NC Business Court Schools Plaintiff's Attorney On How To File A Document Under Seal In The Court

The attorney for the Plaintiff in Preiss v. Wine and Design Franchise, LLC, 2018 NCBC 53, apparently didn't bother to read the Business Court's Rules on what must be done in order to file a document under seal.  That lawyer failed on three separate occasions to comply with the Court's procedures for sealing a document.

So Judge McGuire took the Plaintiff's lawyer to school, though pretty gently.  He said:

On the charitable assumption that Plaintiffs counsel’s continued failure to comply with the applicable BCR regarding filing under seal is a result of ignorance of the procedures, rather than a flagrant disregard for this Court’s authority, the Court will outline the applicable rules and procedures below.

Op. at 3.

Those procedures?  It's best to read the Business Court Rules, mostly Rule 5.2, but if you want a document to stay under seal, you have to file it "provisionally" under seal along with a Motion for leave for it to be filed under seal.  BCR 5.2(b).  Your Motion has to be accompanied by a brief.  BCR 7.2.

The motion and brief must contain enough information to persuade the Court that sealing is warranted. The Rule lists seven categories of necessary information:

(1) a non-confidential description of the material sought to be sealed;

(2) the circumstances that warrant sealed filing;

(3) the reason(s) why no reasonable alternative to a sealed filing exists;

(4) if applicable, a statement that the party is filing the material under seal because another party (the “designating party”) has designated the material under the terms of a protective order in a manner that triggered an obligation to file the material under seal and that the filing party has unsuccessfully sought the consent of the designating party to file the materials without being sealed;

(5) if applicable, a statement that any designating party that is not a party to the action is being served with a copy of the motion for leave;

(6) a statement that specifies whether the party is requesting that the document be accessible only to counsel of record rather than to the parties; and

(7) a statement that specifies how long the party seeks to have the material maintained under seal and how the material is to be handled upon unsealing.

BCR 5.2(b).

Most of those items are pretty easy to assemble.  But it is clear that the most critical ingredient is 5.2(b)(2), "the circumstances that warrant the sealed filing."  What is it that you are asking the Court to take out of the public eye?  I'm not aware of a published Business Court Opinion discussing what will justify a sealed filing, but Judge Bledsoe said this in a 2016 unpublished Order granting a Motion to Seal: "sealing documents from the public record may be appropriate where the documents contain business information, including pricing and cost information, that could harm a litigant's competitive standing."  Order at 2.

Remember that you start on a Motion to seal by running uphill. The Business Court will begin its consideration of a Motion to Seal:

with the 'presumption that the civil court proceedings and records at issue.  .  . must be open to the public.' The party seeking to have a filing sealed bears the burden of overcoming this presumption 'by demonstrating that the public’s right to open proceedings [is] outweighed by a countervailing public interest.'

Op. at 6 (quoting France v. France, 209 N.C. App. 406, 414, 705 S.E.2d 405, 406 (2011).

So what could be such a "countervailing public interest"?  The Business Court Rules give no guidance, but Plaintiff didn't have whatever it takes.  The document filed under seal (a brief) was immediately unsealed by the Court.

What do you have to do while your Motion to Seal is pending?  BCR 5.2(d) says that you must:

Within five business days of the filing or provisional filing file a public version of the document. The public version may bear redactions or omit material, but the redactions or  omissions should be as limited as practicable.

If you are attempting to file an entire document under seal (as this Plaintiff was):

the filing party must file a notice that the entire document has been filed under seal. The notice must contain a non-confidential description of the document that has been filed under seal.

BRC 5.2(d).

This Plaintiff''s counsel repeatedly ignored the Business Court Rules about sealing.  Judge McGuire lectured that "[t]hese rules and procedures for making sealed filings are not frivolous 'make-work' for attorneys, nor are they intended to be optional exercises"  Op. at 5 (emphasis added).

So did Judge McGuire sanction the Plaintiff?  Not now, but he reserved the right to do so.  He said:

because Plaintiffs have now failed for the third time to make efforts to comply with the applicable BCR or this Court’s past Orders, the Court takes under advisement such further relief as may be just and appropriate, including whether the complained-of conduct of Plaintiffs’ counsel merits imposition of sanctions under Rule 11 or other authority.

In Plaintiff's counsel's defense, he may have thought he was entitled to file documents under seal because the parties had agreed to a Consent Protective Order which said that "documents designated by any Party as Confidential 'shall be filed under seal.'"

But the agreement of the parties had no bearing on whether the described documents could be filed under seal.  BCR 5.2(a) says explicitly that a Protective Order dealing with sealing of documents "should include procedures similar to those described in subsections (b) through (d) of this rule."

 

 

 

NC Business Court Rejects The Idea Of A "Settlement Privilege"

Statements made in the course of settlement negotiations are inadmissible at trial, per Rule 408 of the NC Rules of Evidence.  But does that dead end to admissibility protect against the production of such items during discovery?

No, said Judge Bledsoe, in his Opinion late last month in Duke Energy Carolinas, LLC v. AG Insurance SA/NV, 2018 NCBC 38.  He could have rejected Defendant Duke's claim that communications regarding settlement of ther cases weren't subject to production on this principle:

Our courts have long recognized that '[t]he relevancy test for discovery is not the same as the relevancy test for admissibility into evidence.  To be relevant for purposes of discovery, the information [sought] need only be ‘reasonably calculated’ to lead to the discovery of admissible evidence.'  Shellhorn v. Brad Ragan, Inc., 38 N.C. App. 310, 314, 248 S.E.2d 103, 106 (1978); see also N.C. R. Civ. P. 26(b)(1); Lowd v. Reynolds, 205 N.C. App. 208, 214, 695 S.E.2d 479, 483 (2010).  If this test is met, a party may not object to a discovery request merely because 'the information sought will be inadmissible at the trial.'  N.C. R. Civ. P. 26(b)(1).

Op. ¶15.

But Defendant Duke argued for a "settlement privilege," which has been recognized by some courts.  Well, Duke didn't push for a full-blown privilege but something short of that, urging the Court to "require that a “heightened standard of relevance” be met before documents prepared for and communications made during settlement negotiations can be discovered."  Op. ¶19.

The danger of not adopting its position, said Duke, was that "“[p]arties are unlikely to propose the types of compromises that most effectively lead to settlement unless they are confident that their proposed solutions” will not be used for some purpose in later litigation“ by some future third party.”  Op. ¶20.

Judge Bledsoe disagreed, and said that Duke's argument that settlement negotiations should get special protection in discovery "has been widely criticized and rejected by the majority of federal courts that have considered the issue." Op. ¶22.

Although Judge Bledsoe refused to give accord a blanket privilege to the previous settlement negotiations, he did an in camera review of the documents which Duke sought to protect from discovery.  He denied Duke's Motion for a Protective Order to the extent that the documents involved concerned "coal combustion residuals" (i.e. coal ash) or the power plants at issue in the case.  He granted the Motion as to documents he deemed "not reasonably calculated to the discovery of admissible evidence.  These documents concerned asbestos litigation or power plants not involved in the lawsuit before him.                

The Business Court has previously held that settlement agreements are discoverable.

Tags:

Another NC Business Court Appeal Bites The Dust

I guess that every North Carolina lawyer doesn't know that since October 2014, appeals of final decisions by the NC Business Court go directly to the NC Supreme Court instead of to the NC Court of Appeals.

You didn't know that?  Well you are not alone.  The Notice of Appeal of Judge Gale's Opinion in Zloop, Inc. v. Parker Poe Adams & Bernstein, 2018 NCBC 16 dismissing all of Plaintiff's claims was addressed to the COA, not the Supreme Court. Judge Gale dismissed the appeal yesterday, in Zloop, Inc. v. Parker Poe Adams & Bernstein, 2018 NCBC 39.

In all other respects, the appeal was totally compliant with the Rules of Appellate Procedure.  It was timely, and the Notice of Appeal was properly filed in Mecklenburg County.

There are a bunch of minefields along the path of a Business Court appeal.  I've written about the ones that have exploded on an appealing party, like: not filing the Notice of Appeal in the county where the case originated, not including the Notice of Designation to the Business Court in the Record on Appeal, and like the Zloop Notice of Appeal, sending the Notice of Appeal to the wrong appellate Court.

The attorneys for the Defendant in the Zloop case, picking up immediately on the misdirection of the Notice of Appeal, moved to dismiss the appeal.

Plaintiff moved, in response, to be allowed to amend its Notice of Appeal to properly address it to the NC Supreme Court.  By then, the thirty day period to file a Notice of Appeal had run out.

Judge Gale's ruling was that he did not have jurisdiction to allow the amended Notice of Appeal and he granted the Motion to Dismiss the appeal.

Why was the trial court judge ruling on matters concerning an appeal?  You might be thinking that the motion to amend the Notice of Appeal should have been decided by the appellate court.  Rule 25(a) of the North Carolina Rules of Appellate Procedure seems to provide that.  But the Rules also provide that a case is not fully before an appellate court until the Record on Appeal is filed, and that the trial court has jurisdiction over the case until then.

Couldn't Judge Gale have shown some mercy for this minor error? Maybe you think that Judge Gale is too cold-hearted and that he could have given the Plaintiff a pass on this mistaken Notice of Appeal.  Well, no, because as Judge Gale noted in his first decision on exactly the same issue (an unpublished decision, Christenbury Eye Center, P.A. v. Medflow, Inc., he had "no discretion to allow Plaintiff to amend [its] appeal."

Can the NC Supreme Court still accept the appeal?  Yes, as the NC Supreme Court has the power to allow a deviation from its own Rules.  Appellate Rule 2, captioned "Suspension of Rules" specifically allows that.  Maybe the High Court will show some empathy for this Plaintiff as the case involves issues of first impression: whether claims for professional malpractice can be barred by the doctrine of in pari delicto, and whether North Carolina recognizes a tort claim for aiding and abetting breach of fiduciary duty (the Business Court seems pretty sure that it doesn't).

[Note: This is the first time in a long while that I have blogged about a case the day after the Opinion was handed down as opposed to a week later.  That doesn't mean that I have recovered my zip.  It means that Judge Gale's Zloop Opinion was only five pages long.  I encourage more short Opinions.  Those are easier for me to write about.]

NC Business Court On Shareholder Inspection Rights

It's been a while since the Business Court devoted a full opinion to a shareholder's rights to inspect corporate records.  But last week, Judge Bledsoe filled that gap with his Order and Final Judgment in Sharman v. Fortran Corp., 2018 NCBC 27

Fortran?  If you are thinking that Fortran Corp. must control the rights to the Fortran computer coding language, like I was, you are wrong. This Fortran Corporation is a "telecommunications system integrator dedicated to designing, sourcing, implementing and maintaining complex communications solutions."  That's what its last Annual Report says.

The Sharman Opinion deals with the request of multiple Fortran shareholders to inspect a wide swath of Fortran's corporate records.  I can't think of another area of the law where you get a statutory right to discovery before filing a lawsuit (though it's limited to what the statute says you can get).  And you are entitled to a response in five business days!  No thirty or sixty days waiting for a response.  Plus you might be entitled to recover your attorneys' fees.  I wonder why every claim by a shareholder against a director or officer for, say, a breach of fiduciary duty, isn't preceded by the use of this powerful tool.

There are two "separate and distinct categories" of inspection requests.  Op. 16 (quoting Russell M. Robinson, II, Robinson on North Carolina Corporation Law § 10.0 1(7th ed.2017)).  These are generally referred to as "absolute rights of inspection" (per. G.S.§55-16-02(a), and "qualified rights of inspection (per. G.S. §55-16-02(b)).

Absolute Right Of Inspection

Section 55-16-01(e) of the General Statutes lists certain records which a corporation is required to keep.  A shareholder is "entitled" to inspect these records:

(1)  Its articles or restated articles of incorporation and all amendments to them currently in effect;

(2) Its bylaws or restated bylaws and all amendments to them currently in effect;

(3) Resolutions adopted by its board of directors creating one or more classes or series of shares, and fixing their relative rights, preferences, and limitations, if shares issued pursuant to those resolutions are outstanding;

(4) The minutes of all shareholders' meetings, and records of all action taken by shareholders without a meeting, for the past three years;

(5) All written communications to shareholders generally within the past three years and the financial statements required to be made available to the shareholders for the past three years under G.S. 55-16-20;

(6) A list of the names and business addresses of its current directors and officers; and

(7) Its most recent annual report delivered as required by G.S. 55-16-22.

"Absolute" Doesn't Mean Automatic

Not every shareholder has these "absolute" inspection rights. Only "qualified shareholders" can exercise them.  Only those who have held their shares for more than six months before making their demand for inspection, or who hold at least five percent of any class of the corporation's shares are "qualified."  N.C. Gen. Stat. §55-16-02(g). 

"Qualified" Rights Are Tougher To Obtain

Those shareholders trying to exercise the "qualified rights" of Section 55-16-02(b) have to satisfy a more difficult standard.  The requesting shareholder must show that his:

Continue Reading...

NC Business Court: Choice Of Law Dooms Trade Secrets Claim

What choice of law rule applies to trade secrets claims?  No North Carolina appellate court has answered that question, but Judge Robinson of the NC Business Court stepped into that breach in his Opinion in SciGrip v. Osae, 2018 NCBC 10.

The Plaintiff certainly didn't like the answer, as it resulted in the dismissal of its claim for the misappropriation of its trade secrets.

Defendant Osae had worked for the Plaintiff SciGrip for years developing its adhesive products.  He then left to join a competitor, Scott Bader, Inc. (SBI).  SciGrip sued both Osae and SBI in 2008 (in another lawsuit) for Osae's violation of confidentiality restrictions which he had signed while working for SciGrip.  That first lawsuit was settled via a Consent Order, which specified that Osae could not disclose SciGrip's confidential information, and that SBI could not use it.

SciGrip sued Osae again in 2013, after he had joined another company, EBS, which is also in the adhesives industry.  This is the case in the Business Court.  EBS had filed a provisional patent application regarding its adhesives in Europe.  SciGrip alleged that the patent application contained its trade secret information and that Osae was in violation of the Consent Order.

SciGrip also sued Osae for misappropriation of trade secrets.  It sued SBI as well.  SBI, based in the UK, moved for summary judgment on the basis that all of  the alleged misappropriation of trade secrets had occurred outside of the State of North Carolina, and that NC's Trade Secrets Protection Act does not apply to misappropriation that occurred outside of the State.  Osae had done all of his work for SBBI and EBS outside of the State of North Carolina.

The case turned on whether North Carolina's  law ought to apply to the trade secrets claim.  Plaintiff argued for the "most significant relationship" test, saying the North Carolina had the most significant relationship to the events leading to the misappropriation.

Judge Robinson went with SBI's argument, that the proper test was lex loci delicti.  "Under this test, the situs of the claim is the state where the injury or harm was sustained or suffered — the state 'where the last act occurred giving rise to [the] injury.'  Op. Par. 34.

So what was the last act causing harm to the Plaintiff?  Judge Robinson said that "[m]isappropriation occurs when defendant acquires, discloses, or uses another’s trade secret without the owner’s consent or authority."  Op. Par. 35.

Osae had worked for the Plaintiff in North Carolina when he acquired its trade secrets, so that would seem to be the end of the choice of law inquiry.  But Judge Robinson looked to a North Carolina federal court ruling, and decisions from other federal jurisdictions holding

that the lex loci delicti 'is  not the place where the information was learned, but where the tortious act of misappropriation and use of the trade secret occurred.'  Domtar AI Inc. v. J.D. Irving, Ltd., 43 F. Supp. 3d 635, 641 (E.D.N.C. 2014)(concluding that plaintiffs could not bring a claim under North Carolina’s TSPA because defendants’ alleged misappropriation occurred in Canada); 3A Composites USA, Inc. v. United Indus., Inc., No. 5:14-CV-5147, 2015 U.S. Dist. LEXIS 122745, at *10 (W.D. Ark. Sept. 15, 2015) (applying North Carolina conflict of laws rules and following the approach taken in Domtar); Chattery Int’l, Inc. v. JoLida, Inc., No. WDQ-10-2236, 2012 U.S. Dist. LEXIS 57512, at *12−13 (D. Md. Apr. 24, 2012) (applying the lex loci delicti rule and stating that “[m]isappropriation occurs where the misappropriated information is received and used, not necessarily where it was taken or where the economic harm is felt”). 

Op. Par. 35.

Under this standard, Osae's alleged misappropriation occurred either in the United Kingdom, where he had worked at SBI's facilities, or in Florida, where Osae had worked for EBS.

Judge Robinson ruled that Plaintiff could not bring a claim under North Carolina's Trade Secrets Protection Act, and granted summary judgment for the Defendants.

This means that claims for violations of NC's TSPA cannot be pursued (at least in the NC Business Court) for misappropriation occurring outside of the State.  I'm already hearing gloom and doom about this decision, but Plaintiff almost immediately noticed an appeal, so we will be hearing from the NC Supreme Court on this choice of law issue.  Probably next year.

And if you are outraged at Judge Robinson's blunting of the reach of the NC TSPA, remember that "state laws may not generally operate extraterritorially."  Carolina Trucks & Equip., Inc. v. Volvo Trucks of N.A., Inc., 492 F.3d 484, 489-90 (4th Cir. 2007).  So there is nothing unusual about Judge Robinson's unwillingness to extend the TSPA's reach to conduct taking place not only outside of North Carolina, but outside of this country.

 

 

"Holding All The Cards" And Fiduciary Duty Claims

It is hard to base your case on a breach of fiduciary duty when there is a contract in place between the parties.  Contracting parties owe no special duties to each other beyond the terms of the contract.  Branch Banking & Tr. Co. v. Thompson, 107 N.C. App. 53, 61, 418 S.E.2d 694, 699 (1992).

But the NC Business Court twice in January allowed fiduciary duty claims to survive when the relationship between the parties was based on a contract.  The cases are Austin v. Regal Investment Advisors, 2018 NCBC 3 and Can-Dev, ULC v. SSTI Centennial, LLC, 2018 NCBC 9.

Breach Of Fiduciary Duty Claim Against Investment Advisor Gets Past Motion To Dismiss

The Plaintiffs in the Austin case, who had invested funds with the Defendants acting as their investment advisors, sued when the individual Defendant (Barnes) persuaded them to invest in a sketchy venture.  A key claim against the investment advisors was for breach of fiduciary duty.

You probably think that an investment advisor stands in a fiduciary relationship to his client as a matter of law (a de jure relationship), but no NC appellate decision has so held.  Judge Robinson didn't see any need to take that step, and instead ruled that the facts alleged in the Complaint were sufficient at the Motion to Dismiss stage to support a de facto fiduciary relationship.  Op. 43.  He said:

that the Complaint’s allegations regarding the relationship between the parties, the amount of discretion given to Mr. Barnes and Regal to manage Plaintiffs’ investments, and the circumstances of the Triton investment, together with the allegations that Plaintiffs, who were not sophisticated investors, relied on Mr. Barnes and Regal for their financial expertise to manage their investment accounts, are sufficient at the Rule 12(b)(6) stage to plead the existence of a de facto fiduciary relationship.

Op. 43.

Breach Of Fiduciary Duty Claim Survived Motion For Summary Judgment When Contracting Party "Held All The Cards"

So does it get tougher to get beyond the summary judgment stage when you are claiming a de facto fiduciary relationship?  It didn't for the Plaintiff in the Can-Dev decision. That Plaintiff had entered into a joint venture deal with the Defendants to develop self-storage facilities in Canada.  The contractual relationship was carefully detailed, and Judge Robinson noted the well accepted principle that 

parties to a contract do not thereby become each others’ fiduciaries; they generally owe no special duty to one another beyond the terms of the contract[.]

Op. 40 (quoting Branch Banking & Tr. Co. v. Thompson, 107 N.C. App. 53, 61, 41, 8 S.E.2d 694, 699 (1992)).

He then observed that:

the existence of a contract does not foreclose the possibility that a contracting party may repose trust and confidence in the other party, beyond the terms of the contract, such that the other party, in equity and good conscience, becomes bound to act in good faith and with due regard to the interests of the one reposing confidence.

Op. 40.

The standard for proving a de facto fiduciary relationship "is a demanding one."  Op. 37.  The NC Court of Appeals has said that "[o]nly when one party figuratively holds all the cards — all the financial power or technical information, for example — have North Carolina courts found that the special circumstance of a fiduciary relationship has arisen.” Lockerman v. S. River Elec. Membership Corp., 794 S.E.2d 346, 352 (2016).

Plaintiff Can-Dev got over that hurdle  (and at the summary judgment stage, which is all the more impressive).  The Defendants had taken over control of the development projects which were the subject of the contracts, and had failed to provide financial information regarding the projects to the Plaintiff.  Plaintiffs argued, successfully quoting the Court of Appeals' decision in Lockerman, that this "resulted in Defendants “literally ‘[holding] all the cards — all the financial power [and] technical information[.]’”

                                                                          * * *

This isn't the end of the road for the Plaintiffs in either of these cases.  They still have to prove their claims at trial, because whether a de facto fiduciary relationship exists it is "is generally a question of fact for the jury.”  Can-Dev at 40.

I should note that the Plaintiffs in the Austin case (the investment advisor case) are represented by Brooks Pierce lawyers Clint Morse and Jessica Thaller-Moran.

 

 

A Case Doesn't Have To Be "Complex" To Be Designated To The NC Business Court

The North Carolina Business Court sent a message to all lawyers practicing in the Business Court last week in Barclift v. Martin, 2018 NCBC 5.  Judge Gale said in the ruling that:

The  Court is publishing this Order & Opinion to provide guidance to the practicing bar on the statutory process for designating a case as a mandatory complex business case and to clarify apparent misconceptions regarding the requirements for designation.

Op. Par. 1 (emphasis added).

Barclift, contesting the Defendants' designation of his case as a "complex business case," argued that there was nothing complex about his case, and that it could be handled by a regular (non-Business Court) Superior Court Judge.

The "apparent misconception" referenced by Judge Gale?  That a case has to be complex in order to be designated to the Business Court.  The source of the supposed need for complexity stems from Rule 2.1 of the General Rules of Practice, which says that "the complexity of the evidentiary matters and legal issues involved" should be considered in the process of getting a case into the Business Court.

Rule 2.1 isn't totally obsolete as a method for getting a case to the Business Court, but most cases (like the Barclift case) are designated there by way of G.S. sec. 75A-45.4.  A Rule 2.1 designation involves persuading a Superior Court Judge in the County in which the case was filed that it should be a "complex business case."  The factors included in making that persuasion include its complexity.  The "local" Judge, upon being persuaded that the case should be handled by a "Superior Court Judge for Complex Business Cases", (i.e. a "Business Court Judge") then makes a recommendation to the Chief Justice of the NC Supreme Court that he or she so designate the case. Those recommendations are usually rubber stamped and the case lands in the Business Court.

The practice under Section 7A-45.4 is much more streamlined and far more automatic.  The statute lists six categories of cases that can be designated to the Business Court so long as they raise a "material issue."  "Complexity" is not necessary for these cases.

Is this ruling about the lack of a need for complexity in a 7A-45.4 designation something new from the Business Court?  Not at all.  Judge Tennille said in a ruling, over ten years ago, pretty much the same thing.  He held in Johnson v. Johnson, an unpublished Order from 2007, that:

complexity or the lack thereof is not an issue under section 7A-45.4. Section 7A-45.4 simply requires that the action involves a material issue related to at least one of six subjects, including “[t]he law governing corporations” and “issues concerning governance” and “breach of duty of directors.” N.C. Gen. Stat. § 7A-45.4(a)(1).

Order at 1 (emphasis added).

 

 

You Don't Want Your Confidentiality Agreement Evaluated Like A Non-Compete Agreement

You probably think that you can avoid having a confidentiality agreement struck down by an NC court because it doesn't have to meet the stricter standard applied to non-compete agreements.

The NC Business Court's Opinion this month in Duo-Fast Carolinas,, Inc. v. Scott's Hill Hardware & Supply Co., 2018 NCBC 2 may get you thinking differently.

The validity of a non-compete often turns in part on whether the restriction is "reasonable as to time and territory, and designed to protect a legitimate business interest of the employer."  See, e.g., A.E.P. Indus., Inc. v. McClure, 308 N.C. 393, 402–03, 302 S.E.2d 754, 760 (1983).

But a confidentiality agreement is enforceable "even though the agreement is unlimited as to time and area, upon a showing that it protects a legitimate business interest of the promisee.” Chemimetals Processing, Inc. v. McEneny, 124 N.C. App. 194, 197, 476 S.E.2d 374, 376 (1996).

In Duo-Fast, Judge McGuire found a confidentiality agreement to be invalid because it was not reasonable as to time and territory, in Duo-Fast Carolinas,, Inc. v. Scott's Hill Hardware & Supply Co., 2018 NCBC 2.  Wait, what about Chemimetals, which says that confidentiality agreements don't need to be limited as to time and territory.?

The individual Defendant in Duo-Fast, Modero,had been an outside sales representative for the Plaintiff.  He had signed an Employment Agreement saying that he would "not make known to any person. . . the contents of any customer lists."  There was no time limit on this restriction. 

Modero kept Plaintiff's customer information in his personal Yahoo email account.  Op. ¶¶5, 9.  After he left Plaintiff and began working as a sales representative for the Defendant, a direct competitor, Modero contacted some of his former customers using his Yahoo information.

Plaintiff made a number of claims against Modero and his new employer, including a claim for breach of the confidentiality provision of the Employment Agreement.  Judge McGuire ruled that provision to be unenforceable.  He found that "the non-disclosure provisions do not serve Plaintiff’s legitimate business interests, but rather seek to prevent Medero from soliciting Plaintiff’s customers in restraint of trade."  Op. 46.

Analyzing the "confidentiality provision" as a restrictive covenant, the Business Court concluded that:

prohibiting Medero’s use or disclosure of Plaintiff’s customer identities is overbroad. The non-disclosure provisions are not limited as to time, but rather are perpetual.  Such a restraint would prevent Medero from ever using the names  and contact information of Plaintiff’s customers.  Insofar as the non-disclosure provisions seek to prevent Medero from soliciting Plaintiff’s customers, they constitute an unenforceable restrictive covenant.

Op. 47.

What probably harmed Plaintiff's case was that the identities of its customers weren't confidential at all.   They were "readily ascertainable" by visiting construction sites and speaking to contractors.  Op. ¶45.

Plaintiff did not come out well in its lawsuit.  Judge McGuire found a separate non-compete provision to be unenforceable and dismissed all of Plaintiff''s claims.

 

 

NC Business Court Approves Another Disclosure Only Class Action Settlement

Judge Gale's approval last week of a class action settlement, in In re Krispy Kreme Doughnuts, Inc. Shareholder Litigation, 2018 NCBC 1 gives me another opportunity to rail against disclosure only settlements.  You know that I don't like them.  If you don’t know that, I’ve written on this subject several times. Like here, here, and here.

The Krispy Kreme shareholder class litigation followed what has become the inevitable path for almost every merger deal.  The transaction was announced on May 9, 2016.  Seven shareholder lawsuits alleging that the Krispy Kreme board members had breached their fiduciary duties in agreeing to the transaction (five in NC state courts and later consolidated in the NC Business Court) followed in the next month.

The plaintiff shareholders filed a motion for a preliminary injunction blocking any shareholder vote on the transaction until supplemental disclosures in Krispy Kreme's proxy statement were made.  The very next day, in connection with a settlement agreement, Krispy Kreme filed a Form 8-K to supplement its proxy statement.  The shareholder vote went ahead on July 27th, with 95% of those voting approving the deal.

The value of those additional disclosures was assessed by Judge Gale in determining whether to approve the settlement.  As the Opinion didn't consider the amount of attorneys' fees to be awarded to Plaintiffs' class counsel (there has not yet been an application for fees), Judge Gale assessed the "give and the get" of the "give" of the release by the class against the materiality of the additional disclosures (the "get").

North Carolina assesses materiality based on the U.S. Supreme Court's definition of that term in TSC Industries, Inc. v. Northway, 4266 U.S. 48 (1976).  The holding in TSC Industries was:

[a]n omitted fact is material if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote. . . .It does not require proof of a substantial likelihood that disclosure of the omitted fact would have caused the reasonable investor to change his vote. What the standard does contemplate is a showing of a substantial likelihood that, under all the circumstances, the omitted fact would have assumed actual significance in the deliberations of the reasonable shareholder. Put another way, there must be a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the “total mix” of information made available.

 Id. at 449.

 Okay.  Let's assume that I am a reasonable investor looking at the Krispy Kreme supplemented proxy.  Would the supplemental disclosures obtained through the blood and sweat of Plaintiffs' counsel have "significantly altered the 'total mix of information made available" to me in the original proxy? 

I don't think so.

First, "[t]he Supplemental Disclosures included the specific projected unlevered, after-tax free cash flows of Krispy Kreme for the remainder of 2017 and for the fiscal years 2018 through 2023,as derived from the financial projections provided to Wells Fargo by Krispy Kreme management."  This disclosure was designed to deal with the lack of disclosure of Krispy Kreme’s specific projected unlevered after-tax free cash flows Wells Fargo used in its DCF analysis."  Op.  

That would not change the mix of information before me because it is actually meaningless to me,  Unlevered?  Come on.  What?  I don't have a clue what that supplemental disclosure means.  Maybe a hedge fund manager or an MBA student focusing on finance would.  But they would be too knowledgeable to be considered "reasonable investors". 

Class counsel argued that the differences between the discounted cash flow analyses, while "slight in any particular year" that "the differences over time have greater significance."  Op. ¶58.  Judge Gale accepted that as "a reasoned argument that some shareholders might have found" that the Supplemental Disclosure regarding the DCF analysis was material."  Op. ¶58. 

The next supplemental disclosure has a little more meaning to me.  It was in response to Plaintiffs complaining that the original Proxy did not disclose whether the Krispy Kreme board "had discussed post-Merger employment opportunities at the inception of merger negotiations."  Op. ¶52.

 

 In a less than stunning supplemental disclosure, the Defendants added this nugget of questionable value:

 

that Krispy Kreme board members, in preliminary discussions about a potential merger . . . discussed [the buyer's] 'history or managing its portfolio companies for long-term growth and relying on company management to run the business.'

Op. ¶52.

So board members also employed by Krispy Kreme might have been influenced to vote in favor of the transaction because they might keep their jobs?  That speculation makes no difference to me.  And how many board members served in company management?  Did they have excessively rich employment contracts being drafted with the buyer of Krispy Kreme's assets?  Were their votes essential to the approval of the deal? 

Another supplemental disclosure concerned the previous relationship of Wells Fargo -- the investment banker on the deal --- to Krispy Kreme and its acquiror. 

The supplemental disclosures revealed that in the two years before the deal was struck, Krispy Kreme had paid Wells Fargo $300,000 for "investment banking services" and that an affiliate of the buyer had paid Wells Fargo $1 million "in connection with corporate loans."  Op. 52.

Would that have caused reasonable investor me to discount Wells Fargo's analysis of the transaction because they were tainted by their previous receipt of fees?  No.  $1.3 million doesn't carry the influence that it used to.

There's at least one other Krispy Kreme ruling imminent from the Business Court.  That will be the ruling on the fee application from the Plaintiff class' lawyers.  I will be watching for that.

I should probably disclose that I prefer Dunkin’ Donuts over Krispy Kreme.

 

NC Business Court On Conversion Of Electronic Data

The Defendant in SQL Sentry, LLC v. ApexSQL, LLC, 2017 NCBC 105 was alleged to have copied the Plaintiff's software program which was designed to make "resource intensive T-SQL queries. . . in the Microsoft enterprise database platform, SQL Server."  Op. Par. 5.  (Ask your IT person).

Adding insult to injury, the Defendant marketed the program it had copied under the same trademark used by the Plaintiff  to sell its competing program ("Plan Explorer"). 

So, when representatives of this Plaintiff walk into your office, what claims do you fire off in your Complaint against that thieving Defendant?  Trademark infringement, obviously.  How about a claim for conversion?

Maybe.  Electronic data is personal property, so it falls into the category of property which is subject to a claim for conversion.  Op. ¶14.

But the Plaintiff ran into a problem with its conversion claim.  It still had full access to its software, and that killed its conversion claim.

The NC Business Court has repeatedly "held that making a copy of electronically-stored information which does not deprive the plaintiff of possession or use of information, does not support a claim for conversion.” Op. ¶15 (citing RCJJ, LLC v. RCWIL Enters., LLC, 2016 NCBC 44, ¶67; accord New Friendship Used Clothing Collection, LLC v. Katz, 2017 NCBC 71, ¶77; Strategic Mgmt. Decisions, LLC v. Sales Performance Int'l, LLC, 2017 NCBC 68, ¶18; Addison Whitney, LLC v. Cashion, 2017 NCBC 50, ¶39.

Trying to fit a 21st century development like ESI into a tort like conversion, which has been around since the 1500's, is like trying  to fit a round peg into a square hole.

If you are insistent on including a conversion claim in your lawsuit over improper copying of electronic data, you might do better suing in federal court.  The United States District Court for the Western District of North Carolina has recognized such a claimBridgetree, Inc. v. Red F Marketing, LLC, 3:10CV228-FDW, 2013 WL 443698 (W.D.N.C. Feb. 5, 2013).

But avoid the NC Business Court.