Covenant Not To Compete Cases (Without More) Aren't Within The Business Court's Mandatory Jurisdiction

If a case involves only a breach of a covenant not to compete or a confidentiality agreement, it is not within the mandatory "unfair competition" jurisdiction of the North Carolina Business Court, based on two recent decisions.

The first case is Workplace Benefits, LLC v. Lifecare, Inc, decided by the Court on July 14, 2008In that case, which the Defendant designated to the Court, the Plaintiffs were a former employee of the Defendant and her new employer.

The Complaint asserted that the Defendant was improperly using a Confidentiality Agreement signed by the individual Plaintiff to threaten her so she wouldn't call on potential customers.  The Plaintiffs further alleged that potential customers had been impeded from doing business with the corporate Plaintiff as a result. 

The Complaint sought a declaratory judgment that the Confidentiality Agreement was invalid, and also made claims for tortious interference with contract and a breach of the duty of good faith and fair dealing.

The case was designated to the Business Court (by me) based on the Court's mandatory jurisdiction over cases involving "unfair competition law."  Judge Tennille disagreed that there was mandatory jurisdiction, and held:

every suit based upon a breach of a restrictive covenant or breach of a Confidentiality Agreement [will not] give rise to a mandatory business case based upon “unfair competition.” In order to raise a material issue of unfair competition, some additional factors must be alleged. For example, allegations of the theft of trade secrets which provide a competitive advantage to one party could give rise to a mandatory case. See e.g., Analog Devices v. Michalski, 157 N.C. App. 462, 579 S.E.2d 449 (2003). Also, actions designed to unfairly damage another’s business would give rise to an unfair competition claim. See, e.g., Sunbelt Rentals, Inc. v. Head & Engquist Equip., LLC, 174 N.C. App. 49, 620 S.E.2d 222 (2005).

The Court determined that those additional factors were lacking in the Workplace Benefits complaint. 

In the Order in the second case, decided yesterday, the Court remanded a lawsuit in which the plaintiff sought a declaratory judgment that a covenant not to compete was invalid. Judge Tennille remanded the case on his own motion, before any Answer had been filed, and referenced the Workplace Benefits decision.

Covenant Not To Compete, And Summons, Held Invalid

Today, in its Order and Opinion in Bolick v. Sipe, the North Carolina Business Court rejected a novel argument regarding the validity of post-employment consideration for a covenant not to compete.  It also dealt with the issue of the validity of a summons issued in the wrong name.

On the non-compete side, Plaintiff signed the non-compete with the cleaning company for which she had worked three years after she began employment.  Defendant argued that it had held off from firing the Plaintiff in exchange for her execution of the agreement, and that this was valid consideration.

Judge Tennille disagreed, holding:

"The Court is not aware of any prior decisions holding that a decision not to fire someone is adequate consideration for a non-compete. Instead, this state has found that '[w]hen the relationship of employer and employee is established before the covenant not to compete is signed there must be consideration for the covenant such as a raise in pay or a new job assignment.' Whittaker Gen. Med. Corp. v. Daniel, 324 N.C. 523, 527, 379 S.E.2d 824, 827 (1989) (citing Chemical Corp. v. Freeman, 261 N.C. 780, 136 S.E.2d 118 (1964)). That consideration can NOT be the continuation of employment. Mach. Co. v. Miholen, 27 N.C. App. 678, 686–87, 220 S.E.2d 190, 196 (1975). Indeed, under Defendants’ theory, every employer could offer an employee the option of being fired or signing a non-competition agreement and argue that 'consideration' had been paid. That is not the law in North Carolina. The restrictive covenant in this case was invalid."

The issue involving the validity of the summons arose because Plaintiff had sued a company called Molly Mops, LLC, but had meant to sue a different company, Molly Mops Cleaning Service, LLC.  Plaintiff discovered the error promptly, and amended her complaint before any responsive pleading was filed, but never had a new summons issued.

Plaintiff sought leave to amend the original summons to properly name Molly Mops Cleaning Service, LLC.  Judge Tennille denied the Motion, even though the right party had notice of the lawsuit, holding:

This is not a case of misnomer. The wrong entity was named in the summons which was never amended. There is no doubt that MMCS had notice; however, that does not cure the defect. It may well be that plaintiff intended to sue MMCS and was confused; however, that does not cure the defect. Plaintiff did file an amended complaint; however, that did not cure the defect. A proper summons was never served on MMCS and thus no action has been commenced against it.

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In this case, Plaintiff made a substantive mistake and sued the wrong entity. That mistake was fatal. The court does not have jurisdiction over MMCS because no valid summons was issued and served on MMCS.

Brief in Support of Motion for Summary Judgment

Brief in Opposition to Motion for Summary Judgment

Brief in Support of Motion to Amend Summons

Brief in Opposition to Motion to Amend Summons

Full Faith And Credit And Class Actions

Today, in Moody v. Sears Roebuck & Co., the North Carolina Court of Appeals reversed a decision of the Business Court which had refused to approve the dismissal with prejudice of a North Carolina class action.  The Business Court had found that the settlement of the case, even though it had been approved by an Illinois court, was inadequate for the North Carolina class members. 

This is an interesting case (and a long post), but the Reader's Digest version is that: (a) Rule 23 of the North Carolina Rules of Civil Procedure doesn't require court approval before a class action which has not yet been certified is dismissed, but (b) a court nevertheless has the authority to conduct a review of a pre-certification dismissal and should exercise it, and (c) a court's review of a foreign court's approval of a class action settlement is limited to a consideration of whether the foreign court addressed issues of jurisdiction and due process.

The core of Judge Tennille's May 2007 opinion in the Business Court (summarized here) was that there was a "shocking incongruity between the class benefit [of about $2400 to the entire nationwide class] and the fees afforded counsel and the representative [of more than $1 million]."  He held that this "leave[s] the appearance of collusion and cannot help but tarnish the public perception of the legal profession."

The class notice and claims process agreed to by Moody and Sears also came under Judge Tennille's fire.  He held that the class notice was poorly distributed and uninformative, did not provide sufficient time for class members to opt out, and made no mention of the million dollar fee for the lawyers. He held that "it is hard to imagine a more inadequate notice plan and claims process."

The effect of the ruling was that Judge Tennille refused to allow the class plaintiff to dismiss its North Carolina class claims with prejudice, even though Sears had joined in the motion.  Judge Tennille allowed the dismissal of the class claims without prejudice. 

The class plaintiff and his adversary then both appealed Judge Tennille's decision. So, the Court of Appeals was faced with the curious situation of Appellant and Appellee both arguing that the lower court was wrong. 

Each side filed its own brief, and each side filed a response to the other's brief. There was an Appellant's Brief from Plaintiff which said that Judge Tennille's order was "bizarre and unbelievable" (on p. 17), an Appellant's Brief from Sears saying that the Order was "astonishing" (on p. 12); and an Appellee's Brief from Plaintiff and an Appellee's Brief from Sears also urging reversal. So, in the end, the Court had four briefs saying how very wrong the Business Court had been.

A pivotal issue was whether Judge Tennille's approval was even required for the dismissal to be taken.  The Business Court had held in a number of cases, including Moody, that when a claim is made on behalf of a class, court approval is required before any dismissal, even if the class hasn't yet been certified.  Moody presented the first opportunity for the Court of Appeals to deal with that issue, and it rejected the argument that the North Carolina Rules of Civil Procedure require approval before a pre-certification dismissal.

The Court further held, however, that "our holding does not imply that a trial court wholly lacks authority to review a motion for pre-certification dismissal of a class-action complaint."  The Court observed that "[w]ithout some level of pre-certification court supervision, there is an unacceptable risk that parties may abuse the class-action mechanism in myriad ways."  It set out the following standard:

We therefore hold that when a plaintiff seeks voluntary dismissal of a pre-certification class-action complaint, the trial court should engage in a limited inquiry to determine (a) whether the parties have abused the class-action mechanism for personal gain, and (b) whether dismissal will prejudice absent putative class members. If the trial court finds that neither of these concerns are present, the plaintiff is entitled to a voluntary dismissal. However, if the trial court finds that one or both of these concerns are present, it retains discretion to address the issues.

The inquiry is narrower, however, when a foreign court, like the Illinois court which had approved the settlement questioned by Judge Tennille, has already addressed these issues.  The issue, then, the Court determined, is one of full faith and credit. The Court of Appeals observed that the due process and jurisdictional issues considered by the Business Court had been "heard and answered" in the Illinois Court.  [The Illinois Judge had received a letter from Judge Tennille raising his concerns about the settlement and had inquired into those matters at a fairness hearing.]

The Court of Appeals held that any review of the approval of a class action by the courts of another state was "limited" to a consideration of whether jurisdictional and due process issues had been addressed by the foregin court.  It stated:

limited review serves important judicial interests in the efficiency and finality of class-action litigation, and ensures that no "waste of judicial resources" occurs by reason of "reviewing courts . . . conduct[ing] an extensive substantive review when one has already been undertaken in a sister state." Further, "second-guessing the fully[-]litigated decisions of our sister courts would violate the spirit of full faith and credit," and could make North Carolina the jurisdiction of choice for plaintiffs wishing to launch collateral challenges to other states' judicial proceedings. While North Carolina courts surely have an important interest in not enforcing constitutionally infirm foreign judgments, the appropriate manner of correcting foreign trial court errors is "by appeal within the [foreign] state system and by direct review in the United States Supreme Court."

The Court of Appeals concluded that "the jurisdictional and due process conclusions contained in the trial court's 7 May 2007 order were 'fully and fairly litigated and finally decided' in Illinois Circuit Court," and that "[t]his finding concludes our review and forecloses any reconsideration of the merits of the legal issues decided by the Illinois Circuit Court. . . .While we share the trial court's serious concerns regarding the final accounting in the . . . settlement, we are constrained to hold that the trial court erred by refusing to accord full faith and credit to the . . . settlement. We therefore reverse the trial court's 7 May 2007 order and remand this case to the trial court with instructions to dismiss the class-action allegations with prejudice."

The Business Court's opinion had gotten a lot of attention.  The Rand Institute for Civil Justice had called it "fascinating," and a Harvard Law School Professor who writes frequently about class actions had applauded it.

Despite the reversal, the Business Court opinion in Moody remains significant for other reasons.  It is a primer from Judge Tennille's perspective on what are acceptable class action settlements and notice procedures and certainly worth reading before presenting a settlement for approval in his court.

Communications Decency Act Doesn't Insulate StubHub From Scalping Lawsuit

Today, the North Carolina Business Court ruled in Hill v. StubHub, Inc. that the Communications Decency Act didn't provide a defense to on-line ticket seller StubHub against claims that it had violated North Carolina's anti-scalping laws.

In his opinion, Judge Tennille allowed Plaintiffs to proceed on their unfair and deceptive practices claims against StubHub.  He dismissed, however, several other claims brought by the Hills, who were frustrated purchasers of Hannah Montana concert tickets for their eight year old daughter. 

According to the Amended Complaint, the Hills' daughter had  repeatedly told her parents that she had a "sincere and strong" wish to see this show.  Mrs. Hill tried buying tickets on-line when they went on sale, but they sold out in moments. The Hills, probably under unrelenting “sincere and strong” pressure from their daughter, bought four tickets to the concert on StubHub, at a price nearly $100 per ticket higher than the $56 face value of each ticket.

Then, the Hills sued, alleging that  StubHub, along with the unnamed John Doe defendants who actually owned the tickets, had violated North Carolina’s anti-scalping law. The Hills sought class certification, not just for those who had to purchase tickets via StubHub for the Hannah Montana show, but also for the purchasers of tickets to the “many concerts, sporting events and other events and at numerous venues throughout the State of North Carolina” for which tickets had been sold through StubHub. The Hills made multiple claims: (1) violation of North Carolina's anti-scalping statute (2) civil conspiracy, (3) tortious action in concert, (4) unfair and deceptive practices, and (5) punitive damages.

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The North Carolina Business Court Is A "Model For the Nation"

North Carolina's Business Court is a "model for the nation," according to Directorship Magazine's Annual Guide to State Litigation.

In addition to complimenting the Business Court, the Annual Guide gave North Carolina's litigation climate a green light, indicating that the "state's liability climate encourages growth and job creation."   It gave North Carolina a high national ranking, much higher than the State's ranking in the U.S. Chamber of Commerce rankings issued earlier this year.

The State's litigation climate ranking was sixth (behind Tennesse, Utah, Indiana, Ohio, and North Dakota), against twenty-first in the U.S. Chamber report.

Depending on your perspective, the litigation weather in North Carolina according to the Guide is partly cloudy or partly sunny.  The Guide said that North Carolina

"has maintained a fair and predictable liability climate that leads to growth and job creation.  It ranks among the three best states for monetary tort losses, improving from 7th in 2006.  However, North Carolina's product liability losses rank 36th, which indicates heightened litigation activity and a rise in jury verdicts.  Further, the state's plaintiffs' bar is very active in the state legislature: a bill defeated last year extending the statute of repose from 6 to 15 years would have made North Carolina one of three states with the longest period for filing claims.  There is a rule of law majority on the state Supreme Court and the state business court serves as a model for the nation.  North Carolina, however, is a state to be watched because of aggressive trial bar legislative efforts." 

The Directorship Magazine rankings took the U.S. Chamber of Commerce rankings and evaluated them in conjunction with the U.S. Tort Liability Index prepared by the Pacific Research Institute, blending the two into its own ranking.  North Carolina was ranked third in the Pacific Research Institute's study, which evaluates a myriad of empirical evidence.  The Institute's complete spreadsheet, containing data for all 50 states, is here.

North Carolina Business Court Decisions On Appeal

The North Carolina Court of Appeals has before it a number of the interesting issues decided by the Business Court over the past several months.

There are, by my count, fifteen Business Court decisions on appeal to the Court of Appeals.  The cases involve class actions, derivative actions, forum selection clauses, motions to stay, and antitrust law, among other matters.

The list of cases on appeal is below, with links to earlier posts or case summaries on this blog about the Business Court decision as well as the dates of the most recent filings in the Court of Appeals.

Antitrust

Teague v. Bayer AG (Appellant's Brief filed November 21, 2007; Appellee's Brief filed January 23, 2008).  Antitrust case involving issues of indirect purchaser standing. 

Class Actions

Blitz v. Agean (Record on Appeal filed June 16, 2008).  Denial of class action under the Federal Telephone Consumer Protection Act.

Moody v. Sears Roebuck and Co. (briefing concluded January 2008, argued March 5, 2008).  Need for court approval before dismissal of class action.

Derivative Actions

Egelhof v. Szulik  (Appellant's Brief filed June 5, 2008).  Sanctions against derivative action plaintiff and his lawyers.

Gaskin v. J.S. Proctor Co. (Record on Appeal filed June 24, 2008).  Whether claims of limited partners against general partner were derivative, or direct.

Regions Bank v. Regional Property Development Corp. (Notice of Appeal filed May 20, 2008).  Dismissal of derivative action by members of limited liability company. 

Employment

Kornegay v. Aspen Asset Group, LLC (Notice of Appeal filed June 18, 2008).  Appeal from jury verdict finding breach of contract to pay bonus compensation and existence of bonus agreement and violation of North Carolina Wage and Hour Act.  Post-trial, the Court refused to award liquidated damages under the Act.

Motions To Stay

Signalife, Inc. v. Rubbermaid Inc. (Appellants' Brief filed June 13, 2008).  Grant of Motion to Stay based on case filed earlier, through electronic means, in federal court. 

Wachovia Bank v. Harbinger Capital Partners Master Fund I (Record filed May 30, 2008).  Grant of Motion to Stay of North Carolina action in favor of a subsequently filed New York lawsuit. 

Forum Selection Clause

Sony Ericsson Mobile Communications USA, Inc. v. Agere Systems (Record on Appeal filed May 9, 2008).  Enforceability of forum selection clause.

Trusts

Heinitsh v. Wachovia Bank (Appellant's Brief filed 11/13/2007; Appellee's Brief filed January 14, 2008).  Dispute over distribution of trust proceeds, propriety of attorneys' fees incurred by trustee.

Miscellaneous Issues

Eleanor B. Johnson Limited Partnership v. Ball (Record on Appeal filed May 29, 2008).  Issues involving receivership and arbitration. 

Kintz v. Amerilink LTD (Notice of Appeal filed May 27, 2008).  Appeal of jury verdict in breach of contract case.

Media Network, Inc. v. Long Haymes Carr, Inc. (Notice of Appeal filed May 1, 2008).  Appeal of jury verdict regarding breach of advertising contract.

Schlieper v. Johnson (Appellant's Brief filed February 15, 2008; Appellee's Brief filed April 15, 2008).  Dismissal of claims for fraud, negligent misrepresentation, unfair and deceptive trade practices, and breach of contract regarding sale of business.

The photo at the top of this post is from Lance McCord's photostream on Flickr.

North Carolina Discovery Sanctions Order Leads to $107 Million Malpractice Action

An Order granting discovery sanctions in the Western District of North Carolina is the basis for a $107 million malpractice lawsuit against a New York law firm.

The discovery Order was entered two years ago in a multidistrict proceeding formerly pending in Charlotte.  The case, just recently settled, involved the alleged price fixing of polyester staple fiber. 

The law firm of Kaye Scholer represented CNA Holdings, Inc. and Celanese Americas in that litigation.  Judge Vorhees sanctioned Celanese for failing to produce a significant quantity of responsive documents. 

According to the Amended Complaint filed on June 25th against Kaye Scholer, Judge Vorhees ruled from the bench that:

[T]he efficient disposition of a case like this one depends on full and candid discovery and [Celanese has] withheld that compliance with their obligations . . . . The efforts by [Celanese] do not meet the requirements of the discovery rules or the court’s directives . . . . The court is not unmindful of the positions urged by [Celanese], but in the context of the trove of documents it held in the wings just out of sight of the non-class plaintiffs, these positions can’t be seen as coherent or compelling. And they don’t encourage the court to rely on the good faith of [Celanese]. . . . The efforts by [Celanese] to play cat and mouse with the court and with the non-class plaintiffs since at least 2004 is unbecoming . . . to say the least.

The sanction entered by the Court in the antitrust litigation was that Celanese had to pay opposing counsel's attorneys' fees in pursuing the discovery motion, which were more than $100,000, and that the Court would consider further sanctions.  Shortly after that, Celanese fired Kaye Scholer.

New counsel then conducted a comprehensive review of Celanese's records which resulted in the production of hundreds of thousands of additional documents.  The Plaintiffs in the North Carolina case responded by asking for an array of additional sanctions, including (a) a default judgment against Celanese, (b) a finding of fact that Celanese had engaged in “bad faith, willful and deliberate discovery misconduct,” (c) instructions to the jury that this misconduct reflected consciousness of guilt, and (d) adverse inferences against Celanese on claims that it engaged in an illegal price-fixing conspiracy.

Judge Vorhees withheld ruling on the sanctions requested by Plaintiffs, but stated that he "did not take lightly the allegation that material false written and oral misrepresentations were knowingly and intentionally made" to the Court and the Plaintiffs. 

Celanese settled the antitrust claims in May 2008 for $107 million.  In the new lawsuit, Celanese says it was forced to pay this substantial settlement because "[t]he North Carolina Federal Court's sanctions rulings and the threat of additional severe sanctions at trial resulting from Kaye Scholer's conduct materially changed Celanese's likelihood of success at trial."  As Celanese put it, "the inflated $107 million settlement forced by Kaye Scholer's misconduct was essential to avoid the potentially devestating impact of sanctions that would have undermined Celanese's defense on the merits and would have exposed Celanese to catastrophic treble antitrust damages."

Celanese is seeking from Kaye Scholer a return of the legal fees it paid the firm, plus the difference between the $107 million settlement and what it claims would have been a "nominal settlement" in the absence of the discovery issues.  Celanese bases its claim that the antitrust claims had minimal value on memoranda in which Kaye Scholer opined that the case presented little risk.

The lawsuit is pending in federal court in Texas.  Kaye Scholer has filed its own lawsuit in the Southern District of New York seeking the recovery from Celanese of unpaid legal fees, and a declaration that its legal work was properly performed. 

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A (Double?) 2-1 Split From The Court Of Appeals On Personal Jurisdiction

Advising an out-of-state defendant whether it is subject to personal jurisdiction is often a judgment call.  There is no bright line test when minimum contacts are involved.

The 2-1 decision today by the North Carolina Court of Appeals in Rossetto USA, Inc. v. Greensky Financial, LLC, in which two Georgia LLCs challenged personal jurisdiction, illustrates that pretty clearly.  The Court actually split twice on the jurisdiction question, reaching different conclusions on whether there was jurisdiction over the two defendants.

The Georgia companies were Greensky Financial, LLC and Furniture Retailers, LLC.  The trial judge found that it had jurisdiction over both of them.  The Court of Appeals majority found that it had jurisdiction over Greensky, but not over Furniture Retailers.  The dissent found that there was no jurisdiction over Greensky, but that there was jurisdiction over Furniture Retailers.

The facts underlying these conflicting jurisdictional conclusions were fairly routine.  Greensky was a financing company, which had funded a company called EclecticGlobal's purchases of furniture from the Plaintiff, a North Carolina company.  Greensky had made frequent payments on Eclectic's behalf to the Plaintiff and had frequently communicated to Plaintiff's representatives in North Carolina.  That was enough to find jurisdiction for the majority, but not enough for the dissent.

Furniture Retailers had taken over the business of Eclectic.  It had accepted one shipment of furniture sent by Plaintiff to Eclectic and tried to sell that furniture.  It had also made one telephone call to Plaintiff's North Carolina office. Those were insufficient contacts to the majority, but sufficient for the dissent.

I wish I could tell you where to go from here. 

Clint Pinyan and John Buford of Brooks Pierce represent Greensky and Furniture Retailers.