NC Business Court Gives Full Faith And Credit To LegalZoom's California Class Action Settlement

There are probably some of you who lie awake at night wondering whether Leagalzoom's offering of do it yourself lawyering products will be found to be the unauthorized practice of law (UPL) in North Carolina.

For those few of you, that uncertainty will continue.  At the end of last week, Judge Gale issued an opinion in Bergenstock v. Legalzoom.com, Inc., 2015 NCBC 49, dismissing a putative class action by Plaintiffs seeking to represent all North Carolina residents who purchased Legalzoom products or services.  The claims were for UPL, unjust enrichment, and violations of the North Carolina Unfair and Deceptive Trade Practices Act.  Op. ¶28.

The Judge dismissed the complaint, but he did not make a ruling as to Legalzoom's business model, nor did he address the question whether its services constitute UPL.  The resolution of that issue will have to come in the still pending case brought by LegalZoom against the NC State Bar: LegalZoom.com, Inc. v. North Carolina State Bar.  See here for my last update on that case.

The reason for the dismissal in the Bergenstock case was the full faith and credit given to the settlement of a similar class action in 2012 in California (known as the Webster case).  Webster had sued Legalzoom on behalf of a nationwide class.

The Webster Settlement

The Webster settlement covered all claims:

asserted or that could have been asserted [in that case] arising out of the LegalZoom website, any materials available on or through the LegalZoom website . . . the unauthorized practice of law, or the purchase or use of documents prepared through LegalZoom.

Op. ¶17.

In consideration for the settlement, LegalZoom agreed to provide sixty days of free enrollment in its prepaid legal services Programs.  As Judge Gale described those Programs (known as the LegalZoom Legal Advantage Plus Program [for individuals] and the Business Advantage Pro Program [for businesses]), they involve:

services provided by licensed attorneys, including telephone consultations; review and written summary of legal documents; an annual legal checkup (which would be provided to Webster class members in the free sixty-day period), including a written summary and recommendations for legal documents and strategies; a ten percent discount on all LegalZoom products; access to the LegalZoom form library; electronic document storage; and a twenty-five percent discount on legal services not included under the Programs, but provided by a participating firm.

Op. ¶18.

The challenge presented by the Bergenstock putative class was that those Programs were not available in North Carolina.  (That is true, as the NC State Bar has refused to approve the Programs.  That refusal is the subject of litigation between the State Bar and LegalZoom.  Op. ¶20).  The Settlement dealt with members who did not live in states where those Programs were available by providing them with the lesser of (i) $75.00, or (ii) half of the current base price of the document that the class member had purchased from LegalZoom.  Op. ¶19.

The Bergenstock Plaintiffs said that they had not received due process in the Webster settlement because there was no counsel representing their interests and there was no named class representative who had interests in common with them.  They further argued that the California Court approving the settlement had not considered the adequacy of the alternative payment to the class members who did not have the LegalZoom payments available to them.  They asserted that the settlement was not entitled to full faith and credit as to them.

Full Faith And Credit To Class Action Settlements

The main road block faced by the Plaintiffs challenging the effect of the Webster settlement lies in a U.S. Supreme Court decision holding that:

a judgment entered in a class action, like any other judgment entered in a state judicial proceeding, is presumptively entitled to full faith and credit.

Matsushita Elec. Indus. Co. v. Epstein, 516 U.S. 367, 374 (1996), under 28 U.S.C. § 1738 (2014).

The North Carolina appellate courts have accordingly held that courts should:

apply only a “very limited” scope of review when determining whether a foreign judgment is entitled to full faith and credit, with the inquiry limited to whether jurisdictional and due process considerations were “fully and fairly litigated and finally decided” by the court rendering judgment.

Op. Par. 32 (citing Boyles v. Boyles, 308 N.C. 488, 491, 302 S.E.2d 790, 793 (1983); Moody v. Sears Roebuck & Co., 191 N.C. App. 256, 275–76, 664 S.E.2d 569, 581–82 (2008).

If the out-of-state court found  jurisdiction and due process to have been "fully and fairly litigated" and they were finally decided, a "North Carolina court extends full faith and credit without further inquiry."  Op. ¶32.

The Bergenstock Plaintiffs argued that the California court had not specifically considered the adequacy of the settlement amount paid to persons living in states where LegalZoom's programs were not offered and that they therefore had not been afforded due process.

Judge Gale refused to accept that argument, holding that:

the record does not allow for this parsing of the settlement consideration. The full settlement consideration, including the consideration provided to the Alternative Payment Plaintiffs, was before Judge Highberger [the California Judge approving the settlement] for his review. The Court cannot infer that Judge Highberger failed to consider the adequacy of representation of or the adequacy of consideration for the Alternative Payment Plaintiffs merely because he did not make express findings in that regard. He made findings that the overall settlement was fair and reasonable and that the Settlement Class had been adequately represented. The Court then must conclude that the issues Plaintiffs now seek to litigate in this Court were fully and fairly litigated and finally decided by Judge Highberger.

Op. ¶41.

Two Claims You May Not Want To Make In North Carolina

I said yesterday that there was too much in DSM Dyneema, LLC v. Thagard, 2015 NCBC 47 for just one post, so here are the rest of the key points from the case.  They involve two claims you might not want to bother to make in North Carolina -- the first one suing a former employee for violation of fiduciary duty -- and the second a claim resting on the "inevitable disclosure doctrine."

Uncertainty About The Availability Of The Inevitable Disclosure Doctrine

Beware of relying on the "inevitable disclosure doctrine."  Judge Bledsoe points out that the doctrine "has not yet been firmly adopted by the North Carolina courts."  Op. ¶20 & n.4.  I think of the inevitable disclosure argument as an end run for a client which didn't get a non-compete agreement from a departing employee but wished that it had. 

The NC Court of Appeals, although it has yet to accept the doctrine, has described it as applying:

when an employee who knows trade secrets of his employer leaves that employer for a competitor and, because of the similarity of the employee's work for the two companies, it is "inevitable" that he will use or disclose trade secrets of the first employer. See K. Roberson, South Carolina's Inevitable Adoption of the Inevitable Disclosure Doctrine: Balancing Protection of Trade Secrets with Freedom of Employment, 52 S.C.L. Rev. 895 (2001).

Op. ¶20 & n.4 (quoting Analog Devices, Inc. v. Michalski, 157 N.C. App. 462, 470, 579 S.E.2d 449, 454 (N.C. Ct. App. 2003).

Judge Bledsoe was able to avoid deciding whether the doctrine applies in NC, even though the Defendants argued on their Motion for Judgment on the Pleadings that the Plaintiff had pled little more than that its former employee had left its employment and would inevitably disclose its trade secrets to his new employer, a competitor.

The Judge found that there was more than just the "inevitability" of disclosure since the Defendants after hiring away Thagard (Plaintiff's former chief scientist and "technical leader"), were suddenly able to pass a ballistics test for combat helmets used by the Department of Defense.  Before that hiring, the Defendants and all of the Plaintiff's other competitors, had failed that test.  Plaintiff had the only process in its industry which yielded an acceptable helmet.  There were also allegations in the Complaint that Thagard had downloaded trade secret information from his company computer before leaving the Plaintiff, and that he had disclosed that information to the Honeywell Defendants.

So, before making a claim based solely on the inevitable disclosure doctrine, take into account that North Caroline may not recognize the doctrine.

Fiduciary Duty

This second DSM Dyneema decision also contains a completely unsurprising ruling that Defendant Thagard did not owe a fiduciary duty to his former employer.

The NC Supreme Court pretty much ruled that an employee has no fiduciary duty to its employer almost fifteen years ago, in Dalton v. Camp, 353 N.C. 647, 652, 548 S.E.2d 704, 708 (2001).

Judge Bledsoe rejected the Plaintiff's argument that Thagard owed it a fiduciary duty because "he held a position of trust and confidence  at DSM as Application Manager -- Life Protection in which he. . . was the lead scientist and technical leader for DSM's helmet and body armor development and new grade development."  Op. ¶28.

It is hard to conceive of  situation where any employee -- other than one who is an officer or a director of her employer -- would owe a fiduciary duty to her employer.

 

Trade Secret Plaintiff Avoids Dismissal, Gets Discovery

One of the most interesting Business Court decisions of last year was Judge Bledsoe's opinion in DSM Dyneema, LLC v. Thagard, 2014 NCBC 50, in which he held that the Plaintiff, which was suing for misappropriation of trade secrets,was barred from pursuing discovery because it had not identified its trade secrets with "sufficient particularity."  The alleged trade secrets involved the development of ballistic-resistant fibers for enhanced combat helmets.  If you missed that case, click here.

This week, Judge Bledsoe followed up on that decision by denying the Motion for Judgment on the Pleadings of Defendants Honeywell Specialty Materials, LLC, Honeywell Advanced Composites, Inc., and Honeywell International, Inc.

There is so much worth writing about in this Opinion, DSM Dyneema, LLC v. Thagard, 2015 NCBC 47, that I've split it  into two posts.  More tomorrow.

The Honeywell Defendants argued that they were entitled to judgment on the pleadings because the Court had already ruled that the Plaintiff had not identified its alleged trade secrets with the necessary particularity.

While the Court had indeed made that ruling, it pointed out in this second ruling in the case that:

the level of specificity required of a plaintiff to survive a motion for judgment on the pleadings under Rule 12(c) is less than that required to permit discovery into an adversary's confidential and trade secret information.

Op. ¶18.

Adequately Pleading A Trade Secrets Claim

If you are hoping that this case provides a road map for an adequate trade secrets description in a case involving manufacturing/technical type trade secrets, you are bound to be disappointed.  Judge Bledsoe merely measured the allegations in the amended complaint against other cases where the trade secret description had been ruled to be insufficient, finding the Plaintiff's allegations to be "more detailed and specific, and less sweeping and conclusory, than those allegations our courts have found to fail the pleading standard of Rule 12."  Op. ¶19.

Nevertheless, the Court's citation of six Court of Appeals and Business Court decisions finding trade secret allegations to be sufficient to survive a motion to dismiss probably will provide at least some direction to those looking to avoid an early dismissal of a trade secrets claim.  Those cases (which involve mostly customer type trade secrets) are:

Horner Int'l Co. v. McKoy, 754 S.E.2d 852, 859 (N.C. Ct. App. 2014) (holding sufficient under Rule 12(b)(6) plaintiff’s identification of “various raw materials and raw material treatments; extraction, filtration, separation, and distillation techniques; and methods for compounding of flavors, packaging, and plant utility. . . used in the production of flavor materials derived from seven specifically identified substances, such as cocoa, ginseng, and chamomile”);

S. Fastening Sys., Inc. v. Grabber Constr. Products, Inc., 2015 NCBC 40 ¶¶ 23–25 (N.C. Super. Ct. Apr. 28, 2015) www.ncbusinesscourt.net/opinions/2015_NCBC_40.pdf (holding sufficient under Rule 12(b)(6) “confidential customer information such as customer contact information and customer buying preferences and history . . . confidential freight information, sales reports, prices and terms books, sales memos, sales training manuals, commission reports, and information concerning SFS’s relationship with its vendors”);

Veer Right Mgmt. Grp., Inc. v. Czarnowski Display Serv., Inc., 2015 NCBC 12 ¶ 29 (N.C. Super. Ct. Feb. 4, 2015), www.ncbusinesscourt.net/opinions/2015_NCBC_12.pdf (holding sufficient under Rule 12(b)(6) “compilations of information, methods, techniques, and processes that [it uses] in planning, organizing and managing all aspects associated with identifying appropriate shows for their clients, pricing and budgeting, procuring space, setting up booths, staffing booths during the show, tracking sales leads generated by each show, tearing down booths after each show”);

Le Bleu Corp., 2014 NCBC 65 ¶ 29 (holding sufficient under Rule 12(b)(6) “customer lists, pricing information, transaction histories, key contacts, and customer leads”);

Koch Measurement Devices, Inc. v. Armke, 2013 NCBC 48 ¶ 19 (N.C. Super. Ct. Oct. 14, 2013), www.ncbusinesscourt.net/opinions/2013_NCBC_48.pdf (holding sufficient under Rule 12(b)(6) “customer lists, including names, contact persons, addresses, phone numbers . . . [customer] ordering habits, history . . . [and company] pricing and inventory management strategies”); and

TSG Finishing, LLC v. Bollinger, 767 S.E.2d 870, 877 (N.C. Ct. App. 2014)  (recognizing in directing entry of preliminary injunction that particular steps in a process may be trade secrets, not simply the process as a whole).

Op. ¶19.

If you use the descriptions from those cases as a model for your trade secrets complaint, you will stand a pretty good chance of surviving a Motion to Dismiss (at least in Judge Bledsoe's Court).

Discovery Will Go Forward In This Case

The good news in this decision for the Plaintiff -- apart from escaping the Motion to Dismiss -- is that it is now entitled to discovery of the Honeywell Defendants' own trade secrets.

You will remember that the heart of the first Dyneema decision was that the Plaintiff was not entitled to any discovery of the Defendants' confidential information without describing the trade secrets which Plaintiff claimed had been misappropriated.

That ruling caused me to wonder how a plaintiff in a technical case of this type who claims misappropriation of its trade secrets can ever know exactly which of it proprietary processes have been stolen without having the defendant reveal its own trade secrets.

Now, the Court has shown some understanding of the box in which DSM Dyneema found itself in pursuing its trade secrets claim.  Judge Bledsoe said:

the Court is persuaded that in these circumstances—where DSM reasonably contends that the finished product at issue is 'the result of a recipe or formula of numerous variables' and is not publicly available for purchase or inspection, (DSM’s Resp. Honeywell’s Mot. Prot. Order, p. 13), and where the Court finds that the nature of Defendants’ alleged misappropriation creates an inherent difficulty for DSM to identify which portions of its trade secrets have been misappropriated prior to the receipt of discovery from Defendants —the Court concludes that DSM has satisfactorily complied with the Court’s [Order in 2014 NCBC 47] and that the Honeywell Defendants should now be required to produce to DSM their relevant and responsive confidential information and trade secrets.

Op. ¶33.  The Court looked to a Georgia federal court decision recognizing the same difficulty a trade secret plaintiff may face in identifying the trade secrets it says were stolen from it.  In that case, DeRubeis v. Witten Techs., Inc., 244 F.R.D. 676 (N.D. Ga. 2007), the Court held:

[T]he trade secret plaintiff, particularly if it is a company that has hundreds of thousands of trade secrets, may have no way of knowing what trade secrets have been misappropriated until it receives discovery on how the defendant is operating.

Id. at 680.

Coming tomorrow: Whether the inevitable disclosure doctrine applies in North Carolina, and the near impossibility of making breach of fiduciary duty claims against employees.

 

 

Interpreting The Right To Specific Performance In A Shareholder Buy-Sell Agreement

I've never thought very hard about the remedy of specific performance.  That means ordering a party to a contract to perform its contractual obligations.

But the ability of the Court to order specific performance was front and center in the Business Court's decision Wednesday in Hilco Transport, Inc. v. Atkins, 2015 NCBC 44.  The Defendants, shareholders of the Plaintiff corporation, argued that the Court could not order specific performance compelling them to sell their shares to the corporation.

One of the Hilco shareholders had the right under the Buy-Sell Agreement to require the family members of his brother, upon the brother's death. to sell their shares to the corporation.

All of the shareholders were subject to the term of a Buy-Sell Agreement which said in Section 10.1 that "[t]he Stockholders and their successors and assigns shall . . . be entitled to specific performance and injunctive relief to enforce the provisions of this Agreement."

The Buy-Sell Agreement did not specifically give the right of specific performance to the corporation.

When the Defendant shareholders received written notice from the corporation stating that it was exercising its option to purchase their shares, they  refused to allow the redemption.  The corporation sued, demanding specific performance.

The Defendants moved to dismiss, relying on the Latin phrase expressio unius est exclusion alterius.  If your fluency in Latin is fading, that means "the expression of one thing is the exclusion of another," (Order Par. 22).  Given that Section 10.1 of the Buy-Sell Agreement gave the right of specific performance to the shareholders, without mentioning the corporation, the shareholders contended that the corporation did not have that right.

Judge Gale didn't buy that argument.  He looked at the opening sentence to the paragraph giving the surviving brother the right to buy his deceased brother's family's Hilco shares.  The Judge found the language "[n]otwithstanding anything contained in this Agreement to the contrary . . . ." to be significant.

I don't know if I would have viewed that clause as being determinative, but this observation by Judge Gale about the "special rules" for "interpreting stockholder agreements that limit share transfers" is instructive:

'restrictions on alienation or transfer of stock are not favored and consequently are strictly construed.'  Averitt v. Ledbetter Roofing & Heating Co. v. Phillips, 85 N.C. App. 248, 251, 354 S.E.2d 321, 323 (1987).  However, such agreements can be upheld where the language is clear, because '[w]hile both option contracts and restrictions on the alienation of property interests are strictly construed, the clear intent of the parties as expressed on the face of the contract controls.  Lee v. Scarborough, 164 N.C. App. 357, 360, 595 S.E.2d 729, 732 (2004).

Op. ¶19.

If you think that this ruling means that the Defendants have to tender their shares to the corporation, you are wrong.  There are at least a couple of issues yet to be resolved.  The Defendants are challenging the valuation of their shares, which the Buy-Sell Agreement said was to be the stock's fair market value as determined by a specified accountant.  There is also a challenge to the validity and enforceability of the Buy-Sell Agreement.

Can You Sue Only One Conspirator After Dismissing Its Co-Conspirators?

Can you sue an alleged conspirator without suing the other parties to the alleged conspiracy?  That was one of the questions addressed by Judge Gale in the decision last week in  Loftin v. QA Investments LLC, 2015 NCBC 41.

Loftin had invested in an alleged tax shelter product which resulted in a $27 million capital loss deduction which was disallowed by the IRS.  He sued the accounting firm and the law firm which had developed the alleged tax shelter, as well as Defendant QA Investments, the investment advisor which had made the investments in the alleged tax shelter on his behalf.

The accounting firm and the law firm were voluntarily dismissed by Loftin from the case in November 2013.

Motion To Dismiss Conspiracy Claims

QA argued that the civil conspiracy claim against it should be dismissed because its alleged co-conspirators -- the accountants and the law firm -- were no longer parties to the case.  Judge Gale found whether a case can proceed against only one alleged conspirator to be an interesting question of law.  He said that he had "struggled to find any case law directly address[ing]" the issue.  He denied the Motion "in absence of clear precedent dictating otherwise."  Op. ¶32.

Motion To Dismiss Fiduciary Duty Claims

QA disputed that it owed any fiduciary duty to Loftin, but the Court found Loftin's allegations of a fiduciary relationship to be "minimally adequate" to survive the Motion to Dismiss.  Op. ¶44.  Judge Gale said that "[m]uch greater specificity would be required by a Rule 56 standard."  Id.

Those "minimally adequate" allegations were that QA had represented that "it would serve as advisor and guardian over his interests with respect to the [alleged tax shelter] transactions, and that QA represented to Loftin that their relationship was a confidential one."  Id.

Motion To Dismiss Unfair And Deceptive Practices Claim

QA prevailed on its Motion to Dismiss the UDPA claim, on the basis that securities transactions are outside the scope of Chapter 75.  That's pretty well accepted law.  See, e.g, Skinner v. E.F. Hutton & Co., 314 N.C. 267, 274-75, 333 S.E.2d 236, 241 (1985).

The Court rejected, however, QA's argument that it was engaged in a learned profession and therefore protected from Chapter 75 liability per the statutory language of G.S. §75-1.1(b).  The statute does not extend to "professional services rendered by a member of a learned profession."

Lawyers are acknowledged to be members of a "learned profession" and therefore not subject to Chapter 75 claims (Sharp v. Gailor, 132 N.C. App. 213, 510 S.E.2d 702 (1999).  Given that most of the readers of this blog are lawyers you may bristle at the thought of having "investment advisors" as members of our exclusive club.

But have no worries.  Judge Gale wasted no ink in rejecting this argument, holding that he had:

found no support for QA's contention that a general 'investment services' role constitutes a 'learned profession' under Chapter 76.  The Court does not believe that it needs to address that argument any further.

Op. ¶64.

That part of the ruling reminds me of Groucho Marx's famous letter resigning from the Friars' Club, when he said "I don't want to belong to any club that would accept me as one of its members."

 

 

An Interesting Trade Secrets Case From The Business Court

If you were unsure whether customer information held by your client -- like customer contact information, sales reports, prices and terms books, sales memos, sales training manuals, commission reports, and vendor information -- can be considered a "trade secret", the Business Court's opinion this week in Southern Fastening Systems, Inc. v. Grabber Construction Products, Inc., 2015 NC 40 should resolve your uncertainty.

The Parties And The Claimed Trade Secrets

Defendant Farrell had been a sales representative for the Plaintiff Southern.  He left Southern to work for Defendant Grabber, a competitor in the business of selling construction supplies.

Farrell had not signed a non-competition agreement, but he had signed a Non-Disclosure Agreement during his employment with Southern.  The NDA said that Farrell would "not directly or indirectly disclose or use for any reason whatsoever any Confidential Information obtained by" him due to his employment.  Op. 6.

"Confidential Information" was defined under the NDA to include:

customer lists containing customer names and addresses; customer sales records and reports containing product preferences and usual prices charged; price lists containing product sales prices and their cost; sales invoices, packing lists, routing books, customer files, personnel files, computer records, financial records and marketing plans containing tactics and strategies.

Op. 7.  The NDA contained an acknowledgment that Southern's "Confidential Information constitutes Trade Secrets."  Op. 8.

Southern filed suit against Grabber and Farrell alleging a substantial loss of business after Farrell began working for Grabber.  The Defendants moved to dismiss, asserting that Southern had not adequately identified the alleged trade secrets, that the information in question was "readily available . . . from customers and potential customers," and that Southern had not identified any steps that it took to keep its claimed trade secrets a secret.  Op. 22.

Judge Bledsoe disagreed.  On the point of whether the trade secrets were adequately identified, he cited six court decisions, four from the North Carolina Court of Appeals, recognizing that this type of description of customer information is sufficient to plead a trade secret.  Op. 23.  He also cited and called "persuasive" an unpublished decision from Judge McGuire of the Business Court finding a similar description by the same Plaintiff to be adequate.  (I missed that case -- Southern Fastening Systems, Inc. v. Duo-Fast Carolina, Inc. (February 9, 2015) -- and I really try hard not to miss much of interest in the Business Court.  Sorry about that.)

The Court rejected the other defenses given the Plaintiff's allegations in its Complaint that its trade secrets involved "non-public information" that it did not disseminate to its employees unless they first executed an NDA.

The Validity Of The NDA

This decision represents the first time I can remember seeing a Defendant argue that the validity of an NDA should be determined based upon the standard applied to a covenant not to compete.  The Defendant argued that the practical effect of the NDA was to keep Farrell from working for the Plaintiff's competitor so it therefore needed to be supported by consideration and be reasonable as to time and to territory.

Judge Bledsoe ruled that the NDA only restricted Farrell from disclosing Southern's Confidential Information and required him to return that information upon the termination of his employment.  He said that the NDA "permits Farrell to work for any person or entity provided he does not disclose [the Plaintiff's] Confidential Information."  Op. 33.  The NDA was therefore not a restrictive covenant subject to the requirements of G.S. §75-4.

Even after deciding that this NDA did not need to be evaluated under covenant not to compete principles,  the Court went on to consider the issues of consideration and time and territory.

On the point of consideration the Court did not need to resolve the question whether continued employment by Farrell was sufficient consideration for the NDA since Farrell had been provided with Confidential Information in exchange for signing the NDA.

The question whether the lack of limitation as to time and territory rendered the NDA invalid had already been resolved by the NC Court of Appeals in Chemimetals Processing v. McEneny, 124 N.C. App. 194, 476 S.E.2d 374 (1996).  There, the COA held that such an agreement can be valid "even when the agreement is unlimited as to time and area upon a showing that it protects a legitimate business interest" of the employer.  Id. at 197, 476 S.E.2d at 377.  Judge Bledsoe ruled that protecting customer relationships and goodwill was a legitimate business interest of the Plaintiff.

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NC Business Court: What Part Of Disqualification Do You Not Understand?

You will all recall the Business Court's disqualification of a law firm from representing its longtime client, in Kingsdown Inc. v. Hinshaw, 2015 NCBC 27.  Now there is a second chapter to the disqualification, which came in an Opinion last week, in Kingsdown Inc. v. Hinshaw, 2015 NCBC 35.

The disqualified law firm had asked Judge Bledsoe to clarify his Order disqualifying it from representing the Plaintiff Kingsdown.  That was due to the firm's past representation of Defendant Hinshaw (the corporation's CEO) on a personal basis in the transactions which were the heart of the lawsuit.

The law firm was not giving up its representation of its corporate client easily.  The Court's disqualification Order said that the law firm was disqualified from "further representation of Kingsdown in this matter against the Hinshaws."  Op. ¶56.  How far did the prohibition of that Order really go?

The law firm argued that it should be allowed to continue in its role as Kingsdown's regular corporate counsel and to advise Kingsdown on the litigation against Hinshaw without appearing as counsel of record, so long as it did not disclose any of the confidential information it had obtained in the course of its representation of Mr. Hinshaw.

Judge Bledsoe shot that argument down quickly.  He said:

To the contrary, the Court intended that the Firm would cease all representation of Kingsdown adverse to the Hinshaws in this matter, whether as litigation counsel or otherwise. The Firm’s failure to satisfy Rule 10(b) of the Rules of Professional Conduct and the appearance of impropriety created by the Firm’s representation of Kingsdown do not disappear simply because the Firm is no longer counsel of record – as corporate counsel, the Firm is still representing a current client (Kingsdown) adverse to a former client (the Hinshaws) in a substantially related matter, and the ethical concerns attendant to that representation, including the appearance of impropriety, remain.

Op. ¶15.

In other words, once a law firm is disqualified from representing a client in a litigation matter, it may not work "behind the scenes" or consult with, or give advice to that client regarding the matter.  Op. ¶16.

There was one last piece of its representation with respect to the lawsuit which the law firm tried to keep.  That was its representation of its corporate client in the claims it had brought against its former officer, Ray.  The firm argued that it had never represented Ray, that it had none of her confidential information, and that it should be allowed to be adverse to Ray.

Wrong, said Judge Bledsoe, who said that:

because the Firm’s representation of Kingsdown on its claims against Ray will require Kingsdown to take positions directly adverse to the Hinshaws on claims that are substantially related to the Firm’s prior representation of the Hinshaws, the Court concludes that the same considerations requiring disqualification of Tuggle Duggins in this matter adverse to the Hinshaws likewise require disqualification of the Firm in connection with Kingsdown’s claims against Ray.

Op. ¶20.

So it looks like this entire lawsuit is radioactive to the law firm, despite the law firm's protestations that its client is being deprived of the counsel of its choice.  The Court responded to that point by saying that:

the right of one to retain counsel of his choosing is secondary in importance to the Court’s duty to maintain the highest ethical standards of professional conduct to insure and preserve trust in the integrity of the bar. Avoiding a conflict and the appearance of impropriety are the best solutions.

Opinion ¶21.

While you might think that the issue of the law firm's involvement in this case is now over, this may not be the end of the disqualification saga.  The law firm, which was successful before its disqualification on its Motion to Dismiss the counterclaims made by Defendant Ray, has moved for sanctions against Ray.  That motion is pending.  I will report back on this when there is a ruling.  [Update:  New counsel for Kingsdown withdrew the Motion for Sanctions on April 30, 2015]

Business Court Denies TRO In The Midst of A Proxy Fight

The Defendant in Allcorn v. Bradley Creek Boatominium, Inc. sought an injunction against the Plaintiffs in the midst of a proxy fight as to their allegedly defamatory statements in connection with the election of the Defendant's board of directors.  In an (unpublished) Order yesterday,  Judge McGuire denied a Motion for a Temporary Restraining Order.

The Defendant operates a non-profit "recreational boating marina" in Wilmington, NC.  The Plaintiffs, members of the Defendant and owners of boat slips at the marina (a boataminium) were involved in a disagreement with the existing board of directors of the Defendant.

Plaintiffs, exercising their statutory inspection rights, sought the current financial statements of the Defendant corporation and the minutes of its recent Board of Directors meetings (per G.S. §55A-16-04).  Plaintiffs were entitled to this information "if [their] demand was made in good faith and for a proper purpose, (b) [they] describe[d] [the] purpose for which they seek the minutes 'with reasonable particularity,' and (c) the records are directly connected to the proper purpose."  Order ¶12.

What are "proper purposes"?  They include determining stock value, determining the financial condition of the corporation, or investigating the conduct of management.  Order ¶12  A requesting member or shareholder enjoys a "presumption of good faith" in a request for corporate records, and the burden falls to the corporation to overcome the presumption.  Order ¶12.

Although the corporation conceded the request for the board minutes was for a proper purpose, it disputed that the request had been made in good faith.  Since the corporation was seeking ratification of previous actions of its board of directors at an upcoming meeting, and there therefore was a close relationship between the request and the upcoming board agenda, the Court found insufficient evidence to rebut the presumption of good faith and ordered the corporation to produce the requested records.

You are wondering by now how a temporary restraining order plays into this basic request for corporate records.  The Defendant expressed concern on how the Plaintiffs might use the records that it was ordered to produce.  It sought an injunction prohibiting the Plaintiffs from "engaging in or disseminating any defamatory or otherwise false, disparaging or misleading communications about [the corporation's] financial health and/or its Board of Directors, or management to any person or entity."  Order ¶16.

After stating several times that a TRO was an "extraordinary measure"  (Order ¶17), Judge McGuire denied the motion for a TRO.  He said that even assuming that the Defendant had established a likelihood of success on any of its claims, it had not established that it would suffer irreparable harm if the TRO was not issued.

The Judge also pointed out the difficulty that the Court would have in monitoring and enforcing such an injunction:

Particularly significant in this case is that Defendant's requested relief would require the Court to restrain Plaintiffs' rights to communicate with the Marina's membership
immediately prior to a vigorously contested board of director's election. While the Court recognizes that genuinely defamatory speech does not have absolute constitutional protection, the relief requested by Defendant[] goes far beyond protecting it against defamatory statements or communications by Plaintiffs and, effectively, asks the Court to insert itself into Defendant's upcoming Board elections as a referee. Defendant is now requesting that the Court prohibit Plaintiffs from making "incomplete" and "misleading" communications, from "interpretation of the records produced" by Defendant, and from "harassing" Defendant's employees. Such a prohibition on Plaintiffs' conduct would be both overly broad and would not adequately apprise Plaintiffs of the conduct from which they were prohibited in engaging. In addition, as a practical matter, such an order would be nearly impossible to enforce.

Order ¶19.

Judge McGuire also noted that the Defendant's hands were not entirely clean in expressing its concern about false statements possibly being made in the upcoming election of the board of directors of the Defendant.  He said that the Defendant had said in a newsletter to its members that the Plaintiffs' request for corporate records was improper, "despite the fact that North Carolina law clearly entitles Plaintiff[s] to this exact information upon request."  Order ¶20.

They say that "he who seeks equity must do equity."  It has also been said that the two happiest days of a man's life are when he buys a boat and when he sells it.  The current members of the board of directors of the Defendant have undoubtedly had better days.

 

Some Stats On The Business Court

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

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

N.C. Gen. Stat. §7A-343(8a).

The First Semi-Annual Report

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

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

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

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

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

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

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

Report at 3.

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

The 2015 Annual Report

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

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

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

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

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

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

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

NC Business Court Takes On The Oxford Comma

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

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

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

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

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

Op.¶27.

The Plaintiff's argument was that:

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

Op. ¶28.

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

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

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

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

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

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