Failure To Comply With Discovery Orders Results In Dismissal Of Pro Se Plaintiff's Case

Going pro se in the NC Business Court is a bad idea.  At least it was for the Plaintiff in Gillespie v. Majestic Transport, Inc., 2017 NCBC 43 who saw his claims dismissed (without prejudice) for failing to comply with the Court's discovery orders and was ordered to pay attorneys' fees to the Defendant.

Gillespie didn't start out in the Business Court without a lawyer.  His lawyer was allowed to withdraw in November 2016, and the Court ordered Gillespie to report within the next month regarding his efforts to retain a new lawyer.  He didn't make that report, stating later that he had "forgotten" to do so.  Op. ¶12.

Before the deadline for that report had run out, the Business Court granted a pending Motion to Compel, and ordered the Plaintiff to provide supplemental discovery responses and to provide a privilege log within ten days of the Order granting the Motion or within ten days of the appearance of new counsel.

Gillespie, without new counsel, didn't provide the material required by the discovery order.  He also didn't respond at all to Interrogatories served on him by the Defendant. The Defendant filed another Motion to Compel, this time requesting sanctions against Gillespie including  dismissal of his case.

Judge McGuire held a hearing on the second Motion to Compel in January 2017.  Gillespie appeared at the hearing, and explained his non-compliance by contending that "without legal representation, he did not understand his obligations."  Op. ¶12.  He said that he did not intend to represent himself, and asked for additional time to hire an attorney.

Judge McGuire said that he would not dismiss the case and that "[t]he Court desires to provide Gillespie with a final opportunity to retain counsel to represent him."  Op. ¶13.  He gave Gillespie a deadline of February 15th to retain new counsel and to have that new lawyer file a notice of appearance in the case.

When that deadline rolled around, Gillespie informed the Court "it has been impossible to retain new legal counsel,” and that he had  “elected to represent himself in matters of this case so that no further delays occur.”  Judge McGuire granted that request and ordered Gillespie to respond to some outstanding discovery and reminded him of a prior order requiring mediation to take place by March 31st.  He warned Gillespie that if he did not comply with these obligations, that the Court would consider “appropriate sanctions up to and including dismissal of Gillespie’s claims.”  Op. ¶15.

When Gillespie fell down on those obligations, Judge McGuire cut him no slack for proceeding pro se.  He said in ruling on Defendant's Motion for Sanctions that:

The Court is not unsympathetic to Gillespie’s current status as an unrepresented litigant, but notes that he consented to withdrawal of his counsel in this case. Gillespie also was provided with more than a reasonable amount of time to retain new counsel, but failed to do so. Ultimately, an individual who chooses to represent himself in the civil courts of our State must abide by the orders of those courts and by rules of procedure applicable to civil proceedings.

Op. ¶25.  Even so, Judge McGuire ruled that Gillespie's lack of assistance of counsel had "probably hampered his ability to comply with court rules," and that the dismissal would be without prejudice.  Id.

Although Mr. Gillespie might be relieved that he can refile his lawsuit, he can't be delighted at having to pay attorneys' fees to the Defendant.  But I was struck by the reasonableness of the  fees sought by Defendant's counsel.  They were $1265.50 for the first Motion to Compel (4.6 hours at $275 per hour), $770 for the Motion for Sanctions (2.8 hours at $275 per hour) and $385 for the second Motion to Compel (1.4 hours at $275).  Judge McGuire awarded a total of $2,421.00.

Would it have made a difference if Gillespie had been able to find new counsel to step into the case?  Maybe.

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When You Settle A Case, Don't "Over-Release" The Defendant

The parties to Security Camera Warehouse, Inc. v. Bowman, 2017 NCBC 38, had been adverse to each other in a previous lawsuit (not in the Business Court), which they settled.  Security Camera released Bowman, one of its former owners, from all claims in that settlement.  But during the settlement negotiations which resulted in the settlement of lawsuit #1, Bowman had control of Security Camera's computer server, and downloaded what Security Camera said was trade secret information (Security Camera's customer list and other information regarding those customers).

After the settlement was done, Bowman incorporated Defendant Arcdyn to compete with Security Camera, using the customer information he took during the settlement discussions.

Security Camera, understandably aggrieved, sued Bowman and Arcdyn on a variety of theories, including misappropriation of trade secrets and breach of fiduciary duty.

The Defendants said that these claims were barred by the Release.  In his Opinion, Judge Conrad agreed and dismissed most of the claims.

Here are the terms of the Release: Security Camera and Nederlanden (who became the sole owner of Security Camera via the settlement) said that they:

generally release and forever discharge Bowman, his agents, heirs,successors and assigns, from any and all claims, demands, and causes of action of whatever kind or character which [Security Camera and Nederlanden] have, or may have in the future, against Bowman, based on any acts or events that have occurred on or before the execution of this Agreement, whether or not growing out of or connected in any way with operations or business transactions of [Security Camera].

Op. 8 (emphasis added).

Judge Conrad framed the issue as follows: "whether the parties’ mutual release bars recovery for the post-release use of a trade secret wrongfully acquired before the execution of the release."  Op. 24. 

Don't Release Claims Which You "May Have In The Future"

The Court dismissed as "untenable" Security Camera's  main argument that the release was not prospective.” The language contained in the Release, that it covered claims Security Camera “may have in the future," made this pretty clear.  Op. 28.

Judge Conrad noted that Security Camera had not limited the terms of the Release to preserve its trade secrets claims, and that the alleged misappropriation of trade secrets had happened before the execution of the Release. He said:

  • In negotiating the release, Security Camera could have required Bowman to return its property, reserved any potential trade-secret claims, or refused to release claims accruing after the execution of the Agreement.
  • It did not, and it is now far too late to import limitations that were not the subject of the parties’ bargain.

Order 30.

But not all of Security Camera''s claims were dismissed. The Court left standing a claim for the Defendants' interference with a website which the Plaintiff claimed it owned (SCWddns.com).  It said that the Defendants had disabled the website, and that it had to buy a new domain to restore its website.

Although the Defendants claimed that they owned the website, Judge Conrad found that there was an issue of fact on that point, and he refused to dismiss the claim.  Op. 42-43.

On the subject of releases, it's pretty common to release a party from all claims, whether "known or unknown" at the time of the release.  So, it was not out of the ordinary for Security Camera to give up claims it was unaware of that arose during the settlement negotiations.

 

 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Id. 397-98.

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

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

Op. ¶22.

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

It Doesn't Take Magic Words To Revoke An Offer

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

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

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

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

Op. ¶12.

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

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

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

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

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

First Published Opinion From New Business Court Judge Conrad

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

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

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

What Were The Trade Secrets?

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

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

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

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

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

Establishing Misappropriation Of A Trade Secret

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

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

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

Op. ¶38.

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

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

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

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

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

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

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

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

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

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

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

Op. ¶87.

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

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

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

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

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

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

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

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

He said that:

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

Op. ¶29 (emphasis added). 

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

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

Defending A Former Employee Accused Of Misappropriating Trade Secrets

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

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

Rebutting The Trade Secret Plaintiff's Burden Of Proof

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

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

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

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

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

N.C. Gen. Stat. § 66-155.

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

Judge McGuire framed the problem this way:

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

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

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

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

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

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

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

 

NC Business Court: What Is Intrusion Into Seclusion?

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

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

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

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

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

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

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

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

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

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

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

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

The Internal Affairs Doctrine

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

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

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

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

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

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

Op.. ¶22 (emphasis added).

The Pleading Standard For A Non-Existent Claim

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

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

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

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

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

238 N.C. App. 202, 211.

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

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