A Forum Selection Clause Must Be "Mandatory" To Be Enforceable

Everybody loves a penguin, or at least I think that is so.  But Penguin Toilets, the Defendant in Roth v. Penguin Toilets, LLC, 2011 NCBC 45, can't be loving the result it got on its Motion to Dismiss, which was denied in the Business Court by Judge Murphy on Wednesday.

The Motion to Dismiss was based on Penguin's argument that litigation against it had to be brought in Michigan and that North Carolina was therefore an improper venue.  This was premised on a forum selection clause in the LLC's operating agreement which said that:

Any dispute or other legal action concerning this Agreement, including any arbitration or litigation proceedings shall be conducted in Wayne County, Michigan.

I don't know why even a penguin would choose to litigate in Wayne County, which boasts of being the home of the City of Detroit, over the North Carolina Business Court, but Wayne County is where Penguin has its headquarters, so that provides some explanation.

Roth was the former President of Penguin.  He had sued Penguin after his termination, claiming violations of the terms of his Employment Agreement.  He was also a member of the LLC.  Penguin said that venue was improper in North Carolina because of the forum selection clause in the Operating Agreement, although there was no forum selection language in the Employment Agreement.  Judge Murphy held that the terms of the Operating Agreement had not been incorporated by reference into the Employment Agreement and that the lawsuit was about the obligations owed to Roth under his Employment Agreement, not his rights as an LLC member.

Judge Murphy ruled that the clause would not be enforceable even if had been properly incorporated into the Employment Agreement.  North Carolina will only dismiss a case based on a forum selection clause if the clause is mandatory as to where the case must be filed.  That has been the ruling of the NC Court of Appeals before, in Mark Group Int'l, Inc. v. Still, 151 N.C. App. 565, 566 S.E.2d 160 (2002).  Although the Penguin clause specified that "any arbitration or litigation proceedings shall be conducted in Wayne County, Michigan," that language wasn't "mandatory" enough. 

You might think that the word "shall" is equivalent to "must," and therefore mandatory, but the word "shall" is falling into disfavor as a command.  The Committee drafting the Restyled Rules of Federal Evidence, which became effective yesterday, dropped the use of that word in a number of the Restyled Rules. The Committee on Rules of Practice and Procedure said:

'shall' is no longer generally used in spoken or clearly written English. The restyled rules replace "shall" with 'must,' 'may,' or 'should,' depending on which one the context and established interpretation make correct in each rule.

See here. at 29.  Words like "exclusive," "sole," or "only" are the magic words that will carry the ball across the line for an enforceable forum selection clause, as the NC Court of Appeals noted in the Mark Group case.

So what's this Penguin to do?  Leave some of that Michigan winter gear at home and resign itself to litigating in North Carolina.  Keep selling the Penguin toilets with overflow protection it offers from its headquarters in Michigan.  And work on revising that forum selection clause so it will stick the next time.  There's pretty clear guidance now about the words that it takes. 

Oh, and don't forget about N.C. Gen. Stat. §22B-3,  which makes a forum selection clause unenforceable if it requires litigation outside of North Carolina and it's "in a contract entered into in North Carolina."  That type of forum selection clause is against North Carolina's public policy, per the statute.  Roth presumably didn't enter into the Employment Agreement in North Carolina so that statute wasn't an issue in the case.

 

 

 

North Carolina Court of Appeals Tosses Alienation of Affection Case

The North Carolina Court of Appeals sent a pretty clear message last Tuesday  to out of state citizens filing claims for alienation of affection in North Carolina courts.  The message was don't file your lawsuit here, even though North Carolina is one of the few states in the country that hasn't abolished that tort.

The case was Bell v. Mozley.  Mr. Bell, a resident of South Carolina, sued Mozley, another South Carolina resident, for alienating the affections of Bell's wife, and engaging in criminal conversation with her.  Mozley conceded having had sex with Mrs. Bell in a number of states, but denied having done so in North Carolina.  in fact, there was little evidence of any contact between them in North Carolina.

The trial judge denied the motion to dismiss for lack of jurisdiction, ruling that North Carolina had an "especially great" interest in providing a forum for a cause of action that had been abolished in South Carolina.  Judge McCullough, writing for the COA, took a distinctly different view.  He said, in reversing the trial judge and ordering dismissal of the case for lack of jurisdiction, that the decision of Bell to sue in North Carolina "smacks of forum-shopping."

i doubt there are many readers of this blog who concentrate their practice in alienation of affection cases  So beyond that small group, what's in this case for the you business litigators?    Not much, really.  But there's a good covenant not to compete case coming tomorrow, so stay tuned.

U.S. Supreme Court Turns Off "Stream Of Commerce" Jurisdiction At The Tap

Yesterday, the United States Supreme Court delivered two of its most significant opinions on  the subject of personal jurisdiction in nearly twenty-five years (since Asahi Metal Ind. Co. v. Superior Court of California, 480 U.S. 102(1987)).  The new cases are J. McIntyre Machinery, Ltd. v. Nicastro and Goodyear Dunlop Tires Operations, S.A. v. Brown. (linked below)

In Goodyear, Justice Ginsburg authored a unanimous opinion in which the Court reversed a decision by the North Carolina Court of Appeals which she said had "confused" or incorrectly "blended" jurisdictional principles.  The plaintiffs in Goodyear were the parents of two young soccer players who had been killed in a bus accident in France.  Tires manufactured by Goodyear's Turkish subsidiary  were the alleged cause.

The foreign subsidiaries had lost a motion to dismiss made on jurisdictional grounds in the trial court, which had been affirmed by the North Carolina Court of Appeals.  The NC Supreme Court denied a petition for discretionary review, but the Supreme Court accepted certiorari

The Supreme Court reversed, disagreeing with Judge Ervin's conclusion that the sale by the subsidiaries of thousands of tires to North Carolina customers supported a finding of general jurisdiction over them because they had "purposefully injected [their] product into the stream of commerce" without excluding North Carolina from that distribution.  To him, this meant that they had "purposefully availed themselves of the protection of the laws of this State."  681 S.E.2d at 68-69. 

He had concluded that stream of commerce analysis can support a finding of general jurisdiction, necessary because the injury to the soccer players hadn't flowed from the NC sales.

Justice Ginsburg said that the "attenuated connections" to North Carolina fell "far short" of the "'continuous and systematic general business contacts' necessary to empower North Carolina to entertain suit against them on claims unrelated to anything that connects them to the State."

That ruling seems pretty clear, but the companion decision in J. McIntyre clouded things.  It is a fragmented opinion, with Justice Ginsburg this time in the dissent, Justice Breyer concurring, and Justice Kennedy (joined by the Chief Justice and Justices Scalia and Thomas) delivering the plurality opinion.

J. McIntyre had been more deliberate about the sales of its metal recycling machinery in the United States than Goodyear had been for its tires.  J. McIntyre had an affiliated Ohio-based distributor which handled the U.S. sales it had deliberately sought, and it had attended numerous trade shows in the U.S., and it had sold at least one machine in New Jersey, to Nicastro's employer.  The injury to Nicaastro, which involved the severing of four fingers on his right hand, had occurred in New Jersey.

 The New Jersey Supreme Court considered in its opinion the Supreme Court's conflicting opinions in Asahi on how the stream of commerce analysis fits into the personal jurisdiction paradigm (the competing opinions in that case, one by Justice O'Connor and one by Justice Brennan, are discussed by Justice Kennedy in his plurality opinion), and held:

that a foreign manufacturer that places a defective product in the stream of commerce through a distribution scheme that targets a national market, which includes New Jersey, may be subject to the in personam jurisdiction of a New Jersey court in a product-liability action

Justice Kennedy, in the plurality opinion, disagreed, stating that "as a general rule, the exercise of judicial power is not lawful unless the defendant 'purposefully avails itself of the privilege of conducting activities within the forum State, thus invoking the benefits and protections of its laws.'"  It was not enough to the plurality that J. McIntyre had targeted the entire United States as a market and that it perhaps should have foreseen sales in New Jersey.  Forseeability is not the test.  As Justice Kennedy held:

[t]his Court's precedents make clear that it is the defendant's actions, not his expectations, that empower a State's courts to subject him to judgment.

Plurality Op. at 8.

It's hard to assess where jurisdiction stands over foreign entities which  sell some product in various areas of the United States.  The availment of a state's laws must certainly be "purposeful," which isn't a new concept.  It was first articulated by the Supreme Court in Hanson v. Denckla, 357 U.S. 235 (1958).  Justice Ginsburg said that the majority:

turn[s] the clock back to the days before modern long-arm statutes when a manufacturer, to avoid being haled into court where a user is injured, need only Pilate-like wash its hands of a product by having independent distributors market it.

Dissenting Op. at 2.  She said that the majority took "a giant step away from the notions of fair play and substantial justice" imbedded in the notion of the "minimum contacts" necessary to support a finding of personal jurisdiction. 

You can find deeper analysis of these two important Supreme Court opinions at the Civil Procedure & Federal Courts Blog.  There's a lot more to be said about their impact.   They will be confounding those teaching Civil Procedure in our law schools for the next twenty years.  Certainly as much as Asahi did

North Carolina Court Of Appeals: Bright Stars and Letters of Credit

The Court of Appeals on Tuesday of last week, in Speedway Motorsports Int'l Ltd. v. Bronwen Energy Trading, Ltd., unwound a year old decision by the Business Court. In that decision, Judge Diaz had ruled that a Defendant bank which had issued a letter of credit was bound to litigate in Switzerland a crossclaim involving the letter of credit. The judge dismissed the claims against the Bank, relying on a choice of forum clause specifying that litigation would take place in Geneva.  The forum selection clause was contained in a secondary guarantee of amounts drawn on the letter of credit, a guarantee to which the Bank was not a party.

The Business Court had found the third party claims to be closely related to the letter of credit transactions that were at issue and therefore subject to the Swiss forum selection clause.  Judge Diaz based his decision partly on cases where a non-signatory to an arbitration agreement was held to be obligated to arbitrate.

The Court of Appeals went off in an entirely different direction, referencing its 1981 decision in Sunset Invs.,  Ltd. v. Sargent, 52 N.C. App. 284, 278 S.E.2d 558, disc rev. denied, 303 N.C. 550, 281 S.E.2d 401 (1981).  In Sunset, the Court said that the "one bright star" in letter of credit transactions was that "every letter of credit involves separate and distinct contracts."

This "basic principle" is known as the "independence principle" or the "autonomy principle."

The Court of Appeals said that it was "unwilling to risk undermining letter of credit transactions."  It said that given the need for certainty and speed of payment under letters of credit, "it is important that the law not carry into letter of credit transactions rules that properly apply only to secondary guarantees or to other forms of engagement."

The same principle led to another opinion in the same case issued the same day in which the Court of Appeals ruled that there was no personal jurisdiction over the letter of credit issuer in spite of its "incorporation by reference" of the document containing the forum selection clause.  So the Bank still prevailed on its jurisdiction-based motion to dismiss.  It didn't have to defend the claim against it in North Carolina.

So, it seems clear that to draft a forum selection clause binding the issuer of a letter of credit, the drafter must make the clause part of the letter of credit itself.

The World Gets Even Flatter: Fourth Circuit Applies English Law And Enforces English Forum Selection Clause

The Fourth Circuit ruled today in Albemarle Corp. v. AstraZeneca UK Ltd. that it was required to interpret the forum selection clause negotiated by the parties under English law, which meant that the clause would be read as requiring litigation to be brought in an English court, even though the clause would have been  deemed permissive under American law and would have allowed the lawsuit at issue to be filed in the South Carolina court where it had in fact been filed.

The contract, which required AstraZeneca to buy an ingredient for an anesthetic from Albemarle, contained a forum selection clause which said that the contract "shall be subject to English Law and the jurisdiction of the English High Court."

In affirming the dismissal of the case, the Fourth Circuit aligned itself with six other circuits and held that "a federal court interpreting a forum selection clause must apply federal law in doing so."  Federal law on this subject is that ‘an agreement conferring jurisdiction in one forum will not be interpreted as excluding jurisdiction elsewhere unless it contains specific language of exclusion.’"

English law?  In this case it is as different from federal law as my breakfast this morning was from bangers and mash.  '"Under English law, when the parties designate the English High Court as an appropriate forum, the designation is mandatory and exclusive."  Thus, litigation in the High Court was required per English law.

The only issue remaining for the Court was whether it would be unreasonable to enforce the English forum selection clause, an inquiry required by a 1972 Supreme Court decision, The Bremen, 407 U.S. 1 (1972).  In The Bremen, the Supreme Court upheld an English forum selection clause "in the light of present-day commercial realities and expanding international trade" unless it could be shown that such enforcement might violate "a strong public policy" of the unselected forum in which the case had been brought.

In the Albemarle case, Judge Niemeyer rejected the argument that South Carolina had a strong public policy against the enforcement of forum selection clauses because of a state statute disfavoring such clauses.  Quoting The Bremen, he said that the federal policy enforcing such clauses made them "an almost indispensable precondition  to achievement of the orderliness and predictability essential to any international business transaction."  Id. at 13-14.

The North Carolina Business Court has previously enforced a forum selection clause specifying a foreign jurisdiction in Speedway Motorsports International Ltd. v. Bronwen Energy Trading, Ltd., 2009 NCBC 3 (N.C. Super. Ct. Feb. 18, 2009) (Diaz).

 

 

Hiring Of Employee In Violation Of Covenant Not To Compete Subjected New Employer To Personal Jurisdiction

The Business Court held today in Armacell v. Bostic that it had personal jurisdiction over an Italian company, L'Isolante, which hired a scientist, Bostic, away from a competitor.

The Plaintiff claimed that the hiring violated Bostic's non-compete agreement, and that Bostic had also stolen "thousands of data files containing sensitive proprietary information and trade secrets."

The Business Court rejected the argument of L'Isolante that it was not subject to personal jurisdiction, finding that the Italian company had (1) pursued and offered employment to Bostic in North Carolina, (2) had obtained a legal opinion from its North Carolina counsel about the enforceability of Bostic's non-compete agreement, (3) tasked Bostic with supporting, from North Carolina, L'Isolante's research and development efforts, (4) worked directly with Bostic in North Carolina after he was hired, and (5) shipped samples of product to North Carolina.

The Court found these contacts to be "direct and strong," and that L'Isolante "had fair warning that these activities might subject it to the jurisdiction of North Carolina."  Judge Tennille also held that "North Carolina's interest in exercising jurisdiction over L'Isolante is substantial.  This case involves the alleged theft of a large amount of trade secrets from a North Carolina company, with injury felt in North Carolina."

At his deposition, Bostic pled the Fifth Amendment about his alleged theft.  In an earlier opinion, the Business Court drew an adverse inference from Bostic's refusal to testify, and entered a preliminary injunction.

Brief in Support of Motion to Dismiss

Reply Brief in Support of Motion to Dismiss

Business Court Casts Doubt On $55 Million Default Judgment

This case from the North Carolina Business Court involves the world's 29th richest man, the City of Detroit, and a $55 million default judgment.  Oh, and airplanes too.  Big ones.

All this and more was discussed in the Business Court's decision today in Deutsche Bank Trust Company Americas v. Tradewinds Airlines, Inc.2009 NCBC 12 (N.C. Super. Ct. April 29, 2009). 

The $55 Million Default

The saga began when TradeWinds, an air freight carrier, obtained an entry of default against C-S Aviation in August 2004.  C-S was once the world's largest lessor of A300 aircraft, and had leased planes to TradeWinds. 

The entry of default was obtained jointly by TradeWinds, its sole shareholder, TradeWinds Holdings, and another company, Coreolis Holdings.  The three parties did not pursue a default judgment.

Four years passed.  TradeWinds by then had been sold.  Its new owners included the General Retirement System of the City of Detroit and the Police and Fire Retirement System of the City of Detroit. 

TradeWinds learned that the plaintiff in a New York lawsuit had pierced the corporate veil of C-S Aviation.  That was a worthwhile endeavor.  The shareholders of C-S Aviation are George Soros, who Forbes Magazine says is the 29th richest man in the world (the "S"); and Purnendu Chatterjee, also a "wealthy individual," according to the Court (who is the "C.")

TradeWinds decided to pursue a big payday.  It moved in April 2008, without TradeWinds Holdings or Coreolis, to secure the missing default judgment.  It obtained that on June 27, 2008.  The judgment was a whopper: $54,867,872.49.  The very next day, TradeWinds filed suit in the Southern District of New York against Soros and Chatterjee to recover the $55 million.  A month later, TradeWinds filed for bankruptcy protection in Florida in what the Court described as an apparent effort to "shield" the default judgment.  Op. ¶73.

The Motion To Set Aside

Coreolis and TradeWinds Holdings didn't appreciate being left out of this potential multi-million dollar recovery.  They filed a motion in the Business Court to be added as beneficiaries of the judgment.  By then, C-S had moved to set aside both the entry of the default and the default judgment in the Business Court based on service of process, personal jurisdiction, and "extraordinary circumstances."

Judge Tennille deferred ruling on the Motion, noting the multi-state litigation pending concerning his default judgment, including a Bankruptcy Court stay.  He said "like aircraft lined up for departure, the litigation involving TradeWinds is stacked up on the taxiway awaiting clearance for takeoff."  Op. ¶2.  The Court didn't make any definitive ruling in the case because of the Bankruptcy Court stay, but stated what it was likely to do once the stay was lifted.

Service of Process

C-S, a Delaware corporation, claimed that the service of the Third Party Complaint was invalid because Delaware law (8 Del. Code §321) requires in-person delivery of service on a Delaware corporation.  TradeWinds had served C-S by certified mail addressed to C-S' registered agent, CT Corporation, which C-S contended was inadequate.  That was perfectly valid service under Rule 4 of the North Carolina Rules of Civil Procedure.

Judge Tennille ruled that the argument of C-S was "unpersuasive," and that "the local law of the forum determines the method of serving process and of giving notice of the proceeding to the defendant."  Op. ¶36.  North Carolina law therefore controlled the question of service of process.

The Judge further held that he could look to Delaware substantive law "to decide whether the party is properly qualified as an 'agent' to receive service of process," but that he was "not bound by Delaware's restrictions on the manner in which service on a duly qualified agent must be conducted."  Op. ¶36, 39.

C-S further quibbled that the Affidavit of Service filed electronically with the Business Court didn't show a signature reflecting receipt.  The return receipt in the paper file at the Guilford County Superior Court did have the missing signature, however, and Judge Tennille held that the statute permitted him to consider not only "the attached registry receipt" but also "other evidence satisfactory to the court of delivery to the addressee."  Op. ¶51; N.C. Gen. Stat. §1-75.10(a)(4)b.

Personal Jurisdiction

The jurisdictional question turned on N.C. Gen. Stat. Sec. §1-75.4 which permits jurisdiction if there has been "solicitation or services activities . . . carried on within this State by or on behalf of the defendant."  C-S said it hadn't solicited TradeWinds in North Carolina, and that it was actually TradeWinds that had initially approached it. 

The Court said that this made no difference, holding that "C-S Aviation negotiated a contract for the leasing of aircraft, made assurances about the aircraft engine performance, induced TradeWinds to enter into the contract, maintained an ongoing relationship with TradeWinds, renegotiated the agreement that resulted in better leasing terms for TradeWinds, and delivered the aircraft to TradeWinds in North Carolina. . . . C-S Aviation directed its efforts toward TradeWinds, who, while operating out of a North Carolina airport, was a North Carolina resident."  Op. ¶68.

Jurisdiction was therefore proper in North Carolina.

Default Judgment

It doesn't appear that the default judgment will stand.

Judge Tennille observed that he had the power under Rule 60(b)(6) to set aside a default judgment if "(1) extraordinary circumstances exist, (2) justice demands the setting aside of the judgment, and (3) the defendant has a meritorious defense." 

Although the Court didn't set aside the default judgment, it said that it was likely to do so once the bankruptcy court stay was lifted, based on the following:

  • The sheer size of the award itself was "an extraordinary circumstance in favor of setting aside a default judgment."
  • There were "significant procedural irregularities with respect to the Entry of Default and the Default Judgment." 
  • Although the entry of default was entered on behalf of three parties, only TradeWinds sought and obtained the default judgment.

Op. ¶¶71-72.  The Court concluded that "[a] full hearing on damages with all affected parties represented and participating would provide a more just resolution than the procedural gamesmanship now being employed."  Op. ¶73.  

The Court further expressed concerns about what it described as a "lack of transparency on the part of TradeWinds, particularly its failure to disclose the divergence of interests between TradeWinds and the other parties to the Entry of Default."  Op. ¶73.

NC Supreme Court Rules That There Was Personal Jurisdiction Over Corporate Officer

Today, the North Supreme Court made it clear that there can be personal jurisdiction over a corporate officer even if his only contacts with the state were in  his capacity as a corporate officer.

The case is Saft America, Inc. v. Plainview Batteries, Inc.The opinion reverses the April 2008 decision of the Court of Appeals, which had ruled in a split decision that the officer didn't have sufficient minimum contacts with North Carolina to justify jurisdiction because he had no contact with the state in his "individual capacity."

The Supreme Court opinion is unfortunately a per curiam ruling, so it simply adopts without discussion the analysis of the dissenting opinion in the Court of Appeals.  The key portion of that opinion, by Judge Arrowood, read as follows:

In sum, under North Carolina precedent the determination of whether personal jurisdiction is properly exercised over a defendant does not exclude consideration of defendant's actions merely because they were undertaken in the course of his employment. In particular, the corporate actions of a defendant who is also an officer and principal shareholder of a corporation are imputed to him for purposes of deciding the issue of personal jurisdiction. On the other hand, personal jurisdiction cannot be based solely on a defendant's employment status as the agent or officer of a company with ties to North Carolina, or on personal connections to North Carolina that fall short of the requisite "minimum contacts."

The contacts relied upon by the Court of Appeals dissent were that the corporate officer had been the plaintiff's primary contact with the corporate defendant, he had traveled to North Carolina to visit the plaintiff's facility, he had submitted purchase orders on behalf of the corporate defendant. and he had been personally involved "in negotiating and carrying out the contracts that gave rise to the instant lawsuit."

As Judge Arrowood put it in the opinion adopted by the Supreme Court, it does not "correctly state the law in North Carolina" that "actions taken by an individual in the course of his employment or in his 'official' capacity do not 'count' as part of a defendant's contacts with the forum state." 

 

Metatags And Google AdWords Lead To Personal Jurisdiction In North Carolina Trademark Infringement Case

The Internet advertising activities of the Defendants, including the use by Defendants of Plaintiff's trademark to generate "sponsored links" in a Google AdWords campaign and the use of the Plaintiff's trademark in metatags, supported personal jurisdiction in an infringement action.  The case, Market America v. Optihealth Products, Inc,  was decided by Magistrate Judge Eliason of the Middle District of North Carolina on November 21, 2008.

The parties compete in the sale of food supplements containing oligomeric proanthocyanidins, an antioxidant which is presumably good for you.  The Plaintiff's product is OPC-3, for which it has a registered trademark. The Defendants sell a competing product under the trademark OPCXtra. 

The Defendants had sold some of their product in North Carolina, but argued that none of their allegedly infringing activity had occurred in this State because none of the product shipped to the State included Plaintiff's trademark. The Court disagreed, however, and denied the Motion to Dismiss for lack of jurisdiction.  It found that "Defendants engage in a number of activities using Plaintiff's trademark, which is intended to draw individuals to their website, which, in turn, is used to make out-of-state sales." 

Among those activities was the Defendants' participation in Google's AdWords program.  The Defendants had purchased through AdWords the word OPC3, the name of Plaintiff's trademarked product.  That meant that if a person using Google searched for OPC3, a link to Defendants' website would be returned. 

The Defendants had also placed metatags on their website which used the Plaintiff's trademark.  Metatags aren't visible, but if a person searched for "OPC" or "OPC3," that person would be directed to the Defendants' website due to the metatags being "seen" by the search engine.

With regard to the metatags, Magistrate Judge Eliason held that "the mere fact that a defendant did not visually display the plaintiff's trademark through the use of a metatag is not determinative on the issue of use, but rather is more properly a factor to be used in deciding whether there is a 'likelihood of confusion' caused by defendant's activity." The Court declined to follow a Second Circuit decision, 1-800 Contacts v. WhenU.Com, Inc., 414 F.3d 400 (2nd Cir. 2005), which holds that the use of a metatag does not amount to use of a trademark.

The Court further held that the Defendants' use of the OPC3 metatags was "for the express purpose of increasing the chance that Internet search engines will point potential customers, including customers from North Carolina, to their website."

Another factor in the denial of the Defendants' Motion to Dismiss was their purchase of the domain name “www.opc3.com” so that Internet users typing in the “opc3” mark owned by Plaintiff would be directed to Defendants' website and Defendants' competing products.

The Court found the use of Google AdWords, metatags, and the OPC3 website were not "inadvertent choices," but rather "intentional activity seeking to use Plaintiff's trademark in order to draw potential customers of Plaintiff to Defendants' website. . . ."  That made out sufficient minimum contacts for personal jurisdiction, and the New York Defendant will as a result be defending this case in the Middle District of North Carolina.

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.

Court Of Appeals Ruling On Personal Jurisdiction And The Internet

The Court of Appeals held on June 17, 2008 in Dailey v. Popma that a defendant's Internet postings, even though available in North Carolina and causing injury in North Carolina, aren't sufficient for personal jurisdiction unless the postings are "targeted" to residents of the State.

In Dailey, the plaintiff claimed that Popma had posted statements about him on the Internet accusing him of theft, embezzlement, and being the "equivalent" of a child molester, among others.

Popma asserted that the postings had been made by him in Georgia, and that the North Carolina courts could not exercise personal jurisdiction over him.

The Court held, relying on Young v. New Haven Advocate, 315 F.3d 256 (4th Cir. 2002), cert. denied, 538 U.S. 1035, 155 L. Ed. 2d 1065, 123 S. Ct. 2092 (2003), that "the dispositive question in such cases should be whether the defendant 'through the Internet postings, manifest[ed] an intent to target and focus on [the forum state's] readers.'"

After assessing the record, the Court found that plaintiff had "failed to establish that defendant posted the material in the bulletin board discussions with the intent to direct his content to a North Carolina audience" and that there was no basis for personal jurisdiction.

The Dailey decision isn't the first time the Court of Appeals has addressed the interplay between personal jurisdiction and the Internet.  In 2005, in Havey v.Valentine, 172 N.C. App. 812, 616 S.E.2d 642 (2005), the Court of Appeals had adopted the Fourth Circuit's analysis in ALS Scan, Inc. v. Digital Serv. Consultants, Inc., 293 F.3d 707 (4th Cir. 2002), cert. denied, 537 U.S. 1105, 154 L. Ed. 2d 773, 123 S. Ct. 868 (2003).  

The ALS formulation calls for the Court to consider whether the Defendant (1) directs electronic activity into the State, (2) with the manifested intent of engaging in business or other interactions within the State, and (3) that activity creates, in a person within the State, a potential cause of action cognizable in the State's courts.

The decision in Havey also established that  "a person who simply places information on the Internet does not subject himself to jurisdiction in each State into which the electronic signal is transmitted and received."  That the postings have an effect on a North Carolina resident is not enough to support jurisdiction. 

A Notice Of Designation To The Business Court Is A General Appearance For Jurisdictional Purposes

Covenant Equipment Corp. v. Forklift Pro, Inc., 2008 NCBC 10 (N.C. Super. Ct. May 1, 2008)(Tennille)

A service of process issue and a covenant not to compete issue in one decision from the Business Court.  It doesn't get any more exciting than this.  But, seriously, this is a significant procedural decision from the Court, please read on.  (As always, there is a link to the full opinion above).

On the service issue, the delivery of the Complaint to one of the Defendants, Carnie, had not been made in precise compliance with Rule 4 of the North Carolina Rules of Civil Procedure.  The Sheriff had left the Summons and Complaint at Carnie's house in South Carolina, but had not delivered it personally to Carnie and had not left it with another person at the residence.  According to Carnie's Affidavit, the papers had been "left stuck in a crack between my doors" by a Deputy Sheriff with the last name of "Fudge."

The Court overruled the Motion to Dismiss for insufficiency of service of process because it found that Carnie had evaded service.  Looking at federal decisions, Judge Tennille ruled that leaving the Summons and Complaint at Carnie's residence was adequate service given Carnie's efforts to evade proper service.

But the groundbreaking part of the the decision on the service issue was the Court's ruling that Carnie had waived his objection to service because he had filed a Notice of Designation of the case to the North Carolina Business Court.  Judge Tennille held that "the filing of a Notice of Designation in an action constitutes a general appearance for the purpose of personal jurisdiction."  Thus, the objection to the sufficiency of service was waived.

The Court's decision goes beyond service of process.  Most significantly, if you are representing a Defendant planning to move to dismiss for lack of personal jurisdiction, you will waive that argument by filing a Notice of Designation to the Business Court.  To keep it alive, the Notice of Designation must contain an objection to personal jurisdiction.  Carnie's Notice did not.

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Court Of Appeals Splits On Personal Jurisdiction Over Corporate Officer

A panel of the Court of Appeals split today on the legal standard for when a corporate officer can be subject to personal jurisdiction based on contacts created through his or her capacity as an officer.

In Saft America, Inc. v. Plainview Batteries, Inc., the Court reversed the trial court's determination that there was jurisdiction over the defendant's president, who had conceded visiting plaintiff's factory in North Carolina.  The Court held that "personal jurisdiction over an individual officer or employee of a corporation may not be predicated merely upon the corporate contacts with the forum."  The majority ruled that all of the president's actions were in his official capacity as a corporate officer, not in his individual capacity, and reversed the trial court's finding of jurisdiction. 

Judge Arrowood dissented, so this issue may be headed for clarification by the North Carolina Supreme Court.  Here is the key quote from the dissent:

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Internet Advertising Didn't Subject Defendants To Personal Jurisdiction In North Carolina

Burgess v. Vitola, 2008 NCBC 4 (N.C. Super. Ct. Feb. 26, 2008)(Diaz)

Plaintiff sued the defendants, thirty out-of-state dentists and lawyers, charging that they had forced advertisements for their services onto his computer. He alleged that this had been accomplished by a “bug, worm, or virus.” 

Plaintiff based jurisdiction on N.C.G.S. §1-75.4(4)(a), which allows for the assertion of jurisdiction when “solicitation or services activities were carried on within this State or by or on behalf of the defendant.”

The Court didn't agree and granted the Motion to Dismiss, holding “it makes absolutely no sense that Moving Defendants, all of whom operate law or dental practices in states far removed from North Carolina, would have any interest in soliciting [plaintiff], or any other North Carolina resident.” The defendants, via affidavits, had denied such interest, although many of them did have "passive" Internet websites.

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