North Carolina Business Litigation Report : North Carolina Business Litigation Lawyer & Attorney : Mack Sperling : Brooks Pierce Law Firm : Greensboro, Raleigh, Winston-Salem, Charlotte

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

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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.

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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." 

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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.

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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.

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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. 

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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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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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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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