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

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

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

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

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

Judge Bledsoe shot that argument down quickly.  He said:

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

Op. ¶15.

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

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

Wrong, said Judge Bledsoe, who said that:

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

Op. ¶20.

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

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

Opinion ¶21.

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

Business Court Denies TRO In The Midst of A Proxy Fight

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

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

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

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

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

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

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

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

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

Order ¶19.

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

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

 

Some Stats On The Business Court

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

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

N.C. Gen. Stat. §7A-343(8a).

The First Semi-Annual Report

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

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

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

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

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

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

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

Report at 3.

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

The 2015 Annual Report

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

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

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

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

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

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

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

NC Business Court Takes On The Oxford Comma

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

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

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

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

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

Op.¶27.

The Plaintiff's argument was that:

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

Op. ¶28.

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

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

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

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

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

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

 

Pizzas And Trademark Infringement

It is easy to forget that there is a North Carolina Trademark Registration Act.  It is in Chapter 80 of the General Statutes

The Business Court's mandatory jurisdiction extends to cases brought under Chapter 80 per N.C. Gen. Stat. §7A-45.4(a)(4), so you might expect that Court to be a hotbed of litigation involving trademarks.  But the  Order last week in Ray Lackey Enterprises, Inc. v. Village Inn Lakeside, Inc., 2015 NCBC 32 represents, as far as I know, only the second time that the Business Court has ruled in a trademark case.  The only other case I'm aware of is the Windsor Jewelers decision by Judge Diaz six years ago, in 2009 NCBC 2.

The Plaintiff in the Ray Lackey case, which does business as "Village Inn Pizza Parlor," has two marks registered under the NC Trademark Registration Act and a variety of other unregistered marks which it uses in its business.  Those marks are used by a number of company owned restaurants and are also licensed to six separately owned restaurants

The Defendant corporations are owned by former officers and employees of the Plaintiff.  One of the Defendants' principals, Elizabeth Miller, is the daughter of the founder of the Village Inn Pizza Parlor empire.

The Infringement

In July 2014, Ms. Miller opened a new restaurant under the name Village Inn Lakeside which used Village Inn's licensed marks and pizza boxes and cups identical to those used in Plaintiff's restaurants.  The Defendants also were taking steps to open a second Village Inn Pizza restaurant in Jonesville, NC, and had signed a lease to open a third.

The Plaintiff's Motion for a Preliminary Injunction seemed pretty cut and dried.  A Plaintiff is entitled to injunctive relief "to protect its trademarks when a subsequent competitor adopts those trademarks in the same geographic area for the purpose of confusing consumers."  Order 25.

To show infringement under NC law, a plaintiff must prove "that it has a valid protectable trademark and that the defendant's use of a colorable imitation of the trademark is likely to cause confusion among consumers."  Order 27.  Proving a likelihood of confusion creates a presumption of irreparable injury.  Order 28.

Plaintiff proved intentional copying and a likelihood of confusion by the Defendant's use of the Village Pizza Parlor logo on a forty foot tall sign next to its Lakeside restaurant and using other marks used by Plaintiff, like "Home of the Great Pizza Buffet" and "Family owned and operated since 1967."  Hanging a photograph in Defendants' restaurant of the founder of the Village Pizza Parlor concept was undoubtedly a factor in the Court finding infringement.  Order 30.

The Defense of Naked Licensing

The Defendants, faced with all those facts demonstrating infringement, did not deny copying Plaintiff's marks.  Their principal defense to an injunction was that Plaintiff had lost its marks because of "naked licensing."  This occurs when "a licensor does not exercise adequate control over its licensee's use of a licensed trademark such that the trademark may no longer represent the quality of the product or service the consumer has come to expect."  Order 37 (quoting Freecycle Sunnyvale v. Freecycle Network, 626 F.3d 509 n.1 (9th Cir. 2010)).

How does the trademark owner show "adequate control" over its marks?  There are three ways: by having an express, contractual right to control the licensee's operations, by showing actual control through a course of performance, or by showing a justifiable reliance on the licensee for quality control."  Order 37.

Plaintiff conceded that it did not have an express, contractual right to control the six separately owned restaurants.  But the Court found that Plaintiff, which was collecting management and "office expense" fees from the six "independent" restaurants had sufficient quality control and oversight in place over the use of its trademarks.

Since the Defendants had the burden in this injunctive proceeding of showing a likelihood of success on their affirmative defense of naked licensing the Court found that defense to be no bar to the entry of an injunction.

If you are an IP lawyer, you are probably familiar with the Fourth Circuit's decision in Pizzeria Uno Corp. v. Temple, 747 F.2d 1522 (4th Cir. 1984), one of that Court's leading cases on what suffices to show a likelihood of confusion in a trademark case brought under the Lanham Act.  There are a number of other trademark infringement cases pitting pizza business against pizza business. There must be something about pizzas and trademark infringement.