NC Business Court Sends Some Important Messages About Fees To Lawyers For Class Action Plaintiffs

If you've been reading this blog for any length of time, you know that I am very sour on substantial attorneys' fees being awarded to the lawyers for class action plaintiffs who obtain nothing more for the class than valueless additional disclosures with regard to a merger transaction.  You can read some of those posts here and here.

The Business Court has routinely been awarding substantial fees for disclosure only settlements up until now, but the Business Court's decision last week in In re Newbridge Bancorp Shareholder Litig., 2016 NCBC 87 sends the message that its relaxed examination of the value of such settlements is probably at an end.  That is partly based on the Delaware Court of Chancery's decision in In re Trulia, Inc. Stockholder Litig., 129 A.3d 886 (Del. Ch. 2016), which was characterized as the "death knell" there for such settlements.

Judge Bledsoe said in the Newbridge Opinion:

the North Carolina Business Court has historically been guided in its consideration of motions to approve, and award attorneys’ fees in connection with, “disclosure-based” settlements of merger-based class action litigation by the body of persuasive case law developed by the Delaware courts over a period of many years. The Court is also aware that the Delaware courts have recently subjected such motions to much more exacting scrutiny than they have in the past.  See, e.g., In re Trulia, Inc. Stockholder Litig., 129 A.3d 886 (Del. Ch. 2016).

In the absence of contrary instructions from the North Carolina appellate courts, the Court finds the recent trend in the Delaware case law requiring enhanced scrutiny of disclosure-based settlements to merit careful consideration for potential application in this State.  The Court recognizes, however, that the application of Delaware’s recent case law to the Motions would represent a marked departure from this Court’s past practices in connection with the consideration of such motions. As a result, the Court declines to apply enhanced scrutiny to its consideration of the Motions in this case but expressly advises the practicing bar that judges of the North Carolina Business Court, including the undersigned, may be prepared to apply enhanced scrutiny of the sort exercised in Trulia to the approval of disclosure-based settlements and attendant motions for attorneys’ fees hereafter.

Op. Pars. 4 and 5.

Notwithstanding Judge Bledsoe's decision that "enhanced scrutiny" would not be applied in the case before him, he did undertake a pretty close review of the value of the disclosures obtained for the class, and also the amount of the attorneys fees being awarded.

The Disclosures Obtained By Class Counsel Did Not Justify The Amount Of Fees Sought

He said that some of the disclosures touted as the basis for the fee award were "not material" or of "marginal benefit." Op. Pars. 64-65, 71 & n. 10.  He said that the Delaware Court of Chancery had "long rejected" the fallacy "that increasingly detailed disclosure is always material and beneficial disclosure."  Op. ¶64 (quoting Dent v. Ramtron Int’l Corp., No. 7950-VCP, 2014 Del. Ch. LEXIS 110, at *47  (Del. Ch. June 30, 2014)).

After that review, he sliced in half the amount of fees sought by class counsel, finding their fee request (of almost $275,000 based on an implied hourly rate of almost $525) was "not fair and reasonable, but rather excessive based on the circumstances of this case and the record before the Court."  Op. ¶69.

On the limited fee information provided by the class plaintiff's counsel, Judge Gale said that the $135,000 fee award he made yielded an implied average hourly rate of $258.  That probably seemed pretty skimpy to those lawyers, who said that the "usual and customary rates" for  the senior lawyers for the Court-approved Co-Lead Counsel ranged from $650-$850 per hour.  Op. ¶50.

But the lawyers for the class did little to justify their fees.  They did not offer any affidavits of North Carolina attorneys attesting to “the fees customarily charged in the locality for similar legal services,”  as contemplated by the Revised Rule 1.5(a)(3) of Professional Conduct.  Instead, they premised their fee request on a 2015 survey of billing rates published in the National Law Journal.  Judge Bledsoe rejected that, saying that "the NLJ Survey does not report the specific range of hourly rates customarily charged in North Carolina for legal services of the sort Plaintiffs’ counsel provided here."  Op. ¶51.

The Business Court Said That "Typical Fees" In North Carolina For Complex Litigation Are $250-$450 Per Hour

Left without any benchmarks for what North Carolina lawyers charged as "customary rates" for complex commercial litigation, Judge Bledsoe looked to affidavits offered to the Business Court in other class action fee applications which stated that "typical fees charged in North Carolina for handling complex commercial litigation range from $250 to $450 per hour."  Op. ¶52.  He also relied on the hourly fees charged by lawyers appointed by the Business Court to serve as receivers or as counsel for receivers (which ranged from $225 to $475 per hour). Op. ¶54.

Another Important Caution For Future Fee Applications

Another deficiency in the fee application was the failure to supply detailed time records justifying the time spent.  The fee applicants instead presented only summary charts showing the total hours spent on the lawsuit.  In another caution for lawyers requesting approval of fee applications, Judge Bledsoe said:

the Court notes that attorneys’ fees’ petitions in this Court are typically supported by detailed attorney time records and advises that the Court will be reluctant to approve future petitions for attorneys’ fees lacking such evidentiary support.

Op. ¶45 & n. 8 (emphasis added).

Judge Bledsoe also said that there was nothing so special about the work done by class counsel to justify the higher hourly rate that they requested.  He said that: the nature of the work performed by Plaintiffs’ counsel "could have been performed fully by competent North Carolina counsel and that the demands of the [litigation] did not require Plaintiffs to retain counsel from outside North Carolina in order to prosecute the [litigation].  Op. ¶55.

If you think that I am being too hard on Plaintiffs' counsel, I should point out that Judge Bledsoe said he found that:

Plaintiffs’ counsel are highly-regarded, highly-experienced class action counsel that have been involved in a number of significant class action matters including matters resulting in substantial monetary recovery for the class.

Op. ¶46.

Regardless of their qualifications, in the future these lawyers (who were undoubtedly disappointed in this ruling due to their success last year in getting a $550,000 fee award approved by a different Business Court Judge) and other lawyers for class action plaintiffs expecting big fees for anticipated disclosure only settlements of marginal value might need to find some other state in which to file those claims.

No more feeding at the trough in North Carolina.

A Couple Of Other Notes On This Opinion

One of the remarkable things about this Opinion is that there were no objections to the fees sought by the attorneys for the class.  Judge Bledsoe resolved, on his own accord, to closely review and reduce the fees sought.

Second, I recognize that even class actions leading to immaterial disclosure only settlements involve the need for North Carolina lawyers to defend those claims.  So it would be a shame if those out of state lawyers filing the suits leading to these settlements were to stay away from North Carolina altogether.

 

 

Continue Reading...

Who Knew That A Motion To Transfer Venue Could Be So Complicated?

North Carolina cases that are filed in an "improper county" can be transferred to the "proper county" if the "defendant, before the time of answering expires, demands in writing that the trial be conducted in the proper county."  N.C. Gen Stat. §§1-83.

Multiple Claims With Different Venue Requirements

Well, what if there's a multiple count complaint, and only one of the claims was filed in an "improper county?"  That was the situation dealt with by Judge Robinson last week in Aldridge v. Kiger, 2016 NCBC 83.

Plaintiff a resident of Union County, sued the Defendants, including a corporation and an LLC which were based in Mecklenburg County, in Union County.  If there wasn't a specific venue provision applicable to the claims, the case was appropriately filed in Union County.  That would be so per G.S. §1-82, which says that an "action must be tried in the county in which the plaintiffs or the defendants, or any of them, reside at its commencement."

Dissolution Claims Have Their Own Venue Requirement

But Plaintiff's county of residency didn't control, because his complaint included a claim for dissolution of the corporate Defendant.  That claim has a specific venue provision which applies to it.  That provision isn't in Subchapter 4 of Chapter 1 of the General Statutes (G.S. §§ 1-76 to -87), where most of the provisions relating to venue are contained.

Instead, there is a provision regarding proper venue for corporate dissolution claims buried in the North Carolina Business Corporation Act.  Section 55-14-31(a) says that:

Venue for a proceeding to dissolve a corporation lies in the county where a corporation's principal office (or, if none in this State, its registered office) is or was last located.

Maybe you were aware of that provision.  I wasn't, and the attorneys for the Plaintiff obviously weren't either.

So Judge Robinson had no choice but to transfer the venue of the dissolution claim from Union County to Mecklenburg County.  But what about the other claims, which were properly venued in Union County?  Should they stay there?

The Court Did Not Sever The Claims So As To Let the Properly Venued Claims To Remain In The County Of Filing

Rule 42(b)(1) of the NC Rules of Civil Procedure allows the trial court to sever claims and it specifically speaks to venue considerations.  It says:

The court may in furtherance of convenience or to avoid prejudice and shall for considerations of venue upon timely motion order a separate trial of any . . .  number of claims.

While that Rule would seem to allow a severing of the claims, with one to be transferred to Mecklenburg County and the others to remain in Union County, Judge Robinson found the outcome to be dictated by one of the other venue statutes.  Section 1-87(a) of the General Statutes says that:

When a cause is directed to be removed. . .  all other proceedings shall be had in the county to which the place of trial is changed,

He ruled that  "[b]ecause all claims were brought in a single action in Union County , and Union County is an improper venue for the judicial dissolution claim, the entire action must be transferred to Mecklenburg County."  (emphasis added).

For those of you familiar with North Carolina geography, you know that there is not much inconvenience to the Plaintiff in having to litigate all his claims in Mecklenburg County as opposed to Union County.  Those two counties are right next to each other. The courthouses are about 25 miles apart!  The inconvenience is even less, since the case is in the Business Court, and will be overseen by the same Judge until conclusion.

It's hard to see how the Defendants will see this "win" as accomplishing anything much.  They might have thought that they would succeed in getting a dismissal of the case due to improper venue, but "North Carolina case law is clear that a motion to dismiss based on improper venue made pursuant to Rule 12(b)(3) shall be treated as a motion to transfer, rather than a motion to dismiss."  Op. ¶14 (citing Coats v. Sampson Cty. Mem’l Hosp., Inc., 264 N.C. 332, 334, 141 S.E.2d 490, 492 (1965)).

Protecting In-House Counsel From Having To Be Deposed

There a probably few things in legal practice as annoying as getting a Notice of Deposition for your client's in-house counsel.

Are you willing to pursue a Motion for a Protective Order to prevent the deposition?  The Defendant in a case before the Business Court tried that, but its Motion was denied in an Order and Opinion last week from Chief Judge Gale, in Edison v. Acuity Healthcare, 2016 NCBC 82.

The proposed deponent is general counsel and vice president of compliance and risk management for Defendant Acuity  The Defendant, in moving for a Protective Order, said that her deposition would be pointless because it "would be nothing more than a series of objections and instructions to [her] not to answer."  Op. ¶10.

The Shelton Rule

The Defendant premised this Motion on something called the "Shelton rule."  That "rule," if indeed it is a "rule," came from the federal appellate court decision in Shelton v. American Motors Corp., 805 F.2d 1323 (8th Cir. 1986).  The rule provides some protection to an attorney who is to be subjected to a deposition.  The Shelton Court held that a party asking to take the deposition of opposing counsel had to show that:

(1) no other means exist to obtain the information than to depose opposing counsel; (2) the information sought is relevant and nonprivileged; and (3) the information is crucial to the preparation of the case.

Op. 58.

No North Carolina appellate court (federal or state) has adopted the Shelton approach, although it has been followed by two federal district courts in North Carolina.  Op. 13.  (citing CTB, Inc. v. Hog Slat, Inc., No. 7:14-CV-157-D, 2016 U.S. Dist. LEXIS 39024, at  *16–19 (E.D.N.C. Mar. 23, 2016); N.F.A. Corp. v. Riverview Narrow Fabrics, Inc., 117 F.R.D. 83, 85–86 (M.D.N.C. 1987)).  It was also followed by former Business Court Judge Murphy (in Blue Ridge Pediatric & Adolescent Med., Inc. v. First Colony Healthcare, LLC, 2012 NCBC 45).  I wrote about that decision when it was decided four years ago.

Does The Shelton Rule Apply To In-House Counsel?

The Plaintiff argued that the restrictive Shelton rule should not be applied to in-house counsel.  Some Courts have so ruled (cited in Op. 15).  Judge Gale rejected that position, stating that he discerned "no policy reasons that should prevent the Shelton rule from extending to in-house counsel" depending on the objective of the deposition.  He might take a different position "when a deposition targets only litigation strategies rather than necessary, factual information."  Op. 16.

The proposed in-house counsel deponent had been identified by another corporate employee, in a Rule 30(b)(6) deposition, as "the person who could best speak to certain clinical care standards and to consistency among Acuity's hospitals."  Op. 18.

Given her knowledge of facts relevant to the litigation, coupled with the lack of any "evidence . . . showing that she has been substantially involved with overseeing the litigation in this matter,"  (Op. 17), Judge Gale denied the Motion for a Protective Order.

The denial of the Motion doesn't mean that the Court left the Plaintiff to run roughshod over any matters known to the witness that would be protected by the attorney-client privilege.  Judge Gale said that the Defendant could "assert the attorney–client privilege on a question-by-question or subject-by-subject basis, as appropriate, during the deposition."  Op. 18.

Has The Business Court Adopted The Shelton Rule?

At no point in his Opinion did Judge Gale say that the Court had adopted the Shelton rule.  But the last time that the Business Court discussed the application of the Shelton decision (in the Blue Ridge opinion cited above), it applied the rule and quashed the deposition of an attorney who was active in the litigation (he had signed the Complaint). The party requesting the deposition said that it wanted to ask the lawyer about “advice, communications, and receipt of documents [that are] the basis” of Plaintiffs’ suit.  Judge Murphy said that "[s]uch knowledge is precisely the type of information Shelton attempts to protect from disclosure by litigation counsel in a deposition."  Op. 62 (emphasis added).

The circumstances before Judge Gale last week in the Acuity case were quite different.  The lawyer had knowledge of relevant facts.  Remember that "the attorney-client privilege does not protect against the disclosure of facts."  Judge Jolly of the Business Court said that in an unpublished Order back in 2013.

So, if the in-house lawyer of your client has knowledge of the circumstances involved in the lawsuit, her status as a lawyer is unlikely to be sufficient standing alone to protect her from being deposed.

 

Tags:

Member Of A Delaware LLC? Don't Bring Claims To Inspect Books And Records, Or For Dissolution, In North Carolina's Courts

The Plaintiff in Camacho v. McCallum, 2016 NCBC 79 has to head to Delaware to litigate her claims for inspection of the records of the LLC of which she is a member, and also to seek dissolution of the LLC.

Why, even though Plaintiff is a North Carolina resident and the Defendant LLC has business operations in North Carolina?  Because the LLC in question was a Delaware LLC.  Judge Robinson ruled that:

The Delaware Code grants exclusive jurisdiction over inspection claims to the Delaware Court of Chancery.  Op. ¶24.  (It says that in Section 18-305 of the Delaware Code).

The Delaware Court of Chancery also has exclusive subject matter jurisdiction over claims to dissolve a Delaware corporation.  Op. ¶29.

The Delaware Legislature has tried to stake out exclusive jurisdiction for its Court of Chancery in other areas.  Here's an example: Section 145(k) of the Delaware General Corporation Law says, regarding which court may hear actions for indemnification or advancement of expenses, that:

The Court of Chancery is hereby vested with exclusive jurisdiction to hear and determine all actions for advancement of expenses or indemnification brought under this section or under any bylaw, agreement, vote of stockholders or disinterested directors, or otherwise.  The Court of Chancery may summarily determine a corporation’s obligation to advance expenses (including attorneys’ fees).

(emphasis added).

Can Delaware Really Claim Exclusive Jurisdiction For Its Chancery Court?

Can Delaware oust other courts from deciding matters of Delaware corporate law?   And did the Delaware Legislature even really mean to do so?  My guess is probably not.  Remember that Delaware has a Court of Chancery because it divided its court system into its Superior Court, which "has statewide original jurisdiction over criminal and civil cases, except equity cases," and the Court of Chancery, which has exclusive jurisdiction over "equity cases."  So the Delaware Legislature probably meant only to make clear that inspection and dissolution actions filed in Delaware should be brought in the Court of Chancery as opposed to the Delaware Superior Court.

Delaware certainly couldn't prohibit federal courts from ruling on this type of issue per its statutory declaration of "exclusivity."  Judge Easterbrook  of the Seventh Circuit addressed this issue in Truck Components v. Beatrice Co., 143 F.3d 1057, (7th Cir. 1998) with respect to another corporate issue: the right of an officer or director of a corporation to receive advancement for legal expenses in cases making claims regarding their service to the corporation.  He said:

No state may prevent a federal court from exercising jurisdiction created by Congress. . . . Nor do we suppose for one second that Delaware set out to contract the scope  of federal jurisdiction. Section 145(k) allocates jurisdiction among Delaware courts.  Delaware maintains separate systems of courts in law and equity.  Claims based on corporate arrangements go to the Court of Chancery rather than to the law courts, where other contracts are litigated. Such an intra-state allocation has no effect on federal litigation, which merged law and equity long ago.

Id. at 1061-1062 (emphasis added).

The NC Business Court isn't alone in deferring to Delaware's self-proclaimed "exclusive jurisdiction."  So have courts in Florida, Synchron, Inc. v. Kogan, 757 So..2d 564 (Fla. App. 2nd Dist.. 2000); New York:  In re Raharney Capital, LLC v. Capital Stack LLC, 25 N.Y.S.3d 217, 217−18 (N.Y. App. Div., 1st Dept. 2016)(New York court did not have jurisdiction to order dissolution of a Delaware corporation); Pennsylvania: Intertrust GCN, LP v. Interstate Gen. Media,LLC, No. 99, 2014 Phila. Ct. Com. Pl. LEXIS 434, at *7 (Phil Ct. Comm. Pl. 2014)(no jurisdiction to order dissolution of a Delaware corporation); and Vermont: Casella Waste Sys., Inc. v. GR Tech., Inc., No. 409-6-07, 2009 Vt. Super. LEXIS 14, at *7−8 (Vt. Super. Ct. 2009)(same).

California has applied its own statute regarding inspection of corporate records to a Delaware corporation.  Havlicek v. Coast-to-Coast Analytical Services, 39 Cal. App. 4th 1844  (Cal App., 2nd Dist. 1995).  And notwithstanding the Raharney case cited above, New York has done the same, in Sachs v. Adeli, 26 AD 3d 52, 55 (N.Y. App. Div., 1st Dept. 2005).

How Can North Carolina Members Of A Delaware LLC Avoid Having To Bring Claims In A Delaware Court?

It's a good juncture to point out that the persons forming a Delaware corporation can specify in its bylaws that certain claims (those involving the internal affairs of the corporation) must be resolved exclusively in the North Carolina Business Court.  The Court of Chancery so ruled in September 2014.

So, in the absence of such a provision, claims for inspection of books and records and for dissolution (being the internal affairs types of claims that the Chancery Court said could be the subject of a forum selection clause) have to be brought in Delaware.

If you are a North Carolina lawyer creating a Delaware LLC or Delaware corporation for a North Carolina client, you may want to include a North Carolina forum selection provision in the Bylaws or Operating Agreement.  That way you won't have to explain down the line to the client why she has to pursue her claim to inspect corporate or LLC records (or dissolution) in Delaware.

You'll remember that North Carolina (like probably every state, has its own statute permitting LLC members the right to inspect the LLC's records.  That statute applies "only to members of an LLC formed under the North Carolina [Limited Liability] Act."  Op. ¶22.  So a member of a Delaware LLC has no inspection rights under the North Carolina statute.


 

 

 

 

Can You Compel An Insurance Carrier Representative To Attend A Mediation In Person?

You've undoubtedly been in a mediation where the lawyer on the other side has asked for a break so she can call her client's insurance carrier in order to get a response to your latest settlement offer.  You wait -- reliant on her summary of your devastating statement in the mediation about how the carrier will have to pay out to the policy limits after the verdict -- but your demand is rejected.

If only that insurance representative had been there to hear you, rather than getting a watered down version of your position.  Can you get a Court to order that an insurance representative attend the mediation in person?  What do the mediation rules say about a physical attendance at mediation?

Well, they are pretty clear.  Rule 4 of North Carolina's Revised Rules Implementing Statewide Mediated Settlement Conferences designates an "insurance company representative" as a person who "shall attend a mediated settlement conference."  It also specifies that: 

Each such carrier shall be represented at the conference by an officer, employee or agent, other than the carrier's outside counsel, who has the authority to make a decision on behalf of such carrier or who has been authorized to negotiate on behalf of the carrier and can promptly communicate during the conference with persons who have such decision-making authority.

But the Rules don't specifically give a Court the power to order attendance by an insurer representative.  Judge McGuire nevertheless ruled in an unpublished Order last month in Elliott v. KB Home North Carolina, Inc. that the Business Court "has the requisite authority to issue an Order to compel [an insurance carrier to mediation]."  Order ¶9.

He found that power in NC appellate decisions "which have recognized the discretion of the trial court to issue sanctions against parties and those obligated to appear in mediation under the Mediation Rules, but who failed to appear without good cause."  Order ¶9.  Judge McGuire said that "[i]t follows from these cases that the Court has the authority to issue an order to compel attendance at a mediated settlement conference."  Id.  Decisions from Courts in California and West Virginia bolstered his conclusion.  Order ¶10.

If you have that Order in your pocket, how easy is it to get the Business Court to order the representative of an insurance carrier to attend a mediation?  It's most likely tough.  The circumstances of the Elliott case were pretty unique.  The parties had met for mediation four times.  Three insurance carriers had potential liability for Plaintiffs' claims.  A fifth mediation was on the horizon at which the parties said a "global resolution" could not be reached without all carriers being in the room.  One carrier had said that its representative would appear.  That carrier had attended all four of the previous sessions.  Another carrier, whose representative had appeared at two of the previous mediations, opposed the requirement that it attend again.  The third carrier said that its representative would be on vacation during the scheduled fifth mediation, but that he could be available by telephone.

Judge McGuire recognized the costs that the carriers would incur by attending and that they had all attended at least some of the previous mediations, but said that:

the spirit of the Mediation Rules requires that the necessary parties continue to participate in the mediation process until either a resolution has been reached or the mediator has determined that an insurmountable impasse has occurred.

Order ¶10.

Judge McGuire's Order required the attorneys for all three carriers to attend what will hopefully be the final mediation session. and for representatives of two of the carriers to appear in person.  The representative who had an already planned vacation?  He doesn't have to appear in person, but was ordered to be available by telephone "from the starting time of the mediated settlement conference until such time as the mediator declares the mediation closed."  Order ¶14. That requirement could still ruin a vacation.

 

 

 

Does A Petition For Discretionary Review Divest A Trial Court Of Jurisdiction?

The place where a a trial court's jurisdiction over a case on appeal meets the competing jurisdiction of the appellate court over that same case is is a busy intersection.  It is often hard to tell when the trial court no longer has the jurisdiction to make rulings in a case that has been appealed. That power was the issue in two rulings from Business Court Judge Robinson, one in a published Opinion, in SED Holdings, LLC v, 3 Star Properties, LLC, 2016 NCBC 62, and the other in an unpublished Order in that case which followed several weeks later.

The General Rule And Its Exception

The "general rule", as observed by Judge Robinson, is that "an appeal divests the lower court of jurisdiction."  Op. ¶33.  So you would think that once an appeal is filed (and docketed) that the trial court is powerless.  But, that's not so:

the lower court nonetheless retains jurisdiction to take action which aids the appeal, and to hear motions and grant orders, so long as they do not concern the subject matter of the suit and are not affected by the judgment appealed from.

Id.

In the situation before Judge Robinson  last month in the SED case there were two separate appeals pending.  Neither were appeals from rulings of the Business Court, but were from rulings of the Superior Court for Durham County, made during the extended period of time before the case was designated to the Business Court.

Appeal Number One 

Appeal #1 is a long running appeal.  At the time of Judge Robinson's ruling the Court of Appeals had affirmed the trial court's grant of a preliminary injunction and its denial of a Motion to Dismiss.  Those appellate rulings were the subject of a PDR (a Petition for Discretionary Review) pending before the NC Supreme Court.

Appeal Number Two

Appeal #2 was filed this year, and has yet to be ruled on by the COA.  It is an appeal of several orders issued by the trial court holding the Defendants in civil contempt for not complying with the injunction that was the subject of Appeal #1. The Defendants are arguing that the trial court lacked jurisdiction to find them in contempt while the first appeal was pending.

Did The Business Court Still Have Jurisdiction Given The Two Appeals?

Whether the Business Court still had the authority to deal with the Plaintiff's Motion that he enter a mandatory injunction against a recently added Defendant (Charles A. Brown & Associates, PLLC) was the question faced by Judge Robinson.  Did he have any jurisdiction over the case with the two pending appeals? 

Appeal #2 was pretty easy to knock down as an impediment to the Business Court's jurisdiction.  Judge Robinson said that:

the issues presently before it are not embraced within the issues presently before the Court of Appeals in the [Appeal #2] and, thus, do not divest this Court of subject matter jurisdiction to consider and decide the Motion relating to newly added defendant Charles A. Brown.

Op. ¶32.

The Effect of A Petition for Discretionary Review On A Trial Court's Jurisdiction

But the rulings that were the subject of Appeal #1 were fundamental to a North Carolina court having jurisdiction over the entire case, since they concerned the validity or invalidity of a forum selection clause dictating that the case be litigated in Harris County, Texas.  The ruling from the Court of Appeals in Appeal #1 had affirmed the trial court's ruling that the forum selection clause was invalid.

The NC Supreme Court hadn't ruled on the PDR before Judge Robinson's first ruling.  I've observed in the past that your chances of getting the state supreme court to grant a PDR are on the same level as finding a four leaf clover.

Judge Robinson said:

with regard to Defendants' filing of the PDR, the Court concludes that, absent a motion to stay filed with and granted by the appropriate court, the filing of a petition for discretionary review with our State's highest court, by itself, does not divest the trial court of jurisdiction to consider matters after the Court of Appeals has determined a matter on appeal and has issued its mandate.

Op. ¶26.  By the way, what is the "appropriate court" in which to file a Motion to Stay?  Rule 8 of the North Carolina Rules of Appellate Procedure, titled "Stay Pending Appeal" says that:

After a stay order or entry has been denied or vacated by a trial court, an appellant may apply to the appropriate appellate court for a temporary stay and a writ of supersedeas in accordance with Rule 23.

Judge Robinson probably assumed that the NC Supreme Court would do the expected thing and deny the PDR.  Or he might have felt bound to follow the mandate from the Court of Appeals affirming the trial court's ruling that the forum selection clause calling for litigation to take place in Texas was invalid..  An "inferior court must follow the mandate of an appellate court in a case without variation or departure."  In re RAH, 641 S.E.2d 404, 407 (2007). 

But a few weeks after Judge Robinson delivered the published Opinion in 2016 NCBC 62, the NC Supreme Court did the nearly unthinkable and granted the PDR.  That made all the difference to Judge Robinson.  He held that the Business Court had been "divested of jurisdiction to proceed with the Injunction Hearing" because of the granting of the PDR.  Order ¶10.  That sua sponte reversal from Judge Robinson came in an unpublished Order.

So what Should You Do If You Don't Want The Trial Court To Rule Because Of Your Pending PDR?

So what do these rulings mean about the vitality of an NC Superior Court's jurisdiction in a case that is the subject of a pending PDR?  That if you want the Superior Court to refrain from ruling in your case in which a PDR is pending, that you should move for a stay "in the appropriate court" or argue that the PDR will be granted and that the Superior Court therefore no longer has jurisdiction and should not move forward in the case until the NC Supreme Court has made its ruling.  It's probably safer to request a stay given the four leaf clover nature of the granting of PDRs.

You might be wondering whether this case has been "over-appealed." Maybe it has.  In addition to the two appeals already pending, the Defendant has also appealed from Judge Robinson's ruling in 2016 NCBC 62.  That's the third appeal.  Even before that, it had filed a Petition for Rehearing in the COA following the Court of Appeals' decision.  (Good grief Charlie Brown).

But given that the successful PDR is likely to generate an opinion from the NC Supreme Court on the validity of a forum selection clause, all those appeals might be worthwhile.  Maybe the Appellants will ultimately be successful.

Protecting Your Client's President From Having To Be Deposed: NC Business Court

You have probably been in this situation.  Your client is a successful corporate entity, maybe publicly held.  You are defending the entity in a lawsuit and you receive a Notice of Deposition for the CEO of your client.  The CEO is annoyed, says that she knows nothing about the substance of the lawsuit, and that she's too important (and too darn busy) to sit down for a deposition.  She expects you to get her out of it.

It's a difficult objective.  The NC Business Court has looked at this set of facts a couple of times, Once, a couple of years ago, in an unpublished Order in the case of Gay v. People's Bank (which I wrote about in this post), it granted a Motion for a Protective Order. And last week, in Next Advisor Continued, Inc. v. Lendingtree, Inc, 2016 NCBC 70, the Court denied a similar Motion.

Both decisions came from Judge Bledsoe.  Each time he discussed something called the "apex doctrine," but he decided not to formally adopt it.

The Apex Doctrine

What is the apex doctrine?  It is a federally recognized principle that helps top officers of a corporate client avoid having to be deposed.  In a decision from the Western District of North Carolina, it was described as follows:

The 'apex doctrine,' rooted in Federal Rule of Civil Procedure 26, was developed as an aid in ensuring that the liberal rules of procedure for depositions are used only for their intended purpose and not as a litigation tactic to create undue leverage by harassing the opposition or inflating its discovery costs.

Op. ¶14 (quoting Performance Sales & Mktg. LLC v. Lowe's Cos., 2012 U.S. Dist. LEXIS 131394, at *16 (W.D.N.C. 2012)).

The apex doctrine doesn't presumptively exclude the litigant's top officer from being deposed.  It puts the burden on the party asking for the deposition to show that “(1) the executive has unique or special knowledge of the facts at issue and (2) other less burdensome avenues for obtaining the information sought have been exhausted."  Id.

If you are in federal court and are thinking of filing a Motion for a Protective Order to keep your client's President from having to endure the pain of a deposition, Judge Bledsoe's Opinion in the Next Advisor decision contains a comprehensive discussion of the federally recognized apex doctrine (in ¶¶13-14).

North Carolina Standards In Lieu Of The Apex Doctrine

Judge Bledsoe said that North Carolina's courts had not adopted the apex doctrine, and that he found it unnecessary to do so.  He said that our Courts "are permitted to limit discovery where 'justice requires it' to protect a party or person, including a corporate executive, 'from unreasonable annoyance, embarrassment, oppression, or undue burden or expense.'" Op. ¶15.  Discovery can also be limited if it is “unreasonably cumulative or duplicative, or is obtainable from some other source that is more convenient, less burdensome, or less expensive,” or is “unduly burdensome or expensive, taking into account the needs of the case, the amount in controversy, limitations on the parties’ resources, and the importance of the issues at stake in the litigation.” N.C. R. Civ. P. 26(b)(1a)."  Order ¶15.

So, Judge Bledsoe followed those general principles in ruling that Plaintiff's CEO would have to be deposed.  He said that the CEO had "unique, personal knowledge relevant to the issues in dispute in this litigation" relating to Defendant's attempted acquisition of the Plaintiff."  Op. ¶17.

A CEO Being "Too Busy" Isn't Enough To Warrant A Protective Order

He rejected Plaintiff's argument that the CEO "carri[ed] heavy responsibilities as the CEO of a publicly traded company with over 300 employees" and that he should be protected from having to be deposed for that reason.  He held that:

Although [the CEO] undoubtedly maintains a very busy schedule and carries heavy responsibilities in his role as Lending Tree’s CEO, courts have consistently held that if a prospective deponent has relevant knowledge, the mere fact that the prospective deponent is a CEO or is busy does not constitute a showing of good cause for a protective order.

Op. ¶18.

Given that the CEO had direct knowledge of some of the issues in the case, Judge Bledsoe found that the Defendant's right to obtain relevant information from him "outweighed any burden or inconvenience imposed [the CEO] by requiring him to prepare for and submit to a deposition."  Op. ¶19.

There was no evidence of "annoyance," "harassment," or "undue burden" to the CEO.

If you are wondering why a similar Motion for a Protective Order in the People's Bank case was granted, it was a different set of facts.  The Defendant in that case, a "relatively small bank," had already provided four of its executives for their depositions and argued that further depositions of its top officers would be repetitive of those already taken and disruptive to its operations.  Judge Bledsoe said that he was "persuaded that Defendant faces a sufficient risk of disruption and undue burden in these circumstances to afford Defendant limited relief."  Order ¶21.  He permitted the deposition of the bank's Chief Operating Officer, but prohibited the depositions of its Chief Financial Officer and its Chief Administrative Offer.  That Order was without prejudice to the Plaintiff being allowed to re-notice the depositions of the CFO or the CAO.

 

 

 

 

 

 

 

 

 

 

Tags:

It Takes More Than Just $5 Million To Get A Case Into The NC Business Court

This week, I published a post on this blog in which I suggested that a case involving $5 million in controversy could be designated to the Business Court without the Court having to analyze the nature of the claims before it to see if they met any of the bases for mandatory jurisdiction contained in G.S. §7A-45.4.

That was wrong, and it provoked a torrent of controversy directed to me.  Well, probably not a torrent to you, but a torrent to me: an email and a phone call from Business Court Chief Judge Gale and an email from an eminent attorney friend in Raleigh.  I'm glad that Judge Gale looks at my blog (I think that Judge Bledsoe, Judge McGuire, and Judge Robinson look at it too), but I'm unhappy that I might have said anything on this blog that generated a phone call from Judge Gale and which could have steered anyone in the wrong direction.

Let me start by saying that you shouldn't rely on my blog for legal advice or its accuracy.  There is a disclaimer buried somewhere in this blog which says exactly that.

Notwithstanding that disclaimer, I'm pretty serious about getting it right with this blog.  So let's look at the part of the statute governing designations to the Business Court which I didn't describe correctly on Monday: G.S. §7A-45.4(b)(2).  It says:

An action described in subdivision (1), (2), (3), (4), (5), or (8) of subsection (a) of this section in which the amount in controversy computed in accordance with G.S. 7A-243 is at least five million dollars ($5,000,000) shall be designated as a mandatory complex business case by the party whose pleading caused the amount in controversy to equal or exceed five million dollars ($5,000,000).

So the statute is pretty clear that an amount in controversy of more than $5 million, standing alone, isn't enough to make a case mandatory for designation to the Business Court.

The case still has to fall within the grounds set forth in G.S. Section 7A-45.4(a)(1), (2), (3), (4), (5), or (8).  So when I suggested in my last post that Judge Gale didn't have to analyze whether the Complaint in Southeastern Automotive, Inc. v. Genuine Parts Co. 2016 NCBC 61 qualified as an intellectual property case because more than $5 million was in controversy, I was not right.

 

The Business Court Opens Its Door Wide To "Intellectual Property" Disputes

The Business Court doesn't often discuss its interpretation of the statutory bases for a designation to the Court, all of which are contained in G.S. sec. 7A-45.4.  So its published Order this month in Southeastern Automotive, Inc. v. Genuine Parts Co. 2016 NCBC 61, is worth noting.

The issue in Southeastern Automotive was whether the Complaint qualified for designation to the Business Court under G.S. §7A-45.4(a)(5), which says that a party may designate as a complex business case:

Disputes involving the ownership, use, licensing, lease, installation, or performance of intellectual property, including computer software, software applications, information technology and systems, data and data security, pharmaceuticals, biotechnology products, and bioscience technologies.

The statute, before the amendments effective October 1, 2014, mentioned only "disputes involving '[i]ntellectual property law, including software licensing disputes." Op. 19 (referencing former version of G.S. §7A-45.4(a)(5)). 

The Southeastern Complaint did not directly raise issues regarding the ownership of intellectual property. It centered around the Defendant's acquisition of the Plaintiff, and Plaintiff's claims that it had not been fully compensated in the sale.  The shortfall, according to the Plaintiff, was caused by the inadequate operation of Defendant's software programs with respect to the inventory which the Plaintiff had sold.

Judge Gale saw the 2014 amendment as expanding the Court's role in intellectual property lawsuits.  He held:

The Court concludes that the 2014 amendment to section 7A-45.4(a)(5) expanded the scope of disputes within the statute’s purview to include a dispute that involves a material issue regarding the use or performance of intellectual property, including computer software and data, without requiring a dispute regarding ownership of the intellectual property or another dispute that may require application of principles of the body of law known as intellectual property law.

Order 20.

In the end, this analysis by Judge Gale was unnecessary, as the amount in controversy, per the Southeastern Complaint, was in excess of five million dollars.  That made this a case in which designation would be mandatory regardless of whether it was requested by one of the parties.  Order 4 (referencing G.S. §7A-45.4b)(2)).

I frequently look at the Orders from the Chief Judge of the Business Court on challenges to designations (the Chief Judge handles all of the Oppositions to Designation) and don't find much to write about as they usually say nothing more than something like "the allegations in the Complaint fall within the mandatory jurisdiction of the Business Court,"  I collected a number of those unpublished Orders in this 2008 post.

That said, every once in a while the Business Court says something significant about the scope of its mandatory jurisdiction.  For example, in its unpublished Order in  Sonic Automotive, Inc. v. Mercedes-Benz USA, LLC, the Court spoke about its broad approach to designations involving antitrust matters (per G.S. §7A-45.4(a)(3).  

The NC Business Court On Non-Solicitation And Non-Inducement Provisions

There is more discussion of non-solicitation clauses and non-inducement clauses in Judge McGuire's opinion last week in Sandhills Home Care, LLC v. Companion Home Care-Unimed, Inc., 2016 NCBC 59, than I think that I've ever seen before in a North Carolina court decision.  Non-solicitation clauses prohibit a former employee from trying to get business from his former employer's clients.  Non-inducement clauses prevent a former employee from encouraging other employees of the former employer from leaving to join him in his new employment.

Yesterday's post covered the non-competition restrictions in the Sandhills agreement.

Let's start with the non-inducement provisions of the Sandhills agreement:

Non-Inducement Provisions Are Enforceable

Non-inducement provisions are enforceable in North Carolina and they receive the same analysis as non-solicitation provisions (Op. ¶42).  More about that standard for analysis is below.

The Defendants in the Sandhills case raised a novel (and completely unsupported) argument about why the non-inducement provisions before the Court were invalid.  They said that the restrictions violated their right to engage in concerted activity under the National Labor Relations Act, and that they suppressed competition in "North Carolina's home healthcare market." 

Judge McGuire shot down that argument, stating that "North Carolina's appellate courts have held that such restrictions on inducing a former employer's employees can be enforceable" and that the Defendants had "cited to no source for the contention that there is a North Carolina public policy in favor of protecting employee concerted activity."  Op. ¶47

Non-Solicitation And Non-Inducement Provisions Are Subject To The Same Analysis As Non-Competition Provisions

I think that I had been successful in the past in persuading a North Carolina Judge that a provision preventing a former employee from soliciting his former employer's customers did not have to satisfy the same standard as a non-compete.

That argument won't work any longer, if it ever did.  A valid non-solicitation provision, like a provision restricting competition, must be:

(1) in writing, (2) entered into at the time and as part of the contract of employment, (3) based on valuable consideration, (4) reasonable both as to the time and territory embraced in the restrictions, (5) fair to the parties, and (6) not against public policy.

Op. ¶29.

But the standard for reviewing the validity of a non-solicitation provision is more liberal than the standard applied to a covenant not to compete.  Judge McGuire said that:

North Carolina courts are more willing to enforce non-solicitation provisions targeted to the former employer's customers or prospective customers than provisions prohibiting entirely the former employee from working for certain employers or in certain regions.

Op. ¶31.

A Non-Solicitation Agreement Doesn't Need To Be Tied To A Specific Territory

The Sandhills non--solicitation provision was not limited to a specific territory.  It was limited instead to the "book of business" of the Plaintiff.

Judge McGuire said that an argument  made by the Defendants --- that a non-solicitation restriction could not be enforced if it was not tied to a specific geographical description -- had been rejected by the NC Court of Appeals.   Op. ¶33 (citing Farr Associates, Inc. v. Baskin, 138 N.C.App. 276, 281, 530 S.E.2d 878, 882 (2000)).  So, he held that:

North Carolina's courts will enforce a covenant prohibiting a former employee from soliciting his former employer's customers even when not tied to a specific geographic region where 'the terms and conditions of this contract clause were reasonably necessary to protect the employer's legitimate business interests.'

Op. ¶33.

You are more likely to have a customer based restriction enforced if the time period of the restriction is not long.  Time and territory restrictions are evaluated "in tandem."  Op. ¶18.  In the case before Judge McGuire, it was limited to one year, short enough that a geographic restriction was not necessary.

Can A Non-Solicitation Provision Extend To Clients With Which The Employee Had No Contact?

It seems to be an open question whether a non-solicitation covenant can prohibit contact with all of a former employer's customers, or just those customers or prospective customers with whom the employee had personal contact." Op. ¶34

Judge McGuire avoided having to resolve that issue saying that he could not rule the restriction covering all of the former employer's clients to be unreasonable at "this very early stage of the case."  Op. ¶35.

A Non-Solicitation Provision Cannot Cover Prospective Customers Of The Former Employer

Judge McGuire didn't need to break new ground in ruling that language in the restriction prohibiting the solicitation of prospective customers was "unreasonably broad." Op. ¶37.

The NC Court of Appeals reached that conclusion several years ago, in Hejl v. Hood, Hargett & Assocs., 196 N.C. App. 299, 674 S.E.2d 425 (2009).  It held there that:

Defendant's attempt to prevent Plaintiff from obtaining clients where Defendant had failed to do so, is an impermissible restraint on Plaintiff.

Id. at 307, 674 S.E.2d at 430.

Don't include prospective clients in your non-solicitation agreements. This Plaintiff was lucky that the inclusion of prospective customers didn't invalidate its entire non-solicitation provision.  Since that "provision [was] a separate and divisible obligation contained in a separate sentence of the covenant, the Court was able to "blue pencil" it out and leave the remaining restriction on solicitation standing. Op. ¶37.