Some Stats On The Business Court

When the North Carolina Legislature "modernized" the Business Court last year, it added a provision to the General Statutes mandating that the Director of the Administrative Office of the Courts prepare a report, twice a year, showing

the total number of civil cases pending in each business court site over three years after being designated as a mandatory complex business case, motions pending over six months after being filed, and civil cases in which bench trials have been concluded for over six months without entry of judgment, including any accompanying explanation provided by the Business Court.

N.C. Gen. Stat. §7A-343(8a).

The First Semi-Annual Report

The AOC has now prepared that first semi-annual report.  On the question of how many cases have been pending in the Business Court for more than three years, the answer is 56.  Seventeen of those case are on appeal, and twelve had concluded an appeal and had been returned to the Business Court for further proceedings.  Nine of those cases were stayed for other reasons, like a bankruptcy filing by a defendant, or to allow the parties to pursue settlement discussions, or to allow a court-appointed receiver to conduct an investigation.

The more interesting question to me was the number of cases where motions had been pending for more than six months after being filed.  The answer here was 48 motions in which a ruling had not been made, in just twenty cases.

The Report doesn't break down by individual Judge the number of cases in which rulings took longer than six months, which was possibly contemplated by the statute, but the analysis performed by me shows that the majority of the slow moving cases are in Judge McGuire's Court in Raleigh.

Don't interpret that as any indication that Judge McGuire is slow to make rulings.  He has written seventeen published opinions since he was appointed by Governor McCrory to the Court in October of last year.  Plus, that count of cases where it was taking longer than six months for a decision was a snapshot of the Court as of December 2014, only a few weeks after Judge McGuire took his seat on the Court.

And where did the General Assembly come up with the idea that six months to issue an opinion was a good benchmark for judging the timeliness of the Business Court?  By the time briefing on a motion is concluded under the Business Court Rules, about two months will already have passed (20 days to respond to a brief, per Business Court Rule 15.6 and ten days to respond with a reply brief per BCR 15.7).  Then, if the Court schedules a hearing on the Motion, as it often does, even more time will pass.

The Report explains the time it takes for a ruling to be issued in pretty much this way:

[i]t is not unusual, particularly in complex, multiparty litigation, for a motion to be pending for several months before briefing is complete in accordance with the Court's rules and the motion is ripe for consideration.  Motions rarely remain pending for more than six months after being briefed and heard, although written opinions are sometimes extensive, requiring time-intensive writing and editing.

Report at 3.

I know that the Business Court aleady is producing more opinions than I can (or want to) write about, so I have no criticism at all about the time it takes the Court to reach a ruling.  When the Court's new fourth Judge -- Winston-Salem attorney Mike Robinson, nominated to the Court by Governor McCrory last month  -- starts delivering opinions I may start hibernating.

The 2015 Annual Report

By the way, the AOC also issued its annual report on the Business Court: the 2015 Report on North Carolina Business Court.  Some numbers from that Court are that there were 231 cases pending in the Court as of December 31, 2014.  One hundred and eight-nine of those cases were "active," 23 were on appeal, and 19 were stayed or designated as "inactive."  2015 Report 1.

The average age of all pending cases was 756 days.  The average age of the cases in Wake County was the oldest, at 796 days.  Mecklenburg County cases seemed to have the lowest average age, at 718 days.  Guilford County?  748 days.  2015 Report 2-3.

Appendix A to the 2015 Report shows the distribution of cases in the Court by the County in which they were filed.  This part of the Report dispels the conventional wisdom that cases filed in Mecklenburg County remain in the Charlotte division of the Court, and that Wake County cases stay in Raleigh.

The Mecklenburg County numbers show 39 cases pending from that County during 2014, of which 25 were assigned to the Charlotte Judge, 13 to Greensboro, and one to Raleigh.

Wake County was the leading County with pending cases during 2014, with 56.  Forty-one of those cases are assigned to Raleigh, 12 to Greensboro, and 3 to Charlotte. 

Guilford County, the original home of the Business Court, still keeps in Greensboro most of the cases filed there.  Of 18 cases pending during 2014, 16 are assigned to Judge Gale in Greensboro.

Appendix C to the 2015 Report contains a color coded map showing the cases designated to the Business Court by County in 2014.  (That's the map in the picture above)  One of the striking things about that map is the number of Counties that did not designate a single case to the Court during that year.

NC Business Court Takes On The Oxford Comma

You most likely have heard of the Oxford Comma.  It is also referred to as the "serial comma."  If you are not familiar with this literary device, it is a comma placed before the word "and" or another conjunction (like or or nor) in a series of three or more terms.

So, here's one of the more famous examples of why the Oxford Comma is necessary: "We invited the strippers, JFK and Stalin."  Adding the Comma eliminates the ambiguity of the identities of the strippers: "We invited the strippers, JFK, and Stalin."

Judge McGuire considered the effect of an Oxford Comma this week in Medfusion, Inc. v. Allscripts Healthcare Solutions, Inc., 2015 NCBC 31.  The contractual language at issue was in an agreement between the Plaintiff and Defendant to market an "online patient portal."  (That's a way for patients to communicate on-line with their doctors.)  It said that "in no event shall either party be liable for any loss or damage to revenues, profits, or goodwill or other special, incidental, indirect, or consequential damages of any kind, resulting from its performance or failure to perform under this agreement. . . ."  Op. ¶22.

Medfusion then sued Allscripts for $4 million of lost profits and revenues notwithstanding that provision, and the parties offered different interpretations of the limitation of liability (LOL) provision.  As Judge McGuire described those interpretations, the Defendant's contention was:

that the comma before "or goodwill" is an Oxford, or serial, comma that sets apart three independent categories of damages barred by the agreement. . . . [U]nder this interpretation, lost revenues are barred.

Op.¶27.

The Plaintiff's argument was that:

the 'or other . . . consequential damages' language modifies 'revenues, profits, or goodwill' to make clear that these categories of damages are only excluded to the extent that they are considered consequential.

Op. ¶28.

So, who prevailed in this tussle over the effect of the Oxford Comma?  Neither party, as the Court ruled that the provision was susceptible to either interpretation, and therefore ambiguous.  Op. ¶29.

And where does this case go from here?  A jury trial on the meaning of this Oxford Comma sentence?  Maybe, but first the Plaintiff had to step through the Defendant's argument that the lost profit damages that Plaintiff was seeking were not direct damages but were instead "consequential" damages (barred under either construction of the contract).

Lost profits can be either direct or consequential damages under the Illinois law that applied to the contract, depending upon the circumstances.  Op. ¶34 .  I looked briefly at North Carolina law on this point, and it doesn't seem that North Carolina's courts have ever addressed the question of the categorization of lost profit damages.

In the circumstances of this particular contract, Judge McGuire ruled that lost profits "were clearly part of the bargain between the parties and flowed directly from the alleged breach."  ¶34.  The damages were therefore direct and recoverable under Plaintiff's interpretation.

Although Plaintiff's breach of contract claims survived Defendant's Motion to Dismiss, most of Plaintiff's tort based claims (for fraudulent inducement, fraud, and unfair and deceptive practices) were dismissed.

I don't think this case provides any guidance on the use of the Oxford Comma in drafting agreements.  Or writing briefs, for that matter.  Use your best judgment.

 

Pizzas And Trademark Infringement

It is easy to forget that there is a North Carolina Trademark Registration Act.  It is in Chapter 80 of the General Statutes

The Business Court's mandatory jurisdiction extends to cases brought under Chapter 80 per N.C. Gen. Stat. §7A-45.4(a)(4), so you might expect that Court to be a hotbed of litigation involving trademarks.  But the  Order last week in Ray Lackey Enterprises, Inc. v. Village Inn Lakeside, Inc., 2015 NCBC 32 represents, as far as I know, only the second time that the Business Court has ruled in a trademark case.  The only other case I'm aware of is the Windsor Jewelers decision by Judge Diaz six years ago, in 2009 NCBC 2.

The Plaintiff in the Ray Lackey case, which does business as "Village Inn Pizza Parlor," has two marks registered under the NC Trademark Registration Act and a variety of other unregistered marks which it uses in its business.  Those marks are used by a number of company owned restaurants and are also licensed to six separately owned restaurants

The Defendant corporations are owned by former officers and employees of the Plaintiff.  One of the Defendants' principals, Elizabeth Miller, is the daughter of the founder of the Village Inn Pizza Parlor empire.

The Infringement

In July 2014, Ms. Miller opened a new restaurant under the name Village Inn Lakeside which used Village Inn's licensed marks and pizza boxes and cups identical to those used in Plaintiff's restaurants.  The Defendants also were taking steps to open a second Village Inn Pizza restaurant in Jonesville, NC, and had signed a lease to open a third.

The Plaintiff's Motion for a Preliminary Injunction seemed pretty cut and dried.  A Plaintiff is entitled to injunctive relief "to protect its trademarks when a subsequent competitor adopts those trademarks in the same geographic area for the purpose of confusing consumers."  Order 25.

To show infringement under NC law, a plaintiff must prove "that it has a valid protectable trademark and that the defendant's use of a colorable imitation of the trademark is likely to cause confusion among consumers."  Order 27.  Proving a likelihood of confusion creates a presumption of irreparable injury.  Order 28.

Plaintiff proved intentional copying and a likelihood of confusion by the Defendant's use of the Village Pizza Parlor logo on a forty foot tall sign next to its Lakeside restaurant and using other marks used by Plaintiff, like "Home of the Great Pizza Buffet" and "Family owned and operated since 1967."  Hanging a photograph in Defendants' restaurant of the founder of the Village Pizza Parlor concept was undoubtedly a factor in the Court finding infringement.  Order 30.

The Defense of Naked Licensing

The Defendants, faced with all those facts demonstrating infringement, did not deny copying Plaintiff's marks.  Their principal defense to an injunction was that Plaintiff had lost its marks because of "naked licensing."  This occurs when "a licensor does not exercise adequate control over its licensee's use of a licensed trademark such that the trademark may no longer represent the quality of the product or service the consumer has come to expect."  Order 37 (quoting Freecycle Sunnyvale v. Freecycle Network, 626 F.3d 509 n.1 (9th Cir. 2010)).

How does the trademark owner show "adequate control" over its marks?  There are three ways: by having an express, contractual right to control the licensee's operations, by showing actual control through a course of performance, or by showing a justifiable reliance on the licensee for quality control."  Order 37.

Plaintiff conceded that it did not have an express, contractual right to control the six separately owned restaurants.  But the Court found that Plaintiff, which was collecting management and "office expense" fees from the six "independent" restaurants had sufficient quality control and oversight in place over the use of its trademarks.

Since the Defendants had the burden in this injunctive proceeding of showing a likelihood of success on their affirmative defense of naked licensing the Court found that defense to be no bar to the entry of an injunction.

If you are an IP lawyer, you are probably familiar with the Fourth Circuit's decision in Pizzeria Uno Corp. v. Temple, 747 F.2d 1522 (4th Cir. 1984), one of that Court's leading cases on what suffices to show a likelihood of confusion in a trademark case brought under the Lanham Act.  There are a number of other trademark infringement cases pitting pizza business against pizza business. There must be something about pizzas and trademark infringement.

NC Business Court On A Barely Ever Referenced Rule Of Civil Procedure And A Host Of Employment-Related Claims

There are undoubtedly many of the Rules of Civil Procedure that you remember by number.  Certainly Rules 12, 56, and 65.  But Rule 10(b)?  What does that even say?

If you are reaching for your Rulebook, put it away.  Rule 10 is titled "Form of Pleadings."  Section (b) of that Rule says:

Paragraphs; separate statement. - All averments of claim or defense shall be made in numbered paragraphs, the contents of each of which be limited as far as practicable to a statement of a single set of circumstances; and a paragraph may be referred to by number in all succeeding pleadings. Each claim founded upon a separate transaction or occurrence and each defense other than denials shall be stated in a separate count or defense whenever a separation facilitates the clear presentation of the matters set forth.

I translate that as number the paragraphs of your pleadings, and keep them short.  Rule 10 dovetails with Rule 8, which requires a "short and plain" statement of claims with averments that are "simple, concise, and direct."

But the counterclaim that was the subject of the Business Court's ruling in Kingsdown, Inc. v. Hinshaw, 2015 NCBC 28 was anything but compliant with the Rules of Civil Procedure.  Numbered paragraphs 2 and 3 were interrupted by several pages of single dspaced, rambling prose, which alluded to everything between Ray being asked by her employer during her employment to pick up lunches for salesmen, and not being allowed, after her termination, to transfer her old company phone number to her new cellphone or to have access to family photos on her company computer.

So, what is a lawyer to do when faced with responding to such lengthy assertions?  Move to dismiss, of course.  Kingsdown, doing exactly that, argued that Ray's counterclaim was in violation of both Rules 8 and 10.

Judge Bledsoe stated that the usual Rule 8 challenge to a pleading was "based on the lack of specific detail in the complaint, not because the complaint is too detailed and voluminous."  Op. Par. 20.  He found no North Carolina decisions dismissing a complaint for it being overly "detailed," but cited several federal court decisions taking that action. Op ¶20 & n.6.

Even so, the Court denied the Motion to Dismiss on Rule 8 grounds, saying that the allegations of the counterclaims were not "so voluminous or incomprehensible to prevent Kingsdown from discerning the nature and basis" for the counterclaims "or otherwise formulating an answer to the Counterclaims."  Op. ¶20.

Although Ray's counterclaims survived a Rule 8 dismissal, they were dismissed without prejudice because of the violation of Rule 10.  Judge Bledsoe "admonish[ed] Ms. Ray to follow the requirement under Rule 8 to advance 'simple, concise, and direct' allegations in the preparation and filing of her amended Counterclaims."  Op. ¶21.

Despite the dismissal being without prejudice, Judge Bledsoe threw cold water on a number of Ray's counterclaims and dismissed them with prejudice.  Most of those counterclaims stemmed from the termination of her employment with Kingsdown.

Wrongful discharge: Wrongful discharge claims need to be pled with specificity.  Op. ¶25  Ray's "scattershot allegations" (Op. ¶26) fell short of what was necessary for the Court to determine whether Kingsdown had taken any improper action which was the "but for" cause of her termination.  Op. ¶26.  That claim was dismissed without prejudice.

Blacklisting:  To make out a claim under the blacklisting statute (G.S. §14-355) a party must plead "(1) that she attempted to obtain employment with another entity; (2) that [her former employer] took affirmative steps by 'words or writing of any kind' to prevent her from obtaining employment with that entity; and (3) that whatever statements or writing that were made to the entity were false." Op. ¶30.  The Court dismissed this counterclaim with prejudice because Ray had failed to plead any of the essential elements of her claim.

Intentional Infliction of Emotional Distress: Judge Bledsoe observed that:

our appellate courts have consistently held that 'the mere firing of an employee can never be "extreme and outrageous’ conduct sufficient to state a claim for intentional infliction of emotional distress."

Op. ¶34 (quoting Sims-Campbell v. Welch, 2015 N.C. App. LEXIS 166, *11–12 (N.C. Ct. App. Mar. 3, 2015)).

This claim was also dismissed with prejudice because Ray's allegations (that she was slighted or ignored by Kingsdown’s management from time to time, and her frustration and irritation with having to suffer various personal inconveniences resulting from the performance of her job) did not rise to the level of mistreatment that could give rise to a claim for intentional infliction of emotional distress.

Constructive Fraud/Fiduciary Duty: Ray's claim for constructive fraud depended on Kingsdown owing her a fiduciary duty, because the existence of a fiduciary relationship is an element of a constructive fraud claim.  Ray's counsel argued that since Ray was an officer of Kingsdown, and thus owed the corporation a fiduciary duty, that the corporation therefore owed her a reciprocal fiduciary duty.  Judge Bledsoe rejected this argument in a footnote, stating that this was "simply not the law."  Op. ¶42 & n.9.

Unfair and Deceptive Practices: The Chapter 75 claim was dismissed with prejudice as it rested on facts which arose out of Ray's employment and therefore involved "internal business disputes rather than interactions with businesses or consumers."  Op. ¶45.  It was therefore not "in or affecting commerce" which is the type of conduct targeted by G.S. §75-1.1(a).

If you are wondering if there could be any claims left in this hodge podge of counterclaims, the answer is unfortunately yes.  But you are probably as tired of reading about this Opinion as I am writing about it.  A part of a defamation counterclaim was dismissed without prejudice but a part of it with prejudice.  A negligence counterclaim was dismissed with prejudice.  A civil conspiracy counterclaim was dismissed with prejudice.

Dead Partner And Disqualification

The Business Court on Wednesday disqualified  a law firm from representing its longtime corporate client in a lawsuit against the corporation's former CEO and Chairman of its Board of Directors.

The basis for the ruling in Kingsdown Inc. v. Hinshaw, 2015 NCBC 27 was that a partner in the law firm (now deceased) had represented the former CEO/Chairman of the corporate plaintiff (Hinshaw) on a personal basis in some of the transactions that were at issue in the lawsuit.

Hinshaw moved to disqualify the law firm over its protestations that its representation was permitted by Rule 1.10 of the Revised Rules of Professional Conduct.  If that Rule isn't uppermost in your mind, it says that:

When a lawyer has terminated an association with a firm, the firm is not prohibited from thereafter representing a person with interests materially adverse to those of a client represented by the formerly associated lawyer and not currently represented by the firm, unless:

(1) the matter is the same or substantially related to that in which the formerly associated lawyer represented the client; and

(2) any lawyer remaining in the firm has information protected by Rules 1.6 and 1.9(c) that is material to the matter. 

So, to succeed on his disqualification motion, Hinshaw had to show that he had an attorney-client relationship with a former lawyer at the firm, and that the matters on which he had been represented were the "same or substantially related to" the matters involved in the lawsuit  before the Business Court, and the law firm had the burden to show that it did not have access to material confidential information protected by Rules 1.6 and 1.9(c).

Attorney-Client Relationship?

Kingsdown contended that the law firm had never opened a client matter for Hinshaw, had never sent him an engagement letter, and had never been paid any money by Hinshaw.  Hinshaw, from his side, presented affidavit testimony that the law firm's senior partner, since deceased, had often advised him personally. 

Some of the advice concerned his compensation from Kingdown and a transaction regarding a beach house owned by Hinshaw which he traded to Kingsdown for an undeveloped beach property owned by Kingsdown which Hinshaw then leased back to Kingsdown. 

Both of those matters -- Hinshaw's compensation from Kingsdown and the curious beach house deal -- were at the front and center of Kingsdown's lawsuit against Hinshaw for breach of his fiduciary duty.

Judge Bledsoe didn't waste much of his opinion in finding "ample evidence" that Hinshaw could have "reasonably inferred" that he had an attorney-client relationship with the deceased partner, and therefore the law firm. Op. par. 30.

Confidential Information?

The law firm fought hard to show that none of its current attorneys had any of Hinshaw's confidential information.  That was the lawyers' burden to carry, per Ferguson v. DDP Pharmacy, 174 N.C. App. 532, 539, 621 S.E.2d 323. 328 (2005)(“The burden rests upon the law firm to prove the former attorney did not share any information about the former client with the remaining attorneys in the firm.”).  Op. ¶37.

The argument of the lawyers rested partly on an affidavit from a lawyer representing Kingsdown as to his review of his firm's billing records.  The affiant stated that the records showed that none of the lawyers still at the firm had represented Hinshaw on the matters at issue in the lawsuit.  Other lawyers at the firm who had worked on Kingsdown matters presented affidavits stating that they were "not aware" of any of Hinshaw's confidential information.

Judge Bledsoe found that insufficient.  He noted that the situation before the Court was not the usual paradigm presented by Rule 1.10 of an attorney leaving a law firm and taking a client's files and records containing confidential information with her.  Here, the attorney who had personally represented Hinshaw had passed away and the law firm had continued in existence.  The Court held that:

the client’s files and confidential documents presumably remain at the Firm and are available to the other attorneys in the firm. As such, the Court concludes that the failure of the Firm to provide competent and persuasive evidence of the existence and whereabouts of these files, and the clients’ confidential documents and information that may be contained therein, is a significant factor in determining whether Kingsdown and the Firm have met their burden under Rule [1.]10(b).

Op. ¶46.

What could the law firm have done to persuade Judge Bledsoe that its lawyers did not have access to or knowledge of Hinshaw's confidential information?  He didn't say specifically, but wrote that Kingsdown had:

not brought forward competent evidence that the Firm has conducted a sufficient investigation of the Firm’s attorneys and files to ascertain whether the Firm has knowledge of [Hinshaw's] material confidential information, or if such an investigation has been conducted, provided evidence of what the investigation involved, who and what was consulted, and what the investigation found.

Op. ¶44.

So, if you ever find yourself in the unenviable position of representing a corporate client against a former officer/director on transactions where a deceased partner was personally advising that individual, you now have somewhat of a road map to avoiding disqualification.

Appearance of Impropriety

The "overarching consideration" in considering a motion to disqualify is to "prevent even the appearance of impropriety and thus resolve any and all doubts in favor of disqualification."  Op.  ¶48.

While  Hinshaw obviously had angst at being sued by the same law firm that he said had given him the advice that he claimed to have followed, the Court pointed out another significant concern that might create the "appearance of impropriety."

The law firm's attorneys were likely to be witnesses in the lawsuit.  Judge Bledsoe pointed out that:

those attorney-witnesses may potentially face divided loyalties between their allegiance to the Firm and the defense of the Firm’s advice, on the one hand, and their duty of loyalty to, and zealous advocacy for, their clients, on the other, as that advice, and the parties’ actions in alleged reliance on that advice, comes under intense scrutiny.

Op. ¶52.

This Opinion was issued at the same time as another published opinion in the case, Kingsdown Inc. v. Hinshaw, 2015 NCBC 28  That decision -- which I may write about tomorrow -- concerns a motion to dismiss one of the Defendant's counterclaims and third party claims.

 

If You Are Proceeding Pro Se In The Business Court It Is Best Not To Be Defiant

It's probably never a good idea to proceed without a lawyer in any Court, but if you are a non-lawyer and insist on proceeding pro se in the Business Court, don't be defiant and obnoxious.  You will not like the result.

Two of the Defendants (JW Ray and Digi-Plus LLC) in a case called London Leasing LLC v. Arcus  terminated the counsel representing them and decided to proceed on their own.

They did that in a high-handed and arrogant way. When Plaintiff's counsel called Ray to try to arrange a mediation, Defendant Ray told him that:

(1) neither Ray nor DigiPlus would attend any mediation in person, and would only attend by teleconference 'so that the mediator could explain to Plaintiff how absurd or ridiculous Plaintiff’s claims are in this lawsuit;'

(2) neither Ray nor DigiPlus would offer any payment towards a settlement;

(3) neither Ray nor DigiPlus would hire replacement counsel;

(4) neither Ray nor DigiPlus would respond to any discovery requests;

(5) neither Ray nor DigiPlus would pay any judgment levied against them in the lawsuit; and

(6) neither Ray nor DigiPlus would participate in the lawsuit unless they were “arrested for criminal conduct.”

Order ¶6.

As you can imagine, the (unpublished) Order entered by Judge McGuire was not complimentary of this discourtesy.  He stated that these two Defendants had "openly flouted this Court's [case management] order and the applicable North Carolina rules."  ¶14.

The relief granted by the Court in light of this rude behavior -- after ruling that lesser sanctions would be inadequate given the "seriousness of the misconduct" (Order ¶15)  -- was to strike the Answer of these Defendants and to enter default against them.

The only punishment not delivered by Judge McGuire was not noting that Ray was engaging in the unauthorized practice of law if he was also speaking on behalf of DigiPlus LLC.

 

There Is A Difference Between "Inducing" Something and "Causing" Something

If you asked me to list my favorite torts, tortious interference with prospective economic advantage would be near the bottom of the list.

But that tort was front and center in Judge McGuire's Opinion in KRG New Hill Place, LLC v. Springs Investors, LLC, 2015 NCBC, 2015 NCBC 19, which addressed the proof required for an essential element of the tort.

To prove tortious interference with prospective economic advantage, "a plaintiff must show that the defendant, without justification, induced  a third party to refrain from entering into a contract with the plaintiff, which would have been made absent the defendant's interference."  Op. ¶4.

The Defendant Springs Investors -- which was asserting a tortious interference counterclaim -- said that the Plaintiff KRG's breach of an agreement to develop a 123 parcel of real estate caused a third party (Kaplan) to back out of a Joint Venture to develop a residential apartment complex on adjoining property owned by Springs.

Defendant said that the Plaintiff's breach had met the requirement that its actions induced Kaplan's decision to refrain from entering into the Joint Venture, because the breach had caused Kaplan's decision to decide to refuse to go ahead with the Joint Venture.

That was insufficient to make out a claim for the prospective interference tort, said Judge McGuire.  He relied on a Court of Appeals decision affirming a Business Court ruling.  In that case, the COA held, in interpreting the word "induce" in a contract, that:

The relevant definition of 'induce' is (1) 'to move by persuasion or influence[;]'
(2) “to call forth or bring about by influence or stimulation[;]' and (3) “to cause the formation of[.]' Similarly, Black’s Law Dictionary defines inducement as '[t]he act or process of enticing or persuading another person to take a certain course of action.'  We note that all of the above-cited definitions of . . . 'induce' are similar in that they involve active persuasion, request, or petition.

Op. ¶26 (quoting Inland Am. Winston Hotels, Inc. v. Crockett, 212 N.C. App. 349, 354, 712 S.E.2d 366, 369 (2011) (citing Merriam-Webster’s Collegiate Dictionary 637 (11th ed. 2005) and Black’s Law Dictionary 845 (8th ed. 2009)).

So, "inducing" something has to mean more than just causing something.  As Judge McGuire put it:

To equate 'induced' with 'caused' would mean that any type of conduct by a party that caused a third party to refrain from entering into a contract with a claimant would be grounds for asserting the claim. This would have broad implications for contractual relations in this State as it would make every contracting party potentially liable for the types of damages available for intentional torts, including compensatory and punitive damages, whenever the failure to fulfill a contract for any reason caused the other party to the contract to lose a prospective business opportunity.
 

 Op. ¶28.

Judge McGuire granted Plaintiff's Motion to Dismiss the tortious interference counterclaim because the Defendant had not made any allegations of purposeful conduct by the Plaintiff directed towards Kaplan.

Stop Asking The Business Court To Overrule An Order Of Another Business Court Judge

I don't know why lawyers keep trying to get Business Court Judges to overrule decisions by one of their predecessors.  It is just not going to happen, as illustrated (yet again) by Judge Bledsoe's decision in County of Catawba v. Frye Regional Medical Center, Inc., 2015 NCBC 17.

Judge Murphy, in October 2014, had granted summary judgment in favor of the Defendant on  Plaintiff's claims of fraud and unfair and deceptive practices.  Plaintiff, disagreeing with the ruling, first filed a Motion for Reconsideration (which it withdrew), and followed it with a "Motion for Revision."  It filed both motions after Judge Murphy's retirement.

Judge Bledsoe observed that both motions "seek the same relief -- reversal of Judge Murphy's [summary judgment order" ].  Op. ¶8.

If you read this blog, you know that the Business Court has already rejected the argument that Judge Murphy's retirement, and the resulting change in the Business Court Judge handling the case, is not a "substantial change in circumstances" giving the new Judge the authority to modify, overrule, or change Judge Murphy's Order.

But the Plaintiff in the Catawba County case made a new argument as to why Judge Bledsoe had the authority to overrule Judge Murphy.  It relied on Rule 63 of the North Carolina Rules of Civil Procedure, entitled "disability of a Judge," which says that:

If by reason of death, sickness or other disability, resignation, retirement, expiration of term, removal from office, or other reason, a judge before whom an action has been tried or a hearing has been held is unable to perform the duties to be performed by the court under these rules after a verdict is returned or a trial or hearing is otherwise concluded, then those duties, including entry of judgment, may be performed:

(1) In actions in the superior court by the judge senior in point of continuous service on the superior court regularly holding the courts of the district.

NCRCP 63.

Judge Bledsoe disagreed that Rule 63 granted him the authority to overrule Judge Murphy, stating:

Plaintiff essentially contends that [Rule 63] treats Judge Murphy’s retirement at the expiration of his term of office as an invitation to this Court to decide Defendants’ SJ Motion anew. The Court disagrees. Not only would such a reading ignore the North Carolina rule that one Superior Court judge generally cannot overrule another, but read in context, the Court concludes that Rule 63 is intended for situations where, for example, a Superior Court judge leaves the bench prior to entering a written order on a matter that has been heard, or before a matter is remanded from the appellate courts with instructions for further action. The Court does not read Rule 63 to address the situation here, where Judge Murphy received the parties’ briefs, held a hearing, issued a written order ruling on the parties’ arguments and dismissing claims, and then left the bench.

Op. ¶16.

Those of you who are civil procedure aficionados are no doubt thinking about NCRCP 54(b), which says that in the absence of a final judgment, "any order . . . is subject to revision at any time before the entry of judgment adjudicating all the claims and rights and liabilities of all the parties."

Judge Bledsoe recognized that his Opinion means that a party loses its "right to seek revision of a summary judgment ruling by the trial court under Rule 54(b) when the issuing Superior Court Judge retires or otherwise leaves the bench prior to the entry of a final judgment."  Op. ¶16.

Judge Bledsoe also observed that allowing him to overrule Judge Murphy's decision would invite a "potential sea of motions. . . from disappointed litigants seeking to overturn decisions issued in the last weeks of [a] departing judge's service on the bench."  Op. ¶17 & n.2.

So what's the remedy for the unhappy Plaintiff in this case?  As Judge Bledsoe put it, "the party's redress is with the North Carolina appellate courts and not with another Superior Court judge."  Op. ¶17.

 

A Valuable Point From The NC Business Court On Subpoenas Without Depositions

Can you send a subpoena duces tecum -- which translated from Latin is "a writ commanding a person to produce in court certain designated documents or evidence " --  without coupling it with a deposition?

Maybe that question has never puzzled you, but in an Order of the Business Court on February 12, 2015 in Harriott v. Central Carolina Surgical Eye Associates, P.A. Judge Bledsoe answered whether a subpoena duces tecum can be served without noticing a deposition in conjunction with the subpoena.

Plaintiff had served a subpoena duces tecum on several entities which were not party to the case. Those entities objected contending that a "subpoena duces tecum must be issued in conjunction with a proceeding in which testimony is to be received."

Judge Bledsoe disagreed, ruling "a subpoena duces tecum . . . can . . . be used to compel a non-party to produce documents without a concurrent request to testify."  Order at 1-2.

The governing Rule of Civil Procedure (NCRCP 45) is less than clear on this point. It says that a "command to produce records, books, papers, electronically stored information, or tangible things may be joined with a command to appear at trial or hearing or at a deposition, or any subpoena may be issued separately." NCRCP 45(a)(2).

The federal rule, by contrast,  is explicit on being able to serve a subpoena for documents without a contemporaneous deposition.  It says that:

Combining or Separating a Command to Produce or to Permit Inspection . . . . A command to produce documents, electronically stored information, or tangible things or to permit the inspection of premises may be included in a subpoena commanding attendance at a deposition, hearing, or trial, or may be set out in a separate subpoena.

FRCP45(a)(1)(C).

So, if there was any doubt about this practical nuts and bolts issue, state law practice is now consistent with the federal rule.  Subpoena away.  At least in the Business Court.

The Business Court Rules Again On Claims Under The North Carolina Securities Act

Last week's decision in Atkinson v. Lackey, 2015 NCBC 13 doesn't tell you everything you wanted to know about the North Carolina Securities Act (the "NCSA"), but it comes pretty close.

The lawsuit was brought by three individuals who had made investments in the Pacific Fund, a defendant LLC.  The individual Defendants -- Lackey, Saldarini, and Mehler -- were the members of Pacific Capital, which was in turn the sole manager of the Pacific Fund.

The Plaintiffs alleged that their investments in the Pacific Fund had been fraudulently induced by Lackey, Saldarini, and Mehler.  The alleged misrepresentations were that the Pacific Fund owned various properties in high-end residential communities on the South Carolina coast.

The Atkinson case is the latest in a small handful of cases brought under the NCSA that have resulted in rulings from the Business Court.  The others are: NNN Durham Office Portfolio 1, LLC v. Highwoods Realty Limited Partnership, 2013 NCBC 12, Associated Packaging, Inc. v. Jackson Paper Manufacturing Co., 2012 NCBC 13, and Skoog v. Harbert Private Equity Fund, II, LLC, 2013 NCBC 17.  I wrote about NNN Durham and Associated Packaging on this blog, but missed Skoog.

Standing: Were The Fiduciary Duty Claims Direct Or Derivative?

The first issue up for consideration by Judge Bledsoe in Atkinson was whether the Plaintiffs had standing to bring their claims for a breach of fiduciary duty. That issue turned on whether the claims were direct or derivative.  An LLC member or corporate shareholder generally cannot pursue a direct cause of action against a third party for the loss of the value of his investment.  Barger v. McCoy Hilliard & Parks, 346 N.C. 650, 660, 488 S.E.2d 215, 220-21 (1997).

The exceptions to the "Barger Rule" -- rarely met -- are that direct claims may be brought by an LLC member or shareholder when "the wrongdoer owed him a special duty, or (2) that the injury suffered by the guarantor is personal to him and distinct from the injury sustained by the corporation itself."  Id. at 659, 488 S.E.2d at 221.

Judge Bledsoe did not have to plow any new ground to find that the Plaintiffs before him were owed a "special duty."  The NC Court of Appeals held more than thirty years ago that a special duty exists "when the wrongful actions of a party induced an individual to become a shareholder."  Howell v. Fisher, 49 N.C. App. 488, 498, 272 S.E.2d 19, 26 (1980).  Since the Plaintiffs alleged that the Defendants had made misrepresentations in order to obtain their investment, the Plaintiffs had standing to pursue their claims.

Securities Fraud Claims: Primary and Secondary Liability

Standing was not an issue for the state securities fraud claims.  G.S. §78A-56(a)(2) provides an individual cause of action for "any person purchasing a security."

There are "two different pathways" to liability under the NCSA.  The first "pathway" is for "primary liability" under G.S. § 78A-56(a)(2):

which imposes primary civil liability upon “an offeror or seller of a security who (1) makes any untrue statement of a material fact, or (2) fails to state a material fact necessary for a statement which was made to not be misleading.” NNN Durham Office Portfolio 1, LLC, 2013 NCBC 12 at ¶64. To avoid primary liability, an offeror or seller must prove “he did not know, and in the exercise of reasonable care could not have known[] of the truth or omission.” Id.; Latta v. Rainey, 202 N.C. App. 587, 598, 689 S.E.2d 898, 908 (2010). Section 78A-56(a)(2). 

Op. ¶34.

The second "pathway" lies in "secondary liability":

If Plaintiffs can prove that an offeror or seller has primary liability under N.C.G.S. § 78A-56(a)(2), secondary liability will lie for “[e]very person who directly or indirectly controls [that person], every partner, officer, or director of the person, every person occupying a similar status or performing similar functions, and every dealer or salesman who materially aids in the sale,” unless that person proves that he “did not know, and in the exercise of reasonable care could not have known, of the existence of the facts by reason of which the liability is alleged to exist.” N.C.G.S. § 78A-56(c)(1) (2014).

Op. ¶35.

 

 

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