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Jurisdiction Approved in Veil-Piercing Case

A Richmond U.S. District Court accepts the magistrate judge’s recommendation and refuses to dismiss this contract action seeking to pierce the corporate veil of defendant affiliated companies, who allegedly purchased and shared plaintiff’s software licenses.

Plaintiff Brainware Inc. sued defendant Scan-Optics Ltd. alleging breach of contract through failure to make payments in a series of business transactions involving software licenses. Brainware later amended its pleadings to include Scan-Optics USA as a codefendant under a theory of alter-ego liability. Scan-Optics USA moves to dismiss for lack of personal jurisdiction and for failure to sufficiently allege that the corporate veil may be pierced.

Plaintiff alleges Scan-Optics UK is a wholly owned subsidiary of Scan-Optics USA. Throughout the relevant period, Scan-Optics USA directed and controlled its UK subsidiary to such a degree that the two companies functioned as one. In tandem with its control of its subsidiary, Scan-Optics USA routinely transferred funds from Scan-Optics UK to maintain the UK firm in a persistent thinly-capitalized stated. Scan-Optics UK also shared the confidential information obtained from Brainware under the contract with Scan-Optics USA.

Brainware has met the necessary standard to pursue its claim. It alleges Scan-Optics USA “directed,” “micromanaged” and controlled Scan-Optics UK such that the two companies operated as one. It also alleges Scan-Optics USA routinely transfers significant portions of Scan-Optics UK’s funds to itself, thereby leaving Scan-Optics UK thinly capitalized. Finally, Brainware alleges Scan-Optics UK provided the confidential information that was the subject of the contract to Scan-Optics USA, thus giving it the benefit of the contract between Brainware and Scan-Optics USA. This alleged sequence of events paints a picture of Scan-Optics USA accepting the benefit of Brainware’s product through its subsidiary, only to then pilfer the subsidiary to prevent Brainware from obtaining the benefit of its bargain. Brainware has satisfied the “plausibility” pleading standard.

Because the court finds Brainware has sufficiently alleged its alter ego theory of liability, Scan-Optics UK’s contacts with the forum (and the forum selection clause of the contract) could be imputed to Scan-Optics USA. On this basis, the court could conclude that Scan-Optics USA is bound by the contract’s choice of venue provision and jurisdictional waiver. Even if this was not the case, analysis of Scan-Optics USA’s contacts with Brainware in Virginia gives rise to specific personal jurisdiction in this case.

The contract at issue here cannot be isolated from the ongoing business relationship that was formed between Scan-Optics USA and Brainware, regardless of whether the contract was executed by its subsidiary. The nature of the business relationship paints a picture of Scan-Optics USA actively engaging Brainware in a partnership designed for its benefit and that of its affiliated entities. Thus, the contract and resulting dispute are part of a larger, ongoing business relationship between Scan-Optics USA and Brainware. There is a satisfactory nexus between the contract and the developing business relationship, and the exercise of jurisdiction is constitutionally reasonable.

Brainware Inc. v. Scan-Optics Ltd. (Payne, Novak) No. 3:11cv755, June 4, 2012, USDC at Richmond, Va. VLW 012-3-344, 22 pp.

VLW 012-3-344

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