What Are Your Options When You Think That Your Arbitrator Has Gone Out Of Control?

You don't have many options when you think that the arbitrator who you agreed to hear your case has delivered a plainly wrong arbitration award.  In fact, you probably have none at all.

The Defendants in the NC Business Court's recent decision in Trilogy Capital Partners,, LLC v. Killian, 2015 NCBC 103 were left stuck with a $4 million plus Award against them, despite their argument that the Arbitrator had exceeded his authority in making that Award.

The North Carolina Revised Uniform Arbitration Act

These parties had been arbitrating pursuant to the North Carolina Revised Uniform Arbitration Act, which provides only narrow grounds for vacating an arbitration Award.  The reasons include that the arbitrator ""exceeded the arbitrator's powers." The entire list is contained in Section 1-569.23 of the General Statutes.

It's Not Enough That The Arbitrator Just "Got It Wrong"

The Defendants argued that the Arbitrator awarded greater damages than those permitted under the North Carolina Limited Liability Company Act.

Judge McGuire disagreed that this was a basis for vacating the Award and held that:

even if the Arbitrator awarded damages outside of those available under the statute, such an award amounts to no more than an error of law insufficient to vacate the Award.

Op. ¶34.

Arbitrators Do Not Have To Follow The Law

But even if North Carolina law had limited the Arbitrator in the amount he was permitted to award, that made no difference.

Judge McGuire held that arbitrators:

'are not bound to decide according to law when acting within the scope of their authority, being the chosen judges of the parties and a law unto themselves, but may award according to their notion of justice and without assigning any reason.'

Op. ¶33 (quoting Bryson v. Higdon, 222 N.C. 17, 19-20 (1942)).

This Deference To The Decisions Of Arbitrators Is Not A Recent Development

This hands-off approach to the decisions of arbitrators -- even if they don't follow the law and are completely wrong -- is nothing new.

In 1895 (that's right. 120 years ago!), the NC Supreme Court held that:

[i]f an arbitrator makes a mistake, either as to law or fact, it is the misfortune of the party, and there is no help for it.  There is no right of appeal, and the Court has no power to revise the decisions of judges who are of the parties own choosing.

Patton v. Garrett, 116 N.C. 497, 504 (1895)(quoted in Op. ¶34)(emphasis added).

The Federal Arbitration Act

Do you have a greater chance of averting the effect of a wrongly decided arbitration Award under the Federal Arbitration Act?

Probably not.  The grounds for vacating an Award per the FAA are contained in 9 U.S.C. §10.  They are pretty congruent with the grounds enumerated in the state statute.

Federal courts used to recognize "manifest disregard of the law" as an additional common law basis for vacatur, but that ground for challenging an Award was cast into doubt by the United States Supreme Court in Hall Street Associates, LLC v. Mattel, Inc., 552 U.S. 576 (2008) in which the Court said that the grounds set forth in the statute are exclusive.

There is an additional basis in the federal statute for "modification or correction of an award."  Section 11 of the FAA says that a Court may do so if "there was an evident material miscalculation of figures."  10 U.S.C. §11(a).

The Plaintiff in the case before Judge McGuire might have taken a run at a "material miscalculation of figures" argument if the FAA were applicable.  But that argument would likely not have succeeded, given that the argument was more that the award of damages wasn't warranted under the law as opposed to a "miscalculation."


NC Business Court Turns 100

The Business Court turned out its one hundredth published (numbered) opinion of 2015 at the end of last week.  It came in the form of a tax case, in Home Depot U.S.A., Inc. v. North Carolina Dept. of Revenue, 2015 NCBC 100.

How much of a milestone ruling is this?  It marks the first time that the Business Court has delivered one hundred opinions in a year.  That's way more than the opinions issued by the Court in its early years (like in 1996, the Court's second year: 2 opinions, 1997: 5 opinions, 1998: 4 opinions).  Its most productive year before this year was 2014: 73 opinions.

You might be wondering how those 100 opinions compare to the production of the Delaware Court of Chancery.  That Court has already rendered more than twice the number of opinions of the Business Court, 237.  Well, there are five Judges (Chancellors) on that Court and only three active Judges on the Business Court.

And don''t forget that the Court of Chancery is way older (founded in 1792) than the Business Court (founded in 1995).

The Case Was About A Sales Tax Refund Based On The "Bad Debt Deduction"

Home Depot was seeking a refund of some of the sales tax which it had paid to the Department of Revenue (DOR). It said that it was entitled to a bad debt deduction against its gross sales, the amount on which sales tax is calculated.  The requested bad debt deduction for 2004-07 was nearly $2 million.  Op. ¶7.

The applicable statute says that a retailer can deduct from its gross sales "[a]ccounts of purchasers, representing taxable sales, on which the tax imposed by this Article has been paid, that are found to be worthless and actually charged off for income tax purposes."  N.C. Gen. Stat. §105-164.13(15).

Private Label Credit Cards

The bad debts which Home Depot was seeking to deduct were unpaid amounts on Home Depot's Private Label Credit Cards (PLLCs)(credit cards branded with Home Depot's colors and logo, usable only at Home Depot).

If a Home Depot customer does not pay his or her PLLC bill, doesn't Home Depot suffer a bad debt which it should be allowed to deduct from its gross sales?

You would think the answer should be "yes," but first you need to get into the business of PLLCs.  Home Depot doesn't actually extend the credit which its customers enjoy on their cards.  Home Depot, like many other companies that issue PLLCs, farms out the administration of its PLLC program to third party lenders.  In Home Depot's case, the lenders were General Electric Capital Financial, Inc., and Monogram Credit Card Bank of Georgia,  Op. ¶20(5).

The third party banks owned the PLLC accounts.  The banks settled up with Home Depot at the end of each day, paying Home Depot the amount charged by the customer less a service fee.  Op. ¶20(16-17).  The bank, not Home Depot, bore the risk of non-payment.

This case represents one of a number of cases where Home Depot has sought a state sales tax refund based on a bad debt deduction.  Home Depot has apparently not won a single one of these cases. The states where Home Depot has made the same arguments as in North Carolina and lost include: Alabama (Magee v.. Home Depot U.S.A., Inc., 230 So.3d 781 (Ala. App. 2011); Arizona (Home Depot U.S.A., Inc. v. Arizona Dept. of Revenue); Indiana (Home Depot U.S.A., Inc. v. Indiana Dept. of State Revenue, 891 N.E.2d 187 (Ind. Tax 2008);  New Jersey (Home Depot, U.S.A., Inc. v. Director, Division of Taxation); New York (In re Home Depot USA, Inc. v. Tax Appeals Tribunal);Ohio (Home Depot U.S.A., Inc. v. Levin, 905 N.E.2d 630 (Ohio 2009); Oklahoma (In re Sales Tax Claim for Refund of Home Depot, 198 P.3d 902 (Okla. App. 2008); and Washington (Home Depot, U.S.A., Inc. v. State Dept. of Revenue); 

Home Depot can now add North Carolina to its list of losses.  This was an appeal to the Business Court, from a final Agency Decision of the DOR, which had affirmed a grant of summary judgment against Home Depot by an Administrative Law Judge.  Home Depot didn't get traction in the Business Court with any of its arguments.


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You CAN Get A Ruling From A Superior Court Judge After Your Case Is Designated To The Business Court

I wrote yesterday about the arbitration aspects of Gaylor, Inc. v. Vizor, LLC, 2015 NCBC 98.

But there is a significant aspect of Business Court procedure addressed in that case which deserved its own post.

It concerns the authority of a non-Business Court Judge (i.e. a regular Superior Court Judge) to make a ruling in a case after the case is designated to the Business Court.

Business Court Rule 15.1 seems to preclude that kind of ruling. It says that:

[a]fter a case has been assigned or designated to the Business Court . . . parties shall seek rulings on all motions in the case from this Court, and not from Superior Court Judges or Clerks in the counties where cases originate."

I''ve written before about getting a ruling from a Superior Court Judge after designation to the Business Court, but that post was based on emails from two of the Business Court Judges' law clerks and the Business Court TCA (for the many otolaryngologists* who read this blog and who may not know what a TCA is, it is a "Trial Court Administrator," who is charged with managing civil cases as they move through the judicial system).  I cautioned then against relying too heavily on the statements of persons who were not Judges.

But now you've got the Business Court's interpretation of its Rules straight from a Judge.  Here's what Judge Bledsoe said In the Vizor decision:

[w]here, as here, a Notice of Designation requesting designation of a matter as a complex business  case has been filed after a motion has been calendared for hearing before the presiding Superior Court Judge of the county in which the action is pending, the policy of the Business Court has been that the judge before whom the matter was calendared may, in his or her discretion, elect to rule on the motion or defer resolution of the motion to the Business Court judge assigned to the case.

Op. ¶12 & n.4 (emphasis added).

If this practice now bears Business Court approval, it still won't be an easy trick to pull off.  Even if you can get a motion calendared for hearing in Superior Court before the designation of the case to the Business Court, my guess is that most Superior Court Judges probably will decide not to rule in a case that is headed to the Business Court.


*Well, there really is at least one.  And if you don't know what an otolaryngologist is, it is an ear, nose, and throat doctor.



NC Business Court On Arbitrability: Clear And Unmistakable

You may have pondered over the question whether a Judge or an Arbitrator decides if a particular dispute is subject to an agreement to arbitrate.

If you have wondered who makes that sort of decision, it's actually not an open question.  The U.S. Supreme Court held twenty years ago that:

[u]nless the parties clearly and unmistakably provide otherwise, the question of whether the parties agreed to arbitrate is to be decided by the court, not the arbitrator.

AT&T Techs. v. Commun. Workers of America, 476 U.S. 643, 649 (1986)(emphasis added).

The Business Court addressed what can be "clear and unmistakable" at the end of last week in Gaylor, Inc. v. Vizor, LLC, 2015 NCBC 98.  Plaintiff, a subcontractor on a construction project, was suing the general contractor on the project, Vizor.

The issue before Judge Bledsoe was whether the arbitration should include the resolution of Plaintiff's unfair and deceptive practices claim.  In other words, the question was the "arbitrability" of that claim --whether it should be decided in the Business Court or by the arbitrator.

The subcontract said nothing specifically about the scope of the arbitrator's authority.  It provided that all claims rising out of, or relating to this Agreement or the breach thereof. . . shall be subject to arbitration."  But it also said that "[s]uch arbitration shall be conducted in accordance with the Construction Industry Arbitration Rules of the American Arbitration Association then in effect." Op. ¶19.

Rule 9(a) of the Construction Industry Arbitration Rules seems to decide the question.  It says that "[t]he arbitrator shall have the power to rule on his or her own jurisdiction, including any objections with respect to the existence, scope, or validity of the arbitration agreement."

This case was decided under the Federal Arbitration Act.  The Fourth Circuit, however, has never ruled on whether the incorporation of the AAA's Construction Industry Rules meets the "clear and unmistakable" standard laid down by the Supreme Court.

Judge Bledsoe neverthelesss boldly went ahead and ruled that the incorporation of the AAA Rules met the "clear and unmistakable" standard.  Actually, it's not so bold of a ruling, because seven federal Circuit Courts had already reached the same conclusion.  See United States ex rel. Beauchamp v. Academi Training Ctr., 2013  U.S.. Dist. LEXIS 46433, at *15-16 (E.D. Va. 2013).

You might be thinking that you don't care much about this decision because you don't handle  construction arbitrations.  But you would be wrong.  The AAA's Commercial Arbitration Rules contain a very similar provision.  It's Rule 7, which says that:

The arbitrator shall have the power to rule on his or her own jurisdiction, including any objections with respect to the existence, scope, or validity of the arbitration agreement or to the arbitrability of any claim or counterclaim.

So if you have a question of the arbitrability of a claim. and the arbitration agreement incorporates the AAA Rules, arbitrability is likely to be resolved by the arbitrator.



Rule 11 Sanctions (Again!) From The NC Business Court

This month, for the second time in the last two months, Judge McGuire of the NC Business Court entered Rule 11 sanctions against a party whose attorney relied on inaccurate information from the client in making claims against the opposing party.

This month's decision was in NC Bioremediation, LLC v. Sea Winds, LLC, 2015 NCBC 94. The issue relevant to the Motion for Sanctions was whether the person representing himself to Plaintiff's counsel that he was a manager and member of NC Bioremediation in fact had the authority to file the lawsuit.  Or, more bluntly, was he even a member or a manager at all?

Counsel's Investigation Before Filing The Complaint Was Not A Reasonable One Under The Circumstances, And Violated Rule 11

It turned out, of course, that he wasn't.  But could the attorney for the Plaintiff, who had filed his lawsuit in the name of the LLC have known this and not filed the Complaint?  As Judge McGuire put it, "the question for the Court is what inquiry into the facts did Plaintiff's counsel conduct prior to filing the Complaint and was that inquiry a reasonable one under the circumstances?"  Op. ¶16.

It was not, said Judge McGuire.  It consisted mostly of hearsay support from Mauney's former office assistant who said that he had an ownership interest in NC Bioremediation and financial documents that implied that Mauney was a member of the LLC along with another person (Overton).

But public filings --- annual reports filed by NC Bioremediation with the NC Secretary of State -- showed only Overton as a member/manager of the LLC.

Overton delivered an Affidavit to Plaintiff's counsel in which he said that Mauney had never had an ownership interest or member status with the LLC.  Given that it was the Plaintiff which filed that Affidavit with the Court, Judge McGuire questioned why Overton had not been contacted earlier.  He said:

the Court can only conclude that contacting Overton to get his position on Mauney's contended ownership . . . could have been accomplished relatively quickly and with little additional effort.  Counsel has offered no explanation as to why the information in the Overton Affidavit could not have been discovered before the Complaint was filed.

Op. ¶20.

The Court concluded that the factual investigation done by Plaintiff's counsel fell short of Rule 11's requirement that such an inquiry be reasonable under the circumstances."  Op. ¶20.

The Sanction Entered By The Court Was The Dismissal Of The Action (Without Prejudice)

In an earlier decision in Southeast Air Charter, Inc. v. Stroud, 2015 NCBC 79, Judge McGuire sanctioned a Plaintiff whose lawyer relied inappropriately on its client's representation that some of the Defendants had positions with the Plaintiff corporation that warranted them being sued for breach of fiduciary duty.  (You can read about that decision here) .  The sanction imposed there was the payment of $35,887.01 in attorneys' fees.

What was the sanction in NC Bioremediation?  A dismissal without prejudice, with no attorneys' fees awarded.

Was that sanction harsh enough?  Maybe not, given that Overton stated in his Affidavit that he wishes the action to continue. The dismissal without prejudice leave the door open for Overton to recommence the action. 

It's hard to say who would be a worse representative to sue on behalf of the LLC.  Mauney, a North Carolina lawyer, was disbarred by the North Carolina State Bar In July 2013 for, among other professional violations, "mak[ing] demonstrably false statements under oath."  Op. ¶6 & n.9.  And Overton has "been accused of embezzling approximately $500,000 from" Defendant Sea Winds (which Overton denies in his Affidavit at ¶10).  Op. ¶11 & n.28





Unusual Area Of Law For The NC Business Court: Life Estate In A Beach House

When Governor McCrory appointed Judge Gregory McGuire to the Business Court, I doubt that he had any concern whether Judge McGuire had any expertise in the area of trusts and estates.  After all, that area of law is not enumerated in the types of case that warrant designation to the Business Court, contained in G.S. §75A-45.4.

But yesterday's decision in Davis v. Davis, 2015 NCBC 95 required exactly that type of expertise.  In particular, expertise on the validity of restrictions on the alienation of a life estate.

But why would such a case be in the Business Court in the first place?  It was designated to the Business Court on the basis that it concerned the operation of an LLC, and the Court previously issued an (unpublished) Opinion in the case which concerned the standing of the Plaintiffs, members of an out-of-state (Virginia) LLC, to bring a derivative action in North Carolina.

Having resolved that issue in favor of the Plaintiffs in November 2014, all that remained to decide was the interpretation of a restriction on a life estate.

If you are thinking of clicking away, don't. Keep reading. This gets interesting, I promise.

Family Battle Over An Outer Banks Beach House

The Plaintiffs, Melvin and J. Rex Davis, were suing their own mother, Dorothy Davis, over an Outer Banks beach house which the children owned through an LLC (MKR)  in which Melvin, J. Rex, and their sister, Kaye, were the sole members.

Mrs. Davis and her late husband had acquired the beach house in the 1980's, and gifted the beach house to MKR in 2009.  In connection with their grant of the property, the parents retained a life estate in the property with a restriction.  It said that:

said life estate [was] to be personal to the use of the Grantors . . . and may not be utilized by any other person, nor may it be reduced to a cash value for the benefit of the Grantors, or the survivor thereof, but must remain always during the lifetime of said Grantors, or the survivor thereof, available for their individual and personal use without interference from either the remainderrmen or any other person.

Op. ¶13

The children were offended that their mother had been renting out the house after the death of her husband.  The attorney who had drafted the deed testified that he had included that language with the intention that Mr. and Mrs. Davis would not be able to rent the house during their life tenancy. Op. ¶15.  And when I read that provision, I interpret it to mean that the parents could not rent the house.

So you think that would be the end to this unhappy family squabble.  Mom has to stop renting, right? (We all know that renters destroy vacation homes.)

Life Estates And Restrictions On Them

But if you are thinking that Mrs,. Davis was  barred from renting the beach house in which she had a life estate, you are wrong.  Judge McGuire started by running through a short dissertation on life estates and restrictions on their alienation (conveyance).  He observed:

  • '[A] life estate is an estate in land, vesting the holder with the right to use and possess the property during his lifetime.''  Op. ¶27.
  • "An unlimited restraint on alienation of a life estate is against public policy, and therefore, void." Op. ¶28
  • "This principle favoring alienability . . .l conflicts with another common law tenet -- that one who has an interest in property should be able to convey that interest subject to whatever condition he or she desires to impose on the conveyance.  Op. ¶29.
  • "Faced with this conflict, the law has developed so that 'some direct restraints on alienation are permissible where the goal justifies the limit on the freedom to alienate or where the interference with alienation is so negligible that the major policies furthered by freedom of alienation are not materially hampered.'"  Op. ¶29 (quoting 4 Restatement of the Law of Property, Introductory Note to Part II at 2380).

All of that led to the conclusion that "North Carolina has recognized some limited restraints on alienation of life estates as being permissible."  Op. ¶29.

So what about the restriction on Mrs. Davis' life estate?  Permissible or impermissible?

The Plaintiffs took a run at a creative argument: "since Mra. Davis is both the grantor and the life tenant and imposed the restrictions upon her own use of the life estate, the restriction in the Deed does not implicate the public policy reasons underlying the prohibition on alienation.."  Op. ¶30.

Judge McGuire didn't buy that argument.  He concluded that the deed provisions "create a disabling restraint on the alienation of Mrs. Davis' life estate, which is against public policy; thus, such provisions found in the Deed are void."  Opp. ¶34.

Maybe you are worried for Mrs. Davis that the invalidation of the restriction voids the entire life estate.  Judge McGuire said it did not.  Op. ¶34 & n.39.



It Can Be A Tough Road For Trade Secrets Plaintiffs In The NC Business Court

If you are a regular reader of this blog, you know that litigating a trade secrets case in the Business Court can be tough.  Last year, the Court barred a plaintiff from engaging in any discovery at all until it identified its allegedly misappropriated trade secrets with sufficient particularity.  And the Court has frequently dismissed trade secrets claims altogether because they weren't pled with the necessary degree of particularity.

Judge Bledsoe made it even tougher for trade secrets plaintiffs earlier this month, in SciGrip, Inc. v. Osae, 2015 NCBC 86.  SciGrip develops and produces "acrylic-based structural adhesives that are used in the marine and other industries to bond fiberglass and other material together."  Op. ¶2.

SciGrip sued its former employee, Osae, for allegedly disclosing its trade secrets to his new employer, Engineered Bonding Solutions, LLC ("EBS"), a direct competitor of SciGrip.  Osae obtained a 25% membership interest in the EBS LLC as a part of his employment. 

SciGrip sought to obtain information regarding EBS' manufacturing processes from Osae.  Osae had that information, which he said involved EBS' trade secrets, on his computer.  Osae said that the computer was owned by EBS and that he couldn't be forced to disclose EBS' trade secret information.

You are probably thinking that since Osae had possession of the documents (on the computer he was using), that he has the "possession, custody, or control" of the material which was the subject of the discovery requests and that he should be forced to provide it.  Those are the "magic words" of Rule 34 of the NC Rules of Civil Procedure, after all.

Plaintiff Couldn't Force Production Of A Non-Party's Trade Secret Information From Its Employee

But Judge Bledsoe said that this discovery request "present[ed] a highly unique scenario.," and held that:

[h]ere, Plaintiffs seek to discover trade secret and proprietary information of their direct competitor solely through one of its employees.  Typically, when a company alleges trade secret violations by an employee who has departed and begun employment with a competitor, the competitor is either joined as a party in the lawsuit or, if the competitor is a non-party, the company seeks discovery of the competitor's documents from the competitor itself through a third-party subpoena under Rule 45.

Op. ¶17.  The Judge observed that "obtaining trade secret information from a non-party competitor is preferable under Rule 45 because Rule 45 affords greater protections to non-parties.  Op. ¶19.  It is certainly true that Rule 45 provides some protection to a person responding to a subpoena.  Among other things, the Court can compensate the person unduly burdened by the subpoena for lost earnings and for reasonable attorney's fees.  Rule 45(c)(1).

The ultimate holding of the Court was that:

the Court declines to compel production of trade secret and proprietary information of a non-party competitor where the plaintiff seeks such information through an employee's possession of a company laptop and the non-party competitor has refused to submit to North Carolina jurisdiction.

Op. ¶20.

Why wasn't Osae's possession of the trade secret information enough to force him to produce it?  Judge Bledsoe said the following:

[i]]n a workforce where employees have access to a multitude of company documents through any number of portable electronic devices, the traditional line between possession and access has been blurred.

Op. ¶18.

But don't forget that the party claiming to have trade secrets must make "efforts that are reasonable under the circumstances to maintain its secrecy."  N.C. Gen. Stat. sec. 66-152(3)(b).  So don't advise your clients that they can maintain trade secret protection if they make thumb drives or laptops containing their trade secrets indiscriminately available to their workforce.

Plaintiff's Arguments That It Could Compel Production Of The Trade Secret Information Due To Osae's Status As An Agent And As An LLC Member Also Failed

Plaintiff made what seemed like a very good argument that Osae was the agent of EBS and that he therefore had the authority to turn over EBS' trade secret information.  Judge Bledsoe disagreed, saying that "this Court has found no authority compelling an agent to turn over his principal's confidential trade secret information."  Op. ¶23.

And what about Osae's membership interest in EBS?  Wasn't that status sufficient to give him the authority to produce EBS' information?  Judge Bledsoe said no, citing again the lack of authority empowering him to do so:

Plaintiffs have not pointed to any North Carolina or persuasive authority finding that a person's status as an agent, employee, minority shareholder, or part owner of  a company equates to 'possession, custody, or control' of the company's confidential or proprietary documents for purposes of discovery.

Op. ¶27.

SciGrip had not made EBS a co-defendant with Osae because EBS disputed that it was subject to jurisdiction in North Carolina.  SciGrip has gone ahead and sued EBS in EBS' home state of Florida, however, and has already served EBS with a subpoena there.

In the event that "all reasonable efforts to obtain the documents from EBS fail[]," the Court said that SciGrip could renew its motion.

How Concerned Should You Be About This Decision?

I don't read this decision to impede discovery from employees of a plaintiff's competitor.  It is literally limited to trade secret material on a laptop owned by an out-of-state entity which is not subject to jurisdiction in North Carolina.  I don't think that you will face that situation very often.


Business Court Enjoins Enforcement Of High Interest Rate Loans Made By American Indian-Related Business

Judge McGuire's opinion last week in Western Sky in State v. Western Sky Financial, LLC, 2015 NCBC 84 has a little bit of everything in it: choice of law, the U.S. Constitution, claims for usury (excessive interest rates) and American Indians.  If that doesn't impel you to read on, I don't know what would.

The chances are good, if you live in North Carolina, that you've seen at least one commercial for Western Sky.  It offered to loan you $10,000 in a day, with no collateral.  All you had to do was call and fill out a few online forms, but those loans, which ranged from $850 to a maximum of $10,000, "carried interest rates between 89.68% and 342.86%."  Op. 11.

NC Attorney General Roy Cooper came down hard on Western Sky for violating North Carolina's usury laws and otherwise taking advantage of North Carolina consumers.  The penalty for usury in North Carolina is forfeiture of all of the interest specified in the loan agreement, as well as recovery of twice the interest paid by the borrower.  N.C. Gen. Stat. §24-2.

American Indians

Wait.  You are undoubtedly wondering, what do American Indians have to do with all this?.  The Attorney General said that the Defendants were engaged in a "rent-a-tribe scheme, in which [an] unlicensed lender. . . makes usurious consumer loans . . . . by purporting to affiliate with an Indian tribe to claim federal tribal sovereign immunity."  Op. 18.

Western Sky is a South Dakota LLC, whose offices are located on the Cheyenne River Indian Reservation.  Its sole owner, Martin Webb, is a member of the Cheyenne River Sioux Tribe. Op. 7

Western Sky borrowers consented to loan agreements which said that the loan was "subject solely to the exclusive laws and jurisdiction of the Cheyenne River Sioux Tribe, Cheyenne River Indian Reservation." Op. 13.  The loan agreements also provided that they were "governed by the Indian Commerce Clause of the Constitution of the United States of America and the laws of the Cheyenne River Sioux Tribe."  Op. 14.

The Indian Commerce Clause

I'm assuming that none of you have ever heard of, or even thought about, the Constitution's Indian Commerce Clause.  Article I, Section 8, Clause 3 of the Constitution says that the United States Congress shall have power "[t]o regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes."

Choice Of Law 

The central issue of the case was whether North Carolina's very strong restrictions on usurious loans could be applied to Western Sky's business.  Judge McGuire had to get past the argument that applying North Carolina's jurisdiction and laws to the Plaintiff's claims would infringe on the Cheyenne River Sioux Tribe's sovereign immunity.

The Defendants had argued that because Webb, Western Sky's sole owner, was a member of the Cheyennne River Sioux tribe, that Western Sky was exempt from the Court's authority.  And they also argued that Western Sky's assignees of the loans -- California corporations with no Indian connection -- were entitled to the same immunity.

Judge McGuire found that he didn't need to address that argument since even if Western Sky was a tribal member the Court's jurisdiction would not be precluded.  He put his focus on where the loan transactions had occurred and determined that "the last act necessary to formation of the loan agreements occurred in North Carolina,"  Op. 37, and that North Carolina law therefore applied.

The Court had many routes to get to the same conclusion that North Carolina law governed Western Sky's loans notwithstanding the choice of law provisions in the loan agreements.  One lay in the stringent nature of NC's usury laws.  Section 24-2.1(a) of the General Statutes provides that "[f]or purposes of this Chapter, any extension of credit shall be deemed to have been made in this state. . . if the lender offers or agrees in this State to lend to a borrower who is a resident of this State."  The NC Supreme Court has held that "a contract 'made in a foreign State or country with the intent and purpose to evade the usury laws of this State' is invalid and 'the interest laws of North Carolina are applicable." Op. 37 (quoting Bundy v. Comm. Credit Co., 200 N.C. 511, 517-18 (1931).

Also, since the Attorney General was not a party to the loan agreements, he was acting as "an enforcement arm of the State of North Carolina" and was not bound by the choice of law provision.  Op. 38.

And last but not least, there is also the public policy consideration that "North Carolina will not enforce a choice of law provision in a contract where the chosen law would 'violate a fundamental policy of [North Carolina] or otherwise applicable law."  Op. 39.  The usury statute itself says that "[i]t is the paramount public policy of North Carolina to protect North Carolina resident borrowers through the application of North Carolina interest laws."  N.C. Gen. Stat. §24-2.1(g).

More U.S. Constitution

Western Sky also argued that subjecting its loans to North Carolina law would violate the Dormant Commerce Clause of the Constitution.  The Dormant Commerce Clause?  If you don't remember that Clause and you can't find it in the Constitution, that is because it is not only "explicit.  it is implied in the grant of power to the federal government to "regulate commerce . . . among the several States."

Judge McGuire rejected the Dormant Commerce Clause argument, holding that:

[t]he statutes at issue do not attempt to regulate conduct beyond North Carolina's borders and do not unduly burden interstate commerce.    The statutes do not purport to dictate the interest rates or other lending practices that Defendants apply in any state other than North Carolina.

Op. 45.  It also noted that "[C}ourts throughout the United States have consistently allowed states to regulate the content of loan contracts made by out-of-state lenders to resident borrowers." Op. 44 (quoting State of Minn. v. CashCall, Inc., 2013 Minn. Dist. LEXIS 31 (Minn. Dist. Ct. Sept. 6, 2013).

I think that this decision represents the first time that the Business Court has considered these provisions of the United States Constitution.  I think the only other mention of the U.S. Constitution by the Business Court was its discussion of the Full Faith and Credit Clause earlier this year.  Generally, you don't need to know much about the Constitution to litigate in the Business Court.

The AG's Request For A Preliminary Injunction Was Only Partly Successful 

The Attorney General requested an extraordinarily broad preliminary injunction against Western Sky.  Judge McGuire granted only part of what was requested: enjoining Western Sky from making further loans within the State and from collecting payments on the loans that had previously been made.  Given that Western Sky had already ceased making loans in North Carolina even before the Complaint was filed, the Court said that "a restriction on Defendants' ability to initiate new loans would not be a significant hardship." Op. 82

The part of the requested injunction which was denied was that Western Sky establish an escrow fund sufficient to provide full restitution of the usurious interest to those consumers who had paid Western Sky interest higher than the 16% maximum allowed by North Carolina law (N.C. Gen. Stat.  §24-1.1(c) provides that for a loan of $25,000 or less, the maximum rate that may be charged is 16%).

That type of an injunction would amount to the seizure of the Defendants' assets before the entry of a judgment and the Court refused to grant that relief.  The Attorney General argued that the escrow account sought was necessary because of the potential financial impact of the substantial litigation facing Western Sky in other jurisdictions but the Court found no evidence that the escrow of funds was "necessary or appropriate." Op. 78. 

 Western Sky has shut down business in September 2013 due to what it referred to as "unwarranted overreach by state regulators."  The company has faced lawsuits in multiple states, and is also was sued by the Federal Trade Commission and consented to a Permanent Injunction.

A Happy Dance For Plaintiffs Who Moot A Motion To Dismiss By Moving To Amend Their Complaint

Maybe you've been in this situation before.  You've moved to dismiss a complaint, have fully briefed your motion, and the defendant dances in on the day of the hearing on your motion and amends his complaint.  And the defendant doesn't even bother to make a motion to amend his complaint!

What effect does that have on your well-drafted, sure to be granted, motion to dismiss?

Judge Bledsoe addressed almost exactly that situation today in Krawiec v. Manly, 2015 NCBC 82.  The only difference was that the Plaintiff made a Motion to Amend its Complaint.

The Plaintiffs had hired the Defendants to teach at their Forsyth County dance studio, "Happy Dance."  The Defendants quit their jobs and began working at another dance studio, in Charlotte.  The Plaintiffs' lawsuit followed, alleging everything from breach of contract to misappropriation of trade secrets.

The Defendants all moved to dismiss the Complaint in May 2015.  None of them filed an Answer to the Complaint.  The Court held a hearing on the Motion to Dismiss in July 2015.

About one month after the hearing, the Plaintiffs filed a Motion to Amend their Complaint.  That litigation maneuver leads to several questions:

Did Plaintiffs need to move to amend their Complaint?  No, the motion was unnecessary because Rule 15(a) of the North Carolina Rules of Civil Procedure says that "a party may amend his pleading once as a matter of course at any time before a responsive pleading is served. . . ."  N.C.R.Civ. P. 15(a)(emphasis added).

Weren't the Motions to Dismiss a "responsive pleading"?  No, because "[f]or the purposes of [Rule 15(a)], a Rule 12(b)(6) motion to dismiss is not a responsive pleading and thus does not itself terminate plaintiff's unconditional right to amend a complaint under Rule 15(a)."  Op. ¶10 (quoting Hardin v. York Mem'l Park, 221 N.C. App. 317, 320, 730 S.E.2d 768, 773 (2012)).

What happened to the Motion to Dismiss filed before the amendment?  It was rendered moot by the Amended Complaint, which was deemed filed by the Court as of the date of the entry of its Order.  Op. ¶14(b).

So, the outcome for the Defendants in the Krawiec opinion was that Judge Bledsoe allowed the amendment to the Complaint and denied the Motion to Dismiss as moot.

One way you can avoid the disappointing result for the Defendants in this case is to file your Answer at the same time you file your Motion to Dismiss.  But really, who wants to do that?

Special note: This post is the first one in years that i have published the same day as the decision being handed down.  I would be doing a happy dance myself about that if I could dance.  Unfortunately, I have self-diagnosed myself as being "beat deaf" and I have given up any hope of dancing.  But that promptness is largely a function of Judge Bledsoe's opinion only being five pages long anyway.



Did It Need To Be In Writing?

Surratt v. Brown, 2015 NCBC 72, decided last week by the Business Court, involved an oral partnership to open and operate tattoo parlors throughout North Carolina.

Plaintiff and Defendant entered into an partnership (without any written agreement) to open a tattoo parlor in Winston-Salem.  Defendant Brown was to finance the business for a 30% share of the profits; Plaintiff Surratt was to open and operate the business for a 70% share.

The parties later orally agreed to expand their tattooing business by opening additional retail locations in which they would each have a 50% interest.  The new shops, according to Plaintiff, were to carry the "name. concept, design, and intellectual property developed" by Plaintiff in connection with the first store.  Op. ¶28.

Over the next few years, Defendant Brown opened several new new North Carolina tattoo shops: in Greensboro, Greenville, Jacksonville, and Fayetteville.  Surratt sued Brown over the new stores, alleging that he was entitled to an ownership interest in them.

Did The Agreement Need To Be In Writing?

Even if you are fascinated by tattoos, there is not much of interest in the Surratt decision.  It's mostly about whether Plaintiff's claims were barred by the statute of limitations, but there are a couple of interesting tidbits about Section 75-4 of the General Statutes, which requires that certain types of contract be in writing, and also one about conversion.  That statute says that:

No contract or agreement hereafter made, limiting the rights of any person to do business anywhere in the State of North Carolina shall be enforceable unless such agreement is in writing duly signed by the party who agrees not to enter into any such business within such territory.

N.C. Gen. Stat. §75-4 (emphasis added).

The Defendant said that the claimed unwritten promise that he would not open other tattoo shops in North Carolina was unenforceable per Section 75-4 because it limited his right to be in the tattoo business in North Carolina.

Judge Gale, relying on a Fourth Circuit decision, said that:

where an oral agreement merely concerns the use of intellectual property, section 75-4 may not apply so long as other terms do not 'substantially' limit the party's right to do business.

Op. ¶31 (citing Ashley Furniture Indus. v. Sangiacomo, N.A., 187 F.3d 363, 378 (4th Cir. 1999)).

Judge Gale observed that "Plaintiff's narrowed description of the agreement does not prohibit [the Defendant] from operating in the tattoo and piercing industry without [the Plaintiff] so long as [the Defendant] does not utilize the name, concept, or related intellectual property created pursuant and subject to the agreements between the parties."  Op. ¶32.

Given the early stage of the case (this was a Motion to Dismiss), Judge Gale ruled that it was "premature to determine whether the agreement under which Plaintiff seeks to recover must be in writing in order to be enforceable."  Op.  ¶32.

You Cannot Convert A Partnership Interest

On Plaintiff's conversion claim, which asserted that the Defendant had converted the profits of the Partnership as well as Plaintiff's Partnership interest and his management rights, Judge Gale wrote that:

[a[lthough the law is unclear as to the dividing line between tangible and intangible property in some instances, it is clear that only goods and personal property are subject to a conversion claim: intangible interests, such as business opportunities or expectancy interests are not subject to conversion.

Op. ¶33 (emphasis added).

The Judge ruled that only the property interests of profits and distributions were subject to a conversion claim.  Thus, Plaintiff's conversion claim for "his right to partnership property, his business interest in the LLC/Partnership, and his right to participate in management of the LLC/Partnership" was intangible and not an appropriate conversion claim.  Op. ¶34.




The Meaning Of "Successors," "Members," And "Designees" In A Release

The words "successors," "members," and "designees," as used in a Release were at issue in Judge Bledsoe's Opinion last week in TaiDoc Technology Corp. v. OK Biotech Co., 2015 NCBC 71.

Plaintiff TaiDoc had settled a related lawsuit previously pending in the Western District of North Carolina in which Defendant OK was not a party.  One of the settling parties, an LLC known as Prodigy, obtained a release from TaiDoc that released Prodigy's "predecessors, successors, directors, officers, managers, members . . . and their respective heirs, executors and designees . . . from any and all claims whatsoever brought in, or that could have been brought in the Action. . . whether known or unknown. . . ."  Op. ¶4.

OK moved for summary judgment on TaiDoc's claims against it based on the Release.  It said that it was a "successor" to Prodigy, a "member" of Prodigy, and also its "designee."

OK argued that it was a successor to Prodigy, and therefore entitled to avail itself of the protection of the Release, because it had purchased a 45% membership interest in Prodigy (a year) after the Release was obtained by Prodigy. 


Judge Bledsoe rejected all three of OK's arguments.  As to the "successor" argument, he held:

the term 'successors,' as used in the context of the Release Agreement . . . contemplates either a successor legal entity, which stands in the shoes of a party typically through merger, acquisition, or other legal means of succession, or a successor to a person in the testamentary sense, which typically involves a successor standing in the shoes of a predecessor upon a predecessor's incapacity or death.

Op. ¶35.

Particularly astute readers might wonder why it would even make a difference if OK was deemed to be Prodigy's "successor," since TaiDoc's settled claims against Prodigy were undoubtedly different from those which it was bringing against OK.  Judge Bledsoe dealt with that point too, holding that:

even if OK Biotech became a legal 'successor' to the release that [the members of Prodigy] obtained under the Release Agreement, that release was only a release of the claims TaiDoc had against [the members of Prodigy] -- not a release of any claims TaiDoc had against OK Biotech at the time of the Release Agreement, or, in particular, of the claims TaiDoc has asserted against OK Biotech in this action.

Op. ¶36.


OK then argued that since it had acquired a membership interest in Prodigy -- a year after the Release was executed --  it was included in the "members" of Prodigy released a year before by TaiDoc.

Judge Bledsoe dismissed that argument as "fully absurd," stating that this contention:

leads to the implausible and fully absurd construction that the parties intended that any non-party to the Release Agreement could purchase a release of its liability to TaiDoc -- on any claim whatsoever -- by purchasing a membership interest. . . in Prodigy, without TaiDoc having bargained for or contemplated that party's release from liability.

Order ¶41.

The word "members"  didn't mean "future members,"  it meant only those persons or entities which were members of Prodigy at the time the Release was signed.  Op. ¶¶37-38.


OK hadn't run out of arguments why it was entitled to the benefit of the Release.  OK said that it was a "designee" of Prodigy because Prodigy had assigned to it Prodigy's rights under an application to the FDA for a medical device.

That argument had some surface appeal, as the definition of a "designee" in Black's Law Dictionary is a "person who has been designated to perform some duty or carry out some specific role."  Op. ¶43 (quoting Black's Law Dictionary 478 (8th ed. 2004)).

Although Judge Bledsoe didn't say that this argument was "fully absurd," or even that it was "pure applesauce," he did say it was "without merit" and scoffed at it a bit, stating that:

[i]n short, OK Biotech argues that Prodigy had the unfettered right to designate any person or entity in the world as its designee for purposes or receiving the benefits of the [Release] and it chose OK Biotech for these purposes.

Op. ¶42.

In the context of the Release, in which the word "designee" appeared in conjunction with "heirs, executors and designees,"  the Court held that "it is clear that, in context, these three words are intended as similar and related legal terms used to describe types of representatives or successors to a natural person after death."  Op. ¶44.

Given that the posture of this ruling was a denial of a Motion for Summary Judgment as opposed to the granting of a Motion to Dismiss the affirmative defense of release, it's not clear whether the issue of the Release remains alive in this case.  But it seems pretty much dead, at least to me.

If You Reach A Settlement At Mediation, And Say The Settlement Will Be The Subject Of A Forthcoming Formal Agreement, Do You Have A Binding Deal?

You have most likely walked out of a mediated settlement conference at which the shorthand version of the settlement put to paper by the lawyers and the mediator stated that there would be a later, more detailed agreement.  And maybe, the next day, as work began on the "more formal agreement to be prepared later," you and your opposing counsel putting the more detailed pen to paper sank into disagreement on the words which should be used to finalize the settlement.

So, did you have a final and binding deal or not based on the document signed at the mediation?  You most likely did, if you look at Judge McGuire's Order earlier this month in McCarthy v. Hampton, 2015 NCBC 67.  The parties in that case had engaged in a mediation which resulted in a signed document titled "Essential Terms of Mediated Settlement Agreement with Formal Agreement to be Prepared Later."  That same day, the mediator notified the Business Court that the parties had reached a settlement  and that an upcoming hearing in the case would not be necessary.  Defendant's counsel followed up informing the Court via email that the "[p]arties successfully mediated and settled all claims" at the mediation and that the parties were finalizing settlement documents.  Counsel for Plaintiff, copied on the email, did nothing to contradict opposing counsel's email.

Thereafter, the parties exchanged drafts of the "formal agreement" contemplated by the "Essential Terms Agreement" executed at the mediation (which the Court referred to as the "ETA").  Those discussions quickly broke down when issues not specifically addressed in the ETA arose and could not be resolved.

Plaintiff said that the Essential Terms Agreement  was an unenforceable "agreement to agree," in his opposition to a motion to enforce the settlement.  In response, Judge McGuire distinguished an NC Supreme Court decision which found an agreement to be insufficiently final to be binding:

nothing on the face of the ETA indicates that this document was simply intended to outline the desires of the parties. Whereas the language at issue in Boyce [v. McMahan, 285 N.C. 730 (1974)] provided that the parties to that document 'desire to enter into a preliminary agreement setting out the main features as to the desires of the both parties,' id, the ETA provides that '[t]his agreement is . . . to memorialize essential terms of the mediated settlement agreement' in this action.'  Thus, that the ETA on its face purports to be an agreement as to the terms therein, without any qualification that it is merely a preliminary agreement or a recitation of the parties' desires, distinguishes this matter from the facts of Boyce

Order ¶22.

The argument that the ETA was ineffective because it was subject to the condition subsequent of a more formal settlement document also fell on unreceptive ears.  Judge McGuire said:

nothing in the ETA indicates that the agreement memorialized therein was conditioned on the execution of a final agreement.  Aside from simply indicating that one would ultimately be prepared, [the] ETA makes no other reference to a more formal agreement, much less any reference that raises an issue of fact whether the parties intended that the ETA not be a binding agreement until confirmed in a future writing.

Order ¶23.

After that, Judge McGuire paced through seven terms which the Plaintiff said were "material" but had not been addressed by the ETA.  Those ranged from how the intangible assets of the medical practice which was the subject of the lawsuit would be disposed of to what amount of Plaintiff's attorney's fees would be paid by the practice.

Some of the sticking points in the post-mediation negotiations reflected terms different than those contained in the ETA.  As Judge McGuire put it, "[t]he fact that plaintiff later changed [his] mind does not render the settlement agreement unenforceable."  Order ¶29 (quoting Smith v. Young Moving & Storage, Inc., 167 N.C. App. 487, 494 (2004)).  Or, as he said later, "that Plaintiff now seems dissatisfied with the agreement reached does not render the ETA unenforceable."  Order ¶30 (emphasis added).

The other terms which the Plaintiff (who was the party seeking to evade enforcement of the ETA) said were material, but not addressed at the mediation were found by the Court to be embraced by the terms of the ETA, or not material at all.  The Court granted the Defendant's Motion to Enforce Mediated Settlement Agreement.

What should you do if you want to leave a mediation with the ability to avoid a settlement when you suspect that you won't be able to agree on the terms of a final settlement agreement because of an unreasonable and nitpicking opposing counsel?  There's no good answer.  You might try saying in the document prepared by the mediator that the settlement will not be binding until a written agreement to be negotiated later is signed by all parties.  Good luck with getting a decent mediator to let you go home with such an open-ended agreement.  And calling the mediation document an "Agreement as to Non-Essential Terms" would be silly, it would defeat the point of a mediation.

This is the second time in the last two months that the Business Court has refused to allow a party signing off on a settlement document at mediation to escape its terms.  The first case was Judge Gale's decision in DeCristoforo v. Givens, 2015 NCBC 53, which I wrote about in June.





Don't Overplay Your Hand In The Business Court

When you last heard about London Leasing LLC v. Arcus, the Business Court had entered a default in March 2015 against two of the Defendants for what I called their "defiant and obnoxious conduct."

It then seemed like the Plaintiff was just a hop, skip, and a jump away from obtaining a default judgment against the Defendants against whom there had been an Entry of Default, but last week Judge McGuire denied a Motion for Default Judgment in an Order in London Leasing LLC v. Arcus, 2015 NCBC 65.  In fact, he went further than just denying the Motion for Default Judgment.  He actually set aside the Entry of Default he had imposed in the previous unpublished decision.

The ruling didn't represent a softening of the Court's heart as to the defiant Defendants.  The Court remained annoyed even though one of the defaulted Defendants, JW Ray, filed an Affidavit saying that he had not meant to "disrespect this Honorable Court" and that he was "unaware of the significance of his actions."

Judge McGuire said that "the Defendants have not demonstrated good cause to set aside the entry of default based on Ray's misunderstanding of his legal obligation in this matter."  Order ¶26.  He also said that the "Defendants' conduct that lead to the entry of default pursuant to Rule 37 was inexcusable."  Order ¶27 & n.20.  The Court said that it would "enter other appropriate sanctions against Defendants at a future date." Id.

So, having said all that about the "inexcusable" nature of the Defendants' conduct, what was the reason that the Court set aside its Entry of Default?  It lay in the Plaintiff's Motion to Amend its Complaint, adding five new Defendants and seeking to state two new claims against the defaulted Defendants.

The Court said that "it was forced to conclude that Plaintiff's decision to amend its Complaint provides the 'good cause' necessary to set aside the entry of default."  Order ¶27 (emphasis added).  The Defendants hadn't had the opportunity to respond to the new allegations and were entitled to defend against them.

The takeaway from the new London Leasing decision is that it is not a good idea to amend your Complaint after you have an Entry of Default in hand.  You run a risk of losing the Entry of Default.

By the way, if you noticed that there were no posts on this blog last week, it's because I was away at the beach last week with my family.  The Business Court didn't take notice of my absence (maybe I need to put in for secured leave next time I go away), and the Court went ahead and issued four opinions while I was gone which I am busy digesting.  So, look for more posts later this week.

Please note, as it has always said in the Disclaimer to this Blog, that my posts do not represent the views of Brooks Pierce, but only my own.

There's A Difference Between "Confidential And Proprietary Information" And A Trade Secret

I can't remember the last time that the Business Court granted a motion opposing the designation of a case as a mandatory complex business case.  And since the Business Court Modernization Act went into effect in October 2014?  I don't think one has been granted.

But earlier this week, Judge Gale did exactly that, in an Order this week in Cornerstone Health Care, P.A. v. Moore, 2015 NCBC 62.  Plaintiff Cornerstone, a medical practice in Greensboro, sued two of its former doctor-employees who joined competitive practices.  It asserted that they were violating their non-competition and confidentiality agreements.  It made claims for breach of contract and for a declaratory judgment regarding deferred compensation which the doctors claimed was owed to them.

The Business Court has traditionally been a little prickly about accepting the designation of cases involving covenants not to compete.  In 2008, in Workplace Benefits, LLC v. Lifecare, Inc. (unpublished), Judge Tennille held that "every suit based upon a breach of a restrictive covenant . . . [will not] give rise to a mandatory business case based upon 'unfair competition.'"

Nevertheless, the Court had displayed a willingness to accept the designation of such cases if they included claims alleging the theft of trade secrets or actions designed to "unfairly damage another's business."  And the Court had also showed that it would go beyond the way in which the Plaintiff labelled its causes of action and delve into the facts alleged to determine whether there was a basis for the designation.  That largesse was demonstrated by a decision from then Chief Judge Jolly in New Breed, Inc. v. Golden, which I wrote about in 2012.

The Cornerstone Complaint which was the subject of this week's decision seemed to walk the right walk for an acceptable designation.  It asserted that the Defendant doctors would "inevitably disclose Cornerstone's confidential and proprietary information."  Order ¶10(e).  "Confidential and proprietary" information must be a trade secret, right?

No, apparently not, and those allegations were not enough to warrant the designation as a mandatory case for the Business Court.  Now Chief Judge Gale observed that

This Court has historically handled cases designated as complex business disputes which involved employment agreements including restrictive covenants.  In general, it has only done so where the allegations include a claim that the employee. . . misappropriated trade secrets in addition to violating the contract or restrictive covenant.

[t]he Court has not historically been assigned cases based on the assertion of more generalized allegations of the employer's loss of confidential or proprietary information.  Certainly evidence of that nature may be involved in any case concerning an alleged violation of a restrictive covenant contained within an employment contract because such evidence is necessary to support the employer's need for the restrictive covenant.  But that evidence was not the basis on which cases were assigned as mandatory complex business disputes.

Order ¶¶14&15.  The Judge directed that the case should not proceed in the Business Court but on the "regular docket of the Superior Court of Guilford County."  Order ¶20(e).

So it seems there must be some difference between a "trade secret" and "confidential and proprietary information".  Yes, but Judge Gale unfortunately did not expand on the difference. 

There is actually quite a bit written on the subject of confidential information as compared to trade secrets.  The views range from the position of a Massachusetts federal court that "trade secrets and confidential information are essentially identical concepts." Take it Away, Inc. v. Home Depot, Inc., 2009 WL 458552, at *8 (D. Mass. Feb. 6, 2009), to the Business Court's apparent position that they are different.

 You know from past blog posts here that the Business Court is particularly tough on the way trade secrets claims must be pleaded.  The Cornerstone ruling continues in that vein.  Saying that a trade secret is "confidential and proprietary" is not, standing alone, enough to get you into the Court as a mandatory complex case under G.S. §7A-45.4(a)(8).  You need to say more.


Something That You Might Not Have Known About Injunctions

I had always thought that you need to post a bond in order to obtain an injunction, both in federal and state court.  It turns out that I was wrong.

The federal rule seems to require a bond.  It says:

(c) Security. The court may issue a preliminary injunction or a temporary restraining order only if the movant gives security in an amount that the court considers proper to pay the costs and damages sustained by any party found to have been wrongfully enjoined or restrained. The United States, its officers, and its agencies are not required to give security.

FRCP 65(c).

The state rule is even stronger on the apparent need for security.  it says:

(c) Security. - No restraining order or preliminary injunction shall issue except upon the giving of security by the applicant, in such sum as the judge deems proper, for the payment of such costs and damages as may be incurred or suffered by any party who is found to have been wrongfully enjoined or restrained. No such security shall be required of the State of North Carolina or of any county or municipality thereof, or any officer or agency thereof acting in an official capacity, but damages may be awarded against such party in accord with this rule. In suits between spouses relating to support, alimony, custody of children, separation, divorce from bed and board, and absolute divorce no such security shall be required of the plaintiff spouse as a condition precedent to the issuing of a temporary restraining order or preliminary injunction enjoining the defendant spouse from interfering with, threatening, or in any way molesting the plaintiff spouse during pendency of the suit, until further order of the court, but damages may be awarded against such party in accord with this rule.

NCRCP 65(c).

Given the seeming clarity of those Rules, I was surprised to learn, from Judge Bledsoe's opinion earlier this month in Bolier & Co., LLC v. Decca Furniture (USA), Inc., 2015 NCBC 52 that a federal judge or a state judge is free to issue an injunction without any requirement for a bond.

The Bolier case had been designated to the Business Court in 2012.  It was then removed to federal court, where Judge Vorhees (of the W.D.N.C.) entered a preliminary injunction without any requirement for a bond against the Plaintiff.  The case was remanded back to the Business Court in September 2014.

The Plaintiff argued to the Business Court that the federal injunction should be dissolved because it did not require a bond.  Judge Bledsoe rejected that argument, holding:

[t]he law is clear that a federal district court has broad discretion to set a bond amount as the court sees fit and may waive a security requirement altogether as Judge Vorhees did here.  Pashby v. Delia, 709 F.3d 307, 332 (4th Cir. 2013)(citation omitted); see also Aoude v. Mobil Oil Corp., 862 F.2d 890, 896 (1st Cir. 1988)("posting of a bond is not a jurisdictional prerequisite to the validity of a preliminary injunction"); Clarkson Co, v. Shaheen, 544 F.2d 624, 632 (2nd Cir. 1976)("[B]ecause, under Fed. R. Civ. P. 65, the amount of any bond to be given upon the issuance of a preliminary injunction rests within the sound discretion of the trial court, the district court may dispense with the filing of a bond." (citations omitted).

Op. ¶39.  Moreover, the Court said that North Carolina law is to the same effect.  The NC Court of Appeals has held that:

'[t]he trial court has power not only to set the amount of security but to dispense with any security requirement whatsoever where the restraint will do the [party] no material damage, and where the applicant for equitable relief has considerable assets and is able to respond in damages if [the party] does suffer damages by reason of a wrongful injunction.

Op. ¶39 (quoting Stevens v. Henry, 121 N.C. App. 150, 154, 464 S.E.2d 704, 707 (1995)(alterations and quotations omitted)(quoting Keith v. Day, 60 N.C. App. 559, 562, 299 S.E.2d 296, 298(1983)).

The NC COA, in an acknowledgement of the Rule's apparently mandatory language, said in a 1983 decision that it  " is more subtle than one would expect from words so apparently unambiguous."  It went on, in Keith v. Day, to hold that the "... as the court deems proper" language of the rule means that there are some instances when it is proper for no security to be required of a party seeking injunctive relief." 60 N.C. App. at 562, 299 S.E.2d at 299.

I wouldn't read Judge Bledsoe's Opinion to say that the party obtaining an injunction in the Business Court is unlikely to have to post a bond.  A bond of at least some amount is going to be appropriate in most cases.


Business Court: High To Low Posting of ATM Debit Card Transactions Properly Disclosed By Bank

The meaning of the word "item" was the definitive factor in the Business Court's decision last week in Gay v. People's Bank, 2015 NCBC 59.

The case was an attempted class action involving claims against the Bank for allegedly improperly imposing overdraft fees on checking accounts.  The overdraft fees arose due to the Bank's "high to low posting" of ATM charges.

The Bank did not deduct debit card charges from their accounts in the chronological order in which they were incurred, but instead re-ordered them from the largest debit charge to the smallest. This practice, according to the Plaintiff, had the effect of more quickly reducing the funds in his account and thereby "running up" the overdraft charges collected by the Bank.  He sought to represent a class of the Bank's customers who had incurred overdraft charges.

The Bank's position was that its high to low ordering was plainly disclosed in its account agreements.  That seemed pretty clear.  One document said:

Payment Order of Items - The law permits us to pay items (such as checks or drafts) drawn on your account in any order.  To assist you in handling your account with us, we are providing you with the following information regarding how we process the items that you write.  When processing items drawn on your account, our policy is to pay them according to the dollar amount.  We pay the largest items first.  The order in which items are paid is important if there is not enough money in your account to pay all of the items that are presented.  Our payment policy will cause your largest, and perhaps more important, items to be paid first . . . , but may increase the overdraft or NSF fees you have to pay if funds are not available to pay all of your items.

Op. ¶23 (quoting the Bank's Terms and Conditions).

The specificity of that language makes one wonder how the Plaintiff class ever got past a Motion for Judgment on the Pleadings.  But it did exactly that, in an unpublished Order from former Business Court Judge Murphy in April 2014.

What preclusive effect did that Order have on Judge Bledsoe's ruling?  None.  But hold it, if it does not have that effect, doesn't that mean that one Superior Court Judge can overrule another?  And we all know that is not allowed.  Judge Bledsoe wrote:

North Carolina law is clear . . . that 'denial of a previous motion for judgment on the pleadings made under [Rule 12(c)] does not preclude the trial court from granting a subsequent motion for summary judgment.'

Op. ¶20 (quoting Rhue v. Pace, 165 N.C. App. 423, 426, 598 S.E.2d 662, 664-65 (2004)).

Plaintiff tried to stir up ambiguity on whether the disclosure regarding the ordering of "items" included debit card transactions, given its specific reference to checks and draft and its lack of mention of debits.. But Judge Bledsoe said that "[t]he law is clear . . . that the Court will  not read an ambiguity into a contract where none exists."  Op. ¶26.  Moreover, it is settled that "parties can differ as to the interpretation of language without its being ambiguous."  Op. Par. 26 (quoting Walton v. City of Raleigh, 342 N.C. 879, 881-82, 467 S.E.2d 410, 412 (1996).

He concluded that the phrase "such as checks or drafts" following the word "items" was "an unambiguous phrase of inclusion and not an exhaustive list of the specific 'items' embraced by the Bank's policy."  Op. ¶27.  He actually went even further, ruling that the term "'item,' as used here, plainly contemplates any debit to an account -- whether by check, draft, ACH payment, wire, online, mobile device, voice response, debit transaction or other withdrawal."  Op. ¶28.  That construction of the word, he said, was consistent with the "plain, ordinary and popular use of the word 'item.'" as used in Webster's Dictionary  Op. ¶28.

If you are worried about how your own bank handles overdraft fees for the use of your ATM card, you don't have to be.  Or, if you are thinking you'd like to sue banks over overdraft charges, it's probably too late.  The Office of the Comptroller of the Currency put Regulation E in place in 2010.  Regulation E governs how banks must deal with overdraft charges from ATM cards.

Brooks Pierce represented Defendant People's Bank in this case, through Reid Phillips and Daniel Smith.

When A Motion To Strike Can Be Proper

After a defendant succeeded on a Motion for a More Definite Statement, a plaintiff added more detail to the claims that had been dismissed.  The defendant responded to the beefed up allegations with a Motion to Strike.

Is that a proper use of a Motion to Strike?  Yes, said Judge McGuire last week in an Order in Progress Point One-B Condominium Association, Inc. v. Progress Point One Property Owners Association, Inc., 2015 NCBC 54, given the nature of the previous dismissal.

You may be surprised at that conclusion, given that a Motion to Dismiss under Rule 12(b)(6) "is generally viewed as the proper means to challenge the sufficiency of a plaintiff's pleading, not a motion to strike."  Order ¶14.  Motions to strike, under Rule 12(f), are reserved for challenging "any redundant, irrelevant, immaterial, impertinent, or scandalous matter."

The unusual circumstance of this case was that Judge McGuire had dismissed a number of the repleaded claims in a previous decision granting a Motion for a More Definite Statement (2015 NCBC 20).  But he had not said that the dismissal was "with prejudice."  That lack of reference to the quality of the dismissal didn't make a difference, because Rule 41(b) says that "all dismissals, including those under Rule 12(b)(6) operate as an adjudication upon the merits unless the trial court specifies that the dismissal is without prejudice."  Order ¶9 (quoting Johnson v. Bellinger, 86 N.C. App. 1, 8 (1987).

A Motion to Strike is appropriate "where a party attempts to re-allege claims that have been previously dismissed by the court."  Order ¶9.

So if you are dealing with an adversary who refuses to concede that some of its claims were dismissed and insists on going forward with them, a Motion to Strike is completely warranted.

Business Court Refuses To Unwind Mediated Settlement Agreement

The Defendants in last week's decision in DeCristoforo v. Givens, 2015 NCBC 53 were hellbent on getting out from under a settlement they had agreed to at mediation.  They offered a host of challenges to the validity of their agreement, but Judge Gale rejected all of their arguments.

The Parties And The Mediated Settlement

Plaintiff Vivian DeCristoforo was a member of Lindy's Homemade, LLC  and was its former president and CEO.  She and her husband, also an officer of the LLC, sued the LLC, individually and derivatively.  They made claims for a breach of their employment agreements, Wage and Hour violations, tortious interference with their contracts, and violations of fiduciary duty by the individual defendants (who were officers and directors of the LLC).

The parties engaged in mediation in September 2014.  The Plaintiffs said that all parties had settled the case then, although the Defendants challenged that.  The enforceability of the settlement was the issue before the Business Court.

The settlement was reflected by the Mediation Report form cover sheet signed by all of the parties attending the mediation, and two of the attorneys, stating "that a full and final agreement of all issues was reached."  The terms of the settlement were described on an attached "Exhibit A."  Some of the attending parties put their initials on Exhibit A, but one of the individual defendants (Kaye) left the mediation before Exhibit A was finalized and he did not put his initials on it.

That One Of The Defendants Had Left The Mediation Before The Settlement Was Finalized Was Not A Barrier To Its Enforcement

His departure did not affect the enforceability of this settlement.  Judge Gale said:

[t}he Court is not persuaded by Defendants' contention that the settlement can be avoided because Kaye left the mediation before initialing the final Exhibit A.  Kaye left, knowing that the reduction or the terms to paper on Exhibit A was in progress.  His counsel was still present.  There is no indication that he instructed that his signature, reflecting a 'full and final agreement of all issues,' must be withheld until he further assented to Exhibit A.  Under these circumstances, Kaye and Lindy's should be bound to the settlement.

Op. ¶48.

We have all had our clients leave a mediation before all the final details of a settlement have been hammered out.  Planes to catch, traffic to avoid.  Maybe sheer boredom.  Still, it is probably not a good idea to have them leave before all t's and i's have been crossed and dotted.

The Individuals' Signatures -- Which Had No Mention Of Their Authority To Bind The Entities -- Were Sufficient To Bind The LLC And Its Corporate Member

The next question that Judge Gale grappled with was whether the settlement agreement had all of the signatures necessary to bind the parties.  The LLC and its corporate member (Pittco) argued that the signatures of the attendees at the mediation were not sufficient to bind them.  The individuals signing the Mediation Report form did not distinguish whether they were signing in their personal capacities or as representatives of the LLC or its corporate member.

That is contrary to the "nearly universal practice" when transactional documents are involved, which is that "the corporate officer signs twice, once as an officer and again as an individual."  Op. ¶50 (quoting Keels v. Turner, 45 N.C. App. 213, 218, 262 S.E.2d 845, 847 (1980).

Is that the "universal practice" in mediations?  Judge Gale said it was not, writing that:

[o]ften, the time pressures of preparing documents at the end of a long and contentious mediation session require drafting a binding document that does not allow for the same formalities as a transaction completed after multiple document exchanges.  That does not mean, however, that a settlement that the attendees represent to be a full and final resolution of all issues should be easily avoided because of the form of signatures.

Op. ¶50.

So, the Judge concluded that the signatures of the individuals, bearing no reference to their corporate authority, bound both the individual and the corporations they were representing at the mediation. Op. ¶50.

The entities which were Defendants in the DeCristoforo case (the LLC and its corporate member) were hard pressed to argue that the individuals did not have the necessary authority to bind them at the mediation.  Two of the individuals were the members of the LLC's "Special Matters Committee," which had been granted generally the "plenary power" to resolve DeCristoforo's claims and specifically to "execute. . . for and on behalf of [Lindy's] any and all notices, certificates, agreements . . . and other documents or instruments."  One of the Special Matters Committee members also sat on the LLC's Board of Directors, and was Pittco's designee to the LLC Board.

The Lack Of An Agreed Upon Release Did Not Invalidate The Settlement

The Defendants' efforts to evade their settlement did not end here.  They said that the agreement became unenforceable when they were unable to agree on the terms of release following the mediation.  Exhibit A said that there would be "a further statement of. . . complete mutual release." 

The Defendants added terms to the post-mediation release which called for the release of federal claims which were not a part of the Business Court lawsuit and also included terms requiring the Plaintiffs to return corporate documents in their possession, also not mentioned in the terms resulting from the mediated settlement.

Judge Gale found that the language of the Mediation Report was sufficient to release all of the pending claims in the lawsuit and that the voluntary dismissal with prejudice called for by Exhibit A would have the same effect as a release.  Op. ¶57.




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NC Business Court: Motions To Amend And The Statute Of Limitations

Maybe you have the same nightmare that I do.  You have moved to amend your Complaint to add a new defendant.  The statute of limitations is about to run, but your motion to amend was made before the end of the limitations period.  The problem is that you end up getting the Order allowing your amendment after the statute has run.

Is your addition of the new defendant time barred?  You are probably worried, but you might be thinking that the principle of relation back (contained in NC Rule of Civil Procedure 15(c))  will eliminate your concern. 

Judge Bledsoe shed some light on this very dilemma last week, in his Opinion in Insight Health Corp. v. Marquis Diagnostic Imaging of North Carolina, LLC, 2015 NCBC 50.  It turns out that relation back has nothing to do with my nightmare so long as the motion to amend is filed before the expiration of the limitations period.

This wasn't a groundbreaking step by Judge Bledsoe.  He relied on a NC Court of Appeals opinion more than ten years old, which held that:

the relation back principle only applies where the complaint is amended outside the relevant statute of limitations.  It need not be considered where a pleading is amended before the statute of limitations expires.

Op. ¶14 (quoting Zenobile v. McKecuen, 144 N.C. App. 104, 108, 548 S.E.2d 756, 758, disc. rev. denied, 354 N.C. 75, 353 S.E.2d 214 (2001).

So what is the trigger date for the statute of limitations when a motion to amend is involved?  "The date of the filing of the motion [to amend the complaint to add a new claim], rather than the date the court rules on it, is the crucial date for measuring the period of limitations.  The timely filing of the motion to amend [the complaint], if later allowed, is sufficient to start the action within the period of limitations."  Op. ¶14 (quoting Mauney v. Morris, 316 N.C. 67, 71-72, 340 S.E.2d 397, 400 (1986)(emphasis added).

If you are moving to amend to add a new defendant and you are butting up on the statute of limitations, sleep better on this decision.

Two Claims You May Not Want To Make In North Carolina

I said yesterday that there was too much in DSM Dyneema, LLC v. Thagard, 2015 NCBC 47 for just one post, so here are the rest of the key points from the case.  They involve two claims you might not want to bother to make in North Carolina -- the first one suing a former employee for violation of fiduciary duty -- and the second a claim resting on the "inevitable disclosure doctrine."

Uncertainty About The Availability Of The Inevitable Disclosure Doctrine

Beware of relying on the "inevitable disclosure doctrine."  Judge Bledsoe points out that the doctrine "has not yet been firmly adopted by the North Carolina courts."  Op. ¶20 & n.4.  I think of the inevitable disclosure argument as an end run for a client which didn't get a non-compete agreement from a departing employee but wished that it had. 

The NC Court of Appeals, although it has yet to accept the doctrine, has described it as applying:

when an employee who knows trade secrets of his employer leaves that employer for a competitor and, because of the similarity of the employee's work for the two companies, it is "inevitable" that he will use or disclose trade secrets of the first employer. See K. Roberson, South Carolina's Inevitable Adoption of the Inevitable Disclosure Doctrine: Balancing Protection of Trade Secrets with Freedom of Employment, 52 S.C.L. Rev. 895 (2001).

Op. ¶20 & n.4 (quoting Analog Devices, Inc. v. Michalski, 157 N.C. App. 462, 470, 579 S.E.2d 449, 454 (N.C. Ct. App. 2003).

Judge Bledsoe was able to avoid deciding whether the doctrine applies in NC, even though the Defendants argued on their Motion for Judgment on the Pleadings that the Plaintiff had pled little more than that its former employee had left its employment and would inevitably disclose its trade secrets to his new employer, a competitor.

The Judge found that there was more than just the "inevitability" of disclosure since the Defendants after hiring away Thagard (Plaintiff's former chief scientist and "technical leader"), were suddenly able to pass a ballistics test for combat helmets used by the Department of Defense.  Before that hiring, the Defendants and all of the Plaintiff's other competitors, had failed that test.  Plaintiff had the only process in its industry which yielded an acceptable helmet.  There were also allegations in the Complaint that Thagard had downloaded trade secret information from his company computer before leaving the Plaintiff, and that he had disclosed that information to the Honeywell Defendants.

So, before making a claim based solely on the inevitable disclosure doctrine, take into account that North Caroline may not recognize the doctrine.

Fiduciary Duty

This second DSM Dyneema decision also contains a completely unsurprising ruling that Defendant Thagard did not owe a fiduciary duty to his former employer.

The NC Supreme Court pretty much ruled that an employee has no fiduciary duty to its employer almost fifteen years ago, in Dalton v. Camp, 353 N.C. 647, 652, 548 S.E.2d 704, 708 (2001).

Judge Bledsoe rejected the Plaintiff's argument that Thagard owed it a fiduciary duty because "he held a position of trust and confidence  at DSM as Application Manager -- Life Protection in which he. . . was the lead scientist and technical leader for DSM's helmet and body armor development and new grade development."  Op. ¶28.

It is hard to conceive of  situation where any employee -- other than one who is an officer or a director of her employer -- would owe a fiduciary duty to her employer.


Trade Secret Plaintiff Avoids Dismissal, Gets Discovery

One of the most interesting Business Court decisions of last year was Judge Bledsoe's opinion in DSM Dyneema, LLC v. Thagard, 2014 NCBC 50, in which he held that the Plaintiff, which was suing for misappropriation of trade secrets,was barred from pursuing discovery because it had not identified its trade secrets with "sufficient particularity."  The alleged trade secrets involved the development of ballistic-resistant fibers for enhanced combat helmets.  If you missed that case, click here.

This week, Judge Bledsoe followed up on that decision by denying the Motion for Judgment on the Pleadings of Defendants Honeywell Specialty Materials, LLC, Honeywell Advanced Composites, Inc., and Honeywell International, Inc.

There is so much worth writing about in this Opinion, DSM Dyneema, LLC v. Thagard, 2015 NCBC 47, that I've split it  into two posts.  More tomorrow.

The Honeywell Defendants argued that they were entitled to judgment on the pleadings because the Court had already ruled that the Plaintiff had not identified its alleged trade secrets with the necessary particularity.

While the Court had indeed made that ruling, it pointed out in this second ruling in the case that:

the level of specificity required of a plaintiff to survive a motion for judgment on the pleadings under Rule 12(c) is less than that required to permit discovery into an adversary's confidential and trade secret information.

Op. ¶18.

Adequately Pleading A Trade Secrets Claim

If you are hoping that this case provides a road map for an adequate trade secrets description in a case involving manufacturing/technical type trade secrets, you are bound to be disappointed.  Judge Bledsoe merely measured the allegations in the amended complaint against other cases where the trade secret description had been ruled to be insufficient, finding the Plaintiff's allegations to be "more detailed and specific, and less sweeping and conclusory, than those allegations our courts have found to fail the pleading standard of Rule 12."  Op. ¶19.

Nevertheless, the Court's citation of six Court of Appeals and Business Court decisions finding trade secret allegations to be sufficient to survive a motion to dismiss probably will provide at least some direction to those looking to avoid an early dismissal of a trade secrets claim.  Those cases (which involve mostly customer type trade secrets) are:

Horner Int'l Co. v. McKoy, 754 S.E.2d 852, 859 (N.C. Ct. App. 2014) (holding sufficient under Rule 12(b)(6) plaintiff’s identification of “various raw materials and raw material treatments; extraction, filtration, separation, and distillation techniques; and methods for compounding of flavors, packaging, and plant utility. . . used in the production of flavor materials derived from seven specifically identified substances, such as cocoa, ginseng, and chamomile”);

S. Fastening Sys., Inc. v. Grabber Constr. Products, Inc., 2015 NCBC 40 ¶¶ 23–25 (N.C. Super. Ct. Apr. 28, 2015) www.ncbusinesscourt.net/opinions/2015_NCBC_40.pdf (holding sufficient under Rule 12(b)(6) “confidential customer information such as customer contact information and customer buying preferences and history . . . confidential freight information, sales reports, prices and terms books, sales memos, sales training manuals, commission reports, and information concerning SFS’s relationship with its vendors”);

Veer Right Mgmt. Grp., Inc. v. Czarnowski Display Serv., Inc., 2015 NCBC 12 ¶ 29 (N.C. Super. Ct. Feb. 4, 2015), www.ncbusinesscourt.net/opinions/2015_NCBC_12.pdf (holding sufficient under Rule 12(b)(6) “compilations of information, methods, techniques, and processes that [it uses] in planning, organizing and managing all aspects associated with identifying appropriate shows for their clients, pricing and budgeting, procuring space, setting up booths, staffing booths during the show, tracking sales leads generated by each show, tearing down booths after each show”);

Le Bleu Corp., 2014 NCBC 65 ¶ 29 (holding sufficient under Rule 12(b)(6) “customer lists, pricing information, transaction histories, key contacts, and customer leads”);

Koch Measurement Devices, Inc. v. Armke, 2013 NCBC 48 ¶ 19 (N.C. Super. Ct. Oct. 14, 2013), www.ncbusinesscourt.net/opinions/2013_NCBC_48.pdf (holding sufficient under Rule 12(b)(6) “customer lists, including names, contact persons, addresses, phone numbers . . . [customer] ordering habits, history . . . [and company] pricing and inventory management strategies”); and

TSG Finishing, LLC v. Bollinger, 767 S.E.2d 870, 877 (N.C. Ct. App. 2014)  (recognizing in directing entry of preliminary injunction that particular steps in a process may be trade secrets, not simply the process as a whole).

Op. ¶19.

If you use the descriptions from those cases as a model for your trade secrets complaint, you will stand a pretty good chance of surviving a Motion to Dismiss (at least in Judge Bledsoe's Court).

Discovery Will Go Forward In This Case

The good news in this decision for the Plaintiff -- apart from escaping the Motion to Dismiss -- is that it is now entitled to discovery of the Honeywell Defendants' own trade secrets.

You will remember that the heart of the first Dyneema decision was that the Plaintiff was not entitled to any discovery of the Defendants' confidential information without describing the trade secrets which Plaintiff claimed had been misappropriated.

That ruling caused me to wonder how a plaintiff in a technical case of this type who claims misappropriation of its trade secrets can ever know exactly which of it proprietary processes have been stolen without having the defendant reveal its own trade secrets.

Now, the Court has shown some understanding of the box in which DSM Dyneema found itself in pursuing its trade secrets claim.  Judge Bledsoe said:

the Court is persuaded that in these circumstances—where DSM reasonably contends that the finished product at issue is 'the result of a recipe or formula of numerous variables' and is not publicly available for purchase or inspection, (DSM’s Resp. Honeywell’s Mot. Prot. Order, p. 13), and where the Court finds that the nature of Defendants’ alleged misappropriation creates an inherent difficulty for DSM to identify which portions of its trade secrets have been misappropriated prior to the receipt of discovery from Defendants —the Court concludes that DSM has satisfactorily complied with the Court’s [Order in 2014 NCBC 47] and that the Honeywell Defendants should now be required to produce to DSM their relevant and responsive confidential information and trade secrets.

Op. ¶33.  The Court looked to a Georgia federal court decision recognizing the same difficulty a trade secret plaintiff may face in identifying the trade secrets it says were stolen from it.  In that case, DeRubeis v. Witten Techs., Inc., 244 F.R.D. 676 (N.D. Ga. 2007), the Court held:

[T]he trade secret plaintiff, particularly if it is a company that has hundreds of thousands of trade secrets, may have no way of knowing what trade secrets have been misappropriated until it receives discovery on how the defendant is operating.

Id. at 680.

Coming tomorrow: Whether the inevitable disclosure doctrine applies in North Carolina, and the near impossibility of making breach of fiduciary duty claims against employees.



Can You Sue Only One Conspirator After Dismissing Its Co-Conspirators?

Can you sue an alleged conspirator without suing the other parties to the alleged conspiracy?  That was one of the questions addressed by Judge Gale in the decision last week in  Loftin v. QA Investments LLC, 2015 NCBC 41.

Loftin had invested in an alleged tax shelter product which resulted in a $27 million capital loss deduction which was disallowed by the IRS.  He sued the accounting firm and the law firm which had developed the alleged tax shelter, as well as Defendant QA Investments, the investment advisor which had made the investments in the alleged tax shelter on his behalf.

The accounting firm and the law firm were voluntarily dismissed by Loftin from the case in November 2013.

Motion To Dismiss Conspiracy Claims

QA argued that the civil conspiracy claim against it should be dismissed because its alleged co-conspirators -- the accountants and the law firm -- were no longer parties to the case.  Judge Gale found whether a case can proceed against only one alleged conspirator to be an interesting question of law.  He said that he had "struggled to find any case law directly address[ing]" the issue.  He denied the Motion "in absence of clear precedent dictating otherwise."  Op. ¶32.

Motion To Dismiss Fiduciary Duty Claims

QA disputed that it owed any fiduciary duty to Loftin, but the Court found Loftin's allegations of a fiduciary relationship to be "minimally adequate" to survive the Motion to Dismiss.  Op. ¶44.  Judge Gale said that "[m]uch greater specificity would be required by a Rule 56 standard."  Id.

Those "minimally adequate" allegations were that QA had represented that "it would serve as advisor and guardian over his interests with respect to the [alleged tax shelter] transactions, and that QA represented to Loftin that their relationship was a confidential one."  Id.

Motion To Dismiss Unfair And Deceptive Practices Claim

QA prevailed on its Motion to Dismiss the UDPA claim, on the basis that securities transactions are outside the scope of Chapter 75.  That's pretty well accepted law.  See, e.g, Skinner v. E.F. Hutton & Co., 314 N.C. 267, 274-75, 333 S.E.2d 236, 241 (1985).

The Court rejected, however, QA's argument that it was engaged in a learned profession and therefore protected from Chapter 75 liability per the statutory language of G.S. §75-1.1(b).  The statute does not extend to "professional services rendered by a member of a learned profession."

Lawyers are acknowledged to be members of a "learned profession" and therefore not subject to Chapter 75 claims (Sharp v. Gailor, 132 N.C. App. 213, 510 S.E.2d 702 (1999).  Given that most of the readers of this blog are lawyers you may bristle at the thought of having "investment advisors" as members of our exclusive club.

But have no worries.  Judge Gale wasted no ink in rejecting this argument, holding that he had:

found no support for QA's contention that a general 'investment services' role constitutes a 'learned profession' under Chapter 76.  The Court does not believe that it needs to address that argument any further.

Op. ¶64.

That part of the ruling reminds me of Groucho Marx's famous letter resigning from the Friars' Club, when he said "I don't want to belong to any club that would accept me as one of its members."



An Interesting Trade Secrets Case From The Business Court

If you were unsure whether customer information held by your client -- like customer contact information, sales reports, prices and terms books, sales memos, sales training manuals, commission reports, and vendor information -- can be considered a "trade secret", the Business Court's opinion this week in Southern Fastening Systems, Inc. v. Grabber Construction Products, Inc., 2015 NC 40 should resolve your uncertainty.

The Parties And The Claimed Trade Secrets

Defendant Farrell had been a sales representative for the Plaintiff Southern.  He left Southern to work for Defendant Grabber, a competitor in the business of selling construction supplies.

Farrell had not signed a non-competition agreement, but he had signed a Non-Disclosure Agreement during his employment with Southern.  The NDA said that Farrell would "not directly or indirectly disclose or use for any reason whatsoever any Confidential Information obtained by" him due to his employment.  Op. 6.

"Confidential Information" was defined under the NDA to include:

customer lists containing customer names and addresses; customer sales records and reports containing product preferences and usual prices charged; price lists containing product sales prices and their cost; sales invoices, packing lists, routing books, customer files, personnel files, computer records, financial records and marketing plans containing tactics and strategies.

Op. 7.  The NDA contained an acknowledgment that Southern's "Confidential Information constitutes Trade Secrets."  Op. 8.

Southern filed suit against Grabber and Farrell alleging a substantial loss of business after Farrell began working for Grabber.  The Defendants moved to dismiss, asserting that Southern had not adequately identified the alleged trade secrets, that the information in question was "readily available . . . from customers and potential customers," and that Southern had not identified any steps that it took to keep its claimed trade secrets a secret.  Op. 22.

Judge Bledsoe disagreed.  On the point of whether the trade secrets were adequately identified, he cited six court decisions, four from the North Carolina Court of Appeals, recognizing that this type of description of customer information is sufficient to plead a trade secret.  Op. 23.  He also cited and called "persuasive" an unpublished decision from Judge McGuire of the Business Court finding a similar description by the same Plaintiff to be adequate.  (I missed that case -- Southern Fastening Systems, Inc. v. Duo-Fast Carolina, Inc. (February 9, 2015) -- and I really try hard not to miss much of interest in the Business Court.  Sorry about that.)

The Court rejected the other defenses given the Plaintiff's allegations in its Complaint that its trade secrets involved "non-public information" that it did not disseminate to its employees unless they first executed an NDA.

The Validity Of The NDA

This decision represents the first time I can remember seeing a Defendant argue that the validity of an NDA should be determined based upon the standard applied to a covenant not to compete.  The Defendant argued that the practical effect of the NDA was to keep Farrell from working for the Plaintiff's competitor so it therefore needed to be supported by consideration and be reasonable as to time and to territory.

Judge Bledsoe ruled that the NDA only restricted Farrell from disclosing Southern's Confidential Information and required him to return that information upon the termination of his employment.  He said that the NDA "permits Farrell to work for any person or entity provided he does not disclose [the Plaintiff's] Confidential Information."  Op. 33.  The NDA was therefore not a restrictive covenant subject to the requirements of G.S. §75-4.

Even after deciding that this NDA did not need to be evaluated under covenant not to compete principles,  the Court went on to consider the issues of consideration and time and territory.

On the point of consideration the Court did not need to resolve the question whether continued employment by Farrell was sufficient consideration for the NDA since Farrell had been provided with Confidential Information in exchange for signing the NDA.

The question whether the lack of limitation as to time and territory rendered the NDA invalid had already been resolved by the NC Court of Appeals in Chemimetals Processing v. McEneny, 124 N.C. App. 194, 476 S.E.2d 374 (1996).  There, the COA held that such an agreement can be valid "even when the agreement is unlimited as to time and area upon a showing that it protects a legitimate business interest" of the employer.  Id. at 197, 476 S.E.2d at 377.  Judge Bledsoe ruled that protecting customer relationships and goodwill was a legitimate business interest of the Plaintiff.

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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.


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.

NC Business Court On A Barely Ever Referenced Rule Of Civil Procedure And A Host Of Employment-Related Claims

There are undoubtedly many of the Rules of Civil Procedure that you remember by number.  Certainly Rules 12, 56, and 65.  But Rule 10(b)?  What does that even say?

If you are reaching for your Rulebook, put it away.  Rule 10 is titled "Form of Pleadings."  Section (b) of that Rule says:

Paragraphs; separate statement. - All averments of claim or defense shall be made in numbered paragraphs, the contents of each of which be limited as far as practicable to a statement of a single set of circumstances; and a paragraph may be referred to by number in all succeeding pleadings. Each claim founded upon a separate transaction or occurrence and each defense other than denials shall be stated in a separate count or defense whenever a separation facilitates the clear presentation of the matters set forth.

I translate that as number the paragraphs of your pleadings, and keep them short.  Rule 10 dovetails with Rule 8, which requires a "short and plain" statement of claims with averments that are "simple, concise, and direct."

But the counterclaim that was the subject of the Business Court's ruling in Kingsdown, Inc. v. Hinshaw, 2015 NCBC 28 was anything but compliant with the Rules of Civil Procedure.  Numbered paragraphs 2 and 3 were interrupted by several pages of single dspaced, rambling prose, which alluded to everything between Ray being asked by her employer during her employment to pick up lunches for salesmen, and not being allowed, after her termination, to transfer her old company phone number to her new cellphone or to have access to family photos on her company computer.

So, what is a lawyer to do when faced with responding to such lengthy assertions?  Move to dismiss, of course.  Kingsdown, doing exactly that, argued that Ray's counterclaim was in violation of both Rules 8 and 10.

Judge Bledsoe stated that the usual Rule 8 challenge to a pleading was "based on the lack of specific detail in the complaint, not because the complaint is too detailed and voluminous."  Op. Par. 20.  He found no North Carolina decisions dismissing a complaint for it being overly "detailed," but cited several federal court decisions taking that action. Op ¶20 & n.6.

Even so, the Court denied the Motion to Dismiss on Rule 8 grounds, saying that the allegations of the counterclaims were not "so voluminous or incomprehensible to prevent Kingsdown from discerning the nature and basis" for the counterclaims "or otherwise formulating an answer to the Counterclaims."  Op. ¶20.

Although Ray's counterclaims survived a Rule 8 dismissal, they were dismissed without prejudice because of the violation of Rule 10.  Judge Bledsoe "admonish[ed] Ms. Ray to follow the requirement under Rule 8 to advance 'simple, concise, and direct' allegations in the preparation and filing of her amended Counterclaims."  Op. ¶21.

Despite the dismissal being without prejudice, Judge Bledsoe threw cold water on a number of Ray's counterclaims and dismissed them with prejudice.  Most of those counterclaims stemmed from the termination of her employment with Kingsdown.

Wrongful discharge: Wrongful discharge claims need to be pled with specificity.  Op. ¶25  Ray's "scattershot allegations" (Op. ¶26) fell short of what was necessary for the Court to determine whether Kingsdown had taken any improper action which was the "but for" cause of her termination.  Op. ¶26.  That claim was dismissed without prejudice.

Blacklisting:  To make out a claim under the blacklisting statute (G.S. §14-355) a party must plead "(1) that she attempted to obtain employment with another entity; (2) that [her former employer] took affirmative steps by 'words or writing of any kind' to prevent her from obtaining employment with that entity; and (3) that whatever statements or writing that were made to the entity were false." Op. ¶30.  The Court dismissed this counterclaim with prejudice because Ray had failed to plead any of the essential elements of her claim.

Intentional Infliction of Emotional Distress: Judge Bledsoe observed that:

our appellate courts have consistently held that 'the mere firing of an employee can never be "extreme and outrageous’ conduct sufficient to state a claim for intentional infliction of emotional distress."

Op. ¶34 (quoting Sims-Campbell v. Welch, 2015 N.C. App. LEXIS 166, *11–12 (N.C. Ct. App. Mar. 3, 2015)).

This claim was also dismissed with prejudice because Ray's allegations (that she was slighted or ignored by Kingsdown’s management from time to time, and her frustration and irritation with having to suffer various personal inconveniences resulting from the performance of her job) did not rise to the level of mistreatment that could give rise to a claim for intentional infliction of emotional distress.

Constructive Fraud/Fiduciary Duty: Ray's claim for constructive fraud depended on Kingsdown owing her a fiduciary duty, because the existence of a fiduciary relationship is an element of a constructive fraud claim.  Ray's counsel argued that since Ray was an officer of Kingsdown, and thus owed the corporation a fiduciary duty, that the corporation therefore owed her a reciprocal fiduciary duty.  Judge Bledsoe rejected this argument in a footnote, stating that this was "simply not the law."  Op. ¶42 & n.9.

Unfair and Deceptive Practices: The Chapter 75 claim was dismissed with prejudice as it rested on facts which arose out of Ray's employment and therefore involved "internal business disputes rather than interactions with businesses or consumers."  Op. ¶45.  It was therefore not "in or affecting commerce" which is the type of conduct targeted by G.S. §75-1.1(a).

If you are wondering if there could be any claims left in this hodge podge of counterclaims, the answer is unfortunately yes.  But you are probably as tired of reading about this Opinion as I am writing about it.  A part of a defamation counterclaim was dismissed without prejudice but a part of it with prejudice.  A negligence counterclaim was dismissed with prejudice.  A civil conspiracy counterclaim was dismissed with prejudice.

There Is A Difference Between "Inducing" Something and "Causing" Something

If you asked me to list my favorite torts, tortious interference with prospective economic advantage would be near the bottom of the list.

But that tort was front and center in Judge McGuire's Opinion in KRG New Hill Place, LLC v. Springs Investors, LLC, 2015 NCBC, 2015 NCBC 19, which addressed the proof required for an essential element of the tort.

To prove tortious interference with prospective economic advantage, "a plaintiff must show that the defendant, without justification, induced  a third party to refrain from entering into a contract with the plaintiff, which would have been made absent the defendant's interference."  Op. ¶4.

The Defendant Springs Investors -- which was asserting a tortious interference counterclaim -- said that the Plaintiff KRG's breach of an agreement to develop a 123 parcel of real estate caused a third party (Kaplan) to back out of a Joint Venture to develop a residential apartment complex on adjoining property owned by Springs.

Defendant said that the Plaintiff's breach had met the requirement that its actions induced Kaplan's decision to refrain from entering into the Joint Venture, because the breach had caused Kaplan's decision to decide to refuse to go ahead with the Joint Venture.

That was insufficient to make out a claim for the prospective interference tort, said Judge McGuire.  He relied on a Court of Appeals decision affirming a Business Court ruling.  In that case, the COA held, in interpreting the word "induce" in a contract, that:

The relevant definition of 'induce' is (1) 'to move by persuasion or influence[;]'
(2) “to call forth or bring about by influence or stimulation[;]' and (3) “to cause the formation of[.]' Similarly, Black’s Law Dictionary defines inducement as '[t]he act or process of enticing or persuading another person to take a certain course of action.'  We note that all of the above-cited definitions of . . . 'induce' are similar in that they involve active persuasion, request, or petition.

Op. ¶26 (quoting Inland Am. Winston Hotels, Inc. v. Crockett, 212 N.C. App. 349, 354, 712 S.E.2d 366, 369 (2011) (citing Merriam-Webster’s Collegiate Dictionary 637 (11th ed. 2005) and Black’s Law Dictionary 845 (8th ed. 2009)).

So, "inducing" something has to mean more than just causing something.  As Judge McGuire put it:

To equate 'induced' with 'caused' would mean that any type of conduct by a party that caused a third party to refrain from entering into a contract with a claimant would be grounds for asserting the claim. This would have broad implications for contractual relations in this State as it would make every contracting party potentially liable for the types of damages available for intentional torts, including compensatory and punitive damages, whenever the failure to fulfill a contract for any reason caused the other party to the contract to lose a prospective business opportunity.

 Op. ¶28.

Judge McGuire granted Plaintiff's Motion to Dismiss the tortious interference counterclaim because the Defendant had not made any allegations of purposeful conduct by the Plaintiff directed towards Kaplan.

Stop Asking The Business Court To Overrule An Order Of Another Business Court Judge

I don't know why lawyers keep trying to get Business Court Judges to overrule decisions by one of their predecessors.  It is just not going to happen, as illustrated (yet again) by Judge Bledsoe's decision in County of Catawba v. Frye Regional Medical Center, Inc., 2015 NCBC 17.

Judge Murphy, in October 2014, had granted summary judgment in favor of the Defendant on  Plaintiff's claims of fraud and unfair and deceptive practices.  Plaintiff, disagreeing with the ruling, first filed a Motion for Reconsideration (which it withdrew), and followed it with a "Motion for Revision."  It filed both motions after Judge Murphy's retirement.

Judge Bledsoe observed that both motions "seek the same relief -- reversal of Judge Murphy's [summary judgment order" ].  Op. ¶8.

If you read this blog, you know that the Business Court has already rejected the argument that Judge Murphy's retirement, and the resulting change in the Business Court Judge handling the case, is not a "substantial change in circumstances" giving the new Judge the authority to modify, overrule, or change Judge Murphy's Order.

But the Plaintiff in the Catawba County case made a new argument as to why Judge Bledsoe had the authority to overrule Judge Murphy.  It relied on Rule 63 of the North Carolina Rules of Civil Procedure, entitled "disability of a Judge," which says that:

If by reason of death, sickness or other disability, resignation, retirement, expiration of term, removal from office, or other reason, a judge before whom an action has been tried or a hearing has been held is unable to perform the duties to be performed by the court under these rules after a verdict is returned or a trial or hearing is otherwise concluded, then those duties, including entry of judgment, may be performed:

(1) In actions in the superior court by the judge senior in point of continuous service on the superior court regularly holding the courts of the district.


Judge Bledsoe disagreed that Rule 63 granted him the authority to overrule Judge Murphy, stating:

Plaintiff essentially contends that [Rule 63] treats Judge Murphy’s retirement at the expiration of his term of office as an invitation to this Court to decide Defendants’ SJ Motion anew. The Court disagrees. Not only would such a reading ignore the North Carolina rule that one Superior Court judge generally cannot overrule another, but read in context, the Court concludes that Rule 63 is intended for situations where, for example, a Superior Court judge leaves the bench prior to entering a written order on a matter that has been heard, or before a matter is remanded from the appellate courts with instructions for further action. The Court does not read Rule 63 to address the situation here, where Judge Murphy received the parties’ briefs, held a hearing, issued a written order ruling on the parties’ arguments and dismissing claims, and then left the bench.

Op. ¶16.

Those of you who are civil procedure aficionados are no doubt thinking about NCRCP 54(b), which says that in the absence of a final judgment, "any order . . . is subject to revision at any time before the entry of judgment adjudicating all the claims and rights and liabilities of all the parties."

Judge Bledsoe recognized that his Opinion means that a party loses its "right to seek revision of a summary judgment ruling by the trial court under Rule 54(b) when the issuing Superior Court Judge retires or otherwise leaves the bench prior to the entry of a final judgment."  Op. ¶16.

Judge Bledsoe also observed that allowing him to overrule Judge Murphy's decision would invite a "potential sea of motions. . . from disappointed litigants seeking to overturn decisions issued in the last weeks of [a] departing judge's service on the bench."  Op. ¶17 & n.2.

So what's the remedy for the unhappy Plaintiff in this case?  As Judge Bledsoe put it, "the party's redress is with the North Carolina appellate courts and not with another Superior Court judge."  Op. ¶17.


A Valuable Point From The NC Business Court On Subpoenas Without Depositions

Can you send a subpoena duces tecum -- which translated from Latin is "a writ commanding a person to produce in court certain designated documents or evidence " --  without coupling it with a deposition?

Maybe that question has never puzzled you, but in an Order of the Business Court on February 12, 2015 in Harriott v. Central Carolina Surgical Eye Associates, P.A. Judge Bledsoe answered whether a subpoena duces tecum can be served without noticing a deposition in conjunction with the subpoena.

Plaintiff had served a subpoena duces tecum on several entities which were not party to the case. Those entities objected contending that a "subpoena duces tecum must be issued in conjunction with a proceeding in which testimony is to be received."

Judge Bledsoe disagreed, ruling "a subpoena duces tecum . . . can . . . be used to compel a non-party to produce documents without a concurrent request to testify."  Order at 1-2.

The governing Rule of Civil Procedure (NCRCP 45) is less than clear on this point. It says that a "command to produce records, books, papers, electronically stored information, or tangible things may be joined with a command to appear at trial or hearing or at a deposition, or any subpoena may be issued separately." NCRCP 45(a)(2).

The federal rule, by contrast,  is explicit on being able to serve a subpoena for documents without a contemporaneous deposition.  It says that:

Combining or Separating a Command to Produce or to Permit Inspection . . . . A command to produce documents, electronically stored information, or tangible things or to permit the inspection of premises may be included in a subpoena commanding attendance at a deposition, hearing, or trial, or may be set out in a separate subpoena.


So, if there was any doubt about this practical nuts and bolts issue, state law practice is now consistent with the federal rule.  Subpoena away.  At least in the Business Court.

The Business Court Rules Again On Claims Under The North Carolina Securities Act

Last week's decision in Atkinson v. Lackey, 2015 NCBC 13 doesn't tell you everything you wanted to know about the North Carolina Securities Act (the "NCSA"), but it comes pretty close.

The lawsuit was brought by three individuals who had made investments in the Pacific Fund, a defendant LLC.  The individual Defendants -- Lackey, Saldarini, and Mehler -- were the members of Pacific Capital, which was in turn the sole manager of the Pacific Fund.

The Plaintiffs alleged that their investments in the Pacific Fund had been fraudulently induced by Lackey, Saldarini, and Mehler.  The alleged misrepresentations were that the Pacific Fund owned various properties in high-end residential communities on the South Carolina coast.

The Atkinson case is the latest in a small handful of cases brought under the NCSA that have resulted in rulings from the Business Court.  The others are: NNN Durham Office Portfolio 1, LLC v. Highwoods Realty Limited Partnership, 2013 NCBC 12, Associated Packaging, Inc. v. Jackson Paper Manufacturing Co., 2012 NCBC 13, and Skoog v. Harbert Private Equity Fund, II, LLC, 2013 NCBC 17.  I wrote about NNN Durham and Associated Packaging on this blog, but missed Skoog.

Standing: Were The Fiduciary Duty Claims Direct Or Derivative?

The first issue up for consideration by Judge Bledsoe in Atkinson was whether the Plaintiffs had standing to bring their claims for a breach of fiduciary duty. That issue turned on whether the claims were direct or derivative.  An LLC member or corporate shareholder generally cannot pursue a direct cause of action against a third party for the loss of the value of his investment.  Barger v. McCoy Hilliard & Parks, 346 N.C. 650, 660, 488 S.E.2d 215, 220-21 (1997).

The exceptions to the "Barger Rule" -- rarely met -- are that direct claims may be brought by an LLC member or shareholder when "the wrongdoer owed him a special duty, or (2) that the injury suffered by the guarantor is personal to him and distinct from the injury sustained by the corporation itself."  Id. at 659, 488 S.E.2d at 221.

Judge Bledsoe did not have to plow any new ground to find that the Plaintiffs before him were owed a "special duty."  The NC Court of Appeals held more than thirty years ago that a special duty exists "when the wrongful actions of a party induced an individual to become a shareholder."  Howell v. Fisher, 49 N.C. App. 488, 498, 272 S.E.2d 19, 26 (1980).  Since the Plaintiffs alleged that the Defendants had made misrepresentations in order to obtain their investment, the Plaintiffs had standing to pursue their claims.

Securities Fraud Claims: Primary and Secondary Liability

Standing was not an issue for the state securities fraud claims.  G.S. §78A-56(a)(2) provides an individual cause of action for "any person purchasing a security."

There are "two different pathways" to liability under the NCSA.  The first "pathway" is for "primary liability" under G.S. § 78A-56(a)(2):

which imposes primary civil liability upon “an offeror or seller of a security who (1) makes any untrue statement of a material fact, or (2) fails to state a material fact necessary for a statement which was made to not be misleading.” NNN Durham Office Portfolio 1, LLC, 2013 NCBC 12 at ¶64. To avoid primary liability, an offeror or seller must prove “he did not know, and in the exercise of reasonable care could not have known[] of the truth or omission.” Id.; Latta v. Rainey, 202 N.C. App. 587, 598, 689 S.E.2d 898, 908 (2010). Section 78A-56(a)(2). 

Op. ¶34.

The second "pathway" lies in "secondary liability":

If Plaintiffs can prove that an offeror or seller has primary liability under N.C.G.S. § 78A-56(a)(2), secondary liability will lie for “[e]very person who directly or indirectly controls [that person], every partner, officer, or director of the person, every person occupying a similar status or performing similar functions, and every dealer or salesman who materially aids in the sale,” unless that person proves that he “did not know, and in the exercise of reasonable care could not have known, of the existence of the facts by reason of which the liability is alleged to exist.” N.C.G.S. § 78A-56(c)(1) (2014).

Op. ¶35.



Continue Reading...

An Answer To A Million Dollar Question About Designating Cases To The NC Business Court

This past Friday, I went to a seminar put on by the Antitrust and Complex Business Disputes Law Section of the North Carolina Bar Association in an almost successful effort to finish getting my required CLE hours for 2014.  This seminar included presentations from Business Court Chief Judge Gale as well as Business Court Judges Bledsoe, McGuire, and Jolly (Judge Jolly was presented with the Section's Distinguished Service Award). 

Sometimes there is real value in a seminar.  One tip from Chief Judge Gale was worth the price of admission to this alone.  The tip concerned an open question under the Business Court Modernization Act, which became effective on October 1, 2014.

The Modernization Act created a new class of cases which can be designated to the Business Court: Contract disputes where a corporation, partnership, or LLC is a party and where the amount in controversy is more than $1 million.  It is the only type of case which requires the consent of all parties before it can be properly designated to the Business Court.  G.S. §7A-45.4(a)(9)(d).

That consent requirement is hard to reconcile with the requirement that a Notice of Designation must be filed "contemporaneously with the filing of the complaint." G.S. §7A-45.4(d)(1).

How can you get the consent of the opposing party before the complaint is filed?  What if you have no idea what lawyer is going to represent the defendant?  And even after the filing, it may take weeks before counsel appears for the opposing party.  If you wait for counsel to appear and consider your request that the case be designated, you may run afoul of the "contemporaneous" requirement.

So what's the best course of action?  Here's where the tip from Judge Gale came in handy.  He said that it is best not to wait, but to file the Notice of Designation immediately and request that it be held in abeyance pending a response from all other parties whether they will consent.

You would think that having all the Judges in one place last Friday would mean that no opinions would be issued by the Court that day, giving me a day off.  But that was not the case.  Judge Bledsoe delivered an opinion late Friday evening in Atkinson v. Lackey, 2015 NCBC 13, an interesting case involving the North Carolina Securities Act.  Considering that the Judge probably didn't get back to Charlotte from Cary until 6:30 p.m. at the earliest, it makes me wonder how late his clerks work.  But I will write about that case tomorrow.

Supreme Court Justices Box The Fourth Circuit's Ears

Two Justices of the U.S. Supreme Court took the Fourth Circuit to task for not publishing a significant opinion.  The ear-boxing came last month in the form of a denial of a Petition for Certiorari from which Justice Thomas and Justice Scalia dissented, taking the position that the Supreme Court should accept the case for review.

Let's set the stage: The Fourth Circuit's unpublished opinion, forty pages long, came in the case of Austin v. Plumley.  The case is as far as can be from the usual business law case that I usually write about on this blog.  It concerns the sentencing of criminal defendants.  The Fourth Circuit opinion construes a presumption that the Supreme Court set down nearly fifty years ago in North Carolina v. Pearce, 395 U.S. 711, 725-26 (1969): that when a trial judge imposes a harsher sentence on a defendant who was previously sentenced by that judge for the same crime, "judicial vindictiveness" should be presumed..

There is a split among the Circuit courts about under what circumstances judicial vindictiveness should be presumed.  The Fifth and Ninth Circuits construe the presumption narrowly, holding that it applies only when there is a "triggering event" like a reversal by a higher court that "prods the sentencing court into a posture of self-vindication."  Kindred v. Spears, 894 F.2d 1477, 1480 (5th Cir. 1990); accord Fenner v. United States Parole Comm'n, 251 F.3d 782, 788 (9th Cir. 2001).

The Fourth Circuit, in its unpublished opinion, lined up with the Seventh Circuit (United States v. Paul, 783 F.2d 84, 88 (7th Cir. 1986) and took a more expansive view, ruling that the presumption applies when the trial court applies a more severe sentence after it grants a motion for a corrected sentence.

So, should the Fourth Circuit have published this opinion?  The Court's own Local Rules seem to call for that.  Local Rule 36(a) says that the Court's opinions will be published if they meet "one or more" of five criteria.  Justice Thomas felt that at least three were met because the opinion:

'establishe[d] . . . a rule of law within th[at] Circuit,' 'involve[d] a legal issue of continuing public interest,' and 'create[d] a conflict with a decision in another circuit.'

Denial at 7.

Does it make any difference that the opinion is unpublished?  The Fourth Circuit formerly "disfavored" the citation of its unpublished decisions, in the previous version of its Local Rule 36(c).  Now, there is a line of cleavage in the Fourth Circuit Rules -- citing unpublished decisions from before January 1, 2007 is still "disfavored," but unpublished decisions after that date are fair game for citation.  That is due to a change of that date in the Federal Rules of Civil Procedure, which states that:

[a] court may not prohibit or restrict the citation of federal judicial opinions, orders, judgments or other written dispositions that have been:

(i) designated as 'unpublished,' 'not for publication,' 'non-precedential,' 'not precedent,' or the like; and

(ii) issued on or after January 1, 2007.

FRAP 32.1.t

So, lawyers can cite all they want to the Austin v. Plumley decision. The real concern about the Fourth Circuit's unpublished ruling is that is not binding on the Court, as Justice Thomas pointed out, relying on Minor v. Bostwick Labs, Inc., 669 F.3d 428, 433 n.6 (4th Cir. 2012).  He said:

It is hard to imagine a reason that the Court of Appeals would not have published this opinion except to avoid creating binding law for the Circuit.

Denial at 7.

It will be interesting to see if Justice Thomas' and Scalia's beef with the Fourth Circuit results in any visible reaction from the lower appellate court.  It would probably be more likely if Chief Justice John Roberts had joined his two colleagues in the dissent to the denial of the Petition for Certiorari, as the Chief Justice is the Justice on the Supreme Court assigned to the Fourth Circuit.  Justice Scalia has the Fifth Circuit, and Justice Thomas the Eleventh.

Don't think that I scour the Supreme Court's denial of cert. petitions looking for something to write about.  I would not have known about this ruling but for my son, Dash Sperling, a freshman at UNC, reading about it in the New York Times and bringing it to my attention.  Oh, and the North Carolina Appellate Blog also wrote about Justice Thomas' complaining about the Fourth Circuit yesterday.

A Couple Of Things To Know Before Bringing A Piercing The Corporate Veil Claim

You might remember the case of  Cold Springs Ventures, LLC v. Gilead Sciences, Inc..  Last year, Judge Jolly stayed an arbitration proceeding pending a ruling on a piercing the corporate veil claim.  If you are a reader of this blog, you will remember that I wrote about that decision last April.  Now, assuming that you've gone and reread that post, you are up to speed on the issue.

Judge McGuire, taking over the case and stepping into Judge Jolly's shoes, undertook the summary proceeding mandated by G.S. § 1-569.7(b), which says that "[o]n motion of a person alleging that an arbitration proceeding has been initiated or threatened but that there is no agreement to arbitrate, the court shall proceed summarily to decide the issue."

This month's ruling is in 2015 NCBC 1

The issue for the Court was whether the individual Plaintiffs, directors of NC Kyro, could be obligated to arbitrate based on a contract that their corporation had signed with Gilead.  The individuals had not signed the contract, but Gilead argued that it was entitled to pierce the corporate veil and thus make the individuals subject to arbitration.  Gilead is contending in the arbitration it commenced that the individuals are personally liable to it on that contract, again on a piercing the corporate veil theory.

Given that deciding the question of arbitrability involved the consideration of issues basic to Defendant's claim on the merits, Judge McGuire was exceedingly careful to abide by the U.S. Supreme Court's admonition that "in deciding whether the parties have agreed to submit a particular grievance to arbitration, a court is not to rule on the potential merits of the underlying claims."  AT&T Technologies, Inc. v. Communications Workers of America, 475 U.S. 643, 649 (1986).  He said that his "decision will not have collateral estoppel or res judicata consequences." Order ¶10.

But, even with that caution, Judge McGuire's Order should send a pretty clear signal to the Defendant's counsel that its piercing the veil claims aren't likely to succeed.  And for lawyers contemplating bringing such claims in the Business Court, it clarifies some of the standard "magic words" enunciated by courts when considering motions to pierce the corporate veil.

"Control and Domination"

A party seeking to pierce the corporate veil must show "control, not mere majority or complete stock control, but complete domination, not only of finances, but of policy and business practice . . . so that the corporate entity . . . had at the time no separate mind, will or existence of its own."  Green v. Freeman, 367 N.C. 136, 145, 749 S.E.2d 262, 270 (2013).

This element "is a critical, if not the most critical, element in a court's piercing analysis."  Order ¶28.

Gilead came up short on this critical element despite its showing of the individual Plaintiffs' direct involvement in key actions taken by NC Kyro, including its winding down and its dissolution.

Those actions were taken in their capacities as directors of NC Kyro, and Judge McGuire observed that:

directors of North Carolina business corporations are charged with exercising, or directing the exercise of, all corporate powers.  Gilead's argument regarding the control exercised by [the individuals] is based almost entirely on actions taken by those individuals pursuant to their statutory authority as directors.

Order ¶31.

"Inadequate Capitalization"

Another factor considered by the Courts in determining whether to pierce the corporate veil is "inadequate capitalization."  Green, supra, 367 N.C. at 1455, 749 S.E.2d at 270.  But there is a difference between "inadequate capitalization borne [sic] out of deception or fraud, and inadequate capitalization 'arising simply out of a lack of funds available for contribution to the enterprise.'"  Order Par. 39 (quoting R. Robinson, Robinson on North Carolina Corporation Law § 2.10[2].

Although NC Kyro did suffer from inadequate capitalization (one of the Plaintiffs had testified that it "was always insolvent" and "never a going concern"), it was a startup struggling to raise capital.

Judge McGuire held that "the mere fact that NC Kyro's capitalization efforts did not ultimately yield enough capital for the company to survive should not, without more, support the drastic remedy of disregarding the corporate form.  Order ¶40.

So, if you are making a piercing the corporate veil claim, be careful to distinguish actions taken pursuant to corporate authority from "domination and control," and watch out before you take a lack of funds to be the necessary "inadequate capitalization."

Before getting to the published Order, the Judge had to step through ruling on a Motion to Disqualify Gilead's counsel because it had previously represented the Plaintiffs.  He denied that Motion in an unpublished Order.  If you are interested in reading that Order, it is here.


Reading Before Signing Is Advisable

It's pretty basic that your clients should read the agreements that they sign before they sign them.  Or you should at least explain to your client the key provisions in what they are going to sign, if they are not going to read it.

In McMillan v. Unique  Places, LLC, 2015 NCBC 4, decided this week by the NC Business Court, the fact that the Plaintiff had not read the agreement requiring him to arbitrate his claims provided no defense against him being compelled to arbitrate.

McMillan, one of the Plaintiffs, had entered into a business arrangement with the Defendants based upon a three page "Memorandum of Understanding."  The MOU contemplated the subsequent formation of an LLC called Enigma.  A few weeks later one of the Defendants presented McMillan with an Operating Agreement for the LLC.

The thirty plus-page Operating Agreement contained a provision obligating the LLC members to arbitrate any disputes arising out of the agreement.

When disagreements arose among the members of Enigma about the control of the LLC, McMillan ignored the arbitration provision and filed suit in Catawba County.  He then designated the case to the Business Court.

The Defendants made a Motion to compel arbitration.  McMillan, seeking to escape the arbitration obligation, said that he had not read the Agreement.  He said that he was fraudulently induced to sign the Agtreement and that he was unaware of the arbitration provision at the time that he signed it.

Those of you who went to law school know that this type of argument is not going to fare well.  Judge Bledsoe found these contentions unpersuasive, holding:

under well-established North Carolina law, a signatory to 'a written instrument is under a duty to read it for his own protection[; ] . . . [is] ordinarily . . . charged with knowledge of its contents[;] . . . [and] may [not] predicate an action for fraud on his ignorance of the legal effect of its terms.'

Opinion ¶15 (quoting Raper v. Oliver House, LLC, 180 N.C. App. 414, 420, 637 S.E.2d 551, 555 (2006) (quoting Biesecker v.Biesecker, 62 N.C. App. 282, 285, 302 S.E.2d 826, 828-29 (1983)).

But McMillan's wife, another Plaintiff, was also trying to get out from under the unwanted burden of having to arbitrate her claims.  She had not signed the Operating Agreement, but her arguments met with about the same success as those of her non-reading husband.

Judge Bledsoe found her to be bound by the arbitration provision, even though she hadn't signed the Agreement containing it, because she was an intended third party beneficiary of the Operating Agreement, and some of the claims made by her in the Complaint before the Business Court were based on the Agreement.

These Plaintiffs, apparently appalled by the prospect of arbitration, have already filed a Notice of Appeal of Judge Bledsoe's decision.

My partner Clint Morse represents one of the Defendants (Josh Hawn) in this case.


Do You Have To Be The Owner Of A Trade Secret To Sue For Misappropriation?

Can an exclusive licensee of a trade secret sue for its misappropriation?  Maybe, even though North Carolina's version of the Uniform Trade Secrets Protection Act reserves the right to sue to an "owner."  N.C. Gen. Stat. §66-153.

The Uniform Act, by contrast, allows a "complainant" to bring an action for misappropriation.  The Fourth Circuit, applying Maryland's version of the Uniform Act, has held that it is not necessary to be an "owner" to sue under that state's law.  DTM Research, LLC v. AT&T Corp., 245 F.3d 327, 332 (4th Cir. 2001).

Judge Gale addressed the question whether a licensee has standing to sue for misappropriation of its trade secret under the North Carolina Trade Secrets Protection Act just before the new year began, in SCR-Tech LLC v. Evonik Energy Services LLC, 2014 NCBC 71.  Well, he kinda sorta addressed the question, because he refused to reconsider an earlier ruling in the case and never really delved into the issue.

Judge Tennille had been presented with the exact same issue in the SCR-Tech case back in 2010.  (This case has the dubious distinction of being one of the longest running cases in the Business Court, having been filed in 2008).  He denied a motion for summary judgment in which the Defendants argued that Plaintiff lacked standing to pursue its trade secrets claim because it was not the owner of the trade secrets at issue.  That Motion was summarily denied without any discussion.

So, did  that 2010 ruling settle the issue of whether non-owners of trade secrets can sue for misappropriation?  In other words, was Judge Gale entitled to reconsider the issue?

Judge Gale refused to reconsider the issue, stating that he did not see any new argument that had not been raised before Judge Tennille, and that he was "mindful of the import of allowing or requiring one Business Court Judge to revisit the earlier order of another Business Court Judge without any material change in record, policy, or authorities."  Order ¶15.

I would not read this Order as opening the door to trade secrets lawsuits by licensees, given the lack of discussion of the issue by Judge Tennille, and Judge Gale's reluctance to tread on the prior ruling.

Can the Defendants appeal to the NC Supreme Court based upon the recent changes to the cases that may be appealed from the Business Court?  Perhaps.

Let me observe that there were a lot of Business Court decisions in the final month of 2014 which I did not write about.  I've been kind of distracted and will get back on top of things early this new year.

Is Your Client's Customer Information A Trade Secret? Maybe, If You Plead It Specifically Enough.

I have remarked before how hard the Business Court has been on Plaintiffs making trade secrets claims.   You can look here and here for example of these prior posts.  The Court has often dismissed trade secrets claims on a 12(b)(6) Motion because the trade secrets were not described with sufficient particularity.

This week, in Le Bleu Corp. v. B. Kelley Enterprises, Inc., 2014 NCBC 65, Judge Gale stopped short of granting a Motion to Dismiss a trade secrets claim, but nevertheless ordered the Plaintiffs to provide a more definite statement describing their alleged trade secrets in their customer information.

The parties in the case are engaged in the manufacture, sale, and distribution of bottled water in the Southeastern United States.  The trade secrets claimed were Plaintiffs' "customer lists, pricing information, transaction histories, key contacts, and customer leads."  First Amended Complaint ¶30. 

That would seem to be enough of a description of customer information to make out a trade secrets claim.  The NC Court of Appeals had held, just last year, that allegations of misappropriation of "pricing information, customer proposals, historical costs, and sales data" is a sufficient identification of alleged trade secrets. GE Betz, Inc. v. Conrad, __ N.C. App. __, 752 S.E.2d 634, 648-49 (2013). Also, the Business Court had held, in one of its early opinions, that customer information "including the identity, contacts and requirements" of customers can constitute a trade secret.  Sunbelt Rentals, Inc. v. Head & Engquist Equip., LLC, 2002 NCBC 2 at *38, 41-42.

But notwithstanding that authority, Judge Gale was not satisfied that the Plaintiffs' description of their claimed trade secrets was sufficient to support their claim.  He ruled that:

whether 'pricing information, transaction histories, key contacts, and customer leads,' actually constitute trade secrets depends upon the contents of the materials at issue. A price list may constitute a trade secret where it contains pricing information, market forecasts, and feasibility studies, but may not if it consists of raw information without any methodology.

Op. ¶26.

He directed, with regard to the two lists which the Plaintiffs claimed were the trade secrets that had been misappropriated, that they  provide, within twenty days, a more definite statement "that specifically describes the contents of both lists and why the information is entitled to trade secret protection."  Order ¶33.


A "Proper" Party Isn't Necessarily A "Necessary" Party

What is the difference between a "proper" party and a "necessary" party"?  Judge McGuire spelled out the difference early this week in Cape Hatteras Electric Membership Corp. v. Stevenson, 2014 NCBC 62.

Why should you care about the distinction?  Because Rule 19 of the North Carolina Rules of Civil Procedure says that all "who are united in interest must be joined as plaintiffs or defendants."  In the absence of the joinder of a "necessary" party a valid judgment cannot be rendered.

But, as Judge McGuire held:

[a] party is not a necessary party simply because a pending action might have some impact on the party's rights, or otherwise affect the party.

Op. ¶10.

Instead, a person whose interests "may be affected by a decree, but whose presence is not essential in order for the court to adjudicate the rights of others is a 'proper' party, but not a necessary party."  Op. ¶10.

By now you are looking for some context.  The Defendants in the case before Judge McGuire were members of the Plaintiff corporation, an electric membership corporation per G.S. Chapter 117.  The corporation's Bylaws required its members to consent to the relocation of electrical transmission lines running over their property.  The Defendants had agreed, as a condition of their membership, to be bound by the Bylaws of the corporation.  So had all of the other hundreds of members of the corporation.

When the Defendants refused to allow the relocation of a transmission line running over their property, they were sued by the corporation.  The Defendants, in their Motion for dismissal per NC Rule of Civil Procedure 12(b)(7) (for failure to join a "necessary party"), argued that all of the corporation's hundreds of members were necessary parties to the action, because the Court's ruling interpreting the Bylaws would affect all of the members.

Judge McGuire didn't buy that argument.  Although he said that a judgment in the case before him could "in some sense" affect the rights of the members who hadn't been joined, it would "not deprive them of any rights."  Op. ¶14.  Moreover, he observed that there was no existing controversy with the other members, and that joining them as parties might put the Court in the impermissible position of issuing an advisory opinion.  Op. ¶14 & n.7.

Judge McGuire, after denying the Motion to Dismiss, said that the other members of the corporation could intervene in the case, subject to his discretion.  Op. Par. 14.




Don't Try To Get A Retired Business Court Judge's Orders Changed Or Overruled By A Successor Business Court Judge

When there is a change in the Business Court Judge handling your case, there is probably a natural reaction to try to get the new Judge to revisit rulings by the previous Judge which were unfavorable to your client.  That effort is most likely to come to naught, as illustrated by Judge Bledsoe's decision last week in DeGorter v. Capitol Bancorp Ltd., 2014 NCBC 62.

DeGorter had been on the losing end of a summary judgment ruling by Judge Murphy, in June 2014, before Judge Murphy's retirement.  After Judge Bledsoe succeeded to what was remaining of the case, DeGorter moved for reconsideration of the summary judgment ruling.

Of course, DeGorter immediately ran into the buzz saw of the principle that:

‘[o]ne superior court judge may only modify, overrule, or change the order of another superior court judge where the original order was (1) interlocutory, (2) discretionary, and (3) there has been a substantial change of circumstances since the entry of the prior order.’

Op. ¶33 (quoting Taidoc Tech Corp. v. OK Biotech Co., Ltd., 2014 NCBC 48 at ¶11)

So what was the "substantial change in circumstances" offered by DeGorter in support of his Motion for Reconsideration?  It was pretty skimpy.  He said that a new Judge had been appointed and that he had filed a Motion for Reconsideration before the new Judge.  Judge Bledsoe said that accepting those things as a basis for changing Judge Murphy's previous order was insufficient because it would "open the floodgates' and invite reconsideration of numerous matters decided in the months preceding [his] appointment."  Order ¶35.

Judge Bledsoe refused to tamper with Judge Murphy's Order.

So if you are thinking of taking a stab at having one of Judge Murphy's rulings changed or overruled by the Judge taking over his case, you probably shouldn't bother.  Your chances of getting a Business Court Judge to do that are pretty slim.

Also, making a post-judgment Motion to Amend your Complaint is unlikely to be successful.  DeGorter sought to add by amendment a new claim for conspiracy, which would have rested on the claims of constructive fraud and negligent misrepresentation on which summary judgment had been granted.  The  Judge ruled that although a Motion to Amend following summary judgment was not necessarily prohibited (Op. ¶46), the allowance of this Motion would, in effect, result in an overruling of Judge Murphy because the dismissed claims would need to be the basis for the conspiracy claim. Op. ¶48.

But bit as probably fatal to the effort to add a conspiracy claim when, as Judge Bledsoe observed: "in North Carolina 'there is no such thing as a civil action for conspiracy." Op. ¶50 (quoting Reid v. Holden, 242 N.C. 408, 414, 88 S.E.2d 125, 130 (1955)).

Don't like a now-retired Business Court Judge's ruling?  You are probably stuck with it.


The NC Business Court Rules On Recovering Attorneys' Fees In A Derivative Action Against An LLC

In this week's opinion in Ekren v. K&E Real Estate Investments, 2014 NCBC 56, Judge Bledsoe outlined how a derivative action plaintiff can recover attorneys' fees.

What Constitutes A 'Substantial Benefit"?

Fees are specifically allowed by §57D-8-05(1) for a plaintiff in a derivative action against an LLC  if the action results in a "substantial benefit to the LLC."

North Carolina's appellate courts have not construed that term in the LLC context but the Court of Appeals has ruled in a case involving similar language under North Carolina's Business Corporation Act that:

the plaintiff need not necessarily be the prevailing party, nor must the derivative claim have proceeded to a final judgment or order.

Op. ¶13 (quoting Aubin v. Susi, 149 N.C. App. 320, 326, 560 S.E.2d 875, 880 (2002).

The Business Court found further light shed on the term "substantial benefit" by looking to the Model Business Corporation Act, which references in a comment the United States Supreme Court's interpretation of similar language in MBCA §7.46(1).  The Supreme Court said in the case of Mills v. Electric Auto-Lite Co., 396 U.S. 375 (1970) that:

[A] substantial benefit must be something more than technical in its consequence and be one that accomplishes a result which corrects or prevents an abuse which would be prejudicial to the rights and interests of the corporation or affect the enjoyment or protection of an essential right to the stockholder’s interest.

Id. at  396.

The Plaintiff in the Ekren Case Obtained A "Substantial Benefit" For The LLC Even Though The Defendant Granted Her All The Relief Demanded In Her Complaint Before Judgment

The Defendant in the Business Court case argued that the Plaintiff had not obtained a substantial benefit because the Defendant had voluntarily returned to the LLC title to the four properties which he had originally transferred to himself from the LLC, and he had also returned $20,000 he had removed from the LLC account.  The Defendant further argued that he was justified in these actions because he merely meant to "safeguard" the LLC's assets from the Plaintiff, who Defendant said was engaging in "irrational and pathological behavior which appeared to be the product of a degenerative disease." Op. ¶17. 

Because the properties had been returned and the $20,000 had been returned, and those items were the only relief sought by the Plaintiff, the Business Court had dismissed all the claims as moot in March 2014. 

Even so, Judge Bledsoe was buying none of the Defendant's arguments that his good intentions as opposed to the lawsuit, had prompted the result.  He said:

all of the evidence brought forward by the parties shows that the catalyst for the return of the LLC’s assets was the filing and prosecution of Plaintiff’s lawsuit. Although [the Defendant] contends he was going to return the LLC’s assets, he did not do so after Plaintiff’s pre-suit demand, and he did not take any action prior to Plaintiff’s suit to have a receiver or trustee appointed to receive the LLC’s assets he claimed he held in trust. Even if he planned to return the assets to the LLC, the fact that he returned them when he did – and thus the timing of relief to the LLC – was because of the litigation.

Op. ¶18.

So the Court found that the Plaintiff had obtained a "substantial benefit" for the LLC by obtaining the return of the properties and the funds.  It awarded $33,704.50 in attorneys' fees after reducing the amount sought and finding some of the fees sought to be "excessive, redundant or otherwise unnecessary." Op. ¶34.

Recovering For Rule 11 Type Violations In A Derivative Action

The LLC statute allows for the recovery of attorneys' fees if the court finds that any filing:

was not well grounded in fact or was not warranted by existing law or a good-faith argument for the extension, modification, or reversal of existing law and that it was interposed for an improper purpose, such as to harass or to cause unnecessary delay or needless increase in the cost of litigation.

N.C. Gen. Stat. §57D-8-05(3).

If that language sounds familiar, it may be because it "sets out a standard similar to the standard for sanctions under Rule 11 of the North Carolina Rules of Civil Procedure."  Op. ¶20.

But there's a difference between this section and Rule 11,  A Rule 11 analysis has "three prongs."  A violation of any of the three prongs -- which are "(1) factual sufficiency, (2) legal sufficiency, and (3) improper purpose" -- makes out a Rule 11 violation.  Op. ¶23.

The LLC statute, by contrast, requires showing an “improper purpose” in addition to finding that same document 'was not well grounded in fact or was not warranted by existing law. '" Op. ¶23.

The Defendant escaped from being tagged with attorneys' fees despite filing an Answer containing defenses that the Court said were "not well-grounded in law."  Judge Bledsoe found that the Defendant's actions were not motivated by an improper purpose based on the "totality of the objective circumstances."  Op. ¶28.

But don't think that this case gives you the license to raise unfounded defenses.  Judge Bledsoe "caution[ed] . . . that [his] ruling [was] based on the specific circumstances of this case and [was] not in any way intended to suggest a general rule that a party may assert claims or defenses that are not well-grounded in law without consequences under N.C.G.S. § 57D-8-05(3)."  Op. ¶28.

Avoid "Block Billing" Because It Can Result In A Reduction Of Fees

A good point for those seeking to recover attorneys' fees is to avoid "block billing."  That is the pretty common practice for aggregating all of your time entries for a client on a given day without providing the hours expended for each separate task.  Judge Bledsoe cited a couple of cases for the propositions that:

  • “[B]lock billing is not objectionable ‘per se,’ though it may increase the risk that the trial court, in reasonable exercise of its discretion, will discount a fee request, and that
  • block billing precludes the court from determining that all of the amounts claimed . . . are both compensable and reasonable.

Op. ¶33 (quoting Jaramillo v. Cnty. of Orange, 200 Cal. App.4th 811, 830 (Cal. Ct. App. 2011) and Dixon v. Astrue, 2008 U.S. Dist. LEXIS 9903, *11 (E.D.N.C. Feb. 8, 2008))

Based on his review of the Plaintiff's counsel's blocked billed time entries, Judge Bledsoe excluded nearly 80 hours of billing recorded by Plaintiff's attorney on  the basis that those hours  were "excessive, redundant, or otherwise unnecessary."  Op. ¶35.

Notwithstanding that reduction in fees, Judge Bledsoe said that Plaintiff's counsel was "a highly experienced and able litigator and practitioner," and that his hourly rate of $275 was reasonable. Op. ¶¶39-40.


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An Important Message From The Business Court On The Proper Filing Of A Notice Of Designation

Yesterday, the Business Court entered an important Order, titled "Order Regarding Notice of Designation and Assignment," in Southern Fastening Systems, Inc. v. Grabber Construction Products, Inc., 2014 NCBC 55.

The Order deals with the time limits for designating a case to the Business Court, and clears up the question of when and where a Notice of Designation needs to be filed.  This question was not raised by either of the parties to the case.  The Court said that it was the result of an inquiry "on its own motion whether the Notice of Designation was timely in accordance with recent statutory amendments regarding mandatory designation."  Order at 1.  

Section 7A-45.4(d) of the General Statutes says that a Notice of Designation "shall be filed . . . within 30 days of receipt of service of the pleading seeking relief from the defendant . . . ."

Grabber Construction Products, the Defendant, e-filed its Notice of Designation with the Business Court on November 3rd, which was within the thirty day period set by the statute.  The Defendant mailed the Notice of Designation that same day to the Superior Court for Buncombe County, where the case had originated.  The Notice of Designation then was filed in Buncombe County more than thirty days after service.

So, was the Designation timely?  No, said the Court, although it accepted the Designation, stating that it was "recognizing the possible uncertainty in how the statute should be read until clarified by [its] Order."

The Court concluded its very short (about two pages) Order by stating that this largesse would not be extended going forward and that the Order was being published to:

provide notice to the practicing bar that the Court will in the future expect a Notice of Designation to be filed with the appropriate Clerk of Superior Court within the time provided by N.C. Gen. Stat. § 7A-45.4, and that failure to do may result in the Notice of Designation being deemed untimely, defeating a right to mandatory designation.

Order at 2 (emphasis added).  This isn't the first time that the Business Court has dealt with the interplay between electronic filing and the need to file paper copies of filings in the Superior Court for the county in which the case originated.  You probably remember the several cases in which the Business Court dismissed an appeal because the notice of appeal, although timely filed with the Business Court, wasn't timely filed with the Clerk of Superior Court in the county where the case had originally been filed.

Two Things You Should Know If You Are Appealing A Preliminary Injunction On A Covenant Not To Compete

If you are representing a client who has been subjected to an injunction enjoining him from violating a covenant not to compete, and you want to appeal, there are two things you ought to know.  One is good for you, the other probably is not so good.  They were pointed out in Judge McGuire's unpublished Order last Friday in Union Corrugating Co. v. Viechnicki.

Viechnicki, former Director of Sales for the Plaintiff,  had been enjoined from competing with his former employer in some respects via a TRO (granted in Cumberland County Superior Court), which was continued into a Preliminary Injunction (by the Business Court, by Judge Jolly). 

He filed a Notice of Appeal, and a Motion that the Court recognize a stay of the proceedings pending the appeal.

A Trial Judge Has No Authority To Dismiss An Appeal As Interlocutory

First, if you are in this situation, can you even appeal?  Or is your appeal interlocutory and subject to dismissal by the trial court?  Mixed news here, mostly good.  Even if your appeal is interlocutory, a trial court does not have the power to dismiss an appeal as interlocutory.  Order 9.  That part of Judge McGuire's Order was based on a Court of Appeals decision -- Estrada v. Jaques, 70 N.C. App. 627, 321 S.E.2d 240 (1984) -- which held that a trial judge "acted beyond his authority in dismissing [an] appeal . . . as interlocutory."  Id. at 639-40, 321 S.E.2d at 248.

The only authority that a trial judge has to dismiss  an appeal of his or her order is contained in NC Appellate Rule 25.  That power is limited to dismissing an appeal for a failure to take action to perfect an appeal.  Order 9.

Thus, Judge McGuire denied the Plaintiff's Motion to Dismiss Viechnicki's appeal.

A Stay Of Proceedings In The Trial Court Is Only Appropriate If The Ruling Appealed From Affects A "Substantial Right"

But let's say that the case in which the injunction was entered is ongoing, as was Viechnicki's.  You are facing a load of annoying written discovery and then a deposition of your client, and your adversary is angling towards making a motion for summary judgment, as Viechnicki's former employer was.  Are you entitled to a stay of proceedings per G.S. §1-294 until the Court of Appeals hears your appeal? 

Section 1-294 says that:

When an appeal is perfected as provided by this Article it stays all further proceedings in the court below upon the judgment appealed from, or upon the matter embraced therein; but the court below may proceed upon any other matter included in the action and not affected by the judgment appealed from.

You might think that because the Court did not have the power to dismiss the appeal, and that the appeal would therefore be proceeding, that the action would be stayed.  But that's not right: the COA has said that the trial court "has the authority . . . to determine whether or not its order affects a substantial right of the parties or is otherwise immediately appealable."  RPR & Assocs. v. University of North Carolina, 153 N.C. App. 342, 348, 570 S.E.2d 510, 514 (2002). So whether a stay is in effect depends on whether the injunction affects a "substantial right."  While you might think that an injunction enforcing a covenant not to compete, which impairs your client's ability to be employed, must affect a substantial right, you could be wrong.

Appellate cases that have found an injunction enforcing a covenant not to compete affected a substantial right have involved injunctions that "effectively prohibit[ed] defendant from earning a living and practicing his livelihood" (Precision Walls v. Servie, 152 N.C. App. 630, 635, 568 S.E.2d 267, 271 (2002) or caused an "inability to do business" in a seasonal occupation (Milner Airco, Inc. v. Morris, 111 N.C. App. 866, 869, 433 N.C. App. 811, 813 (1993)).

The injunction being appealed by Viechnicki barred him from disclosing confidential information obtained from the Plaintiff, and from soliciting business from "any customer with whom [he] had contact while employed by Plaintiff."  Order 4.  Significantly, the Injunction did not bar Viechnicki  from working for the competitor as its new President or performing sales related duties that did not involve customers with whom he had had contact during his past employment with the Plaintiff.  And Viechnicki's protestations that the injunction prohibited from calling on over 9,000 customers didn't earn him any sway with Judge McGuire.

Judge McGuire ruled that the injunction affecting Viechnicki did not bar him from:

earning a living and practicing his livelihood, [or] deprive [him] of a reasonable opportunity to use his skill and talents, or otherwise give rise to an inability to do business.

Order 17 citations omitted).

Judge McGuire rejected the argument that "a preliminary injunction that enforces a non-compete restriction necessarily affects a substantial right."  Order 15.  Whether a substantial right is affected has to be examined on a case by case basis.  After this analysis, Judge McGuire held that the preliminary injunction enjoining some of Viechnicki's activities did not affect a "substantial right."

So Judge McGuire therefore denied the motion to stay proceedings by the Plaintiff, ordered that the case would proceed, and that Viechnicki should respond to outstanding discovery.





Business Court (In Judge McGuire's First Opinion) Outlines The "Indispensable Requirements" For The Formation Of A Partnership

Well, newest Business Court Judge Gregory McGuire has gotten off to a running start with his first opinion, issued only about a week after his appointment to the Business Court by Governor McCrory.  The case is La Familia Cosmovision, Inc. v. The Inspiration Networks, 2014 NCBC 51.

The main issue in La Familia concerned whether La Familia could pursue its claims that it and one of the Defendants had formed a partnership aimed at the development of a Spanish-language network called "La Familia Cosmovision."  It sought a declaratory judgment recognizing that the parties were in a partnership.  Judge McGuire ruled that there were insufficient allegations to establish the existence of a partnership and granted the Defendants' Motion to Dismiss.

The "Indispensible Requirements" For Forming A Partnership

Judge McGuire stated that:

there are . . . two 'indispensable' requirements that must be met for a legal partnership to exist.  The first requirement is 'sharing of any actual profits.'  The second 'indispensable requisite' is that of 'co-ownership of the business.'  Failure to properly plead allegations supporting the existence of one or both of these elements is fatal to a claim for declaratory judgment of an implied partnership.

Op. ¶36 (emphasis added)(relying on Wilder v. Hobson, 101 N.C. App. 199, 202 (1990) and McGurk v. Moore, 234 N.C. 248, 252 (1951)).

An important point from the La Familia case is that an agreement to share revenue (which was at least an ancillary part of the parties' agreement) does not meet the "indispensable requirement" of a sharing of profits,  There's nothing groundbreaking in this because, as Judge McGuire observed, the NC Supreme Court said 100 years ago that "an agreement to share gross returns does not create a partnership, for the reason that such an agreement is inconsistent with the joint ownership of the profits."   Op. ¶37 (quoting Buie v. Kennedy, 164 N.C. 290, 294 (1913)).

A Partnership Must Include An Agreement To Share Losses

But if sharing profits is an essential element, what about the flip side of that?  Must there also be an agreement to share losses?  North Carolina law was ambiguous, or at least "not clear" on this point, said Judge McGuire.  Op. Par. 41.  But the Judge imposed some clarity on this issue, holding that "[t]he general rule under the Uniform Partnership Act, and other law, is that an agreement to share losses as well as profits is essential to the existence of a partnership." Op. ¶42 (quoting 59A Am. Jur. 2d Partnership § 155 (2014).

The Letter of Intent which Plaintiff said had established the partnership said nothing about loss sharing.  It said that the Plaintiff and the Defendant  were each "solely responsible for all expenses incurred with the performance of their respective obligations under this LOI and any subsequently executed agreement." Op. Par. 38.

Co-Ownership Was Lacking

There was no evidence suggested by Plaintiff that it and the Defendants "ever combined assets or co-owned partnership property or any common legal entity.

Furthermore, the Letter of Intent stipulated that the Defendant Inspirational Networks, Inc. was the sole owner of the name "La Familia Cosmovision."  The Plaintiff had only a license to use that name.

Other factors which led to the Court's grant of the Defendants' Motion to Dismiss were the lack of a partnership tax return ever being filed and that no partnership bank account had ever been established.  Op. Par. 48.  Another factor sinking Plaintiff's claim was that a provision in the Letter of Intent said, under the heading "Relationship of the Parties," that the Defendant was an "Independent Contractor" and that "nothing in this agreement shall be construed to create a joint venture." Op. ¶48.

It didn't help Plaintiff's claim either to rely on "casual statements" made by the Defendant to third parties that it had a "partnership" with the Plaintiff.  The doctrine of "partnership by estoppel" was not applicable because Plaintiff's claim was not based directly on any of those statements. Op.  ¶46 & n.54.

A Question About Suing An Entity Operating Under An Assumed Name

Oh, and there is one other tidbit from the La Familia decision which is worth mentioning.  The Plaintiff had sued two Defendants: The Inspirational Networks, Inc., the corporate entity which had signed the Letter of Intent, and also The Inspiration Networks, the assumed name under which the corporation was doing business.

Could it sue both the corporation and the assumed name under which it was operating?  Judge McGuire said that this appeared to be an issue of first impression in North Carolina and ruled that Plaintiff could not sue both the corporation and the assumed name entity:

For the same reason that it would be nonsensical to name the same entity or individual twice as a party to an action, a plaintiff cannot maintain an action against both a legal entity and its assumed name.

Op. Par. 29.

So, in addition to alleging the "indispensable requirements" of a partnership before suing to establish a partnership, don't sue unnecessary defendants.


Trade Secrets Cases In The NC Business Court: You Show Me Yours Before I'll Show You Mine

There's a new roadblock for plaintiffs in the Business Court suing over trade secrets.  It was imposed last week by Judge Bledsoe in DSM Dyneema, LLC v. Thagard, 2014 NCBC 50, and it bars the plaintiff from proceeding with discovery until the trade secrets allegedly being misused by the defendant are identified with "sufficient particularity."

There is nothing new in requiring particularity in trade secrets claims.  The Business Court has frequently granted motions to dismiss trade secrets claims because the alleged trade secrets were not identified with sufficient particularity, but it had never refused to allow discovery on this basis, at least until the Dyneema decision.

Dyneema had sued its former employee, Thagard, and his new employers, three Honeywell companies, alleging misappropriation of its trade secrets for  the development of ballistic fibers for use in enhanced combat helmets ("ECH").

When the Honeywell Defendants were served with discovery, they objected and refused to produce responsive documents relating to their own methods of producing ECH (which they said were their own trade secrets) on the ground that the Plaintiff had not identified with sufficient particularity the trade secrets which it was saying had been misappropriated.

Judge Bledsoe examined a variety of federal court decisions on the point of when discovery is appropriate in a trade secrets case, and he found the "cases requiring pre-discovery disclosure of trade secrets persuasive."  ¶21.  The reasons supporting this bar to discovery until the plaintiff's trade secrets have been described in sufficient detail included:

  • prevent[ing] fishing expeditions into a competitor defendant's trade secret;
  • deny[ing] a plaintiff the opportunity to craft a trade secret claim to fit the evidence from the defendant;
  • prevent[ing] 'needless exposure of the defendant's trade secrets'; and
  • allow[ing] well-investigated claims to proceed while discouraging meritless trade secrets claims.

Op. ¶18.

The Judge recognized that there are countervailing reasons to allow discovery to proceed, including "the inherent difficulty in certain situations of identifying what portions of trade secrets have been misappropriated prior to receipt of discovery from defendants."  Op. ¶19.

So, how "particular" does a trade secrets plaintiff need to be in identifying its trade secrets with "sufficient particularity"?  The answer is that there is no clear answer.  Judge Bledsoe set an outer boundary, saying that a plaintiff does not need to "define every minute detail of its trade secrets down to the finest detail."  Op. ¶23 (quoting Prolifiq Software Inc. v. Veeva Sys. Inc., 2014 U.S. Dist. LEXIS 77493, *5 (N.D. Cal., June 4, 2014),

Short of that standard, it is hard to say what would meet the Court's approval in the future.  What  Dyneema did offer fell short, notwithstanding a full single spaced page describing its claimed trade secrets.  Op. ¶8.  Court found this description, despite its length, to "simply identify features that are common to all ballistic materials or common to the development and manufacture of ballistic materials." Op. ¶22.

Judge Bledsoe held that Dyneema had to:

specifically describe “what particular combination of components renders each of its
designs novel or unique, how the components are combined, and how they operate
in unique combination”

before it could go forward with discovery of the Defendants’ trade secrets.  Op. ¶24 (quoting Switch Commc’ns Grp. v. Ballard, 2012 WL 2342929, at *4 (D. Nev. June 19, 2012).

So, if you are representing a trade secrets plaintiff in the Business Court, plan on disclosing more about your client's trade secrets than your client would prefer.  Not every "minute detail," but a lot of details.



Don't Throw The Kitchen Sink Of Defenses Into Your Answer

Say you are filing an Answer to a Complaint.  NC Rule of Civil Procedure 8(c)  lists a host of affirmative defenses you might raise.  They are:

accord and satisfaction, arbitration and award, assumption of risk, contributory negligence, discharge in bankruptcy, duress, estoppel, failure of consideration, fraud, illegality, injury by fellow servant, laches, license, payment, release, res judicata, statute of frauds, statute of limitations, truth in actions for defamation, usury, waiver, and any other matter constituting an avoidance or affirmative defense.

Do you want to plead all of those, even though you don't currently have a basis to support them, hoping that you will find some facts in discovery to support them?

That's pretty much what the Plaintiffs did when responding to a crossclaim in National Financial Partners Corp. v. Ray, 2014 NCBC 49, decided on Wednesday by Judge Bledsoe.  The Plaintiffs raised nearly fifty affirmative defenses, hoping that they would generate facts later on to support their myriad defenses.

Many of their defenses were not supported by any facts pertinent to the lawsuit, although the Plaintiffs argued that it was too premature in the litigation for their affirmative defenses to be dismissed and that discovery might yield facts to support their defenses.

The Defendants moved to strike per NCRCP 12(f).  Judge Bledsoe wrote that:

'[T]o survive a motion to strike, a defendant must offer more than a "bare-bones conclusory allegation which simply names a legal theory but does not indicate how the theory is connected to the case at hand."'

Op. ¶34 (quoting Villa v. Ally Fin., Inc., 2014 U.S. Dist. LEXIS 25624, at *6 (M.D.N.C. Feb. 28, 2014)(citation omitted).

It didn't make a difference that the Plaintiffs had a good faith belief that discovery might provide a basis for the defenses stricken by Judge Bledsoe. He said that:

Plaintiffs’ professed good faith belief that their presently unsupported defenses will acquire the requisite factual support through the discovery stage of these proceedings does not alter the reality that these defenses were speculative at the time Plaintiffs asserted them in their responsive pleading.

 Op. ¶35.

Some of the arguments raised by the Plaintiffs in support of the defenses they had stated revealed their speculative nature on their face.  For example, on their defense of accord and satisfaction, Plaintiffs said that:

'[i]t is . . .far from certain that I[] Plaintiffs did not receive full and complete return of whatever funds they provided to Mr. Stokes'.

And the defense of "another action pending" was also quite imaginary.  The Plaintiffs said that:

'[n]o action is pending of which Plaintiffs are currently aware' but noted that '[s]uit may have been filed against Defendants somewhere else or against Plaintiffs in some other jurisdiction.'

Op. ¶¶35(iv) and (ix).

If you are, like me, too critical to be an even-tempered Judge and are wondering if there are sanctions available against a party pleading a horde of defenses without any factual support for them, the answer is that there might be.  Judge Bledsoe observed in a footnote that "Plaintiffs’ assertion of numerous affirmative defenses with little or no factual support can also raise concerns under Rule 11 of the North Carolina Rules of Civil Procedure."  Op. ¶36 & n.7.

He also quoted a Third Circuit case for the proposition that: “the practice of ‘throwing in the kitchen
sink’ at times may be so abusive as to merit Rule 11 condemnation.”)  Id. (quoting  Mary Ann Pensiero, Inc. v. Lingle, 847 F.2d 90, 97 (3d Cir. 1988)).

But no sanctions were entered.  Judge Bledsoe struck fifteen of the speculative defenses with leave to the Plaintiffs to plead them again in the event that they were able to develop evidence through discovery that the defenses could be properly asserted.  Op. ¶36.


Don't Let Yourself Get Ehrenhaused When Appealing From The NC Business Court

It's probably not too soon to verbify the Business Court's opinion in Ehrenhaus v. Baker, 2014 NCBC 30, decided a few months ago.  If you missed that decision, know that you have to file your Notice of Appeal from a Business Court decision not just  by e-filing in the Business Court, but also by filing with the Clerk of Court in the county where the case was filed.  Otherwise, the Business Court can dismiss your appeal.

The plaintiffs in three separate cases suing the former principals of Bostic Construction Company for constructive fraud were Ehrenhaused last week.  They didn't file their Notices of Appeal with the Clerks of Superior Court in the counties from which their cases had originated, and Judge Bledsoe yesterday dismissed each of the appeals in response to the Defendants' Motions to Dismiss, based on the Ehrenhaus ruling.

The only one of the three cases that was published is American Mechanical, Inc. v. Bostic, 2014 NCBC 47.  The Orders from the other two cases dismissing the appeals for the same reason are unpublished.  They are in the Phillips and Jordan case and the Yates Construction Company cases brought against the Bostics.

While Ehrenhaus was certainly correctly decided based on the Business Court Rules and appellate court precedent, I can't say I like the concept of a court with a fully electronic filing system being undercut by a duplicative paper filing at a bricks and mortar courthouse.  Maybe the next time the General Assembly looks into "modernizing" the Business Court, it can take up this issue.

But for now, you are all on notice of where to file your Notice of Appeal from a Business Court decision.  E-file it in the Business Court and file a paper copy with the Clerk of Court in the County in which the case originated.  And don't forget that after October 1st there will be direct appeals from many Business Court rulings to the NC Supreme Court.


Trade Secrets Claims Can Be Tough To Succeed On In The Business Court

If you want to pursue a trade secrets claim in the Business Court, you've got to disclose the details of your trade secret.  The Opinion last week in Unimin Corp. v. Gallo, 2014 NCBC 43 illustrates that point in detail. 

It seems at first blush like a case made for a preliminary injunction for the misappropriation of trade secrets, which is what the Plaintiff Unimin sought.  The individual Defendant, Gallo,  had been Unimin's General Manager of Research and Development.

Gallo had accepted a position with one of Plaintiff's competitors in the business of mining and processing "high purity quartz" (HPQ).

If you are like me, you have dwelt in ignorance of the importance of HPQ to your existence.  It is "one of today's key strategic materials for the high-tech industry."  It is used in semi-conductors, tubing for high temperature lamps, telecommunications devices, and in lenses for telescopes.

The quartz refined into HPQ is mined in only a few places around the world, one of them being in Spruce Pine, North Carolina.  Wherever it is mined, its slight impurities must be removed from the quartz in order to render it true high purity.

Plaintiff Unimin says that it is the global leader in HPQ and that its methods of processing the HPQ which it sells are "confidential, proprietary, and a trade secret." Op. ¶13. It said that Gallo had been the inventor or a "key player" in the development of its trade secrets and that he should be enjoined from using them for the benefit of his new employer.

Hadn't the Plaintiff taken steps to protect itself from Gallo's disclosure of this important and proprietary information?  Of course it had: Gallo was bound up by three separate agreements.  There were two Confidentiality Agreements and a Non-Compete.

The validity of those restrictive agreements wasn't the issue in this case.  Instead, it was whether the Plaintiff had sufficiently identified its trade secrets.

Plaintiff broadly described its trade secrets as the various processes that it followed in refining quartz, but failed to provide enough sufficient specifics to satisfy Judge Bledsoe that the Defendants had been put on notice as to what the trade secrets were.

It is hard to distill from this Opinion what you should show  in pursuing a trade secrets claim in the Business Court, but I will take a stab at it.  (Or if you want the full scope of the Court's analysis, read Paragraphs 35 to 50 of the Opinion).  The answer is not to refer generally to the process you allege is a protected trade secret.  Be prepared to give the details.  Judge Bledsoe said this:

Plaintiff broadly identifies various processes as its alleged trade secrets without offering evidence that those processes are unique to Plaintiff or have been modified by Plaintiff in unique ways.  For example, Plaintiff describes its 'mining process control plan as using "[REDACTED] modeling and process simulations' that develop 'mineral processing strategies' but does not offer evidence explaining what those simulations and strategies are or why these simulations and strategies are unique to Plaintiff.

Op. ¶41.

Apart from the Plaintiff's lack of specificity about its trade secrets, two other factors doomed Plaintiff's request for an injunction.  The first was the argument by Gallo's new employer that any trade secrets claimed to be known to Gallo would be of little use to it, given that its quartz was extracted from a different mine than the North Carolina mine operated by Plaintiff.  Judge Bledsoe found that the differences in the qualities of the different quartz ores "appear to require sufficiently different processes to mine and develop HPQ to render at least some, if not all, of Plaintiff's alleged trade secrets non-transferable."  Op. ¶57.

The second factor was a lack of any showing that Unimin was at risk of Gallo disclosing its trade secrets.  To the Court, this was established by the fact that Gallo had been gone from the Plaintiff's employment for five years before taking a job with his new employer.  During that five year hiatus, he had abided by the terms of his five year non-compete.  Judge Bledsoe ruled that Gallo's:

long-term adherence to his contractual obligations is persuasive evidence that he is not a threat to violate his contractual or other legal commitments to Plaintiff and disclose Plaintiff's alleged trade secrets.

Op. ¶59.

A "mere possibility of misappropriation" under the NC Trade Secrets Protection Act is insufficient to obtain an injunction.  Op. ¶63.

Although Judge Bledsoe had previously granted a Temporary Restraining Order to the Plaintiff, he denied its Motion for a Preliminary Injunction.




Who Bears The Burden Of Proving Waiver Of Attorney-Client Privilege?

This week, in an Opinion in Safety Test & Equipment Co. v. American Safety Utility Corp., 2014 NCBC 40, Judge Gale made a significant ruling on which party bears the burden of proof in showing a waiver of the attorney-client privilege (or showing the absence of a waiver)..

The elements that must be shown to make out the privilege are pretty well established.  Communications between lawyer and client are protected by the privilege if:

(1) the relation of attorney and client existed at the time the communication was made, (2) the communication was made in confidence, (3) the communication relates to a matter about which the attorney is being professionally consulted, (4) the communication was made in the course of giving or seeking legal advice for a proper purpose although litigation need not be contemplated[,] and (5) the client has not waived the privilege.  

Op. 11 (quoting Isom v. Bank of America, N.A., 177 N.C. App. 406, 411, 628 S.E.2d 458, 462 (2006))(emphasis added).

Case Of First Impression In North Carolina

But as to that requirement that "the client  has not waived the privilege," does the party asserting the privilege need to prove that there has been no waiver?  That's the difficult task of proving a negative, and as Judge Gale observed, no North Carolina appellate decision has clearly considered whether "the party claiming privilege has an initial burden to prove the negative of a waiver or whether the privilege proponent need only prove absence of waiver in response to an adequately supported challenge."  Op. 12.

The case before Judge Gale involved a letter from the counsel for Defendant American Safety to one of the individual Defendants (Price) regarding that Defendant's possible employment with American Safety.  As you might guess, this is a case between competing businesses alleging misappropriation of trade secrets.

Curiously, the Plaintiff already possessed a redacted copy of the otherwise privileged letter, though the parties disputed how Plaintiff had obtained the redacted copy.  Plaintiff said that Price had voluntarily given it the letter, but Price denied that.  The Defendants implied that the letter had been stolen.

The Plaintiff also sought by motion to compel to obtain another letter from the same counsel for American Security written about two weeks later, which was identified on a privilege log.

So who wins this skirmish?  The party claiming the letter is protected by the privilege and denying any waiver, or the opposing party, with disputed evidence of waiver?

The Court Adopts A Burden-Shifting Approach

In resolving this question, the Court adopted a "burden-shifting approach," which it said was "'[t]he prevalent, albeit unstated, practice' in the federal courts where issues of potential waiver arise."  Op. Par. 13 (quoting 2 Paul R. Rice, Attorney-Client Privilege in the United States, §9:22, at 82 (2013-2014 ed. 2013).

That approach goes like this:

Under this burden-shifting approach, courts impose the initial burden of establishing the basic elements on the privilege proponent. This initial burden does not require the privilege holder to affirmatively negate waiver. Rather, once the proponent of the privilege establishes the basic elements of privilege, the burden of production of evidence shifts to the opponent to establish a prima facie case of waiver.  If the privilege opponent establishes a prima facie case of waiver, the burden of going forward with evidence shifts back to the proponent to rebut the prima facie case by demonstrating that the privilege is still viable.  Ultimately, the privilege proponent bears the burden of persuasion.

Op. 13 (citations omitted).

Given that the parties submitted conflicting evidence on the waiver issue, Judge Gale applied the principle that "[w]here the weight of the evidence is equal, the adverse ruling must be against the party with the ultimate burden of proof."  Thus, the Defendant lost on its claim of privilege, and it was directed to produce an unredacted copy of the letter already in the Plaintiff's possession.

Subject Matter Waiver Applies When The Waiver Is Not Intentional

The Defendants were also ordered to produce the second letter, the one which was not in the Plaintiff's possession.  Judge Gale said that he could not conclude that the waiver as to the first letter was inadvertent and that the waiver of privilege in the first letter therefore extended to the second.  Op. 19.

The result would have been different if the waiver had been inadvertent.  The Business Court has previously held that

[T]he general rule that a disclosure waives not only the specific communication but also the subject matter of it in other communications is not appropriate in cases of inadvertent disclosure . . . .

Morris v. Scenera Research, LLC, 2011 NCBC 34 at *33.

Judge Gale stanched the flow of blood there.  He ruled that he would not require the Defendants to produce any other communications from their counsel.



When Winding Up A Corporation Don't Do This

I don't know any lawyers who specialize in winding up corporations, but if any of you are out there, you should read this post.

It is important to remember, when winding up a corporation, that "principals and directors of a corporation owe a fiduciary duty to creditors of the corporation when the corporation is insolvent and 'under circumstances amounting to a "winding up" or dissolution of the corporation.'"  Order 6.

In an Order entered last week in Americana Development, Inc. v. Ebius Trading & Distributing Co., Judge Jolly entered a TRO against a financially troubled corporation preventing it from paying debts that had been guaranteed by its principals and officers to the exclusion of its other debts.

In granting a Temporary Restraining Order, Judge Jolly said that the individuals were:

using their positions as principals and officers of [Ebius and its parent corporation] to secure a personal benefit by satisfying only those debts for which they are personally liable.  If Defendants are permitted to favor only those creditors whose debts are personally guaranteed, Plaintiff, as a non-guaranteed creditor of Defendants, would be at risk of significant injury as its claim would go wholly unsatisfied as a result of the improper distribution by [the individuals].  The injury caused by the improper liquidation of Defendants' assets would be irreparable.

Op. 7.

The Defendants were enjoined from paying the debts on which Ebius was not liable, and also from paying any of the corporation's debts other than on a pro rata basis.

Congratulations to my colleague Clint Morse  for obtaining this result for the Plaintiff.


The Motion You Probably Shouldn't Bother To Make In The Business Court (Or In Any Other Court)

I think I might have made a Motion for a More Definite Statement.  If I did that, I did it only once, and I can't remember the result.  Asking for a more definite statement is a rarely used litigation maneuver, allowed by Rule 12(e) of the North Carolina Rules of Civil Procedure.

The Defendant in the NC Business Court case of Shaw v. Shaw made a Rule 12(e) Motion but it was rejected in an Order yesterday by Judge Bledsoe.  The Judge said:

Motions for a more definite statement are not favored by the courts and are 'sparingly granted because pleadings may be brief and lacking in factual detail, and because of the extensive discovery devices available to the movant.'  Ross v. Ross, 33 N.C.App. 447, 454, 235 S.E.2d 405, 410 (1977)(citations omitted).  As long as the pleading meets the standards of N.C.R.C.P.  Rule 8 and the opposing party is adequately notified of the nature of the claim, a motion for more definite statement will be denied.  Id.

Order 10 (emphasis added).

If you are curious about the allegations in the Complaint which were alleged to be too indefinite to allow a response, they were paragraphs 25(e) and (j), which concerned the Defendant's claimed making of unauthorized loans and payment of excessive compensation.

Judge Bledsoe ordered that the allegations fairly notified the Defendant of the claims against him, given the notice pleading requirements of Rule 8.

What about Complaints that go beyond the notice pleading requirements of Rule 8, that have too much detail?  That's a different kettle of fish. I've more often made a Rule 8(e) Motion, arguing that a Complaint violated Rule 8 because it was not "concise and direct."  But that's mainly because I like the word "prolix."  You don't get to use it very often.

Can You Get A Ruling From A Superior Court Judge After Your Case Is Designated To The Business Court?

If you've been reading this blog for a while, you know that once a case is in the Business Court, it is in there forever, even if the issues that justified it being there in the first place are subsequently resolved. 

But when does the Court's jurisdiction begin?  You might think it is when the Chief Justice of the Supreme Court signs an Order designating the case to the Court, especially if you look at G.S §75A-45.4(f), which says that:

Once a designation is filed under subsection (d) of this section, and after
preliminary approval by the Chief Justice, a case shall be designated and administered a complex business case. All proceedings in the action shall be before the Business Court Judge to whom it has been assigned.  . .

The decision by Judge Bledsoe last week in 130 of Chatham, LLC v. Rutherford Electric Membership Corp., 2014 NCBC 35, got me thinking about this issue, though on the surface the case has nothing at all to do with when the jurisdiction of the Business Court attaches.

The issue in the case was whether Judge Bledsoe should stay an order entered in the case while the decision was being appealed. 

The stay requested by Defendant REMC was of an Order entered in Rutherford County Superior Court.  It required REMC to provide the Plaintiff with the list of its members, the minutes of its Board of Directors, records of its member actions, and its financial statements.

The chronology of events is important here.  The case was designated to the Business Court by the Chief Justice on July 15th.  The Order being appealed from was entered in Rutherford County after that, on July 28th, following a hearing on July 21st.  Business Court Chief Judge Jolly assigned the case to Judge Bledsoe after the hearing, but before the Rutherford County Judge's ruling, on July 23rd. 

Judge Bledsoe refused to enter a stay, ruling that entering a stay would "effectively put the Court in the position of overruling [the Rutherford County Judge's] Order in violation of North Carolina law."  Op. ¶24.

What the Opinion doesn't mention is why a Superior Court Judge had entered an Order after the case had been designated to the Business Court.  Business Court Rule 15.1, titled "All Motions to be Filed in Business Court," says that "[a]fter a case has been assigned or designated to the Business Court . . . parties shall seek rulings on all motions in the case from this Court, and not from Superior Court Judges or Clerks in the counties where cases originate." (emphasis added).

So why had a Rutherford County Superior Court Judge entered a ruling in a case that had been designated to the Business Court?  I found the answer to this riddle in some of the filings by the Plaintiff, which included emails to and from the Business Court about what was then the pending motion to obtain the documents.   It turned out that the determining factor was that although the case had been designated to the Business Court, it had not yet been assigned to a particular judge.

Given that the motion had some urgency to it, the Plaintiff went ahead to have it heard in Rutherford County notwithstanding the designation to the Business Court.  But it kept the Business Court informed of its intentions and got a go-ahead to proceed.

Judge Jolly's law clerk stated in an email that "[b]ecause the Business Court is not a court of jurisdiction, a hearing may go forward on the pending motions in the county court of origin if the hearing is needed before the case is able to be assigned to a Business Court judge."

Judge Bledsoe's law clerk then stated in an email "[b]ecause the pending matters before [the Rutherford County Superior Court Judge] . . . were heard and calendared for further hearing prior to the designation of the case to the Business Court, it is the policy of the Business Court that [the Rutherford County Superior Court Judge] can decide whether to go forward with the hearing and rule on the matters pending before him at the time of designation."

Then, Judge Jolly's Trial Court Coordinator weighed in.  She handles the assignment of designated cases to Business Court Judges. but she said that she had been out on vacation and that the case had not yet been assigned due to her absence.  She added "[p]lease keep in mind that Business Court designation is not jurisdictional.  Your hearing may still go forward in Rutherford County."

You can read those e-mails here.

So, that's the long answer to why a Superior Court Judge was entitled to proceed to make a ruling in a case which had already been designated to the Business Court.  But don't read this post and think that you can get away with proceeding in the Court for the county where the case originated after it has been designated to the Business Court.  Ordinarily, a Judge is assigned immediately, removing the gray area into which this case fell. 

And I wouldn't take emails from Court personnel as the gospel.  Judge Bledsoe didn't discuss at all the propriety of the Superior Court's ruling in what had become a Business Court case.

Given 130 Chatham, you  can kinda sorta still obtain an Order from the Superior Court from which you designated the case even after it has been designated to the Business Court by the Chief Justice.  At least until your case is assigned to a Business Court Judge.

I don't recommend trying to pull off this trick.



An Important Tip On Appealing A Decision From The NC Business Court

The Business Court is electronic.  Paper copies of documents are not filed with the Business Court.  So when you e-file a Notice of Appeal, is that sufficient for purposes of Rule 3 of the NC Rules of Appellate Procedure?

Let's look at the Rule first.  It says that:

Any party entitled by law to appeal from a judgment or order of a superior or district court rendered in a civil action or special proceeding may take appeal by filing notice of appeal with the clerk of superior court and serving copies thereof upon all other parties within the time prescribed by subsection (c) of this rule.

N.C. R. App. Pro. 3(a)(emphasis added).

The Plaintiff in Ehrenhaus v. Baker, 2014 NCBC 30 wanted to file a cross appeal from Judge Murphy's decision awarding attorneys' fees to his lawyers in his lawsuit over Wachovia's merger with Wells Fargo.  If you need to be refreshed on that ruling, I wrote about it in April.

Since one of the individuals objecting to the fee award had already filed a notice of appeal, the Plaintiff had ten days after that to file his own notice of appeal.  N.C. R. App. Pro. 3(c).

The tenth day was May 2, 2014.  Plaintiff e-filed his notice of appeal with the Business Court on April 30, 2014. 

Was the notice of appeal timely?  No, said Judge Gale, as the notice of appeal was not filed with the Mecklenburg County Clerk of Superior Court until May 15, 2014.

The decision hinged on whether the e-filing, which had been delivered to the "Clerk of Court" at the Business Court, satisfied the filing requirement of Appellate Rule 3 of being directed to the "clerk of superior court."  (Note that the Business Court's electronic filing system produces a Notice of Electronic Filing which includes a reference to service on "Clerk of Court,"  which actually is the email address of the Court's law clerk in Raleigh.)

Plaintiff argued that the Business Court was a separate Superior Court within the North Carolina General Court of Justice and that he had therefore properly filed his notice of appeal with the Business Court "Clerk of Court."  Judge Gale rejected this argument, and observed that "the Business Court does not have its own clerk of court."  Op. 11 (emphasis added).

While the Court was "sympathetic" to Plaintiff's argument that he had been misled by the electronic filing system into believing that he had properly filed his notice of appeal, Judge Gale ruled that he could not "overlook the plain language of Appellate Rule 3 that requires a notice of appeal to be filed with the clerk of superior court within the time prescribed by Appellate Rule 3(c)."  Op. 13.

So Judge Gale dismissed Plaintiff's appeal.  But why did the Business Court have the authority to dismiss the appeal?  The answer is that Appellate Rule 25 "allows the trial court to dismiss an appeal if the appellant failed to give notice of appeal within the time allowed by"  Appellate Rule 3.  Landingham Plumbing & Heating of North Carolina, Inc. v. Funnell, 102 N.C. App. 814, 815, 403 S.E.2d 604, 605-06 (1991).

I don't know why Judge Gale didn't reference Business Court Rule 8.1 in his Opinion.  That Rule makes it clear that all filings with the Business Court must be made  with the Clerk of Superior Court in the judicial district where the case is pending.  It says that "all documents and materials submitted to the Business Court shll also be filed wihin five (5) business days with the Clerk of Superior Court in the judicial district in which the matter is pending."

Is an appeal of this ruling about an appeal a possibility?  Maybe, as the Plaintiff may have a legitimate argument that he was misled by the Business Court's filing system.  Judge Gale observed that the Court has corrected the "default" in the system that recognized the Court's "Clerk of Court."  He said that:

Prior to the briefing on the Motion, the court was not cognizant that the Notice of Electronic Filing email in this and other actions refers to the notice as having been sent to “Clerk of Court” by email to raleigh.clerk@aoc.nccourts.org.  That email address is for the law clerk resident in the Raleigh chambers of the Honorable John R. Jolly, Jr., Senior Special Superior Court Judge for Complex Business Cases. The court believes this application was added as a default by the system administrator. This default has now been removed.

Op. 12.

So if you are filing an appeal from a Business Court ruling, make sure to file a paper copy in the office of the Clerk in the County in which the case was filed within the time period set in Appellate Rule 3.






Welcome Judge Bledsoe To The NC Business Court

Charlotte attorney Louis A. Bledsoe, III has been appointed by Governor Pat McCrory as a Special Superior Court Judge, and NC Supreme Court Justice Sarah Parker has designated him as a Special Superior Court for Complex Business Cases, which means he will be handling cases in the Business Court.

The Governor's press release said this about Judge Bledsoe:

Louis Bledsoe’s extensive experience in business and commercial litigation makes him well-suited for the Business Court. He has developed a great reputation as a litigator and has earned the trust and respect of many members of the Bar. He will be an outstanding judge for our state’s Business Court.

I don't often find myself in agreement with what Governor McCrory says, but he is absolutely right about Judge Bledsoe.  He will be an excellent Business Court Judge.  Until crossing to the other side of the bench, Judge Bledsoe was a partner at Robinson, Bradshaw & Hinson, which is undoubtedly one of the best law firms in the State of North Carolina.

New Judge Bledsoe will sit in the Charlotte Business Court.  He begins his judicial career with a pretty full docket of cases.  It looks like all of the cases previously being handled by Judge Murphy, who was until yesterday the only Business Court Judge in Charlotte, already have been assigned to Judge Bledsoe.  Judge Murphy's term on the Court ended June 30th.

I'm not sure how much longer it will be available, but here is a link to Judge Bledsoe's bio at Robinson Bradshaw.

Congratulations to Judge Bledsoe on a well-deserved appointment.  He has been a reader of this blog and I hope he will continue.

Complying With The Rules Is Important In The Business Court

There's an ominous sounding sentence in a Business Court decision this week:

A party practicing before the North Carolina Business Court should take the deadlines imposed by its orders and the rules of practice very seriously.

Estate of Capps v. Blondeau. 2014 NCBC 24 at 36.  It is so ominous sounding that you would expect that sentence to be followed by punishment of the non-compliant party.  But Judge Jolly exercised mercy over the party which hadn't followed the rules.

What was the rule violation?  Two of the Defendants in the case (the Knights) hadn't filed their brief in support of their motion for summary judgment until more than 24 hours after the filing deadline set by the Court in its Case Management Order (requires all motions to be accompanied by a brief).  Also, the Knights never filed with the Court the exhibits referenced in their brief (BCR 15.5 requires a party to provide documents supporting allegations of fact in a brief).  Adding to their disregard of the Business Court Rules, the Knights never filed their Motion with the Wake County Superior Court (required by BCR 8.1)and they did not pay the required twenty dollar motion fee (dictated by N.C. Gen. Stat. § 7A-305(f)).

Plaintiffs demanded that the Business Court summarily deny the Knights' Motion for Summary Judgment due to the rules violations, which is permitted under BCR 15.11.  That rule says that:

[t]he failure to file a brief or response within the time specified in [BCR 15] shall constitute a waiver of the right thereafter to file such a brief or response.  . . .   A motion unaccompanied by a required brief may, in the discretion of the Court, be summarily denied.

Judge Jolly, in his discretion, opted to consider the Knights' Motion for Summary Judgment notwithstanding the Rules violations.  He referenced an appellate court decision -- Hammonds v. Lumbee River Elec. Membership Corp., 178 N.C. App. 1, 15 (2006) -- as support for his holding that:

[i]n deciding whether to dismiss a filing for procedural error, courts should weigh the impact of the rule violations on the non- violating party and the importance of upholding the integrity of the rules against the broader public policy favoring the resolution of disputes on the merits.

Op. Par. 37.  He noted the "relatively short delay" in meeting the deadline and the "relatively minor impact on Plaintiffs due to the delay."  Op. 37.

But after all that procedural hoopla, Judge Jolly went ahead, considered the motion for summary judgment and denied it without much discussion. 

So the only valuable lesson out of this decision is to follow the Business Court Rules.  A complete set of thos Rules is available here.

It Depends On The Meaning Of The Word "With"

The contractual interpretation issue before the Business Court in Schultheis v. Hatteras Capital Investment Management, LLC, 2014 NCBC 23, turned on the meaning of the word "with."  Well, actually on the phrase "entering into any contract . . . with."

HCIM, one of the Defendants, had acquired a 55% membership interest in Hatteras Alternative Mutual Funds (HAMF).  At that time,  HCIM became the sole managing member of HAMF per an Operating Agreement.  Four years later, HCIM signed an Asset Purchase Agreement to sell all the assets of HCIM and HAMF to two unrelated entities .

The HAMF Operating Agreement said in Section 2.03  that the consent of the non-managing members of HAMF was required before "the entering into any contract . . . with the Managing Member or an Affiliate of the Managing Member." 

HCIM and HAMF were both parties to the Asset Purchase Agreement, but they were both sellers, on the same side of the transaction.  Judge Jolly observed that:

The Interpretation Issue fundamentally raises the question of what it means to say that an entity enters into a contract "with" another entity in a multi-party transaction. As Defendants note with examples, the common use of the term "with" in this context refers to the contractual binding of bargaining parties on opposite "sides" of such a transaction, while one might use "alongside" or "along with" to refer to parties on the same "side" of a contract.

Op. ¶16.

In isolation, the word "with" might have carried the day for the Plaintiffs and have required the consent to the deal from the  non-managing members of HAMF, but the Court determined that their consent was not required.  Two factors guided the Court's determination: Delaware decisions construing similar language, and a consideration of the "totality" of the Operating Agreement of HAMF.

Delaware Courts have construed the term "enter into an agreement with" to refer to two parties on the opposite sides of an agreement. See e.g. In re Quest Software Inc. Shareholders Litig., Civ. A. 7357-VCG, 2013 WL 3356034, at *1 (Del. Ch. July 3, 2013) (unpublished opinion) (target company “entered into an agreement with” acquiring company); In re PAETEC Holding Corp. Shareholders Litig., CIV.A. 6761-VCG, 2013 WL 1110811, at *1 (Del. Ch. Mar. 19, 2013)(unpublished opinion) (in the context of a merger, dissolving company “entered into an agreement with” absorbing company); Abacus Sports Installations, Ltd. v. Casale Const., LLC, CIV.A. N10L-08062CLS, 2012 WL 1415603, at *1 (Del. Super. Feb. 14, 2012) (unpublished opinion) (general contractor “entered into an agreement" with subcontractor).

But the Court also looked to the totality of the Operating Agreement and said that

Even if the court felt conflicted over the plain meaning of the word "with" in the context of § 2.03(f), the rest of the Operating Agreement as a whole clearly points to the parties' intention to vest the authority to sell HAMF in HCIM alone. Whether such an
arrangement was inadvertent or, more likely, the result of deliberation and  bargaining by the Parties, Plaintiffs cannot rest on the dictionary definition of the word "with" to substantively rewrite the Operating Agreement to provide them with rights they failed to secure at the outset.

Op. ¶b20.

The other pertinent provisions were Section 5.06, a "drag along" provision which obligated HAMF's non-managing members to accept an offer to consummate a Sale of [HAMF], and Section 2.02, which gave the Managing Member the sole authority to approve a Sale of [HAMF].  Although Section 2.02 might seem to be dispositive, it was expressly subject to Section 2.03 (which contained the problematic "with" language).

So, now that Judge Jolly has ruled that HCIM did not need the consent of the non-managing members of HAMF to engage in this transaction, is the case over? Not by a long shot, as the Complaint makes multiple other claims.  And I picked up from one of the Defendants' briefs that the proposed buyer has walked away from this transaction as a result of the Plaintiffs' lawsuit.


Collateral Estoppel Sinks LLC Members' Claim

It might seem uncontroversial that the members of a limited liability company cannot follow with a personal lawsuit for injuries after their LLC litigates, and loses, claims based on the same issues.

But it took the Business Court a while to get to that conclusion last week, in Lancaster v. Harold K. Jordan and Co., 2014 NCBC 22.

The Plaintiffs were the member-managers of Village Landing, LLC.  The LLC had made claims against Harold K. Jordan and Co. in an arbitration asserting that HKJ had misrepresented that it would build condominiums instead of the townhomes called for under the construction contract.  It said that this had caused the LLC "great financial harm." 

Right before the arbitration began, the member-managers sued HKJ for damages.  Then, the LLC lost on those claims in the arbitration.  The arbitrator, in his Award, specifically rejected the allegations regarding the townhome/condominium issue.

Nonmutual Collateral Estoppel

The unsuccessful arbitration meant that the LLC member-managers also failed in their Business Court lawsuit, which Judge Jolly dismissed based on collateral estoppel.  In reaching that result, he observed that he was "not aware of any North Carolina precedent addressing the attempted use of nonmutual collateral estoppel against nominally different plaintiffs."  Op. ¶30.

It could be that you don't remember the term "nonmutual collateral estoppel" because you went to law school as long ago as I did.  But it "prevent[s] a plaintiff from relitigating an issue the plaintiff has previously litigated unsuccessfully in another action against a different defendant."  Op. ¶30 (quoting Bendet v. Sandoz Pharms. Corp., 308 F.3d 907, 910-11 (8th Cir. 2002)).

So whether nonmutual collateral estoppel applied turned on the question of whether there was an "identity of parties" between the LLC in the arbitration and the member-managers in the Business Court lawsuit.  That can be shown by the parties being "in privity," but North Carolina law is that "privity with a corporation is not established solely by one's position as a corporate officer or shareholder."  Op. Par. 34 (relying on Troy Lumber v. Hunt, 251 N.C. 624, 627 (1960).

The LLC Members Had Control Over The Arbitration

The NC Supreme Court recognized, in Thompson v. Lassiter, 246 N.C. 34 (1957), that there is a "well established exception" to the "general rule" that an identity of parties is necessary to prevail on a res judicata defense. Op. ¶¶35-36.  (Wait, you sharp eyed readers are thinking: This is a case involving collateral estoppel, not res judicata.  Judge Jolly said that "the court notes that res judicata and collateral estoppel are companion doctrines, that traditionally have shared the identity requirement." Op. ¶31). 

So, that exception, applicable to both res judicata and collateral estoppel, has four elements:

(a) control of both the original and present lawsuit, (b) a proprietary interest or financial interest in the prior judgment, (c) an interest in the determination of a question of fact or a question of law regarding the same subject matter or transactions and (d) notice of participation.

Op. ¶36.

The first element, control, "is met when a corporation is dominated by a single party or entity or is otherwise the alter ego of that party or entity."  Op.  Par. 39.  Given that the Plaintiffs were the sole member-managers of the LLC, plus their active involvement in the arbitration (by calling eighteen witnesses to testify), Judge Jolly found that the control element was met.  It probably did not help that one of the Plaintiffs had testified at the arbitration that the Plaintiffs and the LLC were "one and the same."

The second element, a proprietary interest in the prior judgment, was also met, given that the LLC was "essentially a pass though entity" and the Plaintiffs were "financially intertwined" with the LLC.  Op. ¶41.

As for an interest in the determination of questions of fact or law, Judge Jolly wrote that:

At the very core of Plaintiffs' Claims against HKJ in this matter is the allegation that HKJ either negligently or purposely misled Plaintiffs in constructing "condominiums, rather than townhouses." This was the precise issue that Village Landing litigated extensively against HKJ in the Arbitration Action, an alleged misrepresentation that Plaintiffs' counsel contended was the proximate cause of millions of dollars in losses.  Not only did Plaintiffs have an "interest" in the Arbitrator's determination on this issue, it was central to their LLC's entire case against HKJ in the Arbitration Action – as it is in their individual action here.

Op. ¶42.

The notice element was obviously met due to the Plaintiffs' involvement in the LLC's arbitration.

What Counts In Collateral Estoppel Is ISSUES, Not Claims

The Plaintiffs argued that their personal claims were "separate and distinct" from the claims pursued by the LLC in arbitration.  It didn't make any difference.

Judge Jolly observed that "our courts have repeatedly held that 'collateral estoppel precludes the subsequent adjudication of a previously determined issue, even if the subsequent action is based on an entirely different claim.'"  Op. ¶50 (emphasis in original)(quoting Hailes v. N.C. Ins. Guar. Ass'n, 337 N.C. 329 (1994)).

Since the arbitration had resolved the issue of whether HKJ had misrepresented that it was building townhomes instead of condominiums, the Plaintiffs were foreclosed from pursuing claims based on that issue.

The Remaining Elements For Collateral Estoppel Were Met

Judge Jolly quickly ticked through the remaining elements of collateral estoppel.  The issue had been "actually litigated" as it was "clear that litigation of issues in an arbitration action satisfies the 'actual litigation' prong of the collateral estoppel doctrine."  Op. ¶55.  It had been "actually determined" because the Arbitration Award was a reasoned one because it directly discussed and decided the issue of misrepresentation.  Op. ¶56.  Given its centrality to the Award, it was also "necessary and essential" to the Award.  Op. ¶57.

* * *

The easiest takeaway from this case is that LLC members can't pursue their own personal claims after their LLC has already arbitrated claims resting on those same issues.




General Assembly May "Modernize" The NC Business Court

A bill was introduced this week in the NC General Assembly that would be entitled "An Act to Modernize the Business Court By Making Technical, Clarifying, And Administrative Changes To The Procedures For Complex Business Cases."  Here's the text of the bill.

This is a summary of the proposed changes:

Appeals From Business Court

There would be a direct appeal to the NC Supreme Court from any final judgment in a case designated as a mandatory complex business case per G.S. §7A-45.4.  Since the NC Supreme Court has yet to rule in a case that originated in the Business Court (as far as I know) even though the NC Court of Appeals has ruled in many such cases, this will result in more Supreme Court decisions in business cases. 

Changes to Cases That May Be Designated As Mandatory Complex Business Cases

One of the first posts that I wrote on this blog (way back in 2008!) was about the jurisdiction of the Business Court.  You can find it here, but this proposed bill would change things.

The proposed bill does away completely with jurisdiction over cases involving intellectual property law (currently in G.S. §7A-45.4(5)) and cases involving "the Internet, electronic commerce, and biotechnology" (currently in G.S. §7A-45.4(6))

The bill adds two new explicit categories of cases that would qualify to be designated as complex business cases:

  • One is "disputes involving trade secrets under Article 24 of Chapter 66 of the General Statutes."
  • The other is contract disputes if a few conditions are met: at least one plaintiff or one defendant must be authorized to transact business in North Carolina per Chapter 55, 55A, 55B, 57D, or 59 of the General Statutes, the claim must be for breach of contract or seek a declaration of an obligation under a contract, and the amount in controversy must be at least one million dollars.

There Would Be Cases That Must Be Designated As Mandatory Complex Business Cases

In a new twist, the proposed bill specifies certain types of cases which must be designated as mandatory complex business cases.  Call these "mandatory mandatory" complex business cases. Those are:

  1. Some cases involving tax law, like "a contested tax case for which judicial review is requested under G.S. 105-241.16" or "a civil action under G.S.105-241.17."
  2. Disputes arising under corporate law, partnership law, or LLC law where the amount in controversy is at least $5 million.
  3. Cases involving regulation of pole attachments brought pursuant to G.S.§62-350.

If a party fails to designate a "mandatory mandatory" case, the Superior Court in which it was filed can either dismiss it without prejudice or stay it until it is properly designated per proposed new Section 7A-45.4(g).

Increase In Designation Fee

The proposed bill would increase the fee for designating a case to the Business Court by one hundred dollars, from one thousand dollars to eleven hundred dollars.

But the bill doesn't fix the problem that the designation fee is not recoverable as an element of costs.  I wrote about that issue last year.

Additional Reporting On The Activity In The Business Court

The proposed bill would require the Director of the Administrative Office of the Courts to report semiannually to the Chief Justice and each member of the General Assembly on the number of cases that have been pending at each location of the Business Court for more than three years, motions pending without a ruling for more than six months after being "fully ripe for decision" and the number of cases in which bench trials were held and completed for more than six months in which no judgment had been rendered.  The report is to include an explanation from the Business Court. 

Thanks to my partner, Charles Marshall, who sent me a copy of this proposed legislation.


Corporate Shield Holds Up Against Creditor

There's no expression when speaking of football players to recognize a performance that hits three exceptional marks (like a hat trick in hockey or a triple double in basketball or the triple crown in baseball). 

Maybe there should be, because Jeff Bostic, who played twelve years in the NFL for the Washington Redskins and on three Super Bowl winning teams, pulled off an extraordinary triple victory yesterday in the Business Court.  He got summary judgment in three cases in which he was the Defendant: Yates Constr. Co. v. Bostic, 2014 NCBC 19; Phillips & Jordan, Inc. v. Bostic, 2014 NCBC 18; and American Mechanical, Inc. v. Bostic, 2014 NCBC 17.

All of the Plaintiffs were subcontractors on construction projects for Bostic Construction Inc., which Bostic owned.  When the company failed and they were not paid, the Plaintiffs sued Bostic personally, alleging that Bostic had engaged in constructive fraud by commingling and misusing the funds from construction loans and using those funds for personal purposes.

Those facts might give rise to a claim by a shareholder of the construction company, but each of these Plaintiffs was only a creditor.  They ran into this settled principle:

Generally, directors and officers of a corporation are not liable, solely by virtue of their offices, for torts committed by the corporation or its other directors and officers.

Phillips & Jordan Op. ¶19 (relying on Oberlin Capital, L.P. v. Slavin, 147 N.C. App. 52, 57, 554 S.E.2d 840, 845 (2001).

Before a director or an officer can be directly liable to a creditor, there must be "a tort personally committed by [him] or one in which he participated."  Id.

The problem for each of these Plaintiffs is that they had no direct communication or interaction with Bostic.  His ownership status, standing alone, therefore was "insufficient to hold him legally accountable for an injury to Plaintiffs [as] third party creditor[s] of" the corporation.  Ops. ¶ 22.



Despite What You Think, the Business Court Isn't Always Open

Everybody knows that you have thirty days to file a Notice of Appeal in a civil case.  Rule 3(c)(1) of the North Carolina Rules of Appellate Procedure says that: "a party must file and serve a notice of appeal: within thirty days after entry of judgment."

The lawyers appealing from a grant of summary judgment in a Business Court case, Carter v. Clements Walker PLLC, obviously knew that.  They e-filed their Notice of Appeal with the Court on the thirtieth day, but Judge Gale granted the Defendant's Motion to Dismiss their appeal in an Order this week.

Why wasn't that appeal timely, you are wondering.  Well, the answer is that even though the Notice of Appeal was e-filed in the Business Court on the thirtieth day, it was filed too late -- at 7:37 p.m.

But the Business Court is electronic.  You can make filings at any time during the day, or night.  Rule 6.7 of the Business Court Rules even says that "[a]n electronic filing may be submitted to the Court at any time of the day or night."

But  Business Court Rule 6.7 goes on to say that:

For purposes of determining the timeliness of a filing, if the submission of the filing began during normal business hours of the Business Court (8:00 a.m.–5:00 p.m., Monday through Friday, excluding holidays), the filing is deemed to have occurred on that date.   If the submission of the filing began after normal business hours of the Business Court, the filing is deemed to have occurred on the next day the Business Court is open for business.

So Judge Gale found this Notice of Appeal to be untimely, and dismissed the appeal.  If you are fascinated by appellate procedure (and if you are, you should be reading the North Carolina Appellate Practice Blog), then you might be wondering how it is that the trial court gets the authority to dismiss an appeal.  Judge Gale covered all that.  Order ¶¶ 9-12.

Briefly, you are thinking of the general rule that an appeal takes the case out of the jurisdiction of the trial court, rendering the trial judge "functus officio."  That's certainly true, but Rule 25(a) of the Rules of Appellate Procedure says that a Motion to Dismiss an appeal can be presented to the trial court until the appeal has been filed in an appellate court.  An appeal isn't "filed" with the Court of Appeals when the Notice of Appeal is filed with the trial court.  Instead, "filing" with the appellate court occurs only when the record on appeal is filed or the docket fee is paid. 


NC Business Court Stays Arbitration Pending Ruling On Piercing The Veil Claim

The Order in Cold Springs Ventures, LLC v. Gilead Sciences, Inc., 2014 NCBC 10 is a procedural conundrum wrapped up in arbitration issues.  The Plaintiffs in the Business Court are the respondents in a separate arbitration proceeding brought by the Defendant.  But none of the Plaintiffs -- all of whom were shareholders or directors of a corporation which had signed off on the arbitration agreement forming the basis for the arbitration -- had personally signed the arbitration agreement.

There's nothing novel about holding persons who haven't signed arbitration agreements to be bound by them.  The NC Court of Appeals held years ago that "well-established common law principles dictate that in an appropriate case a nonsignatory can enforce, or be bound by, an arbitration provision within a contract executed by other parties.” Ellen v. A.C. Schultes of Md., Inc.,172 N.C. App. 317, 320, 615 S.E.2d 729, 732(2005) (quoting Wash. Square Sec., Inc. v. Aune, 385 F.3d 432, 435 (4th Cir. 2004)).

The non-signatories in Cold Springs were not willing to go to arbitration.  They moved for a preliminary  injunction to enjoin the Defendant from proceeding with the arbitration against them.  The Defendants' response was that they were entitled to "pierce the veil" against the corporate signer of the arbitration agreement and thereby get to the shareholders.

But is a Court entitled to determine a piercing the veil theory up front, in advance of an arbitration that is based on that very issue, or does that improperly delve into the merits?

Start with the concept of "arbitrability," which is "undeniably an issue for judicial determination."  AT&T Techs. v. CWA, 475 U.S. 643, 649 (1986).  Going along with that, however, is the concept that the court "is not to rule on the potential merits of the underlying claims."  Id.

So what's a court to do when arbitrability is wrapped up with the merits of the case?  Especially when the Defendants' demand for arbitration provides no specifics as to why the veil should be pierced, and makes only rote allegations as to why it should obtain that result.

Judge Jolly had little hesitation about getting at least somewhat into the merits.  He held:

An important distinction must be drawn between [impermissible] consideration of the merits of an arbitrable claim and the threshold arbitrability inquiry that necessarily involves the same issues that underly the merits of a claim. The mere fact that certain issues could later be litigated substantively cannot on its own foreclose courts from assessing arbitrability. In such a situation, the overriding spirit of the Supreme Court's jurisprudence demands that courts nonetheless address those issues for the narrow and limited purpose of determining whether a claimant seeking to compel arbitration can sufficiently allege a basis for going forward against a responding party.

Op. ¶16.

Remember that this was a Motion for a Preliminary Injunction, to enjoin the Defendants from proceeding with the arbitration against the Plaintiff shareholders.  So what else did Plaintiff have to show to halt the arbitration?  Irreparable harm and a likelihood of success on the merits.

Irreparable harm was present, because "forcing a party to arbitrate an issue absent an agreement to do so constitutes 'per se irreparable' harm."  Op. ¶17.

On likelihood of success on the merits, Judge Jolly looked to G.S. § 1-569.7(b), which says that"[o]n motion of a person alleging that an arbitration proceeding has been initiated or threatened but that there is no agreement to arbitrate, the court shall proceed summarily to decide the issue."

He ruled that the parties should plan limited discovery on whether the shareholder Plaintiffs could be compelled to arbitrate, to be concluded in about the next six weeks.  The Judge also stayed the arbitration pending a ruling on the piercing the veil basis for the arbitration.

Oh, and if you are wondering which party has the burden of proof going forward, it is the Defendant, because "under both state and federal law, the party seeking to compel arbitration bears the "burden of establishing an agreement to arbitrate."  Op. 27  (citing  Routh v. Snap-On Tools Corp., 108 N.C. App. 268, 274 (1992).

That's a heavy burden here, because the NC Supreme Court said in State ex rel. Cooper v. Ridgeway Brands Mfg., LLC that "proceeding beyond the corporate form is a strong step: 'Like lightning, it is rare [and] severe[.]'"


NC Court Of Appeals: Foreclosures and Immutability

Can a law passed by a Legislature be called "immutable?"  (that means it's ageless, not ever subject to change).

The Court of Appeals used that word this week in Heaton-Sides v. State Employees Credit Union to describe a statute dealing with foreclosures. 

The case dealt with the rights of a person to her personal property after a foreclosure.  A homeowner has ten days following a foreclosure to retrieve personal property left in her home, based on a combined reading of G.S. §45-21.29(1) and §42-25.9(g).

The Court of Appeals rejected the Defendant's argument that Heaton-Sides had waived the ten day period by not taking it up on its invitation that she notify it of her intention to reclaim her property.

Chief Judge Martin ruled that the ten day period could not be waived, holding that:

In contract law there are generally two types of rules: default rules and immutable rules. Default rules are rules that “parties can contract around by prior agreement.” Ian Ayres & Robert Gertner, Filling Gaps in Incomplete Contracts: An Economic Theory of Default Rules, 99 Yale L.J. 87, 87 (1989).  Immutable rules, by comparison, are those rules that “parties cannot change by contractual agreement.”  Id. While these terms usually refer to the Uniform Commercial Code, they demonstrate the principle that some rules may be avoided by contract while others may not.

Op. 7.

When a law is subject to revocation or amendment by the Legislature, can it really be said to be immutable?  That's a pretty strong word.  That the sun rises in the east and sets in the west is immutable.  Nobody can change that.  Unless you live on Venus.





Collecting On Judgments Against A Member's LLC Interest

A lawyer has limited remedies to collect on a judgment from a defendant who is unwilling to pay.  If the defendant holds stock in a corporation, you can execute on the shares, take possession of them, and sell them. N.C. Gen. Stat. §1-324.3.  But if that ownership interest is in an LLC, a "charging order" is your only recourse (per G.S. §57D-5-03(d)).

If you don't know what a charging order is, it is a court order against an owner of an LLC interest which gives a creditor the right to receive any distributions that the owner of the interest would have received until the judgment is paid.

The Old LLC Act

Former Section 57C-5-03 of the General Statutes (which was repealed and replaced in January 2014 by the new North Carolina Limited Liability Act in Chapter 57D) said that:

On application to a court of competent jurisdiction by any judgment creditor of a member, the court may charge the membership interest of the member with payment of the unsatisfied amount of the judgment with interest.

But what exactly did the holder of the charging order receive under the Old LLC Act, and what did the LLC owner lose upon the issuance of a charging order?  Last week, the NC Court of Appeals wrestled with the question whether a charging order operates as an assignment of an LLC interest, in First Bank v. S&R Grandview, LLC.

First Bank had obtained a charging order against Donald Rhine, a member of S&R Grandview, an LLC.  The charging order said that the Plaintiff "shall hereafter have the rights of an assignee" of Mr. Rhine's interest of the LLC, and that Mr. Rhine then had no remaining membership interest in the LLC.  The charging order said that his membership right would "lie fallow" until the judgment against him was satisfied.

Mr. Rhine appealed, arguing that the charging order did not operate to assign his LLC interest.  First Bank rejoined that the effect of  the charging order under Section 57C-5-03 was that Mr. Rhine was no longer a member of the LLC to which the order applied.

There was some plausibility to First Bank's argument.  Section 57C-5-03 said that "[t]o the extent so charged, the judgment creditor has . . . the rights of an assignee of the membership interest." And Section 57C-5-02 said that "a member ceases to be a member upon assignment of all of his membership interest."

A Charging Order Does Not Work An Assignment Of An LLC Interest

The Court of Appeals disagreed with First Bank's position, holding that "[n]owhere in these provisions does the General Assembly mandate an assignment of membership interests from a debtor to a judgment creditor through a charging order." Op. 8.  It added that "[h]ad the General Assembly intended a charging order to assign all membership interests and terminate a debtor’s membership in an LLC, as plaintiff contends, it could have easily included language to that effect." Op. 8-9.

The changes in the LLC Act through Chapter 57D bolstered the Court's conclusion.  The new provision dealing with charging orders states that "this Chapter does not deprive any interest owner of a right."  N.C. Gen. Stat. §57D-5-03(c).  I'm not sure whether statutory interpretation lets a court look at the subsequent actions of a Legislature to determine what the Legislature meant the first time around.

But anyway, why did this Defendant care whether his LLC interest was assigned and whether he had lost his membership rights?  Remember that an LLC member has an ownership interest that includes both an economic interest and a right to participate in the management of the LLC.  N.C. Gen. Stat. §57D-1-03(25).

A charging order can affect only the economic interest.  The charging order in First Bank went too far.  It took away Mr. Rhine's management rights.

What happens if those with management rights in the LLC decide to defer distributions from the LLC because of a dislike for the judgment creditor?  That's undoubtedly a risk, and it will probably be the subject of a yet to be decided court decision.

Why Should You Care About The Old LLC Act?

The NC General Assembly repealed the Old LLC Act, in Chapter 57C and replaced it with the New LLC Act through Chapter 57D.  That change became effective three months ago, on January 1, 2014.

Do you need to worry about the repealed Act?

Maybe.  In the "Savings Provisions" in the New Act, the General Assembly said that "[a]ny proceeding commenced before January 1, 2014, may be completed in accordance with the law then in effect."  N.C. Gen. Stat.  §57D-11-03(d)




The "Bright Star" Fades: The NC Business Court On Letters Of Credit

I've resolved this year to blog about every numbered decision of the Business Court, as opposed to past years, where my lack of enthusiasm about the more boring decisions has left me writing about less than 100% of the Court's decisions.

My resolve was tested with Judge Murphy's decision last week in Speedway Motorsports Int'l , Ltd. v. Bronwen Energy Trading, Ltd., 2014 NCBC 5, but I have bitten the bullet and I have laboriously produced this post.

What's the new Speedway decision about?  A complicated international dispute over oil contracts, letters of credit, a guarantee of letters of credit, and claims for fraud, conversion, negligent misrepresentation, and unfair and deceptive practices.

You might remember the Bronwen case.  It's been pending in the Business Court since 2008 and has been up and back from the Court of Appeals over that 5+ years.  I wrote about the Court of Appeals decision affirming  the Business Court in 2011 (and reversing it in another decision issued at the same time).  In the affirming decision, the COA held that the "one bright star" in letter of credit transactions was that "every letter of credit involves separate and distinct contracts."

The effect of that ruling was that the COA affirmed the dismissal of claims against Defendant BNP-Suisse, which had issued a demand guarantee to BNP-France on a letter of credit issued by France.  The Suisse guarantee was secured by $12 million which Plaintiff had on deposit with Suisse.  When Plaintiff sued over the draw on its letter of credit with Suisse, France argued that the case was governed by a choice of forum provision in the Suisse guarantee calling for resolution in Switzerland.

The COA held that Plaintiff, which was not a party to the guarantee given by Suisse in connection with the letter of credit transaction,  was barred by the "independence rule"  from availing itself of the choice of forum provision because the contracts surrounding a letter of credit transaction must be "separate and distinct."

So in last week's ruling, France sought to push the COA ruling in support of a new motion for judgment on the pleadings.  France argued that Plaintiff couldn't make any claims at all against it based on its draw on the guarantee because the guarantee was "separate and distinct" from the obligations between Suisse and the Plaintiff.

That seems to fit with the independence principle, doesn't it?  Not the way Judge Murphy saw it. France might have prevailed if the claims against it were based in contract.  But they were tort-based claims, for fraud, negligent misrepresentation, conversion, unfair and deceptive practices, and for an accounting.

Judge Murphy therefore denied the Rule 12(c) claim, holding that:

The Court of Appeals’ description of the “independence principle” was grounded in principles of contract. See Speedway I, 209 N.C. App. at 564, 706 S.E.2d at 263; see also Speedway II, 209 N.C. App. at 485, 707 S.E.2d at 392. Specifically, the Court of Appeals was concerned with maintaining the separateness of the multiple contracts that are characteristic of letter of credit transactions. See id. However, nothing in the Speedway opinions shields a defendant from purely tort-based claims like those alleged by Plaintiff. See id. Furthermore, France cites no authority that forecloses non-contract, purely tort-based claims by application of the independence principle. The import of the independence principle is that France is not bound by and cannot seek the benefits of the contracts that Plaintiff made with others.

Op. 28 (emphasis added).


What Happens To A Covenant Not To Compete Upon The Sale Of A Business?

Be careful with covenants not to compete when you buy or sell a business.  That's the lesson from Amerigas Propane, LP v. Coffey, 2014 NCBC 4, decided this week by Judge Jolly.

The Plaintiff had Defendant Coffey, an employee of the company which it was acquiring, sign a "Confidentiality and Post-Employment Agreement" after the acquisition.  The Agreement contained a non-solicitation provision and a section protecting the buyer's "confidential information." 

The Plaintiff fired Coffey a year later, and he went to work for a competing propane company.

Plaintiff moved for a preliminary injunction enforcing the restrictive covenants, which was denied by the Court.

You all know that there must be consideration for a covenant not to compete.  Those types of agreements ordinarily are entered into at the start of an employment relationship, and the new employment itself constitutes the consideration.  In North Carolina, continued employment can't satisfy the consideration requirement.

So did the acquisition work a termination of Coffey's employment with the selling company so that he had a new employment with the buyer?

Here's where it gets interesting.  The type of acquisition makes a difference. If it had been an asset purchase it might have been a new employment which could have served as consideration. Judge Jolly observed that:

an employment contract signed at the time of a business acquisition may only use employment with the acquiring company as consideration if the old employment relationship is deemed terminated as a result of the transaction. In this regard, North Carolina courts previously have stated that acquisition of another company by asset purchase will act as a termination of existing employment relationships, and existing employees of the acquired business do not necessarily become employees of the acquiring entity.

Op. 5 (relying on Calhoun v. WHA Med. Clinic, PLLC, 178 N.C. App. 585, 597 (2006) (citing
QSP v. Hair
, 152 N.C. App. 174 (2002)); and Better Bus. Forms & Prods., Inc. v. Craver, 2007 NCBC 34 (2007) ("[W]hen an employer sells its assets . . . the employment relationship has been terminated." Id. ¶38.).

But an acquisition via a stock purchase (or by purchasing membership interests, as happened in this case) doesn't have the same effect.  It does not automatically terminate existing employment relationships "and therefore ordinarily will not constitute new employment for purposes of consideration."  Op. 6.

So the Plaintiff was left to argue that there was other consideration for the restrictive covenants, like "new benefits" made available to Coffey, and a raise in salary shortly after the acquisition.  Judge Jolly didn't buy that.  He found the "new" benefits to be essentially the same as Coffey would have received with the selling employer.


The Business Court Takes A Narrow View Of When Claims Are "In Or Affecting Commerce" Under Chapter 75 Of The General Statutes

Chapter 75 claims have rarely fared well in the Business Court, though there is not much doubt about why they are included in almost every Complaint in the Court.  The prospect of treble damages (per G.S. §75-16) and attorneys' fees (per G.S. § 75-16.1) is too tempting for many to pass up.

But this week in Powell v. Dunn, 2014 NCBC 3, Judge Gale provided some clear guidelines about when these claims don't fit in the business litigation context because they are not "in or affecting commerce," an essential element under the statute.

The Plaintiffs in the case were holders of the common stock of Engenious Software, based in Cary, North Carolina.  The Defendants were former directors of the company who held preferred stock.  The directors negotiated a sale of the company, which had involved two potential acquirers and the services of an investment banker, for $40 million.  That sale apparently yielded nothing for the common shareholders.  The Plaintiffs made a claim for unfair and deceptive practices per Section 75-1.1 over the way the sale was handled, alleging a breach of fiduciary duty.

Judge Gale dismissed the claim, holding that:

when the unfair or deceptive conduct alleged only affects relationships within a single business or market participant, and not dealings with other market participants, that conduct is not “in or affecting” commerce within the meaning of Section 75-1.1,

Op. Par. 17.

He based that ruling on two North Carolina Supreme Court decisions construing the statute: HAJMM Co. v. House of Raeford Farms, Inc., 328 N.C. 578, 403 S.E.2d 483 (1991)  and White v. Thompson, 364 N.C. 47, 691 S.E.2d 676 (2010).

The White case was featured on this blog when it was decided, but the HAJMM case was decided before the idea of a blog was invented.  In HAJMM, the Court said that the statute extended only to “the manner in which businesses conduct their regular, day-to-day activities, or affairs, such as the purchase or sale of goods, or whatever other activities the business regularly engages in and for which it is organized.”  It affirmed the dismissal of 75-1.1 claims premised on unfair or deceptive acts related to the corporation's capital raising efforts.

The Powell decision is also noteworthy for its rejection of  the Plaintiffs' argument that the involvement of an investment bank in the transaction, and that another potential buyer was involved, made the claim one "in or affecting commerce."

Is a breach of fiduciary duty a per se violation of Section 75-1.1?  Judge Gale didn't reach that question because the claim was not "in or affecting commerce."  Op. ¶ 20 & n.4.

North Carolina COA Refuses To Award Attorneys' Fees Based On "New York Rates"

There's enough of interest in the North Carolina Court of Appeals' decision this week in GE Betz, Inc. v. Conrad for five posts. It's got a couple of good rulings on covenants not to compete, a few points about trade secrets issues, and an interesting matter of a violation of a protective order.  The opinion, a unanimous sixty-four pager written by Judge Robert C. Hunter, is worth reading.

The attorneys' fee aspect of the case was the most interesting part of the opinion to me.  The trial court awarded $5.77 million in fees to GE Betz, a General Electric subsidiary.  GE Betz had been successful, after trial, on its claims that the Defendants violated G.S. §75-1.1 and misappropriated trade secrets.

Over $3 million of the fees were billed by GE Betz's prestigious New York-based law firm -- Paul Hastings.  The hourly rate of Paul Hasting's lead counsel ranged from $633.25 to $675.75 during the course of the litigation.  The North Carolina firm that tried the case -- Ward & Smith -- charged significantly less, at rates between $270 and $390 an hour.  The trial court said that Ward & Smith was "a highly capable and qualified law firm."  Op. 51.

A trial court must make findings regarding the reasonableness of the fees in making an award.  A key factor to be considered is the "customary fees for like work."

The COA recognized that the question whether local rates should be a benchmark for reasonableness was one of first impression.  Judge Hunter said:

our appellate courts have not had occasion to decide whether fees must be awarded in light of the rates typically charged in the geographic region where the litigation takes place.

Op. 48.  He looked to a Fourth Circuit decision which "held that the community where the court sits is “the appropriate starting point for selecting the proper rate.” Nat'l Wildlife Fed'n v. Hanson, 859 F.2d 313, 317 (4th Cir.1988).

Judge Hunter refused to weigh in on whether it was reasonable for GE to hire its out-of-state counsel.  He held:

we decline to adopt a test that forces courts to assess the reasonableness of a litigant’s decision to hire counsel generally.  Parties, including GE, are free to hire as counsel whomever they wish at whatever rates they are willing to pay. The issue is whether the fees awarded against an adverse party are reasonable, not whether it was reasonable for those fees to be incurred by the prevailing party.

Op. 50.

On the issue of the reasonableness of the fees, Judge Hunter observed that "[i]t appears that much of the work performed by Paul Hastings' attorneys could have just as effectively been performed by local counsel at local rates.  The trial court did not attempt to make this distinction."  Op. 52.  He gave this example:

in April 2007, associate attorneys at Paul Hastings charged $500.00 per hour – double the $250.00 fee charged by attorneys at Ward and Smith – for “factual investigation and development; obtaining and analyzing [c]lient documents; [and] interview[ing] witnesses”. These duties clearly did not require a prior relationship or intimate knowledge of GE’s employment contracts [which was part of GE's argument as to the reasonableness of the fees], because GE paid the attorneys at Ward and Smith to perform almost identical work during the same time period.

Op. 52-53.

In the end, the COA ruled that it was unreasonable to force the unsuccessful Defendants to pay a fee "that includes rates double those billed in the community where the litigation took place for work that seemingly did not require such a premium."  Op. 53. 

It gently chided GE for its excess, saying that " [u]ltimately, GE’s willingness to pay significantly higher rates for work that they could have procured for much less does not necessitate a finding that those fees are reasonable when awarded against" the Defendants.  Id. 

The case was remanded to the trial court for further findings.


Business Court Says "Rule Of Reason" Analysis Appropriate To Antitrust Claim By Chiropractors Against Their Independent Practice Association

I can think of only three reasons why you might want to know about the Business Court's decision in Sykes v. Health Network Solutions, 2013 NCBC 53:

  • You are a chiropractor or you live with one.
  • You are fascinated by the subject of the management of health care costs.
  • You are interested in antitrust law.

If you don't fit those qualifications but are still willing to continue reading, the case is about Plaintiff Sykes' claim that Defendant HSN violated antitrust laws by fixing prices for chiropractic services through its operation of an "independent practice association" of chiropractors.

If you are already asleep, skip to near the end of this post, under the heading "Why The Injunction Was Denied."

Some Medical Terminology

To start, you'll need to know some healthcare terminology.  HSN is an IPA (an independent practice association).  Independent chiropractors each enter into a PPA (practitioner participation agreement) with HNS.  HNS negotiates with Payors (insurance companies like Blue Cross/Blue Shield and other third party purchasers of chiropractic services) to establish reimbursement rates for its members.  The chiropractors who are members of the network agree to be reimbursed by the negotiated rates.

HNS follows a QMI (Quality Management and Improvement Plan) to ensure that the services provided by its members are delivered in "the most effective and cost-efficient manner."  Op. Par. 20.

HNS established a maximum allowable average cost per patient for its providers (the chiropractors) of 151% of the HNS network average.  A provider exceeding this benchmark following review per the QMI faces probation, then termination by the network. 

The Antitrust Issues

Sykes contended this practice of controlling chiropractic costs was anti-competitive and illegal.  The illegality argument rested on North Carolina's insurance laws, which say that a review of a medical provider's costs must be based solely upon "medical necessity" and performed by a licensed entity.

The Court observed that of the 1,667 chiropractors licensed in North Carolina, 1,006 were HSN members.  Op. ¶16.  Though the Plaintiff's alleged that HSN had monopoly power, Judge Gale did not reach that issue.