Getting A Covenant Not To Compete Case Into The Business Court

Long time readers of this blog know that you can't designate a case limited to a covenant not to compete to the Business Court.  That's the Lifecare case, from 2008, in which Judge Tennille said "every suit based upon a breach of a restrictive covenant . . . [will not] give rise to a mandatory business case based upon 'unfair competition.'"

Judge Tennille intimated in Lifecare that additional allegations surrounding the breach of the covenant might give rise to the Business Court's mandatory jurisdiction.  He said:

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).

Late last week, Judge Jolly refined the contours of the Business Court's unfair competition jurisdiction, in an Order on Notice of Designation in New Breed, Inc. v. Golden.  The New Breed complaint alleges that the multiple defendants, all former IT professionals with New Breed, were lured away by a competitor in violation of covenants contained in their employment agreements.

So what pushed New Breed over the hurdle and into the jurisdiction of the Court?  Judge Jolly said that the Complaint alleged unfair competition, which is a basis for mandatory jurisdiction under G.S.§7A-45.4(a)(4).  He said that the styling of that particular cause of action as "unfair and deceptive practices," which are excluded from the Court's unfair competition jurisdiction under Section 7A-45.4(a)(4), made no difference. 

He held:

Under North Carolina's current scheme of notice pleading, in examining a claim alleged in a complaint, neither the court nor party litigants are limited to the technical label given to the claim by the pleader. Rather, the reader appropriately should examine the actual facts alleged.

Op. Par. 13.

Upon examining the "actual facts alleged," Judge Jolly concluded the Complaint stated a claim for common law unfair competition, which he said was "a wrongful act done in the context of competition between business rivals."   Order 11. He read the Complaint to make allegations that "Defendants were guilty of unfair competition in that they wrongfully intended to (a) raid Plaintiff of its IT employees, (b) harm Plaintiff's business and (c) acquire Plaintiff's trade secrets and confidential and proprietary information." Id.

Also noteworthy in the Order is Judge Jolly's ruling that it isn't necessary to sue the competing business to make out a claim for unfair competition.  He held that "[t]he court cannot find a requirement that a competing business be a party litigant as a condition precedent to alleging a common law claim for unfair competition." Order 12.  New Breed sued only its former employees, not their new employer.

 

COA Sets Aside $2.1 Million Unfair and Deceptive Practices Verdict Against Bank

You all know that there is no Chapter 75 claim for a breach of contract unless there are "substantial aggravating circumstances."  What if you have the substantial aggravating circumstances but you don't have a breach of contract?  The Court of Appeals answered that question Tuesday in SunTrust Bank v. Bryant/Sutphin Properties, LLC.

The answer is you might not have anything.  That's why the COA set aside the Defendants' $2.1 million verdict against SunTrust. 

Here's how Judge Stroud summed it up:

the jury found that although there was not a breach of contract there were “[s]ubstantial
aggravating circumstances” that took place. Mitchell, 148 N.C. App. at 75, 557 S.E.2d at 623-24. While this was a logical conclusion for the jury to make, as they could properly find that a breach of contract had not taken place and that plaintiff had committed the acts listed in [the verdict question covering the allegedly unfair and deceptive acts]. . . it was error for the trial court to determine as a matter of law that these acts constituted a Section 75-1.1(a) violation where the only acts alleged were “[s]ubstantial aggravating circumstances” to a breach of contract when there was no breach of contract. Id. Without an independent Section 75-1.1(a) claim based upon some conduct outside the scope of the contracts, an award for a Section 75-1.1(a) claim could be entered only if the jury found a breach of contract accompanied by “[s]ubstantial aggravating circumstances.” Id. As the jury did not find a breach of contract, the inquiry should have ended because there was no breach of contract. Id.

 Op. 15-16.

If you can't understand that unusual result, and you don't want to slog through Judge Stroud's 23 page opinion to figure it out, here's the story: 

The jury found that the Bank had frozen one of the Defendant's money market accounts without any notice of a default or making any demand for repayment of a separate loan it had made, which action the Defendants said had destroyed their business.  The jury also found, somewhat inconsistently, that the Bank hadn't breached the contract that governed the money market account by freezing the account.  The trial judge had determined those actions to be an unfair and deceptive practice and had trebled the $700,000 damages awarded by the jury for those actions, per G.S. §75-16.

The reversal was based on the lack of breach of contract to accompany the "substantial aggravating circumstances."

The moral of this story seems to be that if you are trying to morph a breach of contract claim into a treble damage claim under Chapter 75, you'd better be able to prove the breach of contract.

The SunTrust decision marks the second time this month that Judge Stroud has tangled with Chapter 75.  In the other opinion, Green v. Freeman, the Judge affirmed the dismissal of Chapter 75 claims made by investors in a business.  She ruled that this was "raising capital," which "is not a business activity contemplated within the Act."  Op. 37.  By the way, that case is headed to the Supreme Court of NC based on a dissent, though the majority and the dissent agreed on the Chapter 75 issue.  The issue for the appeal concerns the sufficiency of the evidence to support a breach of fiduciary duty claim on which the Plaintiffs prevailed.

Ethics And Email, From The NC State Bar

The intersection of technology and the rules of ethics continues to develop.  The NC State Bar has proposed a new FEO (2012 Formal Ethics Opinion 5), which deals with the interesting question of the attorney-client privilege of an employee's emails to her personal lawyer that are on her employer's email system.

If Your Client Is The Employee

The Opinion contains a caution: If you are a lawyer representing an employee in any matter, whether related to her employment or not, you probably shouldn't communicate with her at her office email address.  The opinion recommends that the lawyer "explore with the client alternative methods of communicating including use of the employee’s personal email system, telephone, and texting. "

If Your Client Is The Employer

If you are a lawyer representing the company, can you access the employee's emails with her lawyer on the corporate system?  Only if you can conclude "confidently" and "in good faith" that any privilege has been waived.

How can you arrive at that "confident" determination?  It depends on whether the employee "had a reasonable expectation of privacy in the email communications."  That requires taking into account a hodgepodge of factors, including:

whether the employer has a clear, unambiguous policy regarding email usage and monitoring; whether that policy is effectively communicated to employees; whether the policy is adhered to by the employer; whether third parties have access to the employee’s email account on the employer’s system; when/where the communication occurred (at home or the office; during work or leisure hours); and whether the employee took affirmative steps to preserve the privacy of the communication.

Since the opinion recommends that the attorney seeking to view or use the emails "should err on the side of recognizing the privilege whenever an analysis of the facts and case law is inconclusive," it seems that the necessary "confidence" might not often be found. 

But let's say that you are in the rare situation where the employee could not be said to have a "reasonable expectation of privacy" in the emails.  Do you have to notify the employee's personal counsel that you are going to read them?  There is a bright line answer here: No.  The reason is that the fact that the employer has copies of the emails is confidential client information, which the employer's attorney may not disclose without his client's consent or unless an exception to confidentiality (like a need to disclose to comply with the law, a court order, or the rules governing discovery) applies.

Employee's Personal Email Account

The opinion isn't really different when it's a personal email account involved (like a gmail account which the employee accesses at work).  The lawyer for the employer can't advise his client to invade the account by changing the password.  I didn't realize that was possible, but it would violate RPC 1.2(d), which prohibits a lawyer from counseling a client "to engage in criminal or fraudulent conduct,"  Nor can the lawyer reap the benefit of the client undertaking that action on its own.  That would be assisting the client in fraudulent conduct.

But what if you don't need to change a password to access the account, or you can recover the emails from the employee's hard drive?  No clear answer.  Given that the Opinion is fiercely protective of the privilege, I would say you can't.  It says that the privilege "is fundamental to the client-lawyer relationship and the trust that underpins that relationship. As such, the bar must protect the privilege and seek to limit incursions upon the privilege that are not warranted by law."

This isn't the only foray of the State Bar into the intersection of ethics and email.  2012 FEO 7, proposed at the same time, says that a lawyer sending an email to a lawyer representing an adverse party cannot copy the other lawyer's client on the email.

The Opinion says that "[c]opying the opposing party on a communication—whether email or conventional mail—with opposing counsel is a communication under Rule 4.2(a) and prohibited unless there is consent. "  "Consent" means "express consent from opposing counsel."

The Opinion sets out the same rule even if the opposing client was copied on the email to which the response is being made.

Note that these Opinions are only proposed.  The Bar is inviting and accepting comments.

Thanks to my friend Molly Whitlatch for suggesting that I write about 2012 FEO 5.