Legalzoom Strikes Out In Declaratory Judgment Action Against NC State Bar

Sometimes you have a hard time telling who won and who lost a motion ruling.  That's true of Judge Gale's ruling on Monday in Legalzoom, Inc. v. The North Carolina State Bar, 2012 NCBC 47.

You are all undoubtedly familiar with Legalzoom, an on-line purveyor of do it yourself legal documents. This isn't the first time that I've written about Legalzoom. The NC State Bar has been making noise for several years that the vending of Legalzoom's documents is the unauthorized practice of law, and therefore illegal. 

This irked Legalzoom, so it hauled off and sued the Bar for a declaratory judgment in September 2011 seeking a ruling that it isn't engaged in the unauthorized practice of law.   It also made affirmative claims for "commercial disparagement" and for the Bar violating the Monopoly Clause of the state Constitution.  The State Bar made a motion to dismiss, arguing that all of Legalzoom's claims depended on it not being involved in the unauthorized practice of law.

So who won?  No one.  Judge Gale denied the motion to dismiss Legalzoom's claim for declaratory relief, and deferred ruling on the other claims.

The principal reason for the ruling was the Bar had not put the unauthorized practice issue in play by presenting a claim for unauthorized practice.  The Bar can do that by making a claim for injunctive relief to a Superior Court (per N.C. Gen Stat. §84-37), or a District Attorney can initiate misdemeanor proceedings against an unauthorized offender (per G.S. §§84-7, and 84-8).

Judge Gale said that "[a] declaratory judgment action is not generally envisioned as a proceeding to force a State agency or criminal authority to undertake an enforcement proceeding it has in its discretion to date elected not to take."  Op. 44.

Judge Gale said that a motion to dismiss "is seldom an appropriate pleading in actions for declaratory judgments."  Op. 28.

He invited the Bar to make a counterclaim raising the unauthorized practice of law issue.  I expect that will be coming soon, unless the Bar and Legalzoom patch up their differences.

The Last Word On That Thirty Days

I hope you don't think I am harping on this recent change in the procedure for designating a case to the Business Court, but on Friday Judge Jolly withdrew his Order in the Kight v. Ganymede Holdings II, Inc. case, recognizing that it was "a change in the previous practice relative to certain time requirements for designating an action as a mandatory."  It's just not fair to change the rules in the middle of the game.

[If you haven't followed this important issue, up until recently a plaintiff had thirty days after filing his or her complaint to file a Notice of Designation to the Business Court.   Beginning August 10th, Judge Jolly said that the Notice of Designation had to be filed at the same time as the Complaint (or the Amended Complaint if the amended document raises Business Court issues)].

Judge Jolly's New Order lets Kight slip into the Business Court despite filing his Notice of Designation twenty-seven days after filing his Amended Complaint.  Nevertheless, Judge Jolly sent up a clear signal that the rule has now changed.  He said in the New Order in the Kight case that:

Notwithstanding any previous rulings of this court or any procedural guidelines that may be found on the North Carolina Business Court website or elsewhere on the Internet, as of this date and pursuant to N.C. Gen. Stat. § 7A-45.4(d)(1), any Notice of Designation by a plaintiff, third-party plaintiff or petitioner for judicial review that is based upon a complaint, third-party complaint or petition for judicial review, respectively (collectively, "Complaint") that is not filed on the same day as the Complaint shall not be considered filed contemporaneously with the Complaint and will be deemed untimely.

New Order 2.

This should be the last word on that now vanished thirty days.

 

 

 

Change In Business Court Designation Procedure: A Plaintiff No Longer Has 30 Days From Filing A Complaint To Designate The Case To The Business Court

There was one thing I could have told you for sure about Business Court procedure before August 10th.  That was that a Plaintiff had 30 days from the filing of his Complaint to designate the case to the Business Court per N.C. Gen. Stat. §7A-45.4.

That certainty was based on a decision from Judge Tennille over four years ago, in Ross v. Autumn House, Inc. He reached that conclusion notwithstanding the language of the statute, which says that "[t]he Notice of Designation shall be filed: (1) By the plaintiff or third-party plaintiff contemporaneously with the filing of the complaint . . . in the action." N.C. Gen. Stat. § 7A-45.4(d)(1)(emphasis added). 

The Autumn House decision was based on Guidelines still available today on the Business Court's website which say that the Plaintiff could file a Notice of Designation within 30 days of filing the Complaint.

So what's changed?  Chief Judges of the Business Court for one thing.  Judge Jolly, who took over the chiefship after Judge Tennille's retirement in early 2011, issued an Order on August 10th in Foster v. Bell Mini-Storage, Inc. in which he said the statute requires that:

a plaintiff must file a notice of designation at the same time the complaint is filed.

Order Par. 5

So now, after Foster v. Bell Mini-Storage, Inc., if you are a Plaintiff wanting to designate your new case to the Business Court, you'd better file that Notice of Designation at the same time you file your Complaint.

Note that Judge Jolly found the designation in Foster to be valid even though it was made more than thirty days after the complaint was filed.  He did that because the answer raised issues of corporate governance.  Section 7A-45.4(d)(3) says that any party has "30 days of receipt of service of the pleading seeking relief from the defendant or party" to file a Notice of Designation.  The Notice was filed six days after the Answer was filed, so it was timely in that regard.

But there's no doubt now that the thirty day largesse granted by the Autumn House decision to Plaintiffsd has been laid to rest.  Judge Jolly referenced that decision yesterday in an Order in Kight v. Ganymede Holdings II, Inc., 2012 NCBC 46, and held that:

In Ross v. Autumn House, Inc., Caldwell County No. 07 CVS 2172 (N.C. Super. Ct. Order Feb. 26, 2008), this court interpreted "contemporaneously" in this context to mean within thirty days of the filing of the complaint, relying on certain "guidelines" published on the website for the North Carolina Business Court.


The court now reconsiders the requirement that a notice of designation be filed contemporaneously with the complaint. To comply with this requirement, a plaintiff must file a notice of designation at the same time the complaint — or amended complaint — is
filed.

Op. at 2.  This disagreement between Judge Tennille and Judge Jolly over the meaning of "contemporaneous" reminds me of Humpty Dumpty's statement to Alice (in Through the Looking Glass) that "When I use a word, it means just what I choose it to mean — neither more nor less."

For now, the Business Court's definition of "contemporaneous" means what Judge Jolly chooses it to mean: "at the same time."

 

 

Please Nominate This Blog For The ABA "Blawg 100"

Do me a favor.  Take five minutes and fill out an American Bar association form (link here) nominating this blog to be included on the ABA's list of the 100 best legal blogs.

The blog fits pretty well the criteria set out by the ABA for a nomination.  The ABA says:

  • We're primarily interested in blawgs in which the author is recognizable as someone working in a legal field or studying law in the vast majority of his or her posts.
  • The blawg should be written with an audience of legal professionals or law students—rather than potential clients or potential law students—in mind.
  • The majority of the blawg's content should be unique to the blawg and not cross-posted elsewhere or cut and pasted from other publications.
  • We are not interested in blawgs that more or less exist to promote the author's products and services.

There's a box on the form where you have to explain your reasons for supporting the blog.  The question is "Why Are You A Fan Of This Blawg?'  If you are dry on reasons, here are a few suggestions:

  • This blog changed my life.  [fill in how and tell me about that too]  [Ex: In addition to feeling knowledgeable and up-to-date, I  am taller and better-looking when I go to Court as a result of reading the blog.]
  • It's like a Cliffs Notes for the NC Business Court.  Mack reads the cases and summarizes them. and I don't have read them.
  • Everybody I know reads this blog.  If that's not true, tell everybody you know to read it. 

Please take the few minutes this will take.  After all, it is Friday.

Note that lawyers and personnel associated with Brooks Pierce are discouraged by the ABA from voting.  But I am specifically encouraged by the ABA to invite non-Brooks Pierce readers to send it  messages on behalf of this blog.

The deadline for nominations is September 7th.

Now, this is just the first step.  If I make the list I'll ask you later in the year to vote for me.

Thanks in advance for your support of this blog.

 

You Need All Your Ducks In A Row To Prove Default Under A Security Agreement

The Plaintiff in Kreich, Inc. v. Tarheel Publishing Co. thought he had all of his ducks in a row for summary judgment and a preliminary injunction.  But he didn't.

Defendant was in serious default under promissory notes given in connection with its acquisition of the Plaintiff's interest in an LLC.   Payments were due on the first day of each month, with a ten-day cure period.  The payments were chronically between 25 and 70 days late for almost an entire year.

Plaintiff wanted to exercise his rights under a Membership Interest Pledge Agreement, which was his security for the promissory notes.  The Pledge Agreement gave the Plaintiff equal control of the LLC it had sold to Defendant Hayes in the event of a default.

Given the repeated acceptance of delinquent payments, Judge Gale saw questions of fact on whether the Plaintiff had waived his right to timely payments.  Well, you might be thinking, didn't he have a provision in his agreement saying that acceptance of late payments wasn't a waiver of a right to call a default?

No difference, said Judge Gale, holding that:

a party that has consistently accepted late payments can only enforce timely payment by first giving notice to the other party of his intention to enforce the terms of the agreement in the future. Meehan v. Cable, 135 N.C. App. 715, 719, 523 S.E.2d 419, 422 (1999). This rule can apply even when the contract contains a non-waiver provision, as a non-waiver provision can itself be waived or modified through the conduct of the parties. See 42 E., LLC v. D.R. Horton, Inc., ___ N.C. App. ___, ___, 722 S.E.2d 1, 6-7 (2012).

Op. ¶16 (emphasis added).

There was no evidence that the Defendant had been given notice that the Plaintiff intended to enforce its right to timely payments, so the Motion for a Preliminary Injunction enforcing the Pledge Agreement was denied.

 

 

Motion to Compel Yields in Camera Review of Discovery to Bank

The Order on the Motion to Compel last week in WNC Holdings, LLC v. Alliance Bank & Trust Co. will be of particular interest to lawyers in litigation with banks.

The case deals mainly with the discoverability of a bank's "compliance review documents."  Those are defined by statute as "documents prepared for or created by a compliance review committee."  N.C. Gen. Stat. sec 53-99.1(a)(2).  A compliance review committee is a committee appointed by the board of directors of a bank and charged with determining compliance with:

1. Loan underwriting standards;

2. Asset quality;

3. Financial reporting to federal or State regulatory agencies;

4. Adherence to the bank's investment, lending, accounting, ethical, and financial standards; or

5. Compliance with federal or State statutory requirements.

Id. at (a)(1)(b).  Probably good stuff to have if you are suing a bank for failing to follow its own underwriting guidelines with regard to an allegedly inflated proposal, as WNC is doing.

There's a statute dealing with these types of documents.  It says that they "are not discoverable or admissible in evidence in a civil action against a bank, its directors, officers, or employees, unless the court finds that the interests of justice require that the documents be discoverable or admissible in evidence."  N.C. Gen. Stat. Sec. 53-99.1 (emphasis added).

Judge Murphy, after observing that "there is no case law in North Carolina dealing with the interpretation of" the statute, said that the term "in the interests of justice" meant "the fair allocation of common advantages and the sharing of common burdens between parties to a legal action."  Op. ¶11.

He ordered the bank Defendant to provide its compliance review documents for an in camera inspection.

But WNC wasn't as successful in its attempt to obtain attorney-client privileged documents based on  its argument that they fell within the crime-fraud exception.  (If you've forgotten the crime-fraud exception to attorney-client privilege, it says that communications between a lawyer and a client will not be privileged where an attorney's services are utilized in furtherance of a crime or fraud.).

Judge Murphy said that before he would conduct an in camera review of the documents in question, the Plaintiffs would need to "present 'a factual basis adequate to support a good faith belief by a reasonable person,’ . . . that in camera review of the materials may reveal evidence to establish the claim that the crime-fraud exception applies.'"  Op. ¶14.

Plaintiff's argument that the communications sought were made during the time that the bank defendant had allegedly converted hundreds of thousands of dollars from its account were insufficient to "support a good faith belief that an in camera review would reveal evidence that the crime-fraud exception applies."  Op. ¶15.

 

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Business Court Rules On Multiple Discovery Issues, Including: Validity Of Subpoena, Deposing Opposing Counsel, And Need For A Motion For A Protective Order

There haven't been a lot of opinions from the Business Court on Motions to Compel, but yesterday there were two, both from Judge Murphy.  In the first, Blue Ridge Pediatric & Adolescent Medicine, Inc. v. First Colony Healthcare, LLC, 2012 NCBC 45, the Judge found a general objection insufficient to withstand the Motion to Compel and made other rulings of interest.

You'd Better Think About Moving for a Protective Order

The objections to the discovery in the case stated that the discovery was inappropriate and that the Defendant intended to move for a protective order against it.

But the Defendants who had objected to the discovery never followed on with their Motion for a Protective Order.  Judge Murphy held that this was fatal to their opposition to the Motion to Compel and granted the Motion:

The appropriate means for the [] Defendants to prevent or limit discovery that they contend is unreasonable, inappropriate, and excessive is to seek a protective order under Rule 26(c). Because no such motion has been made to this Court, the Court concludes that the [] Defendants have not properly contested Plaintiff Blue Ridge’s discovery requests.

Op. 29 (emphasis added).

So if you are trying to shut the other side down on discovery, you'd better file a Motion for a Protective Order soon, probably before they file a Motion to Compel.

And there's more to the Blue Ridge case.

Service of Subpoena on a Corporation

When you send a subpoena to a corporation, do you have to address it to a particular human being?  Rule 45 says that a subpoena must contain "[a] command to each person to whom it is directed. . . ."

The subpoena at issue was addressed to a law firm (a P.A., and therefore a corporation), without naming an individual or agent responsible for compliance.  There's no North Carolina appellate case law on the validity of this sort of subpoena.

The Judge found "substantial compliance" with Rule 45, particularly since a corporation is often held to be a "person" under the law.

Good to know, though there's no reason not to put the name of the registered agent on a subpoena to a corporation.

Preserving Objections Based on Privilege

The law firm quarreling with the validity of the subpoena also objected to it on the basis that it sought privileged materials.  And it did, it asked for "all materials, whether considered privileged or not, that relate to the transactions and execution of instruments that give rise to this litigation."

Here, the non-compliance with the Rules of Civil Procedure was more extreme than with the subpoena.   Rule 45(d)(5) says that a person receiving a subpoena objecting on grounds of privilege must make the objection "with specificity" and support it with:

a description of the nature of the communications, records, books, papers, documents, electronically stored information, or other tangible things not produced, sufficient for the requesting party to contest the objection.

Judge Murphy held that as a result of a failure to obey Rule 45, the privilege issue was not properly before him.  Op. ¶49.  He didn't find waiver of the privilege, however.  He ordered a privilege log to be produced in thirty days, and for the parties to meet to attempt to resolve the claims of privilege.

Deposing Opposing Litigation Counsel

 You've all wanted to depose opposing trial counsel at one time or another.  Admit it. 

There's no North Carolina state court authority on whether you can do that, but Blue Ridge provides some guidance.  It adopts the standard set out by the Eighth Circuit in Shelton v. American Motors Corp., 805 F.2d 1323 (8th Cir. 1986), followed by the Middle District of North Carolina in N.F.A. Corp. v. Riverview Narrow Fabrics, Inc., 117 F.R.D. 83 (M.D.N.C. 1987); and Static Control Components, Inc. v. Darkprint Imaging, Inc., 201 F.R.D. 431 (M.D.N.C. 2001).

The Shelton case says that you can depose opposing counsel only if you have:

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

Op. 58.

Applying that standard, Judge Murphy quashed the subpoena to the attorney who had signed the Complaint.He didn't find attractive Defendants' position that they wanted to ask the lawyer about “advice, communications, and receipt of documents [that are] the basis” of Plaintiffs’ suit.  He said that "[s]uch knowledge is precisely the type of information Shelton attempts to protect from disclosure by litigation counsel in a deposition."  Op. 62.

The opportunity for deposing opposing litigation counsel is pretty limited.  Better quench that desire.

 There's Another One Coming

Yes, I did say there were two Motion to Compel opinions.  The Blue Ridge case was so chock full of stuff that I'm saving the other case for Monday.

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On Expert Witnesses, Confidential Material, And Protective Orders

Protective Orders usually list those persons who can view documents that are designated "confidential": like counsel of record and their staff, designated business representatives of the client, court reporters, and experts.

Sometimes information can be so sensitive that the producing party doesn't want to share it with an expert.  A well-designed Protective Order can deal with that type of concern.  That was the case in this  week's Order in SCR-Tech LLC v. Evonik Energy Services LLC, 2012 NCBC 43.  The issue was whether an expert designated by the Plaintiff should be allowed to see the confidential material produced by the Defendants under the terms of the Protective Order agreed to by the parties.

The Protective Order said that the party producing confidential information could object to it being seen by an expert "with current or prior employment within the industry in which the parties compete."

The Defendants objected to an expert named Staudt, who Defendants said "actively consulted for its competitors," being allowed to see the confidential material they had produced,   Plaintiff disagreed, and took the dispute to Judge Gale for resolution.

The Judge first concluded that the term "industry" as used in the Protective Order was "the broader SCR industry in which both parties operate and in which the expert was involved.  ("SCR" stands for "selective catalyst reduction," which is "a chemical process by which harmful nitrogen oxide contained in coal-burning power plants’ exhaust gas is converted into harmless nitrogen gas and water.")

The next step for the Business Court was to decide how to balance the risk to the Defendants of producing sensitive confidential information to an expert "with prior or ongoing involvement with [the Defendants'] competitors."  Op. 15.

North Carolina's courts hadn't addressed this issue yet, so Judge Gale looked to federal decisions for guidance.  The leading case is apparently Digital Equip. Co. v. MicroTech, Inc., 142 F.R.D. 488 (D. Colo. 1992).  It lays out five factors for consideration:

(1) the expert’s affiliation with the receiving party;

(2) the extent of regular employment, consultation, or association with the receiving party;

(3) present involvement in the receiving party's competitive decisions;

(4) the potential for future involvement of the expert in the receiving party’s competitive decisions; and

(5) if the expert’s involvement is deemed beyond the point of independent, the expert’s willingness to curtail or forego future involvement with the receiving party.

The past work done by Staudt for the Plaintiff did not give the Court much pause under the first two factors, as it was more than five years ago.   But Judge Gale was concerned more about Staudt's work for the Defendants' other competitors.  He said there was not enough information in the record on that point for him to make a decision, and he ordered the Plaintiff to supplement the record on Staudt's "independence" from those competitors, using the Digital factors.

Judge Gale also indicated that he might require Staudt to agree that he would not do future "non-litigation" consulting work with the Plaintiff related to the services at issue in the lawsuit.  He said that "[s]uch a covenant would eliminate concerns relating to the fourth and final Digital factors of future involvement with the receiving party."  Op. 22.

The SCR-Tech Order is a good illustration of the concerns that experts may present in a case between competitors.  Tailor your Protective Orders carefully in those types of cases.

 

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Fourth Circuit Blunts CFAA As A Remedy Against A Rogue Employee

Let's say a client calls telling you that a valued former employee has left to work for a competitor.  Just before leaving, the employee emailed himself a substantial number of your client's confidential documents.  He's now made a presentation to a potential customer, using the "stolen" information, and he secured the customer for his new employer.

The client asks what can you sue the rogue employee for.  Lots of causes of action come to mind.  Violating a non-compete (if there was one).  Conversion?  Tortious Interference? Misappropriation of trade secrets?  Maybe violation of a confidentiality agreement?

What about a claim under the Computer Fraud and Abuse Act?  It seems to fit.  The CFAA

renders liable a person who (1) "intentionally accesses a computer without authorization or exceeds authorized access, and thereby obtains . . . information from any protected computer," in violation of [18 U.S.C.] § 1030(a)(2)(C); (2) "knowingly and with intent to defraud, accesses a protected computer without authorization, or exceeds authorized access, and by means of such conduct furthers the intended fraud and obtains anything of value," in violation of § 1030(a)(4); or (3) "intentionally accesses a protected computer without authorization, and as a result of such conduct, recklessly causes damage[,] or . . . causes damage and loss," in violation of § 1030(a)(5)(B)-(C).

If you had read the Fourth Circuit's opinion last week in WEC Carolina Energy Solutions LLC v. Miller, you would stop dead in your tracks.  In affirming the dismissal of the CFAA claim, Judge Floyd wrote:

Our conclusion here likely will disappoint employers hoping for a means to rein in rogue employees. But we are unwilling to contravene Congress’s intent by transforming a statute meant to target hackers into a vehicle for imputing liability to workers who access computers or information in bad faith, or who disregard a use policy

Op. 13.

The problem with the claim by WEC was that its former employee had been given access to the confidential information during his employment.  CFAA doesn't provide a remedy for misappropriation, said the appellate court, when the authorization has not been rescinded.

In reaching this conclusion the Fourth Circuit rejected the approach taken by Judge Posner and the Seventh Circuit in Int'l Airport Ctrs., LLC v. Citrin, 440 F.3d 418 (7th Cir. 2006), which was that an employee who takes data to further interests contrary to those of his employer violates his duty of loyalty and thereby terminates his agency relationship, thus losing his authority to access the computer or any information on it. 

Judge Floyd held that "[t]he deficiency of a rule that revokes authorization when an employee uses his access for a purpose contrary to the employer's interests is apparent."  Op. 12.  It was as obvious to the Judge as Facebook.  He said that:

Such a rule would mean that any employee who checked the latest Facebook posting or sporting event scores in contravention of his employer’s use policy would be subject to the instantaneous cessation of his agency and, as a result, would be left without any authorization to access his employer’s computer systems.

 Id.

The Court concluded that Congress didn't intend to impose criminal liability for a Facebook "frolic."