The Supreme Court of Virginia recently issued an opinion applying the principles of res judicata to affirm the dismissal of a contract claim. In The Funny Guy, LLC v. Lecego, LLC, No. 160242 (Feb. 16, 2017), the plaintiff filed a second lawsuit asserting alternative legal claims after its first lawsuit was dismissed. The court held that if alternative claims qualify for joinder under the “same transaction or occurrence” standard, they likewise constitute res judicata under Rule 1:6 of the Supreme Court of Virginia. This decision has significant implications for litigants in Virginia courts, especially in cases involving settlement agreements.
The dispute involved a contract for IT services between The Funny Guy, LLC and Lecego, LLC. A dispute arose following termination of the contract over payment for The Funny Guy’s services. In its first lawsuit, The Funny Guy sued to enforce a settlement agreement, alleging that Lecego had agreed to pay most of the disputed fees as part of a settlement agreement, but later refused to do so. The trial court dismissed the first lawsuit, finding there was no “meeting of the minds” on the settlement. The Funny Guy filed a second lawsuit asserting breach of contract and quantum meruit, or unjust enrichment. The trial court dismissed the second suit based on res judicata, ruling that the breach of the underlying contract and claim for services provided were alternative theories of recovery that could have – and thus should have – been asserted in the first suit for the breach of the settlement agreement.
In a 4-3 decision, the Supreme Court of Virginia affirmed, holding that Rule 1:6 prohibited The Funny Guy from filing two separate lawsuits when it could have joined all of its claims in a single suit. Rule 1:6, adopted by the Court in 2006, provides that if the underlying dispute produces different legal claims—arising out of the “same conduct, transaction or occurrence”—that can be joined in a single lawsuit, then those claims must be joined unless an exception to res judicata exists. Also citing Va. Code §§ 8.01-272 & 8.01-281; Rule 1:4(k) of Supreme Court of Virginia, which “prohibits litigants from gaming the litigation system with multiple lawsuits involving the same underlying dispute.”
The Court analyzed whether The Funny Guy’s claims arose from a single transaction or occurrence by asking “whether the facts are related in time, space, origin, or motivation, whether they form a convenient trial unit, and whether their treatment as a unit conforms to the parties’ expectations or business understanding or usage” (quoting Restatement (Second) of Judgments § 24(2)). Regarding the “time” and “space” factors, the claims involved a single, ongoing payment dispute concerning the same money for the same work. The court found that the “origin” and “motivation” for the claims were that The Funny Guy sought payment for its work. The court concluded that the three alternative theories of recovery asserted by The Funny Guy all fit within a single factual narrative that easily forms “a convenient trial unit.” As to the last factor (the “parties’ expectations or business understanding or usage”), the court noted that reasonable commercial parties would not expect a single payment dispute to turn into multiple lawsuits. As a result, the court decided res judicata applied to The Funny Guy’s second suit.
The dissent challenged several points in the majority opinion, including the conclusion that treating a settlement agreement as a single unit with the underlying claim conforms to the expectations of parties who enter into a settlement agreement. The dissent opined that parties who believe they have executed a valid settlement agreement are likely to believe they have bargained to release the underlying claim, avoiding the costs of litigating that claim. The dissent states that, under the majority’s ruling, “[e]very time parties settle and one of them breaches the settlement agreement, the other party will have to prepare not only to litigate that breach but also the underlying claim, with all of its evidentiary burdens and litigation expenses.” In response, the majority concedes that a party suing on the settlement agreement would need to assert the underlying claim as an alternative theory where the defendant disputes the existence of a valid settlement agreement and the claims share the requisite commonality. However, if the parties accept the settlement agreement as legally enforceable, but “merely dicker among themselves over whether it was breached,” there would be no reason to assert an alternative claim.
Companies facing a second lawsuit filed by the same litigant based on the same transaction should consider filing a plea in bar asserting res judicata. Conversely, if a party needs to file a lawsuit to enforce the terms of settlement, it must carefully consider whether it could – and therefore should – include all alternative theories of relief based on the underlying claim, including the claims underlying the alleged settlement. While the court in The Funny Guy noted that a party need not assert an alternative claim regarding the underlying claim where the parties do not dispute the existence of the settlement agreement, that is often the primary contention. Thus, a party may need to assert and be prepared to litigate the breach of the settlement agreement as well as the underlying claims in order to preserve its rights. Otherwise, the other party may get the last laugh.