies, data, etc) is going to be much harder for the agency to get around than generic opposition from public comments.

Lesson Five: Mind the State Budget

The State Budget, adopted every two years and amended every other year, is always the most important piece of legislation passed by the General Assembly.  But it is not just about money.  A lot, and I mean a lot, of policy is made through the State Budget.  

Thus, stakeholders should pay attention to budget language—both as it is being considered and implemented.  The General Assembly, ultimately, is the chief policymaker in Virginia, and it has an enormous ability to attach conditions to the appropriations it makes.  And that conditioning power is often used to direct or restrict regulatory action by the Executive Branch.

That can be a total game-changer—so just be aware of how legislative changes, even arcane ones in the State Budget, could impact the regulatory process in ways helpful or hurtful to your cause.

Conclusion

The regulatory process is a dynamic one that operates alongside political and judicial processes.  It is, in many ways, electrical engineering for lawyers, but it also is a human process.  So, in the end, participation is key—and quality matters more than quantity.  That said, when the stakes are high in a regulatory action, I hope some of these lessons-learned from the inside will be helpful in successfully navigating the process. If you have any questions or need guidance on Virginia regulatory processes or appeals, contact us today.

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Kill the Goose that Lays the Golden Eggs? Is There an Alternative Remedy to Dissolution in Oppression Cases?

Thursday, November 30th, 2023

A New Path for Appellate Lawyers

Last year, the jurisdiction of the Court of Appeals of Virginia was expanded to offer aggrieved litigants in civil cases an automatic right of appeal. Va. Code § 17.1-405(A)(3).[1] That change offers opportunities for the Court to provide guidance to circuit courts and litigants in many areas of law that are unsettled, under-developed, or otherwise unclear. This is particularly true of corporate law under the Virginia Stock Corporation Act, an area in which decisions by the Supreme Court of Virginia have been few and far between over the past few decades, despite significant statutory changes over the years. This article discusses one of those open issues – the scope of relief available in a shareholder oppression case brought under the judicial dissolution statute of the Act, Virginia Code § 13.1-747. With oppression cases on the rise, the Court of Appeals should have the occasion to decide the question.

An Undeveloped Issue in Virginia Corporate Law

In an oppression case, a minority owner typically alleges that the majority owner(s) have attempted to “freeze” or “squeeze” him out of the business or suppress his rights.[2] Code § 13.1-747 provides at least one potential remedy in such circumstances. The circuit court, in the exercise of its equitable authority, “may dissolve a corporation” when a shareholder establishes that “the directors or those in control of the corporation have acted, are acting, or will act in a manner that is illegal, oppressive, or fraudulent[.]” Va. Code § 13.1-747(A)(1)(b) (emphasis added). The Supreme Court of Virginia has held that the statute is remedial and intended to protect the rights of corporate stockholders – particularly minority owners. Baylor v. Beverly Book Co., 216 Va. 22, 24, 216 S.E.2d 18, 19 (1975).

Code § 13.1-747 is the successor statute to Virginia Code § 13.1-94, which stated, in relevant part, that “[a]ny court of record, with general equity jurisdiction . . . shall have full power to liquidate the assets and business of the corporation” in an action by a stockholder where oppression is established. Va. Code § 13.1-94(a)(2) (repealed) (emphasis added). The statute also provided a limited alternative to dissolution in an oppression case: to place the corporation into receivership until the management authority of the corporation has either been restored to the original board of directors or a new board is elected.

In the cases of Giannotti v. Hamway and White v. Perkins, the Supreme Court of Virginia interpreted Virginia Code § 13.1-94 as providing the exclusive remedies to an oppressed minority shareholder, and did “not permit the trial court to fashion other, apparently equitable remedies.” Giannotti, 239 Va. at 28, 387 S.E.2d at 733; White, 213 Va. at 135, 189 S.E.2d at 320. However, the Supreme Court also described the circuit court’s authority to order dissolution as “discretionary” – presumably because the court could choose the alternative remedy of receivership. 239 Va. at 28, 387 S.E.2d at 733. Also seemingly key to the Supreme Court’s analysis was the strong language in the Code § 13.1-94, which vested the circuit court with “full power” to liquidate a corporation where oppressive conduct was established.

In 1985, the General Assembly rewrote the Virginia Stock Corporation Act. Jordon v. Bowman Apple Prods. Co., 728 F. Supp. 409, 414 n.7 (W.D. Va. 1990) (noting the overhaul of the statute).[3] The phrase “full power to liquidate” in Code § 13.1-94 was changed to “may dissolve” in § 13.1-747(A) today.[4] Meanwhile, the “full power” language was incorporated into a new subsection (B) of § 13.1-747 – a provision that does not relate to oppressive conduct.[5]

Additionally, the General Assembly omitted the alternative remedy of temporary receivership from § 13.1-747. Virginia Code § 13.1-747(F) now provides only a single alternative to dissolution in an oppression/dissolution case: the other shareholders may elect to purchase the shares of the dissenting minority.[6] See Va. Code § 13.1-749.1.

The Supreme Court of Virginia has not interpreted and applied § 13.1-747(A) since the comprehensive changes in 1985. In the absence of additional guidance, at least two lower courts in Virginia have followed the holdings in White and Giannotti under the prior Code section. See Jordon, 728 F. Supp. at 415 (applying White to a § 13.1-747(A) claim); Colgate v. Disthene Group, Inc., 85 Va. Cir. 286, 292 (Buckingham County, 2012) (same).

The Question for the Court of Appeals

This begs the question: is a circuit court powerless to consider and issue any other equitable remedy in lieu of dissolution in an oppression case? Code § 13.1-747(A) provides that the circuit court “may” dissolve a corporation when shareholder oppression is established, and the Supreme Court has further stated that the issuance of such relief is “discretionary.” Giannotti, 239 Va. at 28, 387 S.E.2d at 733. In this regard, the Supreme Court of Virginia has instructed circuit courts to “be reluctant to order the liquidation of a functioning corporation at the instance of minority stockholders.” Id. Indeed, often “[t]o liquidate the corporation is to kill the goose that laid the golden egg.” Giannotti, 239 Va. at 30, 387 S.E.2d at 734 (Gordon, Ret. J., dissenting). Accordingly, it is conceivable under the current statute for a circuit court to find oppression but decline to order dissolution, thus leaving an oppressed minority shareholder essentially without recourse.[7] Conversely, a circuit court may feel compelled to dissolve a going concern to ensure that an oppressed plaintiff is provide some remedy.

Supreme Court of Virginia

These scenarios, along with the substantial rewriting of the Act in 1985, would seem to suggest that the circuit court’s power is not as curtailed as it was under the prior scheme, but rather allows the court discretion to award some form of equitable relief in lieu of dissolution. These possible remedies might include: (1) appointing a receiver; (2) appointing provisional directors; (3) requiring the issuance of dividends or distributions; and/or (4) requiring the corporation or the majority stockholder(s) to purchase the minority shareholder’s stock at a particular price. See, e.g., Masinter v. WEBCO Co., 164 W. Va. 241, 254 n. 12, 262 S.E.2d 433, 441 (1980) (listing “possible forms of relief against oppressive conduct short of outright dissolution”).

An Opportunity for the Court of Appeals

Historically, the “chancellor” was vested with broad authority to “do equity” in light of the facts and circumstances presented by a particular case. In corporate dissolution/oppression cases, the Supreme Court had previously determined that such power was curtailed by Code § 13.1-94. However, the substantial changes to the Act in 1985, the absence of appellate direction under the present Act, and few lower court decisions in the arena leave open the possibility that a circuit court presiding over an oppression/dissolution case maintains some authority to issue equitable relief that is short of completely dissolving the corporation. The Court of Appeals’ expansion should afford the Court the opportunity to reach this issue and provide critical direction to the circuit courts deciding such cases.

So stay tuned and contact our appellate lawyers for additional guidance on this and other appellate issues as the Court of Appeals of Virginia continues to exercise its expanded jurisdiction and develop existing law.

[1] There are limited exceptions not material to this article. See Va. Code § 17.1-406.1(B).
[2] The Supreme Court of Virginia has defined “oppressive” conduct to mean action “by corporate managers toward stockholders which departs from the standards of fair dealing and violates the principles of fair play on which persons who entrust their funds to a corporation are entitled to rely.” Giannotti v. Hamway, 239 Va. 14, 23, 387 S.E.2d 725, 730 (1990); accord White v. Perkins, 213 Va. 129, 134, 189 S.E.2d 315, 320 (1972).
[3] Code § 13.1-747 took effect in January, 1986. While Giannotti was decided in 1990, the case was initially filed in 1980 when the prior Code § 13.1-94 was still in effect. 239 Va. at 16, 387 S.E.2d at 726. Accordingly, the Supreme Court of Virginia applied Code § 13.1-94 in that case. Id.
[4] This language was adopted from the judicial dissolution provisions in §§ 14.30 and 14.31 of the Model Business Corporation Act.
[5] Subsection B provides, in relevant part, that “[t]he circuit court . . . shall have full power to liquidate the assets and business of the corporation at any time after the termination of corporate existence, pursuant to the provisions of this article upon the application of any person, for good cause, with regard to any assets or business that may remain[.]” Virginia Code § 13.1-747(B).
[6] Subsection F was added to § 13.1-747 in 2019.
[7] While a shareholder may file suit under the derivative sections of the Stock Corporation Act, see, e.g., Va. Code § 13.1-672.1, a derivative action is brought to vindicate the rights of the corporation, not those of an individual shareholder.

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