A Couple Of Things Not To Do In The NC Business Court

The NC Business Court's decision last month in Krawiec v. Manly, 2016 NCBC 7, illustrates a couple of things not to do in the Court.

Don't Make "Aiding and Abetting" Claims

The Plaintiff made a claim against some of the Defendants for aiding and abetting the other Defendants in their alleged breach of contract.  It didn't withstand a Motion to Dismiss.

Judge Bledsoe observed that there was only one mention of such a cause of action in a reported North Carolina decision.  That was in an unpublished 2011 Superior Court Order that dismissed the claim.  Although there was an appeal of that Order, the Court of Appeals didn't consider that cause of action.  Op. ¶71 (citing Pete Fortner, PLLC v. Koonce Wooten & Heywood, LLP, 2011 N.C. App. LEXIS 130).

If the lack of North Carolina authority was not enough of a basis to dismiss the Plaintiffs' aiding and abetting claim, Judge Bledsoe also stated that numerous states had refused to recognize a claim for aiding and abetting a breach of contract (like New York, Illinois, Pennsylvania, and Arizona).  Op. ¶71.

If you are wondering why North Carolina's Courts would even need to recognize a claim for aiding and abetting a breach of contract when our Courts already recognize a claim for tortious interference with contract, you are dead on target.  Judge Bledsoe recognized that "some courts have noted that 'aiding and abetting breach of contract' is akin to a claim for tortious interference with contract." Op ¶71 & n.15.

But the tortious interference counterclaim that the Plaintiffs had brought was dismissed along with their aiding and abetting claim.  Why?  There was no allegation that the Defendants had knowledge of the contract that was interfered with, an essential element of the tort.

The breach of contract claim was not the only aiding and abetting claim that the Court dismissed.  It also dismissed an aiding and abetting breach of fiduciary claim.  The validity of those claims has repeatedly been questioned by the Business Court and even by the NC Court of Appeals.  Judge Bledsoe described the validity of such a claim as an "open question."  Op. ¶72.

The Court didn't have to address whether such a claim exists because the Plaintiffs had not alleged that any of the Defendants owed them a fiduciary duty.  There has to be a breach of a fiduciary duty before it can be "aided and abetted."  Op. ¶72.

It is probably a waste of time to make an aiding and abetting claim in the Business Court.  At least for aiding and abetting a breach of contract or aiding and abetting a breach of fiduciary duty.

You might remember the name of the Krawiec case.  It generated an Opinion from the Business Court last year holding that the filing of an amended Complaint moots a previously filed Motion to Dismiss.  That win last year for the Plaintiffs only delayed the Business Court's review of their claims following the filing of a Motion to Dismiss the Amended Complaint.

But these Plaintiffs only delayed the inevitable consideration of a Motion to Dismiss by filing their Amended Complaint.  Judge Bledsoe dismissed a substantial number of their claims, based on a Motion to Dismiss the Amended Complaint.  But several claims survived the renewed Motion to Dismiss like: the breach of contract claim, as well as claims for fraudulent misrepresentation, unjust enrichment, and punitive damages.

Don't Make A Trade Secrets Claim Without Pleading Every (Yes, EVERY) Aspect Of It With Specificity

I have written several blog posts on the requirement that a trade secrets claim be pled with specificity,  like here, here, and here.  These Plaintiffs failed to do that.

Among the claims dismissed by Judge Bledsoe was the Plaintiffs' claim of trade secrets in their "original ideas and concepts for dance production." That claim was dismissed because it was, as Judge Bledsoe put it,  "so non-specific and generalized as to be meaningless." Op. ¶46. 

The allegation that some of the Defendants had "unlawfully disclosed" the claimed trade secrets was also deemed inadequate. Op. ¶48.  The requirement of specificity in trade secrets pleadings also extends to "the acts by which the alleged misappropriation was accomplished."  Op. ¶49.

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Arbitration Provision Which Completely Prohibited Any Discovery Enforced By NC Business court.

I don't draft arbitration provisions in agreements, but if I did I would not draft one like the one in Taggart v. Physicians Pharmacy Alliance, Inc.  Not because it turned out to be unenforceable, but because it was found to be enforceable. What?

Judge McGuire granted a Motion to Compel Arbitration in that case in an (unpublished) Order last week.

The arbitration provision said that:

[i]]t is the desire and intent of the Parties that such arbitration be held without any discovery, deposition or motion practice, that the arbitrator receive evidence solely through the written submissions and not hold an evidentiary hearing, and that the arbitrator has no ability to extend dates or apply rules that conflict with these provisions.

Order 2 (emphasis added).

So the Plaintiff will have to go into this arbitration with absolutely no discovery, and with no way for the arbitrator to assess the credibility of witnesses (since there will be no depositions and all the evidence will be presented in writing).

Although I have arbitrated cases where the arbitration provision made no mention of discovery (and most often I got none), my preference for an arbitration clause which specifies that limited discovery will be allowed to the parties.

What About Discovery In Arbitration?

It's tempting to say that arbitration -- often billed as being quicker and less expensive than in-court litigation --- shouldn't include any discovery, but as a practical matter, it often does.  The Rules of the American Arbitration Association specifically permit discovery.  The Procedures for Large, Complex Commercial Disputes give the arbitrator the "[b]road authority to order and control the exchange of information, including depositions."

But it's not particularly clear whether the AAA Rules apply anyway.  The arbitration provision calls for the arbitrator to be selected via AAA procedures, but does not make any mention or incorporation of the AAA Rules. 

And regardless of whether the AAA Rules apply, these parties chose, in a most emphatic way, to prohibit any discovery whatsoever.  

The AAA Rules probably don't apply, but if they did, Rule 22 provides for a "pre--hearing exchange and production of information."  Maybe there's an argument that an "exchange and production of information" doesn't fall into the category of the prohibited "discovery."

Was This  Arbitration Provision Enforceable?

Plaintiff said that the ban on discovery and the lack of any ability to have the arbitrator to consider a motion made the arbitration "unfair and substantively unconscionable."  Order 16.

That might have been a successful argument if the parties to the agreement had been of "greatly unequal bargaining power."  But under Delaware law (which governed the Agreement), great deference is accorded to "the voluntary agreements of sophisticated parties."  Op. ¶15 (quoting NACCO Indus., Inc. v. Applica Inc., 997 A.3d 813, 840 (Del. Ch. 2011),

Judge McGuire concluded that:

although arbitration procedures might not be as extensive as [those available in courts], by agreeing to arbitrate, a party "trades the procedures and opportunity for review of the courtroom for the simplicity, informality, and  expedition of arbitration."    An agreement between  two corporate parties to decrease expected litigation costs is not unconscionable, particularly when both sides must adhere to the same prohibitions.

Order 19 (quoting Tierra Right of Way Servs. v. Abengoa Solar Inc., 2011 U.S. Dist.. LEXIS *15-16 (D. Ariz.. 2011).

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Notwithstanding the ruling forcing him to arbitrate  without any discovery at all, it is hard to feel sorry for Mr. Taggart.  The arbitration was required under the terms  of a Stock Purchase Agreement by which the Plaintiff sold his company for $52.5 million dollars.  Plaintiff was represented in that transaction by one of the largest law firms in the United States.

The issue in arbitration will be whether Mr. Taggart is bound to indemnify the buyer of his company for a $5 million settlement paid after the sale as the result of an investigation by the U.S. Department of Justice of the company

 

Should An Arbitrator Or A Judge Be The One To Decide Whether An Arbitration Is Barred By Res Judicata

There are all sorts of questions when court proceedings run alongside an arbitration dispute.  Who decides issues that cut across both?  Judge?  Arbitrator?

Assume that you represented the Claimant in an arbitration In which the opposing party (the Respondent) made a number of counterclaims on which it was awarded a substantial amount.  You're still smarting from the loss, and the Respondent starts a second arbitration.  The claims in the second arbitration are essentially a rehashing of the original counterclaims.

You've got a pretty good res judicata defense.  But who decides whether the Respondent now turned Claimant is barred from pursuing its new claims?  Can the Arbitrator assigned to the second Arbitration deal with that issue?

A Plaintiff in the Business Court found itself in precisely this situation.  Allscripts, a "healthcare-related software provider"  had initiated an arbitration against Etransmedia Technology, Inc., which "delivers similar software programs to medical practices and health systems."

The arbitration panel socked Allscripts with an Award of nearly $10 million on Etransmedia's counterclaims which was confirmed by an NC Court..

Almost two years after that Award, Etransmedia filed its own arbitration action against Alllscripts.

Allscripts, seeing these "new" claims as barred by the resolution of the first arbitration, filed a Complaint seeking an injunction that the claims were barred by res judicata.  Etransmedia opposed the request for an injunction, arguing that the question of res judicata should be decided by the Arbitrator in the second  case. The case (Allscripts Healthcare, LLC v. Etransmedia Technology, Inc.) was designated to the Business Court, and Judge McGuire issued an (unpublished) Order right before Christmas, denying the request for an injunction and ruling that the Arbitrator was the proper decisionmaker on this issue.

The NC COA Had Previously Ruled That A Judge (Not An Arbitrator) Decided Issues Of Res Judicata

Allscripts presented two Court of Appeals decisions seeming to dictate a ruling in its favor and giving the Business Court the right to rule on the injunction.  In the first, C & O Dev. Co. v. American Arbitration Ass'n,  48 N.C. App. 548 (1980), the Court held that "it is our opinion that the extent of a judgment's binding effect is a matter for judicial determination." In the second case, Rodgers Builders, Inc. v. McQueen, 76 N.C. App. 16 (1985), the Court held that:

[t]he scope of an arbitration award and its res judicata effect are matters for judicial determination; therefore, whether plaintiff's claims are barred was for the superior court to determine.

Id. at 23.

The NC Legislature Changed Those Rulings With The Enactment Of The Revised Uniform Arbitration Act

Why would Judge McGuire rule otherwise, given the clarity of those COA decisions?  Because those cases were decided before North Carolina adopted the Revised Uniform Arbitration Act (the "RUAA") in 2003,  Order 21.  Judge McGuire observed that:

[s]ection 6(c) of the RUAA provides that '[a]n arbitrator shall decide whether a condition precedent to arbitrability has been fulfilled and whether a contract containing a valid agreement to arbitrate is enforceable.

Order 21 (quoting N.C. Gen. Stat. §1-569.6(c)).

If you are not seeing how that statutory language covers a res judicata argument, it's clearer in the Official Comment to Section 6(c)  It says that the provision is meant to:

incorporate the holdings of the vast majority of state courts and the law that has developed under the [Federal Arbitration Act] that . . . issues of procedural arbitrability, i.e. whether  prerequisites such as time limits, notice, laches, estoppel and other conditions precedent to an obligation to arbitrate have been met, are for the arbitrators to decide.

Order 27.

Given that the RUAA was meant to bring the state arbitration act in line with the Federal Arbitration Act, the NC COA's opinion in WMS, Inc. v. Alltel Corp., 185 N.C. App. 86 (2007) was determinative.  There, the appellate court held that "in the context of the FAA, the issues of res judicata and collateral estoppel must be decided initially by the arbitrator and not the trial court."  Id. at 92.

Would you rather have a Judge or an Arbitrator decide a question of res judicata? Don't forget that arbitrators aren't obligated to follow the law.  Judge McGuire observed a month ago 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.'

Trilogy Capital Partners,, LLC v. Killian, 2015 NCBC 103, ¶33 (quoting Bryson v. Higdon, 222 N.C. 17, 19-20 (1942)).

If you are wondering whether an arbitration Award is even entitled to res judicata effect, that bridge was crossed years ago.  See  Lancaster v. Harold K. Jordan and Co., 2014 NCBC 22, 48 ("It is clear that a confirmed Arbitration Award constitutes a final judgment on the merits for purposes of collateral estoppel.").

 

 

 

Sometimes It Might Not Be Worth It To Appeal The Denial Of A Preliminary Injunction

I don't think that it was worth it for TSG to appeal Judge Murphy's Order denying its Motion for a Preliminary Injunction on a covenant not to compete.  That's true even though an injunction (though not on the covenant) was ultimately granted by Judge Bledsoe in an unpublished Order on December 14th. 

From Business Court To Court Of Appeals To NC Supreme Court And Back

Here''s a quick procedural history of the case:  In January of last year TSG filed in the Business Court a Motion for Preliminary Injunction enforcing a covenant not to compete..  Judge Murphy denied the Motion via an unpublished Order in February 2014.  TSG appealed and obtained a decision from the NC Court of Appeals reversing Judge Murphy in December 2014., 566 S.E.2d 561 (2014). The COA remanded the case to the Business Court and directed it to enter the previously denied Preliminary Injunction.  But then, the Defendant filed a Petition for Discretionary Review with the NC Supreme Court.  The Supreme Court denied that Petition (like it does with almost all of them) eight months later, in August 2015.

The Term Of The Covenant Not To Compete Ran Down During The Appeals

All throughout this appeal, the clock on TSG's two year -compete was winding down,  Its former employee, Defendant Bollinger, had quit his job at TSG on November 21, 2013 and began employment with a competitor, Defendant American Custom Finishing, LLC, four days later.  The non-compete agreement which he had signed was in place for two years.  (It said as to its term thatthe employee could be enjoined "[d]uring the period of two (2) years following the date of Employee's termination of employment with TSG. . . ."  Murphy Order 9).

By the time of Judge Bledsoe's Order last week, the two-year period of the non-compete had expired, and Judge Bledsoe ruled that the covenant not to compete could not be enforced.  Op. 23.

The Court Couldn't Extend The Term Of The Covenant Not To Compete

Covenant not to compete experts will think of those NC cases that extend the term of the non-compete for the period that it was being violated.  But those cases involve covenants that contain an explicit provision regarding their extension, like: "[t]he periods of protection shall not be reduced by any period of time during which [the employee is] not in compliance therewith." Phillips Elecs. N. Am. v. Hope, 631 F.Supp.2d 705, 718 (M.D.N.C. 2009)

The NC COA enforced such language in QSP, Inc. v. Hair,  152 N.C.App. 174, 177-78, 566 S.E.2d 851, 853 (2002), where the non-compete said that:

[Employee] agree[s] in light of the special nature of QSP's fund-raising business that if [employee] violate[s] this Agreement, appropriate relief by a court requires that the terms of paragraphs 1(a-f) and 3(b) will be extended for a period of twelve (12) months commencing on the date of [employee's] last violation of this Agreement....

But in this case, the covenant contained no provision regarding an extension, so Judge Bledsoe could not extend it beyond its two year term.

The Appeal Presented No Basis For An Extension

How about that failed Petition for Discretionary Review?   Was that a basis for extending the covenant's duration?  The passage of time caused by that unsuccessful Petition by the Defendants had caused the non-compete to expire.  The competitive restriction was governed by Pennsylvania law, which allows for an extension of a covenant's restriction if "fraud or unnecessary delay caused by the [enjoined party] . . . unjustly permitted the . . . time restraint to expire."  Op. 22 (quoting Hayes v. Altman, 266 A.2d 269, 272 (Pa. 1970)).

Judge Bledsoe said that there was no evidence:

to suggest that Bollinger has engaged in fraud or unnecessary delay to cause the restrictive period to expire.  To the contrary, Judge Murphy declined to enter a preliminary injunction in February 2014, and Plaintiff elected to appeal.  When the Court of Appeals overturned Judge Murphy's decision, Bollinger timely exercised his legal right to file a petition for discretionary review with the North Carolina Supreme Court.  Upon learning of the Supreme Court's denial of Bollinger's petition for discretionary review and the certification of that decision to [the Clerk of Superior Court for the County in which the case had been filed], this Court has acted promptly to issue this Preliminary Injunction Order as directed by the Court of Appeals.  Accordingly, the timing of this Order is the result of the normal processes of the North Carolina court system and not due to any 'fraud or unnecessary delay' by Bollinger.  Thus, an extension of the restrictive period . . . is not available. . . .

Op. 26 (emphasis).  Read "normal processes of the North Carolina court system" to read that the judicial system is not built for speed.  (I'm not picking on the North Carolina courts, that's true of all court systems).  If you are chasing after an injunction on a non-compete in the appellate courts after it was denied in the trial court, your non-compete is likely to expire during the appeals. So, pursuing the "normal processes" of an appeal may be a waste of time (and your client's money).

Can You Really Appeal An Order Denying (Or Granting) An Injunction Or Is It Interlocutory And Not Appealable?

The opinion from the NC COA in the TSG case gives a brief discussion of the appealability of an Order granting or denying an injunction.

The Court said that:

North Carolina appellate courts have routinely reviewed interlocutory court orders both granting and denying preliminary injunctions, holding that substantial rights have been affected. See, e.g., A.E.P. Industries, Inc. v. McClure, 308 N.C. 393, 302 S.E.2d 754 (1983); Iredell Digestive Disease Clinic, P.A. v. Petrozza, 92 N.C.App. 21, 373 S.E.2d 449 (1988) aff'd, 324 N.C. 327, 377 S.E.2d 750 (1989); Cox v. Dine-A-Mate, Inc., 129 N.C.App. 773, 501 S.E.2d 353 (1998); Masterclean of North Carolina, Inc. v. Guy, 82 N.C.App. 45, 345 S.E.2d 692 (1986).

566 S.E.2d at 853.

An Argument Based On The Inevitable Disclosure Doctrine Didn't Work

Plaintiff took a run at enjoining Bollinger from working in its industry of textile finishing based on the inevitable disclosure doctrine.  That seemed like a good idea given that Pennsylvania recognizes the doctrine.  Op. 28.  But Judge Bledsoe said that NC law, not Pennsylvania law, governed Plaintiff's claim for misappropriation of trade secrets.  Order 28.  He cited three previous Business Court opinions in which the Business Court said that it was "uncertain" and "unclear" whether North Carolina's appellate courts had recognized the doctrine.  Op. 28.

But the Plaintiff got an injunction enjoining Bollinger from misappropriating its trade secrets or any "confidential or other proprietary information as opposed to an injunction based on the non-compete, which would have prevented Bollinger from working for his neww employer.  The bond required was quite small -- only $250 -- since "the potential risk for damages" to Bollinger was deemed to be minimal.  Order 31.

All Is Not Lost: Plaintiff Can Still Get Damages

It's worth noting that the expiration of the non-compete doesn't preclude the Plaintiff from recovering  damages "that arose as a result of Bollinger's alleged violation of the Non--Compete Provision during the restrictive period."  Op. 27 & n.8.

 

Problems To Avoid When Making A Meiselman Claim And/Or Filing A Derivative Action

The Business Court's Opinion last week in Coleman v. Coleman, 2015 NCBC 110, provides useful guidance on how to properly plead a Meiselman claim, and proper procedure to follow before making a derivative claim.

Plaintiff in the Coleman case made both a Meiselman claim and a derivative claim.  As you will guess from the case name, this was a family dispute in which all of the parties were  "related, either through blood or through marriage."  Op. 3.  Plaintiff was a shareholder and President of two family-owned corporations, one of which owns Asheville Mall.  He had been removed from  his position by his co-shareholder family members despite what he said was a shared expectation that he would remain the President as long as he was "capable and willing to serve."  Op. 11.

Plaintiff couched his first claim as one for "Breach of Fiduciary Duty -- Meiselman Action.  If you aren't familiar with a "Meiselman action," the North Carolina doctrine -- decided iby the NC Supreme Court in the case of Meiselman v. Meiselman in 1983 -- protects a shareholder in a closely held corporation from "the frustration of his reasonable expectations as a shareholder" (Op. 19).  That can include things like like continued employment with the corporation or actions affecting share ownership.  The shareholder must show that his  "reasonable expectations" were known to or assumed by the other persons involved with the corporation.  

Don't Expect Conclusory Allegations To Get You Past A Motion To Dismiss

The Plaintiff before the Court hadn't pleaded his Meiselman claim adequately.  Judge Bledsoe said that:

Plaintiff has not pleaded sufficient facts to show his expectations were reasonable or concurred in by Defendants.  Plaintiff has advanced only conclusory allegations that Defendants knew of and frustrated his substantial and reasonable expectation of continuing to serve as President of the Corporations.

Op. 22.

Plaintiff also hadn''t pled his claim with enough detail to get past the presumption afforded the corporation by the business judgment rule.  The business judgment rule creates a "a strong substantive presumption that [a] director's judgment will not be judicially second-guessed unless it cannot be attributed to a rational business purpose."  Op. 31.

Plaintiff said he had been replaced as President by a person who did "not have the requisite expertise or experience to properly manage the Corporations."  Op. 32  The Judge said that "[t]his conclusory statement, standing alone, is insufficient to demonstrate that the board's actions were outside the realm of the business judgment rule." Op. 32. 

Don''t Ask For Relief Which The Court Doesn't Have The Power To Grant

Another reason that the Meiselman claim was dismissed was because the relief that the Plaintiff sought (his reinstatement as President) could not be granted by the Court.

Judge Bledsoe observed that here was a significant change "between the statutory framework in which North Carolina courts  analyzed Meiselman and the framework in existence today."  Op. 24.  Years ago, a trial judge had the power per the now repealed G.S. §55-125.1 to cancel, alter, or enjoin "any resolution or other act of the corporation or to direct or prohibit "any act of the corporation or of shareholders, directors, officers or other persons party to the action."

As the law stands now, "courts are limited in the exercise of their 'discretionary equitable jurisdiction to order involuntary dissolution, or, alternatively, a mandatory buyout for the protection of the minority shareholders in closely held corporations.'"  Op. 24.  Reinstatement?  Not available.

The Dismissal Of The Meiselman Claim Was Without Prejudice

The Court allowed the Plaintiff to amend his Meiselman claim "in a manner consistent with Rule 8's requirements and prevailing case law.

A Demand on The Corporation Is Essential Before Filing A Derivative Action

A demand on the corporation to take action is an essential prerequisite to the filing of a derivative action.  G.S. §55-7-42 says that a shareholder "may not commence a derivative proceeding" without having made a written demand "upon the corporation to take suitable action."

A Plaintiff must wait ninety days after the demand before starting a derivative action.  The 90 day period is waived only if the corporation rejects the demand before the 90 days have run, or if irreparable injury would result to the corporation if the potential plaintiff is forced to wait.  N.C. Gen. Stat. §55-7-42.

This Plaintiff didn't wait the 90 days, contending that the corporations had rejected his demand via a voicemail.

What Constitutes The Rejection Of A Demand

Plaintiff had made his demand in a letter which he  sent to the other directors and shareholders of the corporations.  The attorney who Plaintiff said was counsel for the "Majority Shareholders and Majority Directors" (Op. 27 & n.3) left Plaintiff the voicemail rejecting the demand.

That phone call was not sufficient to avoid the 90 day waiting period because there was no allegation that this attorney had the authority to bind the corporation.  Op. 29.  That ruling was consistent with a decision from the Business Court last year, in which Judge Gale held that:

any response adequate to constitute a corporate rejection that excuses the further running of the ninety day waiting period must be made by those with the authority to act on behalf of the corporation.

Petty v. Morris, 2014 NCBC 66 at 46

Make Sure To Verify Your Derivative Action Complaint

Rule 23(b) of the NC  Rules of Civil procedure says that all complaints initiating a derivative action must be verified under oath. 

This Plaintiff had not verified his complaint, so his lawsuit was dismissed without prejudice.

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If you are thinking that this Plaintiff stands in pretty good shape even after the grant of the Defendants' Motion to Dismiss because he has the right to refile his claims, you are mostly right.  But given that the lawsuit was filed in August of last year, Mr. Coleman will be starting all over again, nearly a year and a half later, following the dismissal.

 

 

A Couple Of Points About Receiverships

There's a lot to wonder about receiverships.  Like, how is the Receiver's  compensation calculated?  And does it make a difference to compensation if a corporate shareholder says the receivership was unnecessary, and that it was obtained for improper purposes?

Judge Bledsoe answered those questions this week in Ekren v. K&E Real Estate Investments, LLC. 2015 NCBC 107,

Compensation Can Be Based On Gross, As Opposed To Net, Receipts

A Receiver, once appointed by the Court, is paid per the terms of G.S. §1-507.9.  The statute says that: the court shall allow a "reasonable compensation to the receiver for his services, not to exceed five percent upon receipts and disbursements, and the costs and expenses of administration of his trust and of the proceedings in said court, to be first paid out of said assets."

Let's say that a receiver sells a piece of property for $100,000 which is subject to a $90,000 mortgage.  Is the five percent allowed by the statute calculated on the $100,000 gross receipt, or the net receipt of $10,000 which is left following the payment of the mortgage?

 The receiver for K&E Real Estate Investments had submitted two previous requests for compensation based on net receipts, but in the request before the Court requested that it be based on the gross receipts.

Judge Bledsoe denied an objection to the request for compensation, stating:

N.C. Gen. Stat. sec. 1--507.9 . . . does not require that commission be paid on net receipts, and the Court does not find that the Receiver's decision to seek commission based on net receipts in his first two applications precludes his request to be paid on gross receipts in the current Motion.

Op. 5.

Compensation Of Receiver Appointed For "Spiteful Purposes"

The Court also rejected the Defendant's argument that the Receiver's fees should be reduced because the lawsuit which led to the appointment of the Receiver was "motivated strictly by [Plaintiff's] spite."  Order 8.  Judge Bledsoe said that '[t]he Receiver's compensation should not be dependent upon the wisdom of his appointment."  Op. 8.

 

Do The Same Rules Apply To Receivers For LLCs As For Corporations?

Eagle-eyed readers will have noticed that the receivership in this case was for an LLC, and that Section 1-507.9 only mentions the compensation of receivers for "insolvent corporations."

Judge Bledsoe noted that the Order appointing the Receiver for the LLC (entered by Judge Murphy in 2012) said that the Receiver would be paid per G.S. Section 1-507.9  Op. 3 & n.1.

The NC Limited Liability Company Act has multiple provisions providing for the appointment of a Receiver.  It has no specific provision regarding the compensation of a Receiver.  The closest it comes is Section 57D-6-04, which says that:

The court may order the LLC to compensate the receiver and reimburse the receiver's expenses, including the fees and expenses of attorneys and other professionals retained by the receiver.

Plaintiff Gets A Rare Win On A Motion For Reconsideration In The NC Business Court

It's pretty hard to succeed at getting a Business Court Judge to reconsider a prior ruling and reverse himself.  But the Plaintiff in RREF BB Acquisitions, LLC v. MAS Properties, LLC, 2015 NCBC 105, accomplished exactly that last week.

I wrote about this case when the earlier ruling in the case was made, about six months ago.  But I didn't mention the aspect of the ruling on which the Court has now reversed itself.

Why would have I overlooked something that was significant enough for Judge McGuire to reverse himself upon?  Well, it involved ECOA,  Writing about an ECOA issue is about as interesting to me as tackling something involving ERISA or RESPA. 

If you are lost in that alphabet soup of acronyms, ECOA is the Equal Credit Opportunity Act.  It was enacted by Congress in 1974, and it prohibits any creditor from discriminating against any applicant, with respect to any aspect of a credit transaction, on the basis of race, color, religion, national origin, sex, marital status, or age.

RESPA?  The Real Estate Settlement Procedures Act.  ERISA? The Employee Retirement Income Security Act.

The regulations controlling ECOA provide that a waiver of the protections of the Act cannot be waived in any transaction constituting an "extension of credit." The  Defendants in RREF had signed off on a waiver of their defenses to the collection of a promissory note.  They had signed that waiver in a loan modification agreement which said that they:

waive any objection thereto, affirm any and all obligations to [the lender] and certify that there are no defenses or offsets against said obligations or [the lender].

Op. ¶1 (emphasis added).

In its June ruling (2015 NCBC 58), the Business Court found this language to be ambiguous as to whether it was intended to cover the ECOA defense to collection of the promissory note raised by the wife of the borrower. 

So what changed in the intervening six months warranting a reconsideration of the June ruling?  It was one of those rare North Carolina Supreme Court rulings in a civil case delivered at a most opportune time, in Ussery v. Branch Banking and Trust Co. decided on September 25, 2015.

In Ussery, a factually similar case, the NC Supreme Court reversed the denial of a motion for summary judgment by the NCCOA.  The Supreme Court held that the plaintiff had waived all of its defenses to the validity of a loan by the Defendant.  The waiver language was contained in a loan modification agreement (like RREF's was) and was nearly identical to the waiver signed by Mrs. Saunders and procured by the same Bank involved in the RREF case (BB&T).  The Supreme Court called this language "clear and unambiguous."  Ussery at 21.

The Supreme Court did not specifically address the argument made by RREF in the Business Court: that the waiver was unenforceable as a matter of law because the loan modification agreement was an "extension of credit."

Judge McGuire, no longer hobbled by his previous ruling that the language of the waiver was ambiguous, went on to deal with that issue, and ruled that:

Sybil Saunders was not required to prospectively waive her rights under the ECOA when she entered into the original loan agreements, but did so in exchange for avoiding a soon due large payment and obtaining a modification of the terms o[f] the existing loan.  The Court cannot conclude that there is any basis . . . for permitting a borrower to waive their ECOA claims in a forbearance or settlement agreement but not in a loan modification or restructuring agreement.

Op. ¶11.

This decision is good news for banks working out troubled loans.  They can erect a strong defense to an ECOA claim when securing a waiver in a loan modification agreement.

Previous Motions for Reconsideration made in the Business Court have generally not met with success.  That''s been particularly true of Motions aimed at trying to get a new Business Court Judge to fix the claimed errors of a predecessor Judge.

The Business Court observed many years ago that "[t]he North Carolina Rules of Civil Procedure do not include a provision for ''reconsideration.'"    GR&S Atlantic Beach, LLC v. Hull, 2013 NCBC 39 n.1.

The Plaintiff in RREF was lucky to be handed an NC Supreme Court decision supporting its Motion for Reconsideration.  There''s probably not much chance of that happening.

 

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. 

Successor?

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.

Member

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.

Designee

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.

Op.¶27.

The Plaintiff's argument was that:

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

Op. ¶28.

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

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

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

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

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

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

 

Pizzas And Trademark Infringement

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

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

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

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

The Infringement

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

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

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

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

The Defense of Naked Licensing

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

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

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

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

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

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 dismisse