These Class Action Lawyers Made Their Fees The Old-Fashioned Way. They Earned Them!

It's not very often that I see a fee application in a settled class action in the Business Court that doesn't strike me as requesting approval of an overpayment for a less than successful result.  Those are most often in the settlement of merger class action in which the only benefit for the class was the extraction of additional disclosures in a proxy statement.

But last week, looking at the Order approving a class action settlement and a fee petition in Elliott v. KB Home North Carolina, Inc., 2017 NCBC 37, I had exactly the opposite reaction.  It was an excellent result for the class members, and the nearly $2 million in attorneys' fees approved by the Business Court were well earned.

I've written about the Elliott case three times: The class was certified by Judge Jolly in 2012.  Judge Jolly ruled later that KB Home had waived its right to compel arbitration of the claims.  After Judge Jolly's retirement, Judge McGuire ruled that he could modify the membership of the previously certified class due to a change in circumstances.  The class members are homeowners in North Carolina living in houses built by KB Home.  The houses were constructed with siding manufactured by HardiePlank that did not have a weather restrictive barrier (a WRB) behind the siding.  The houses were then damaged by water infiltration.

This is not a settlement where the class members receive something like coupons towards a future home purchase.  Instead, there is real and substantial money being paid to them.  Depending on the square footage of their homes, class members who are current homeowners can be paid between $6500 and $17,000.  In the alternative, these class members can have their existing siding and replaced with new HardiePlank, this time with the missing WRB.

There is also a subclass of class members who have already sold their homes.  These subclass members are entitled to receive either a lump sum payment of $3250 or to prove that the selling price of their home decreased due to the lack of a WRB.  This type of recovery is capped at $12,000.

There is no doubt that the lawyers worked hard to achieve this result, as detailed in the Affidavit of lead counsel in support of the fee petition.  They filed or responded to twenty-seven briefs in the trial court and eight briefs in the appellate courts.  They reviewed 46,000 pages of documents produced, and they took or defended or attended forty-four depositions in five states.  Fee Affidavit ¶41.

Judge McGuire wrote in glowing terms of the qualifications of class counsel.  He said that they had "decades of experience litigating construction product defect cases on an individual, multi-family, and class basis."  He called one of the lawyers "one of the nation's most respected and experienced attorneys in these areas."  Order ¶37.

As a part of the settlement agreement, the Defendants agreed that they would not oppose a request for fees and expenses not to exceed $1,925,00.  That is exactly the amount requested by Plaintiffs' counsel: including $148,493.61 in out-of-pocket expenses and $1,776,506.39 in attorneys' fees.

That fee amounted yielded an "implied hourly rate" of $337.28 (based on 5,267 hours of work), which was approved as reasonable by Judge McGuire. Order ¶¶40-41.  That hourly rate is within the ranges previously approved as reasonable by the Business Court -- like $325.04 per hour in Corwin v. British Am. Tobacco PLC, 2016 NCBC 14 at *15 and between $300 and $500 per hour in Nakatsukasa v. Furiex Pharms., Inc., 2015 NCBC 71 at *24.

I have a hard time reconciling this fee petition to the one from the lawyers representing the class in the Ehrenhaus case (which challenged the merger years ago between Wachovia and Wells Fargo).  The Ehrenhaus lawyers asked for $1,975,00, almost the same as the request by the Elliott lawyers ($1,925,000).  But the Ehrenhaus lawyers obtained nothing of value for that class.  Also, they did not bother to submit any records regarding the hours worked on the case, other than to claim having spent 2300 hours on the case (less than half of the 5267 hours spent by the Elliott lawyers).  They took four depositions (the Elliott lawyers took forty-four) and reviewed 9,500 pages of documents (far less than the 46,000 obtained by the Elliott lawyers).  The Ehrenhaus settlement, moreover, came just a couple of months after the lawsuit was filed.  The Elliott lawyers worked their case for eight years.

The Ehrenhaus fee petition of $1,975,000 ended up getting chopped down by Judge Diaz of the Business Court by nearly half (to $1 million).

Is There A "Secret Rule" In The NC Business Court Regarding Motions To Compel?

Thinking of filing a Motion to Compel in the NC Business Court?  You might want to file it before the close of the discovery period, even though there is no Business Court Rule establishing a deadline for doing so.

That's because there might be a "secret rule," based on Judge Robinson's (unpublished) Order last week in Carmayer LLC v. Koury Aviation.

Here was the situation: The parties were litigating over the Defendant's alleged misrepresentations as to its ability to rent out at a profit an airplane that it advised the Plaintiff to purchase.  In discovery, the Plaintiff asked for financial information as to other aircraft rented out by the Defendant.  The Defendant refused to provide the information.

The Plaintiff initiated a discovery dispute to the Business Court per new BCR 10.9 in January 2017.  In February, Judge Robinson indicated that the requested financial information seemed to be relevant and within the scope of discovery.  Although he did not issue a formal ruling per BCR 10.9(b) (which he wasn't required to do), he stated that he would be likely to grant a Motion to Compel if one were filed.

The discovery period ended a week later, on February 15, 2017.  Five weeks later, the Plaintiff filed a Motion to Compel production of the financial information.

There is neither a Business Court Rule nor an NC Rule of Civil Procedure prohibiting the filing of a Motion to Compel after the discovery period is over.

Likewise, as Judge Robinson observed: "the North Carolina appellate courts have not established a bright-line rule governing the propriety of motions to compel filed after the close of discovery."  Op. ¶16.

Federal courts, on the other hand, take the position that "[g]enerally, in order for a motion to compel to be timely, it must be filed before the end of discovery."  Op. ¶17.  Judge Robinson cited two opinions from North Carolina district courts questioning or denying motions to compel filed at the end of the discovery period or after it.  PCS Phosphate Co., Inc., v. Norfolk Southern Corp., 238 F.R.D. 555, 558 (E.D.N.C. 2006); Greene v. Swain Cty. P'ship for Health, 342 F. Supp. 442, 449 (W.D.N.C. 2004).

It's not always possible to file a Motion to Compel before the close of discovery.  What about the opposing attorney improperly instructing her witness, at a deposition taken on the last day of discovery, to refuse to answer a question?  Or an inadequate response to written discovery served at the very end of the discovery period?

There are exceptions to every rule, even those that might be "secret."  Federal courts look to a variety of factors when deciding whether to exercise their discretion to rule on a motion to compel filed after the end of discovery.  The case relied on by Judge Robinson, Days Inn Worldwide, Inc. v. Sonia Investments, 237 F.R.D. 395, 397-98 (N.D. Tex. 2006)(Op. ¶18), put those factors as follows:

(1) the length of time since the expiration of the deadline, (2) the length of time that the moving party has known about the discovery, (3) whether the discovery deadline has been extended, (4) the explanation for the tardiness or delay, (5) whether dispositive motions have been scheduled or filed, (7) the age of the case, (8) any prejudice to the party from whom late discovery was sought, and (9) disruption of the court's schedule.

Id. 397-98.

Considering those factors, Judge Robinson ruled the Motion to Compel to be untimely and refused to consider it.  He noted that:

  1. The Motion was filed five weeks after the close of discovery.
  2. It was filed roughly ten months after the Defendant initially objected to the discovery request and when Plaintiff therefore was aware of the Defendant's unwillingness to produce the requested financial information.
  3. The Plaintiff failed to file its Motion immediately, but waited weeks after knowing of the Court's position on the discovery.  There was not an adequate explanation for its delay.
  4. The Motion was filed after the Defendant had filed a Motion for Summary Judgment, which would "disrupt the schedule of [the] litigation."

Op. ¶22.

Despite my reference to a "secret rule," there is no indication in Judge Robinson's Order that this is a rule that will control in other cases before him or whether it will be applied by the other Business Court Judges.  And, if Judge Robinson had wanted to send a message to lawyers practicing in the Business Court. he probably would have published the Order.  Nevertheless, it's safer not to wait until after discovery has ended to file a Motion to Compel.  Unless you can't avoid it.

It Doesn't Take Magic Words To Revoke An Offer

The lawyers in Baker v. Bowden, 2017 NCBC 30, decided this week by Judge Robinson, were negotiating a settlement agreement by email.  The Plaintiff thought that it had a deal.  When the Defendant balked, the Plaintiff moved the Business Court to enforce the settlement. 

The Plaintiff, whose lawyer had sent an email to the Defendant's lawyer stating "[m]y client accepts the offer," found that there was no offer anymore, and no enforceable agreement.

The Plaintiff's lawyer thought in accepting the offer that the Defendant's offer was still open for acceptance.  But even the Defendant's lawyer wasn't sure if it was.  His last email to Plaintiff's counsel said:

in the interim since yesterday afternoon my client is actually having second thoughts about his offer, so I’m not sure it’s still on the table. I’m not saying it isn’t, but I need to talk with him and see if I can work him through this. I’ll let you know later this afternoon.

Op. ¶12.

The Plaintiff's email accepting the by then questionable offer followed this email, but Judge Robinson concluded that the "second thoughts" email was a valid revocation of the offer.  Op. ¶23.  You don't need to use the word "revoke" to withdraw an offer, and "[a]ny clear manifestation of unwillingness to enter into the proposed bargain is sufficient."  Op. ¶23.

The situation before the Court was spelled out in the Restatement (Second) of Contracts, which gives this example of a similar situation when an offer is revoked:

when an offeror states, “Well, I don’t know if we are ready. We have not decided, we might not want to go through with it." 

Op. ¶22 (quoting Restatement (Second) of Contracts sec. 42, comment d).

Reliance on the Restatement as authority seems like a firm foundation.  The Restatement is said to be "a work without peer in terms of overall influence and recognition among the bar and bench."

First Published Opinion From New Business Court Judge Conrad

Business Court Judges don't have to issue written Opinions in cases granting Preliminary Injunctions.  (G.S. § 7A-45.3 limits the obligation to issue a written Opinion to rulings rendered per NCRCP 12, 56, 59, and 60).  But even so, new Business Court Judge Conrad chose a case granting a Preliminary injunction (Addison Whitney, LLC v. Cashion, 2017 NCBC 23) to be his first published (numbered) Opinion.

The Plaintiff, Addison Whitney, is a branding company.  Among other things, it creates product names, and has done so for a number of famous companies,  It came up with "Outlook" for Microsoft and "Escalade" for Cadillac.  It has a specialty in creating names for new drugs from pharmaceutical companies. 

Addison Whitney sued the Defendants -- all of whom had formerly held top positions at Addison Whitney -- after they left en masse and started a competing company.  Several of the Defendants had signed "Confidential Information and Unauthorized Disclosure Agreements" and "Employee Confidentiality Agreements."  One Defendant had signed an Employee Confidentiality Agreement which contained a non-compete provision.  The other Defendants had not signed any document containing a non-compete.

What Were The Trade Secrets?

Addison Whitney argued that it had three separate categories of trade secret information. 

First, it said that it had "created a database that contains information regarding drug product characteristics for nearly 4,000 drug products on the market.”   This was a mix of publicly accessible information and of information that was "not publicly available and chosen based on the 'professional judgment' of Addison Whitney employees." Op. ¶18.  This database was password-protected.

Second, Addison Whitney maintained 246 case studies of work it had done for particular clients which contained non-public information regarding its work and sometimes the confidential information of clients.  These were also password protected. 

Finally, Addison Whitney kept its client and prospective client information on SalesForce, a "customer relationship management program."  Addison Whitney put non-public information about clients’ buying habits and upcoming product into SalesForce.  Only a limited number of Addison Whitney employees had access to its SalesForce platform.

Addison Whitney said that each of these three categories of trade secret information gave it a "competitive advantage."  Judge Conrad ruled that all of these types of information are entitled to trade secret protection..  As to the client information, he said that North Carolina courts "routinely hold that such information is protectable as a trade secret".  Op. ¶35 (citing Drouillard v. Keister Williams Newspaper Servs., Inc., 108 N.C. App. 169, 174, 423 S.E.2d 324, 327 (1992); Computer Design & Integration, LLC v. Brown, 2017 NCBC LEXIS 8 at *27–28).

Establishing Misappropriation Of A Trade Secret

Since the Defendants, as former employees, had legitimate access to the Plaintiff's trade secrets, the existence of access and opportunity to acquire them was insufficient to establish misappropriation.

Relying on Judge Bledsoe's recent opinion in Am. Air Filter Co. v. Price, 2017 NCBC LEXIS 9, at *23, Judge Conrad held that:

there must be substantial evidence (1) that the wrongdoer accessed the trade secret without consent, or (2) of misappropriation resulting in an inference of actual acquisition or use of the trade secret.

Op. ¶38.

Access without consent can be shown by "showing that an employee continued to access trade secrets after receiving a job offer from a competitor and then later accepted the offer"  Op. ¶39.

The "relevant inquiry," per Judge Conrad, was "when Defendants’ plan to resign and to open their own competing business became sufficiently concrete to render continued access to trade secrets unauthorized."  Op. ¶39.

Since the Defendants told others at the company in December 2016 that they were planning to resign, Judge Conrad ruled that was the point after which their trade secret access became unauthorized.

After that point, they obtained copies of the case studies, a list of clients with open opportunities, and a list of prospective clients.  They also accessed a number of other documents both before and after resigning.  These included accessed "client brand guidelines, market research, linguistic reports, naming strategy briefs, and client strategy presentations.”  Op. ¶25. 

Continue Reading...

NC Business Court On Conflicting Rules Of Civil Procedure: Do You Need Leave Of Court To Amend Your Answer To Add A Counterclaim?

If I asked you if you were familiar with Rule 13(f) of the NC Rules of Civil Procedure, I'm betting that you would respond with a glassy stare and a slack jaw.  That Rule deals with a counterclaim that you should have made in your Answer, but which you left out.  It says that "[w]hen a pleader fails to set up a counterclaim through oversight, inadvertence, or excusable neglect, or when justice requires, he may by leave of court set up the counterclaim by amendment."

Leave of Court?  Asking permission?  Well, how does that square up with NCRCP 15, which deals with "amended pleadings?" That Rule says that you can amend your Complaint "as a matter of course" (i.e. without "leave of the Court") at any time before a "responsive pleading is served."  But Rule 13(f) seems to contemplate that the permission of the Court is needed before amending an Answer to raise an overlooked counterclaim. 

Judge Robinson dealt with these apparently conflicting Rules last week in Recurrent Energy Development Holdings, LLC v. Sunenergy1, LLC, 2017 NCBC 18.  Defendant Sunenergy1 had amended its Answer to add a counterclaim.  It did so within thirty days of filing its original, counterclaim-less Answer, but without asking for the permission of the Business Court.

The Plaintiff moved to strike the Answer, contending that NCRCP 13(f) required leave of Court  to add the counterclaim.

Judge Robinson, finding no North Carolina appellate authority on the point, looked to federal court decisions, though he found the federal case law to be "scant."  The majority of federal courts looking at the federal version of the Rule had decided that:

a party may amend its answer to add a counterclaim as a matter of course under Federal Rule 15(a), and that leave of court under Federal Rule 13(f) was only required after the period for amendment under Federal Rule 15(a) had expired.

Op. ¶87.

Judge Robinson observed that "a few other courts" had found otherwise.  Op. ¶88.

There really wasn't any need to decide which line of federal cases to follow because the Federal Rules were amended in 2009 to delete Rule 13(f).  The reason for the deletion was that the Rule was "largely redundant and potentially misleading."  Op. ¶93 (quoting Notes of Advisory Committee on 2009 amendments).  The Notes to Rule 15 state that the deletion of Rule 13(f) "establishes Rule 15 as the sole rule governing amendment of a pleading to add a counterclaim."

Judge Robinson interpreted the deletion of FRCP 13(f) to confirm that FRCP 15(a) "was always intended to apply to amendments to add counterclaims."

So, you do not need to file a Motion asking the Court to permit you to add a counterclaim to your Answer if you add that counterclaim within 30 days of your original Answer.  You can do that as "a matter of course."

Defending A Former Employee On a Non-Compete Or For Misappropriation Of Trade Secrets? Read This.

Do you really have to rush to Court to obtain an injunction for a misappropriation of trade secrets?  Maybe not.  But for an injunction enforcing a non-compete agreement, maybe yes.  The Plaintiff in American Air Filter Co. v. Price, 2017 NCBC 9 didn't get its non-compete enforced (partly due to its delay in filing suit), but that same delay didn't prevent it from getting an injunction to block its former employee from disclosing its trade secrets to his new employer.

Employers Who Wait Too Long To Seek An Injunction To Enforce A Non-Compete Run A Risk

First, as to non-compete agreements, it's best to move quickly if you want to enjoin a former employee from violating her covenant not to compete.  The Plaintiff in American Air Filter Co. v. Price waited nearly four months to seek a preliminary injunction.  Judge McGuire said its lack of urgency refuted its claim of the irreparable harm essential to the entry of an injunction.

He said that:

It is . . . significant that Plaintiff learned Price was employed with [a competitor] in late August, 2016, but did not file this action until November, 2016, did not seek a TRO to enforce the non-competition covenant, and did not move for a preliminary injunction until December 9, 2016. Plaintiff’s lack of urgency in seeking injunctive relief counsels against the idea that it is likely to suffer irreparable harm.

Op. ¶29 (emphasis added). 

The same delay didn't affect Plaintiff's proof of irreparable harm as to the threatened disclosure of its trade secrets.  Judge McGuire said that:   

The acquisition and potential disclosure or use of the information in Plaintiff’s confidential databases, which contain extensive data collected by Plaintiff from its customers and proprietary costing formulas, would cause irreparable harm to the Plaintiff.
      Op. 51.

Defending A Former Employee Accused Of Misappropriating Trade Secrets

The more interesting points of American Air Filter concern what is necessary to make out the requisites for a trade secrets injunction, and how a former employee can defend against one.

First, Judge McGuire held that it is not necessary to show that misappropriation of a trade secret  has actually occurred in order to obtain an injunction under the TSPA.  Op. 40.  There's nothing groundbreaking here.  The COA held in  Horner Int’l Co. v. McKoy, 232 N.C. App. 559, 569-70, 754 S.E.2d 852, 859-60 (2014), that a "threat of misappropriation was sufficient to warrant an injunction under the TPSA.  And the language of the statute itself does not require actual misappropriation for an injunction.  It says that "actual or threatened misappropriation of a trade secret may be preliminarily enjoined."  N.C. Gen. Stat. § 66-154(a).

Rebutting The Trade Secret Plaintiff's Burden Of Proof

There is a difficult issue regarding the burden of proof in making out a trade secrets case.  You might think that would be an easy matter.  After all, North Carolina's version of the Uniform Trade Secrets Act contains a provision titled "burden of proof." That provision is not present in the Uniform Act.  It says that:

Misappropriation of a trade secret is prima facie established by the introduction of substantial evidence that the person against whom relief is sought both:

(1)        Knows or should have known of the trade secret; and

(2)        Has had a specific opportunity to acquire it for disclosure or use or has acquired, disclosed, or used it without the express or implied consent or authority of the owner. 

This prima facie evidence is rebutted by the introduction of substantial evidence that the person against whom relief is sought acquired the information comprising the trade secret by independent development, reverse engineering, or it was obtained from another person with a right to disclose the trade secret. This section shall not be construed to deprive the person against whom relief is sought of any other defenses provided under the law. 

N.C. Gen. Stat. § 66-155.

All of the bases for rebuttal of the prima facie case in North Carolina's statute assume that the Defendant has acquired the trade secrets.  What about a Defendant who had access to the trade secrets but defends on the basis that she never acquired or used trade secrets at all? Are there any other ways to rebut the prima facie case than those specified in the statute?

Judge McGuire framed the problem this way:

If these grounds were exclusive, an absurd result would follow: Every employee in North Carolina who had access to her employer's trade secrets but did not acquire them would have to go to trial to fend off the employer's claim of misappropriation.

Op. 42 (quoting RLM Communications, Inc. v. Tuschen, 831 F.3d 190, 200-01 (4th Cir. 2016).

The author of the RLM decision from the Fourth Circuit relied upon by Judge McGuire, navigating in territory without precedent for a guide, said that "[w]e do not think the Supreme Court of North Carolina, which has not had occasion to consider the meaning of the statute, would adopt such an interpretation." 

If your reaction, like mine, was what expertise could a federal Fourth Circuit Judge have to offer regarding how the NC Supreme Court might interpret North Carolina state trade secrets law, we are wrong.  The author of the RLM decision was Judge Albert Diaz.  If you don't remember Judge Diaz, he was a former (the second) Judge on the NC Business Court. He was nominated by President Obama in 2009 to serve on the Fourth Circuit and confirmed not long after his nomination.

So what is the standard applied to a former employee who admits that he had access to trade secrets, but defends on the basis that he did not acquire them?  Judge McGuire, relying on the RLM decision, said that:

Evidence that a former employee had access to, and therefore an 'opportunity to acquire,' an employer’s trade secrets, without more, is not sufficient to establish a prima facie case of misappropriation.  Rather, the employer must establish either that the former employee accessed its trade secrets without authorization or provide other sufficient evidence of misappropriation to raise an inference of actual acquisition or use of its trade secrets. 
Op. 45 (emphasis added).

Adopting that somewhat more difficult standard didn't help the Defendant before Judge McGuire.  He was working for a direct competitor of the Plaintiff in pretty much the same job he had held with the Plaintiff.  The Defendant had continued to access the Plaintiff's computer systems after being offered a job by the corporate Defendant.  Also, when the individual Defendant resigned from the Plaintiff, he didn't inform his employer that he was going to work for a competitor.  And he continued to access Plaintiff's trade secret information after he resigned.
 
Judge McGuire found that these facts established a likelihood of success on the merits, and granted a preliminary injunction prohibiting the individual Defendant from disclosing the Plaintiff's trade secrets.
 

 

NC Business Court: What Is Intrusion Into Seclusion?

I had never heard before of a "privacy tort" claim for "intrusion into seclusion."  But it exists in North Carolina per Judge Gale's Opinion in Dishner v. Goneau, 2017 NCBC 7, decided in the NC Business Court this week.  This is not a brand new tort.  It has been recognized by the NC Court of Appeals in the cases cited by Judge Gale (see below) and is even spelled out in the Restatement (Second) of Torts §652.

What is it?  "[T]he intentional intrusion, 'physically or otherwise, upon the solitude or seclusion of another or his private affairs or concerns.'”  Op. 43.  (quoting Miller v. Brooks, 123 N.C. App. 20, 26, 472 S.E.2d 350, 354 (1996) (quoting Smith v. Jack Eckerd Corp., 101 N.C. App. 566, 568, 400 S.E.2d 99, 100 (1991)).

The tort typically requires “a physical or sensory intrusion or an unauthorized prying into confidential personal records.”Op. Par. 43 (quoting Broughton v. McClatchy Newspapers, Inc., 161 N.C. App. 20, 29, 588 S.E.2d 20, 27(2003)).

The intrusion furthermore must be "highly offensive to a reasonable person."  Op. 43.

The allegations of the Plaintiff as to the intrusion into seclusion didn't pass muster.  He said that the Defendant, his former partner, had accessed his private email account without authorization and had sent emails to persons who were his contacts.  Judge Gale dismissed that claim without prejudice in the event that the Plaintiff could restate the claim "with adequate supporting detail."  Op. 46.

If you are thinking that this allegedly unauthorized intrusion into Plaintiff's computer sounds like a claim that could be brought under the Computer Fraud and Abuse Act, 18 U.S.C. §1030, so did the Plaintiff.

But that claim was dismissed as well.  That statute requires that the Plaintiff plead and prove at least $5,000 in loss as a result of the violation.  18 U.S.C. §1030(g).  Judge Gale said that "loss of goodwill, business opportunities, or revenue resulting from improperly acquired information do not constitute 'loss' within the meaning of the CFAA."  Op. 41.  He said that the $5,000 loss required under the statute must be "related to fixing a computer."  Id.

Judge Gale's narrow interpretation of "loss" under the CFAA was based on  Nexans Wires S.A. v. Sark-USA, Inc. 319 F. Supp. 2d 468, 475 (S.D.N.Y. 2004), aff’d, 166 F. App’x 559 (2d Cir. 2006), which contains a pretty thorough discussion of the point.

Internal Affairs Doctrine Leads To Dismissal Of An Aiding And Abetting A Breach Of Fiduciary Duty Claim By NC Business Court

A lot of North Carolina court decisions have questioned whether a claim for "aiding and abetting a breach of fiduciary duty" can be made in North Carolina  (many of them are cited in ¶16 of the Islet Sciences Opinion referenced below). Most of those decisions have cast doubt on whether that claim is recognized at all in North Carolina, including several in the Business Court.  But no Business Court Judge has been willing to dismiss an aiding and abetting breach of fiduciary duty claim on the basis that it is not a valid claim in North Carolina

So parties keep asserting that questionable claim.  I wish they'd quit.  It's a dead end.

Business Court Judge McGuire dismissed such a claim earlier this month in an Opinion in Islet Sciences, Inc. v. Brighthaven Ventures, LLC, 2017 NCBC 5.  The individual Defendants, Green and Wilkinson, had been officers and directors of the Plaintiff and therefore owed it a fiduciary duty.  They were also the owners of the Defendant Brighthaven, whose merger discussions with the Plaintiff had fallen through.  The Plaintiff alleged in support of its claim that Brighthaven had provided "substantial assistance to Green and Wilkinson in breaching [their] fiduciary duties" and had therefore aided and abetted those breaches. Op. ¶15.

The Internal Affairs Doctrine

The Plaintiff, a Nevada corporation, argued that the law of Nevada -- which recognizes an aiding and abetting breach of fiduciary duty claim -- should control and that Defendant Brighthaven's Motion to Dismiss should be denied.  The argument for the application of Nevada law was premised on the internal affairs doctrine.

Maybe you don't remember the internal affairs doctrine.  The NC Court of Appeals has defined it as:

a conflict of laws principle which recognizes that only one State should have the authority to regulate a corporation's internal affairs — matters peculiar to the relationships among or between the corporation and its current officers, directors, and shareholders — because otherwise a corporation could be faced with conflicting demands.

Op. ¶18 (quoting Bluebird Corp. v. Aubin, 188 N.C. App. 671, 680, 657 S.E.2d 55, 63).

It wasn't difficult for Judge McGuire to shoot down the internal affairs argument, given that the corporate Defendant was an outsider to the Plaintiff, not one of its officers or directors.  He held that:

While a standard of fiduciary responsibility expected of officers and directors of a corporation generally should be the subject of uniform regulation by the state of incorporation, the same concerns do not necessarily apply to the conduct of third-party corporate outsiders that may lead to tort liability for aiding and abetting.  Such third party conduct does not implicate the standard to which a director or officer should be held; that standard is best left to determination by the state of incorporation.

Op.. ¶22 (emphasis added).

The Pleading Standard For A Non-Existent Claim

After determining that North Carolina law controlled the question of the validity of the aiding and abetting claim, Judge McGuire held the Plaintiff to a heightened pleading standard.  He said that pleading such a claim (even if it doesn't exist) requires "facts supporting an allegation of “substantial assistance by the aider and abettor in the achievement of the primary violation.'”  Conclusory facts like those alleged by the Plaintiff -- that the abettor “was aware of [the fiduciary's] . . . acts and rendered substantial assistance” -- didn't suffice.  Op. ¶27.  The claim was therefore dismissed.

The need for factual specificity in an aiding and abetting claim comes from an NC Court of Appeals decision cited by Judge McGuire (Op. ¶27): Bottom v. Bailey, 238 N.C. App. 202, 767 S.E.2d 883 (2014).  The Bottom case, which relies on another appellate decision, says that:

the tort of aiding and abetting a breach of fiduciary duty, according to Blow [v. Shaughnessy, 88 N.C. App. 484, 364 S.E.2d 444 (1988)], requires “(1) the existence of a securities law violation by the primary party; (2) knowledge of the violation on the part of the aider and abettor; and (3) substantial assistance by the aider and abettor in the achievement of the primary violation.”

Despite its articulation of that standard, the Bottom decision was unsparing in its assessment that an aiding and abetting breach of fiduciary duty claim cannot be made in North Carolina.  It said:

The court finds that no such cause of action exists in North Carolina. It is undisputed that the Supreme Court of North Carolina has never recognized such a cause of action. The only North Carolina Court of Appeals decision recognizing such a claim, Blow v. Shaughnessy, 88 N.C. App. 484, 489, 364 S.E.2d 444, 447–48 (1988), involved allegations of securities fraud, and its underlying rationale was eliminated by the United States Supreme Court in Central Bank of Denver v. First Interstate Bank of Denver, 511 U.S. 164, 114 S.Ct. 1439, 128 L.Ed.2d 119 (1994).

238 N.C. App. 202, 211.

The Business Court has often dismissed fiduciary duty/aiding and abetting claims.  Like in Tong v. Dunn, 2012 NCBC 16,  Regions Bank v. Regional Property Development Corp., 2008 NCBC 8, Battleground Veterinary Hospital, P.C. v. McGeough, 2007 NCBC 33; and Sompo Japan Insurance Inc. v. Deloitte & Touche, LLP, 2005 NCBC 2.

But the Business Court has never dismissed that type of claim on the basis that it is not recognized in North Carolina.  It is inevitable that that is going to happen, but until then, the Court will find another way to dismiss those claims.  Don't waste your time making that claim.

Five Things You Should Know About Discovery Under The New Business Court Rules

There are new Rules for the NC Business Court In effect, as of January 1, 2017.  If you have a case in the Business Court, or are expecting to designate a case there, you should look them over.  They are applicable to all actions currently pending in the Business Court.

If you are not willing to take the time to read the new Rules (which is not recommended), here are five things which affect discovery in the Business Court under the new Rules:

Be Courteous And Cooperative

New Rules 10.1 through 10.8 govern discovery.  The new Rules dictate cooperation in discovery.  Rule 10.1 (titled "general principles") says that:

The parties should cooperate to ensure that discovery is conducted efficiently. Courtesy and cooperation among counsel advances, rather than hinders, zealous representation.

If you think that this is a new and unfairly burdensome obligation, you are in the wrong profession.  The North Carolina Revised Rules of Professional Conduct say that "[l]awyers are encouraged to treat opposing counsel with courtesy and to cooperate with opposing counsel when it will not prevent or unduly hinder the pursuit of the objective of the representation."  Comment 1 to RRPC 1.2

Proportionality

The Rules make a specific reference to the concept of "proportionality," which was incorporated into the Federal Rules of Civil Procedure with the 2015 amendments to those Rules.  New Rule 10.3(a) says that in the Case Management Conference:

Counsel should discuss the scope of discovery, taking into account the needs of the case,the amount in controversy, limitations on the parties’ resources, the burden and expense of the expected discovery compared with its likely benefit, the importance of the issues at stake in the litigation, and the importance of the discovery for the adjudication of the merits of the case.

If you find this to be a startling limitation on the scope of discovery, it isn't.  NCRCP 26(b)(1a), effective in 2015 and captioned "limitations on frequency and extent," references much the same concepts.  If you have an interest in mastering the challenge of proportionality, the drafters of the new Business Court Rules recommend studying A Practical Guide in Achieving Proportionality under New Federal Rule of Civil Procedure 26, 9 The Fed. Cts. L. Rev. 20 (2015).

Electronically Stored Information (ESI)

The new Rules speak more specifically to electronically stored information (ESI), more so than did Old Rule 17.1(t), which mentioned only "metadata.".  New Rule 10.3(c) says that counsel for the parties should prepare an ESI protocol —an agreement between the parties for the identification, preservation, collection, and production of ESI."  The Rule goes on to suggest the items that should be covered, like "the specific sources, location, and estimated volume of ESI" and how the search should be conducted.  When should this happen?  Per new Rule 9.1(d), at the Case Management Meeting.  That meeting is required to happen no more than sixty days after the designation of the case to the Business Court.  (new Rule 9.1(b)).

Interrogatories, Requests For Admission, And Depositions

Interrogatories and requests for admission are limited to no more than twenty-five (new Rule 10.4(b)).  That's half the number permitted by the past set of Rules, which allowed for fifty of each (old Rule 18.2).  The number of depositions allowed remains unchanged-- to no more than twelve by each party.  (new Rule 10.4(c); old Rule 18.2),  Though under the old Rules, Rule 18.2 excluded "testifying experts" from the limitation of twelve.  The new Rules make no such exclusion, so this represents somewhat of a limitation.

All depositions are subject to a time limit of seven hours.  New Rule 10.7(a).  You might remember that when Rule 30 of the Federal Rules of Civil Procedure were amended in 2000  to provide for the same time limit, that there initially was debate about whether the time taken for breaks -- like coffee, lunch, or a trip to the bathroom -- was included in the time limit.  It wasn't really much of a debate, since the federal advisory committee notes actually resolved that question. The notes say “[t]]his limitation contemplates that there will be reasonable breaks during the day for lunch and other reasons, and that the only time to be counted is the time occupied by the actual deposition.”

The new Business Court Rule 10.7(a) resolves that practical issue on its face, it says that the seven hours is measured by "on--the-record time."

The new Rule contains some clarification for 30(b)(6) depositions.  A party providing a 30(b)(6) witness may often present multiple witnesses, each addressing a separate 30(b)(6) topic.  Rule 10.4(c) says that "for depositions conducted pursuant to Rule 30(b)(6), each period of seven hours of testimony will count as a single deposition, regardless of the number of designees presented during that seven-hour period."

Streamlined Procedure For Resolving Discovery Disputes

In a new approach for resolving discovery disputes, new Rule 10.9(b)(1) requires the moving party to "initiate a telephone conference among counsel and the presiding Business Court judge about the dispute."  in order to initiate this telephone conference, the moving party a party first must e-mail a summary of the dispute [of less than 700 words] "to the judicial assistant and law clerk for the presiding Business Court judge and to opposing counsel."  The opposing party has seven calendar days to respond with an equally pithy (700 word) response.  After receiving the response, the Judge can either require the filing of a formal motion and a brief, or rule based on the summaries.

It will be interesting to see how this approach works.  Maybe the Business Court Judges will be innundated with telephone conferences.  Or maybe, after the lawyers exchange the summaries, they will be infected with the spirit of courtesy and cooperation dictated by new Business Court Rule 10.1.

Credit Where Credit Is Due

I was guided in preparing this post by a document prepared by the principal drafters of the new Rules, including my partner Jennifer Van Zant, who seems to get mentioned on this blog more than any other Brooks Pierce lawyer.  The document was prepared quite a while ago (in May 2016), so the Rule changes actually implemented may vary from what are described in it.  It is titled Key Features of Proposed Changes to the North Carolina Business Court Rules.

I am working on adding the Revised Rules to the Sidebar of this blog.  They have been hyperlinked by my assistant Nancy Preslan, who is undoubtedly the best legal assistant in the world.  "Hyperlinked," in this case, means that you can clink on any Rule in the table of contents and hop to that Rule, and then click on the Rule itself to return to the Table of Contents.  That saves a lot of paging back and forth.  For now, they are here.

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NC Business Court Starts Off 2017 By Denying A Motion For Sanctions And Adding A New Judge

In the NC Business Court's first Opinion of the new year, Judge Bledsoe denied Defendants' Motion for Rule 11 Sanctions in Kure Corp. v. Peterson, 2017 NCBC 1.  The decision holds a few lessons about the operation of Rule 11 of the NC Rules of Civil Procedure.

You Can't Avoid A Rule 11 Sanction in North Carolina By Withdrawing Your Complaint

Maybe you got carried away and filed a Complaint that you discovered later wasn't "well grounded in fact" or "warranted by existing law" and was therefore in violation of Rule 11.  That  conduct exposed you (and your client) to a sanction of having to pay "the reasonable expenses incurred because of the filing of the pleading . . . including a reasonable attorney's fee."  NCRCP 11(a).

Can you avoid the whole problem by dismissing or amending the Complaint?  If you are in federal court, the answer would be "yes."  There is a "safe harbor" under FRCP 11.  Judge Bledsoe observed that under the Federal Rules, "once a party serves a Rule 11 motion on the opposing party, the motion 'must not be filed or be presented to the court if the challenged paper, claim, defense, contention, or denial is withdrawn or appropriately corrected within 21 days after service or within another time the court sets.'  Fed. R. Civ. P. 11(c))."  Op. 7 & n.2.

The Federal Rules were amended in 1993 to add that "safe harbor" language.  The North Carolina Rule was last amended in 1986 and was nearly identical to the federal rule in effect at that time.  It therefore doesn't provide for any "safe harbor."

So even though the Plaintiff in the Kure case had amended its Complaint, and even though the counsel filing the Complaint had had new counsel substituted for them, the lawyers filing the original Complaint were still subject to Rule 11 sanctions.

Suing On Behalf Of An Incorrect Party Is Not Sanctionable Under Rule 11

The Plaintiff Kure Corp. was suing as a result of alleged misrepresentations made to it.  As the Defendant pointed out in its Rule 11 Motion, however, Kure had not been formed as a corporation until after the alleged misrepresentations were made.  The Defendant said that the Plaintiff's counsel were subject to Rule 11 sanctions because they had sued on behalf of the wrong party.

The Business Court, looking to the terms of NCRCP 17, which says in part that "[n]o action shall be dismissed on the ground that it is not prosecuted in the name of the real party in interest until a reasonable time has been allowed" for substitution of the proper party, denied that aspect of the Rule 11 Motion.

Judge Bledsoe's ruling was bolstered by an NC Court of Appeals decision holding that “[c]ourts should not impose sanctions under Rule 11 when relief is available under another provision which more specifically addresses the situation.”  Op. 21(quoting Overcash v. Blue Cross & Blue Shield, 94 N.C. App. 602, 618, 381 S.E.2d 330, 340 (1989)).

Wanting To Be The First To File Isn't An "Improper Purpose" Per Rule 11

The parties to the Kure case had met to discuss a resolution of their dispute before the lawsuit was filed.  Defendants alleged that at that meeting, Plaintiff's representative had demanded that the Defendants sign a settlement agreement or that "plaintiff would file its Complaint within the hour." Op. 27.

In addition to its requirement that a pleading be "well grounded in fact" or "warranted by existing law" Rule 11(a) also condemns filing for an "improper purpose."  It says that a signature on a Complaint is a certification that litigation it is not "interposed for any improper purpose, such as to harass or to cause unnecessary delay or needless increase in the cost of litigation."

An improper purpose is “any purpose other than one to vindicate rights . . . or to put claims of right to a proper test.” Op. 26 (quoting Mack v. Moore, 107 N.C. App. 87, 93, 418 S.E.2d 685, 689).  Judge Bledsoe ruled that the sort of conduct complained of by the Defendants was not sanctionable.  He said that:

Defendants. . . have not pointed to any authority demonstrating that a desire to gain a litigation advantage is beyond the scope of 'vindicating rights' or 'putting claims of right to a proper test.' Finding that Plaintiff acted with an improper purpose would expose to sanctions countless attorneys who make pre-filing settlement demands or seek to file before the opposing party does.

Op. 28.

A Couple More Things: New Judge(s?) for the Business Court And My Resolution

The Business Court also started off 2017 with at least one new Judge.  Adam M. Conrad was nominated a Special Superior Court Judge by outgoing Governor Pat McCrory in December 2016.  I don't know new Judge Conrad, but he has an outstanding background including a U.S. Supreme Court clerkship and formerly being a partner at King & Spalding.  Judge Conrad takes his Business Court judgeship by way of the General Assembly's enactment of N.C. Gen. Stat. sec. 7A-45.1(a9), which created  a new special superior court judgeship which the Governor, prior to submitting the nominee for confirmation and in consultation with the Chief Justice, shall determine has the requisite expertise and experience" to be designated as a business court judge."  His nomination was confirmed by the NC General Assembly last month.

Judge Conrad has assumed his position and will be residing in the Business Court in the Mecklenburg County courthouse.

Governor McCrory also nominated Andrew Heath as a Special Superior Court Judge.  Mr. Heath, confirmed by the General Assembly last month, is the former North Carolina Budget Director and former Chairman of the North Carolina Industrial Commission.  I'm pretty sure that I've read somewhere that Judge Heath is in line for an assignment to the Business Court, but don't count on me being correct on that. In any event, a seat on the Business Court may become available, possibly due to Judge Gale's resignation from the Court last October, which is referenced in the General Assembly's confirmation of Judge Heath (What!?  I spoke with Judge Gale about whether he had resigned, and he explained a complicated series of events, including his retirement, which led to him being named a "Senior Business Court Judge" (per a 2015 amendment to the General Statutes, codified in N.C. Gen. Stat. §7A-52(a1)).  That position allows him to be recalled from retirement to serve on the Business Court and to continue to hear cases beyond the mandatory retirement age of 72.  He continues to be the Chief Judge of the Business Court.

Finally, I made the ill-advised resolution in 2014 to write about every numbered Business Court decision.  I have failed miserably at that and please know that this year I have resolved that I definitely will NOT write about every numbered Business Court decision going forward.  That will be an easier resolution to keep.  I hope that this won't cause you to stop reading.