NC Business Court: Choice Of Law Dooms Trade Secrets Claim

What choice of law rule applies to trade secrets claims?  No North Carolina appellate court has answered that question, but Judge Robinson of the NC Business Court stepped into that breach in his Opinion in SciGrip v. Osae, 2018 NCBC 10.

The Plaintiff certainly didn't like the answer, as it resulted in the dismissal of its claim for the misappropriation of its trade secrets.

Defendant Osae had worked for the Plaintiff SciGrip for years developing its adhesive products.  He then left to join a competitor, Scott Bader, Inc. (SBI).  SciGrip sued both Osae and SBI in 2008 (in another lawsuit) for Osae's violation of confidentiality restrictions which he had signed while working for SciGrip.  That first lawsuit was settled via a Consent Order, which specified that Osae could not disclose SciGrip's confidential information, and that SBI could not use it.

SciGrip sued Osae again in 2013, after he had joined another company, EBS, which is also in the adhesives industry.  This is the case in the Business Court.  EBS had filed a provisional patent application regarding its adhesives in Europe.  SciGrip alleged that the patent application contained its trade secret information and that Osae was in violation of the Consent Order.

SciGrip also sued Osae for misappropriation of trade secrets.  It sued SBI as well.  SBI, based in the UK, moved for summary judgment on the basis that all of  the alleged misappropriation of trade secrets had occurred outside of the State of North Carolina, and that NC's Trade Secrets Protection Act does not apply to misappropriation that occurred outside of the State.  Osae had done all of his work for SBBI and EBS outside of the State of North Carolina.

The case turned on whether North Carolina's  law ought to apply to the trade secrets claim.  Plaintiff argued for the "most significant relationship" test, saying the North Carolina had the most significant relationship to the events leading to the misappropriation.

Judge Robinson went with SBI's argument, that the proper test was lex loci delicti.  "Under this test, the situs of the claim is the state where the injury or harm was sustained or suffered — the state 'where the last act occurred giving rise to [the] injury.'  Op. Par. 34.

So what was the last act causing harm to the Plaintiff?  Judge Robinson said that "[m]isappropriation occurs when defendant acquires, discloses, or uses another’s trade secret without the owner’s consent or authority."  Op. Par. 35.

Osae had worked for the Plaintiff in North Carolina when he acquired its trade secrets, so that would seem to be the end of the choice of law inquiry.  But Judge Robinson looked to a North Carolina federal court ruling, and decisions from other federal jurisdictions holding

that the lex loci delicti 'is  not the place where the information was learned, but where the tortious act of misappropriation and use of the trade secret occurred.'  Domtar AI Inc. v. J.D. Irving, Ltd., 43 F. Supp. 3d 635, 641 (E.D.N.C. 2014)(concluding that plaintiffs could not bring a claim under North Carolina’s TSPA because defendants’ alleged misappropriation occurred in Canada); 3A Composites USA, Inc. v. United Indus., Inc., No. 5:14-CV-5147, 2015 U.S. Dist. LEXIS 122745, at *10 (W.D. Ark. Sept. 15, 2015) (applying North Carolina conflict of laws rules and following the approach taken in Domtar); Chattery Int’l, Inc. v. JoLida, Inc., No. WDQ-10-2236, 2012 U.S. Dist. LEXIS 57512, at *12−13 (D. Md. Apr. 24, 2012) (applying the lex loci delicti rule and stating that “[m]isappropriation occurs where the misappropriated information is received and used, not necessarily where it was taken or where the economic harm is felt”). 

Op. Par. 35.

Under this standard, Osae's alleged misappropriation occurred either in the United Kingdom, where he had worked at SBI's facilities, or in Florida, where Osae had worked for EBS.

Judge Robinson ruled that Plaintiff could not bring a claim under North Carolina's Trade Secrets Protection Act, and granted summary judgment for the Defendants.

This means that claims for violations of NC's TSPA cannot be pursued (at least in the NC Business Court) for misappropriation occurring outside of the State.  I'm already hearing gloom and doom about this decision, but Plaintiff almost immediately noticed an appeal, so we will be hearing from the NC Supreme Court on this choice of law issue.  Probably next year.

And if you are outraged at Judge Robinson's blunting of the reach of the NC TSPA, remember that "state laws may not generally operate extraterritorially."  Carolina Trucks & Equip., Inc. v. Volvo Trucks of N.A., Inc., 492 F.3d 484, 489-90 (4th Cir. 2007).  So there is nothing unusual about Judge Robinson's unwillingness to extend the TSPA's reach to conduct taking place not only outside of North Carolina, but outside of this country.

 

 

A Case Doesn't Have To Be "Complex" To Be Designated To The NC Business Court

The North Carolina Business Court sent a message to all lawyers practicing in the Business Court last week in Barclift v. Martin, 2018 NCBC 5.  Judge Gale said in the ruling that:

The  Court is publishing this Order & Opinion to provide guidance to the practicing bar on the statutory process for designating a case as a mandatory complex business case and to clarify apparent misconceptions regarding the requirements for designation.

Op. Par. 1 (emphasis added).

Barclift, contesting the Defendants' designation of his case as a "complex business case," argued that there was nothing complex about his case, and that it could be handled by a regular (non-Business Court) Superior Court Judge.

The "apparent misconception" referenced by Judge Gale?  That a case has to be complex in order to be designated to the Business Court.  The source of the supposed need for complexity stems from Rule 2.1 of the General Rules of Practice, which says that "the complexity of the evidentiary matters and legal issues involved" should be considered in the process of getting a case into the Business Court.

Rule 2.1 isn't totally obsolete as a method for getting a case to the Business Court, but most cases (like the Barclift case) are designated there by way of G.S. sec. 75A-45.4.  A Rule 2.1 designation involves persuading a Superior Court Judge in the County in which the case was filed that it should be a "complex business case."  The factors included in making that persuasion include its complexity.  The "local" Judge, upon being persuaded that the case should be handled by a "Superior Court Judge for Complex Business Cases", (i.e. a "Business Court Judge") then makes a recommendation to the Chief Justice of the NC Supreme Court that he or she so designate the case. Those recommendations are usually rubber stamped and the case lands in the Business Court.

The practice under Section 7A-45.4 is much more streamlined and far more automatic.  The statute lists six categories of cases that can be designated to the Business Court so long as they raise a "material issue."  "Complexity" is not necessary for these cases.

Is this ruling about the lack of a need for complexity in a 7A-45.4 designation something new from the Business Court?  Not at all.  Judge Tennille said in a ruling, over ten years ago, pretty much the same thing.  He held in Johnson v. Johnson, an unpublished Order from 2007, that:

complexity or the lack thereof is not an issue under section 7A-45.4. Section 7A-45.4 simply requires that the action involves a material issue related to at least one of six subjects, including “[t]he law governing corporations” and “issues concerning governance” and “breach of duty of directors.” N.C. Gen. Stat. § 7A-45.4(a)(1).

Order at 1 (emphasis added).

 

 

You Don't Want Your Confidentiality Agreement Evaluated Like A Non-Compete Agreement

You probably think that you can avoid having a confidentiality agreement struck down by an NC court because it doesn't have to meet the stricter standard applied to non-compete agreements.

The NC Business Court's Opinion this month in Duo-Fast Carolinas,, Inc. v. Scott's Hill Hardware & Supply Co., 2018 NCBC 2 may get you thinking differently.

The validity of a non-compete often turns in part on whether the restriction is "reasonable as to time and territory, and designed to protect a legitimate business interest of the employer."  See, e.g., A.E.P. Indus., Inc. v. McClure, 308 N.C. 393, 402–03, 302 S.E.2d 754, 760 (1983).

But a confidentiality agreement is enforceable "even though the agreement is unlimited as to time and area, upon a showing that it protects a legitimate business interest of the promisee.” Chemimetals Processing, Inc. v. McEneny, 124 N.C. App. 194, 197, 476 S.E.2d 374, 376 (1996).

In Duo-Fast, Judge McGuire found a confidentiality agreement to be invalid because it was not reasonable as to time and territory, in Duo-Fast Carolinas,, Inc. v. Scott's Hill Hardware & Supply Co., 2018 NCBC 2.  Wait, what about Chemimetals, which says that confidentiality agreements don't need to be limited as to time and territory.?

The individual Defendant in Duo-Fast, Modero,had been an outside sales representative for the Plaintiff.  He had signed an Employment Agreement saying that he would "not make known to any person. . . the contents of any customer lists."  There was no time limit on this restriction. 

Modero kept Plaintiff's customer information in his personal Yahoo email account.  Op. ¶¶5, 9.  After he left Plaintiff and began working as a sales representative for the Defendant, a direct competitor, Modero contacted some of his former customers using his Yahoo information.

Plaintiff made a number of claims against Modero and his new employer, including a claim for breach of the confidentiality provision of the Employment Agreement.  Judge McGuire ruled that provision to be unenforceable.  He found that "the non-disclosure provisions do not serve Plaintiff’s legitimate business interests, but rather seek to prevent Medero from soliciting Plaintiff’s customers in restraint of trade."  Op. 46.

Analyzing the "confidentiality provision" as a restrictive covenant, the Business Court concluded that:

prohibiting Medero’s use or disclosure of Plaintiff’s customer identities is overbroad. The non-disclosure provisions are not limited as to time, but rather are perpetual.  Such a restraint would prevent Medero from ever using the names  and contact information of Plaintiff’s customers.  Insofar as the non-disclosure provisions seek to prevent Medero from soliciting Plaintiff’s customers, they constitute an unenforceable restrictive covenant.

Op. 47.

What probably harmed Plaintiff's case was that the identities of its customers weren't confidential at all.   They were "readily ascertainable" by visiting construction sites and speaking to contractors.  Op. ¶45.

Plaintiff did not come out well in its lawsuit.  Judge McGuire found a separate non-compete provision to be unenforceable and dismissed all of Plaintiff''s claims.

 

 

NC Business Court On Conversion Of Electronic Data

The Defendant in SQL Sentry, LLC v. ApexSQL, LLC, 2017 NCBC 105 was alleged to have copied the Plaintiff's software program which was designed to make "resource intensive T-SQL queries. . . in the Microsoft enterprise database platform, SQL Server."  Op. Par. 5.  (Ask your IT person).

Adding insult to injury, the Defendant marketed the program it had copied under the same trademark used by the Plaintiff  to sell its competing program ("Plan Explorer"). 

So, when representatives of this Plaintiff walk into your office, what claims do you fire off in your Complaint against that thieving Defendant?  Trademark infringement, obviously.  How about a claim for conversion?

Maybe.  Electronic data is personal property, so it falls into the category of property which is subject to a claim for conversion.  Op. ¶14.

But the Plaintiff ran into a problem with its conversion claim.  It still had full access to its software, and that killed its conversion claim.

The NC Business Court has repeatedly "held that making a copy of electronically-stored information which does not deprive the plaintiff of possession or use of information, does not support a claim for conversion.” Op. ¶15 (citing RCJJ, LLC v. RCWIL Enters., LLC, 2016 NCBC 44, ¶67; accord New Friendship Used Clothing Collection, LLC v. Katz, 2017 NCBC 71, ¶77; Strategic Mgmt. Decisions, LLC v. Sales Performance Int'l, LLC, 2017 NCBC 68, ¶18; Addison Whitney, LLC v. Cashion, 2017 NCBC 50, ¶39.

Trying to fit a 21st century development like ESI into a tort like conversion, which has been around since the 1500's, is like trying  to fit a round peg into a square hole.

If you are insistent on including a conversion claim in your lawsuit over improper copying of electronic data, you might do better suing in federal court.  The United States District Court for the Western District of North Carolina has recognized such a claimBridgetree, Inc. v. Red F Marketing, LLC, 3:10CV228-FDW, 2013 WL 443698 (W.D.N.C. Feb. 5, 2013).

But avoid the NC Business Court.

 

Nc Business Court Stretches NCRCP 14 to Allow New Third Party Defendants To Be Added Years After The Commencement Of Litigation

The North Carolina Rules of Civil Procedure are fairly identical to the Federal Rules of Civil Procedure.  In fact, I am hard pressed to think of any substantial differences.

But the lack of one word contained in FRCP 14 -- "original" -- but omitted from the parallel NC Rule made all the difference in the NC Business Court's Opinion in AP Atlantic, Inc. v. Crescent University City Ventures, LLC, 2017 NCBC 91.

The case had to do with Plaintiff AP filing a third party complaint against multiple Defendants after Defendant Crescent University amended its Answer and counterclaim.  Big deal, you are probably thinking.  Rule 14 says that you can add as a third party Defendant anyone who "is or may be liable" to that party.  It is designed to "promote judicial efficiency and the convenience of parties by eliminating circuity of action . . . by consolidating [all] suits into one action."  Op. ¶26 (quoting Heath v. Board of Comm’rs, 292 N.C. 369, 376, 233 S.E.2d 889, 893 (1977)(quoting Charles Alan Wright et al., Federal Practice and Procedure § 1442 (1971)).

What made the AP Atlantic case unusual was that the counterclaim against AP which entitled it to add third party defendants who "were or might be liable to it" was first made in January 2016.  It wasn't until a year and a half later (in July 2017), when Crescent amended its counterclaim, that AP made its third party complaint against thirteen new third party defendant subcontractors.

AP Did Not Need The Permission Of The Court To File Its Third Party Complaint

Defendant Crescent said that AP needed to leave of court to make its third party complaint.  Crescent, relying on NCRCP 14, disputed that it had needed leave of court.  North Carolina's Rule 14 says:

At any time after commencement of the action a defendant, as a third-party plaintiff, may cause a summons and complaint to be served upon a person not a party to the action who is or may be liable to him for all or part of the plaintiff's claim against him. Leave to make the service need not be obtained if the third-party complaint is filed not later than 45 days after the answer to the complaint is served.

N.C. R. Civ. Pro. 14(a)(emphasis added).

The third party complaint adding the thirteen new parties was filed 21 days after the Answer amending the counterclaim against AP.  Timely?  Not under federal Rule 14, which says that:

the third-party plaintiff must, by motion, obtain the court's leave if it files the third-party complaint more than 14 days after serving its original answer.

FRCP 14(a)(1)(emphasis added).

The absence of the word "original," or any reference to amended pleadings in NCRCP 14, led Judge Bledsoe to rule that the words "answer to the complaint" in NCRCP 14 were ambiguous.  Op. ¶18.  He then embarked on an effort to determine the intention of the North Carolina Legislature in adopting a rule that did not parrot the "original answer" language of FRCP 14.

It Was Fundamental To The Court's Decision That The NC Legislature Is Presumed To Know Everything

He started with the proposition that:

Because North Carolina’s rule was first enacted in 1967, and because the Court must presume the legislature acted with full knowledge of prior and existing law, the Court must presume that the legislature knew of the language in Federal Rule of Civil Procedure 14 and — and continues to make — a deliberate decision not to use it in North Carolina’s rule.

Op. ¶21.

The presumption that the NC Legislature was omniscient and well versed in the Federal Rules of Civil Procedure is not something that Judge Bledsoe created out of thin air.  The North Carolina Supreme Court has said many times that "[i]t is always presumed that the legislature acted with care and deliberation and with full knowledge of prior and existing law."  See, e.g., State v. Benton, 276 N.C. 641, 174 S.E.2d 793, 805 (1970).

Judge Bledsoe moved on to considering the meaning of the words "original answer" in the federal rule, concluding that it "would be the first or earliest answer filed in a lawsuit, as no answer would have been filed before it."  Op. ¶23. It follows from that proposition that North Carolina's version of Rule 14 doesn't make a distinction between original or amended pleadings.  Op. ¶23.

So, AP was allowed to amend its third party complaint -- without leave of Court -- to add more than a doen new parties to the case well more than a year after the case was first filed.

Judge Bledsoe obviously had some uneasiness about this ruling, saying that he made his decision "reluctantly."  Op. ¶23.

 

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Incorporating By Reference In Your NC Business Court Brief? Don't Do It!

If you have ever drafted a Complaint, you have undoubtedly used the words that your previous numbered allegations were "incorporated by reference."  It's a way of not having to repeat yourself.  That  shortcut is specifically allowed by Rule 10(c) of the North Carolina Rules of Civil Procedure, which says that: "Statements in a pleading may be adopted by reference in a different part of the same pleading or in another pleading or in any motion in the action."

If you have a case where you have filed multiple briefs, you might "incorporate by reference" arguments you made in an earlier brief.  You probably haven't thought twice about that. 

Well, Judge McGuire of the NC Business Court has thought about it, and he doesn't like it.  In American Air Filter Co. v. Price, 2017 NCBC 54, he ruled that the use of incorporation by reference of earlier briefs could be a violation of the Rules of the NC Business Court and that it could result in the Court refusing to consider the referenced argument.

How could that be, you are wondering, as there is no mention (or any prohibition) of this practice in the Court's rules.  The reason is that the inclusion of the pages of a previously filed brief might push you over the page limitations contained in the Business Court Rules for briefs.  The Rules require the lawyer for a party filing a brief to limit her words to 7,500, and to "include a certificate by the attorney or party that the brief complies with this rule." BCR 7.8.

Judge McGuire said in the American Filter case that: 

The General Rules of Practice and Procedure for the North Carolina Business Court (“BCR”) do not expressly permit parties to incorporate previously-filed briefs and documents outside of the brief at issue, at least not to supplement the substantive text of the brief at issue. In fact, BCR 7.8 provides strict word limits on briefs submitted to this Court. Even if incorporation of previous briefs were allowable, it appears a party incorporating a previously-filed brief would have to certify under BCR 7.8 that the brief and the incorporated brief did not exceed the word limits. Defendants have not done so in this case. As a result, the Court declines to consider Defendants’ arguments and authorities regarding choice of law issues contained in other filings with the Court.

Op. at n.2.

 

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When You Settle A Case, Don't "Over-Release" The Defendant

The parties to Security Camera Warehouse, Inc. v. Bowman, 2017 NCBC 38, had been adverse to each other in a previous lawsuit (not in the Business Court), which they settled.  Security Camera released Bowman, one of its former owners, from all claims in that settlement.  But during the settlement negotiations which resulted in the settlement of lawsuit #1, Bowman had control of Security Camera's computer server, and downloaded what Security Camera said was trade secret information (Security Camera's customer list and other information regarding those customers).

After the settlement was done, Bowman incorporated Defendant Arcdyn to compete with Security Camera, using the customer information he took during the settlement discussions.

Security Camera, understandably aggrieved, sued Bowman and Arcdyn on a variety of theories, including misappropriation of trade secrets and breach of fiduciary duty.

The Defendants said that these claims were barred by the Release.  In his Opinion, Judge Conrad agreed and dismissed most of the claims.

Here are the terms of the Release: Security Camera and Nederlanden (who became the sole owner of Security Camera via the settlement) said that they:

generally release and forever discharge Bowman, his agents, heirs,successors and assigns, from any and all claims, demands, and causes of action of whatever kind or character which [Security Camera and Nederlanden] have, or may have in the future, against Bowman, based on any acts or events that have occurred on or before the execution of this Agreement, whether or not growing out of or connected in any way with operations or business transactions of [Security Camera].

Op. 8 (emphasis added).

Judge Conrad framed the issue as follows: "whether the parties’ mutual release bars recovery for the post-release use of a trade secret wrongfully acquired before the execution of the release."  Op. 24. 

Don't Release Claims Which You "May Have In The Future"

The Court dismissed as "untenable" Security Camera's  main argument that the release was not prospective.” The language contained in the Release, that it covered claims Security Camera “may have in the future," made this pretty clear.  Op. 28.

Judge Conrad noted that Security Camera had not limited the terms of the Release to preserve its trade secrets claims, and that the alleged misappropriation of trade secrets had happened before the execution of the Release. He said:

  • In negotiating the release, Security Camera could have required Bowman to return its property, reserved any potential trade-secret claims, or refused to release claims accruing after the execution of the Agreement.
  • It did not, and it is now far too late to import limitations that were not the subject of the parties’ bargain.

Order 30.

But not all of Security Camera''s claims were dismissed. The Court left standing a claim for the Defendants' interference with a website which the Plaintiff claimed it owned (SCWddns.com).  It said that the Defendants had disabled the website, and that it had to buy a new domain to restore its website.

Although the Defendants claimed that they owned the website, Judge Conrad found that there was an issue of fact on that point, and he refused to dismiss the claim.  Op. 42-43.

On the subject of releases, it's pretty common to release a party from all claims, whether "known or unknown" at the time of the release.  So, it was not out of the ordinary for Security Camera to give up claims it was unaware of that arose during the settlement negotiations.

 

 

It Doesn't Take Magic Words To Revoke An Offer

The lawyers in Baker v. Bowden, 2017 NCBC 30, decided this week by Judge Robinson, were negotiating a settlement agreement by email.  The Plaintiff thought that it had a deal.  When the Defendant balked, the Plaintiff moved the Business Court to enforce the settlement. 

The Plaintiff, whose lawyer had sent an email to the Defendant's lawyer stating "[m]y client accepts the offer," found that there was no offer anymore, and no enforceable agreement.

The Plaintiff's lawyer thought in accepting the offer that the Defendant's offer was still open for acceptance.  But even the Defendant's lawyer wasn't sure if it was.  His last email to Plaintiff's counsel said:

in the interim since yesterday afternoon my client is actually having second thoughts about his offer, so I’m not sure it’s still on the table. I’m not saying it isn’t, but I need to talk with him and see if I can work him through this. I’ll let you know later this afternoon.

Op. ¶12.

The Plaintiff's email accepting the by then questionable offer followed this email, but Judge Robinson concluded that the "second thoughts" email was a valid revocation of the offer.  Op. ¶23.  You don't need to use the word "revoke" to withdraw an offer, and "[a]ny clear manifestation of unwillingness to enter into the proposed bargain is sufficient."  Op. ¶23.

The situation before the Court was spelled out in the Restatement (Second) of Contracts, which gives this example of a similar situation when an offer is revoked:

when an offeror states, “Well, I don’t know if we are ready. We have not decided, we might not want to go through with it." 

Op. ¶22 (quoting Restatement (Second) of Contracts sec. 42, comment d).

Reliance on the Restatement as authority seems like a firm foundation.  The Restatement is said to be "a work without peer in terms of overall influence and recognition among the bar and bench."

NC Business Court On Conflicting Rules Of Civil Procedure: Do You Need Leave Of Court To Amend Your Answer To Add A Counterclaim?

If I asked you if you were familiar with Rule 13(f) of the NC Rules of Civil Procedure, I'm betting that you would respond with a glassy stare and a slack jaw.  That Rule deals with a counterclaim that you should have made in your Answer, but which you left out.  It says that "[w]hen a pleader fails to set up a counterclaim through oversight, inadvertence, or excusable neglect, or when justice requires, he may by leave of court set up the counterclaim by amendment."

Leave of Court?  Asking permission?  Well, how does that square up with NCRCP 15, which deals with "amended pleadings?" That Rule says that you can amend your Complaint "as a matter of course" (i.e. without "leave of the Court") at any time before a "responsive pleading is served."  But Rule 13(f) seems to contemplate that the permission of the Court is needed before amending an Answer to raise an overlooked counterclaim. 

Judge Robinson dealt with these apparently conflicting Rules last week in Recurrent Energy Development Holdings, LLC v. Sunenergy1, LLC, 2017 NCBC 18.  Defendant Sunenergy1 had amended its Answer to add a counterclaim.  It did so within thirty days of filing its original, counterclaim-less Answer, but without asking for the permission of the Business Court.

The Plaintiff moved to strike the Answer, contending that NCRCP 13(f) required leave of Court  to add the counterclaim.

Judge Robinson, finding no North Carolina appellate authority on the point, looked to federal court decisions, though he found the federal case law to be "scant."  The majority of federal courts looking at the federal version of the Rule had decided that:

a party may amend its answer to add a counterclaim as a matter of course under Federal Rule 15(a), and that leave of court under Federal Rule 13(f) was only required after the period for amendment under Federal Rule 15(a) had expired.

Op. ¶87.

Judge Robinson observed that "a few other courts" had found otherwise.  Op. ¶88.

There really wasn't any need to decide which line of federal cases to follow because the Federal Rules were amended in 2009 to delete Rule 13(f).  The reason for the deletion was that the Rule was "largely redundant and potentially misleading."  Op. ¶93 (quoting Notes of Advisory Committee on 2009 amendments).  The Notes to Rule 15 state that the deletion of Rule 13(f) "establishes Rule 15 as the sole rule governing amendment of a pleading to add a counterclaim."

Judge Robinson interpreted the deletion of FRCP 13(f) to confirm that FRCP 15(a) "was always intended to apply to amendments to add counterclaims."

So, you do not need to file a Motion asking the Court to permit you to add a counterclaim to your Answer if you add that counterclaim within 30 days of your original Answer.  You can do that as "a matter of course."

NC Business Court: What Is Intrusion Into Seclusion?

I had never heard before of a "privacy tort" claim for "intrusion into seclusion."  But it exists in North Carolina per Judge Gale's Opinion in Dishner v. Goneau, 2017 NCBC 7, decided in the NC Business Court this week.  This is not a brand new tort.  It has been recognized by the NC Court of Appeals in the cases cited by Judge Gale (see below) and is even spelled out in the Restatement (Second) of Torts §652.

What is it?  "[T]he intentional intrusion, 'physically or otherwise, upon the solitude or seclusion of another or his private affairs or concerns.'”  Op. 43.  (quoting Miller v. Brooks, 123 N.C. App. 20, 26, 472 S.E.2d 350, 354 (1996) (quoting Smith v. Jack Eckerd Corp., 101 N.C. App. 566, 568, 400 S.E.2d 99, 100 (1991)).

The tort typically requires “a physical or sensory intrusion or an unauthorized prying into confidential personal records.”Op. Par. 43 (quoting Broughton v. McClatchy Newspapers, Inc., 161 N.C. App. 20, 29, 588 S.E.2d 20, 27(2003)).

The intrusion furthermore must be "highly offensive to a reasonable person."  Op. 43.

The allegations of the Plaintiff as to the intrusion into seclusion didn't pass muster.  He said that the Defendant, his former partner, had accessed his private email account without authorization and had sent emails to persons who were his contacts.  Judge Gale dismissed that claim without prejudice in the event that the Plaintiff could restate the claim "with adequate supporting detail."  Op. 46.

If you are thinking that this allegedly unauthorized intrusion into Plaintiff's computer sounds like a claim that could be brought under the Computer Fraud and Abuse Act, 18 U.S.C. §1030, so did the Plaintiff.

But that claim was dismissed as well.  That statute requires that the Plaintiff plead and prove at least $5,000 in loss as a result of the violation.  18 U.S.C. §1030(g).  Judge Gale said that "loss of goodwill, business opportunities, or revenue resulting from improperly acquired information do not constitute 'loss' within the meaning of the CFAA."  Op. 41.  He said that the $5,000 loss required under the statute must be "related to fixing a computer."  Id.

Judge Gale's narrow interpretation of "loss" under the CFAA was based on  Nexans Wires S.A. v. Sark-USA, Inc. 319 F. Supp. 2d 468, 475 (S.D.N.Y. 2004), aff’d, 166 F. App’x 559 (2d Cir. 2006), which contains a pretty thorough discussion of the point.

NC Business Court Starts Off 2017 By Denying A Motion For Sanctions And Adding A New Judge

In the NC Business Court's first Opinion of the new year, Judge Bledsoe denied Defendants' Motion for Rule 11 Sanctions in Kure Corp. v. Peterson, 2017 NCBC 1.  The decision holds a few lessons about the operation of Rule 11 of the NC Rules of Civil Procedure.

You Can't Avoid A Rule 11 Sanction in North Carolina By Withdrawing Your Complaint

Maybe you got carried away and filed a Complaint that you discovered later wasn't "well grounded in fact" or "warranted by existing law" and was therefore in violation of Rule 11.  That  conduct exposed you (and your client) to a sanction of having to pay "the reasonable expenses incurred because of the filing of the pleading . . . including a reasonable attorney's fee."  NCRCP 11(a).

Can you avoid the whole problem by dismissing or amending the Complaint?  If you are in federal court, the answer would be "yes."  There is a "safe harbor" under FRCP 11.  Judge Bledsoe observed that under the Federal Rules, "once a party serves a Rule 11 motion on the opposing party, the motion 'must not be filed or be presented to the court if the challenged paper, claim, defense, contention, or denial is withdrawn or appropriately corrected within 21 days after service or within another time the court sets.'  Fed. R. Civ. P. 11(c))."  Op. 7 & n.2.

The Federal Rules were amended in 1993 to add that "safe harbor" language.  The North Carolina Rule was last amended in 1986 and was nearly identical to the federal rule in effect at that time.  It therefore doesn't provide for any "safe harbor."

So even though the Plaintiff in the Kure case had amended its Complaint, and even though the counsel filing the Complaint had had new counsel substituted for them, the lawyers filing the original Complaint were still subject to Rule 11 sanctions.

Suing On Behalf Of An Incorrect Party Is Not Sanctionable Under Rule 11

The Plaintiff Kure Corp. was suing as a result of alleged misrepresentations made to it.  As the Defendant pointed out in its Rule 11 Motion, however, Kure had not been formed as a corporation until after the alleged misrepresentations were made.  The Defendant said that the Plaintiff's counsel were subject to Rule 11 sanctions because they had sued on behalf of the wrong party.

The Business Court, looking to the terms of NCRCP 17, which says in part that "[n]o action shall be dismissed on the ground that it is not prosecuted in the name of the real party in interest until a reasonable time has been allowed" for substitution of the proper party, denied that aspect of the Rule 11 Motion.

Judge Bledsoe's ruling was bolstered by an NC Court of Appeals decision holding that “[c]ourts should not impose sanctions under Rule 11 when relief is available under another provision which more specifically addresses the situation.”  Op. 21(quoting Overcash v. Blue Cross & Blue Shield, 94 N.C. App. 602, 618, 381 S.E.2d 330, 340 (1989)).

Wanting To Be The First To File Isn't An "Improper Purpose" Per Rule 11

The parties to the Kure case had met to discuss a resolution of their dispute before the lawsuit was filed.  Defendants alleged that at that meeting, Plaintiff's representative had demanded that the Defendants sign a settlement agreement or that "plaintiff would file its Complaint within the hour." Op. 27.

In addition to its requirement that a pleading be "well grounded in fact" or "warranted by existing law" Rule 11(a) also condemns filing for an "improper purpose."  It says that a signature on a Complaint is a certification that litigation it is not "interposed for any improper purpose, such as to harass or to cause unnecessary delay or needless increase in the cost of litigation."

An improper purpose is “any purpose other than one to vindicate rights . . . or to put claims of right to a proper test.” Op. 26 (quoting Mack v. Moore, 107 N.C. App. 87, 93, 418 S.E.2d 685, 689).  Judge Bledsoe ruled that the sort of conduct complained of by the Defendants was not sanctionable.  He said that:

Defendants. . . have not pointed to any authority demonstrating that a desire to gain a litigation advantage is beyond the scope of 'vindicating rights' or 'putting claims of right to a proper test.' Finding that Plaintiff acted with an improper purpose would expose to sanctions countless attorneys who make pre-filing settlement demands or seek to file before the opposing party does.

Op. 28.

A Couple More Things: New Judge(s?) for the Business Court And My Resolution

The Business Court also started off 2017 with at least one new Judge.  Adam M. Conrad was nominated a Special Superior Court Judge by outgoing Governor Pat McCrory in December 2016.  I don't know new Judge Conrad, but he has an outstanding background including a U.S. Supreme Court clerkship and formerly being a partner at King & Spalding.  Judge Conrad takes his Business Court judgeship by way of the General Assembly's enactment of N.C. Gen. Stat. sec. 7A-45.1(a9), which created  a new special superior court judgeship which the Governor, prior to submitting the nominee for confirmation and in consultation with the Chief Justice, shall determine has the requisite expertise and experience" to be designated as a business court judge."  His nomination was confirmed by the NC General Assembly last month.

Judge Conrad has assumed his position and will be residing in the Business Court in the Mecklenburg County courthouse.

Governor McCrory also nominated Andrew Heath as a Special Superior Court Judge.  Mr. Heath, confirmed by the General Assembly last month, is the former North Carolina Budget Director and former Chairman of the North Carolina Industrial Commission.  I'm pretty sure that I've read somewhere that Judge Heath is in line for an assignment to the Business Court, but don't count on me being correct on that. In any event, a seat on the Business Court may become available, possibly due to Judge Gale's resignation from the Court last October, which is referenced in the General Assembly's confirmation of Judge Heath (What!?  I spoke with Judge Gale about whether he had resigned, and he explained a complicated series of events, including his retirement, which led to him being named a "Senior Business Court Judge" (per a 2015 amendment to the General Statutes, codified in N.C. Gen. Stat. §7A-52(a1)).  That position allows him to be recalled from retirement to serve on the Business Court and to continue to hear cases beyond the mandatory retirement age of 72.  He continues to be the Chief Judge of the Business Court.

Finally, I made the ill-advised resolution in 2014 to write about every numbered Business Court decision.  I have failed miserably at that and please know that this year I have resolved that I definitely will NOT write about every numbered Business Court decision going forward.  That will be an easier resolution to keep.  I hope that this won't cause you to stop reading.

Think You Can Appeal The Business Court's Denial Of Your Opposition To Designation? You Probably Can't

The NC Supreme Court's jurisdiction over appeals from the Business Court expanded significantly with the passage of a bill by the NC General Assembly "modernizing" the Business Court in 2014.  A party can appeal even interlocutory orders of the Business Court to the state's highest Court.  N.C. Gen. Stat. §7A-27(a).

What about an Order from the Business Court denying an opposition to a designation to the Business Court?  That's surely "interlocutory," so appealable, right?  Yes, sure, if it affects a "substantial right," as provided in  G.S. §7A-27(a).

Given a ruling from the NC Supreme Court this week, however, it seems unlikely that being forced against your will to litigate in the Business Court will ever be deemed to affect a "substantial right."

The case is Hanesbrands Inc. v. FowlerPlaintiff, suing the Defendant for breaching stock grant agreements, designated the case to the Business Court at the time it filed its Complaint in August 2015.  The Defendant objected to the designation in September 2015.  Judge Gale denied the Opposition the next month and the interlocutory ruling was appealed to the NC Supreme Court.

The Supreme Court ruled that a "substantial right" was not affected by the case remaining in the Business Court and dismissed the appeal.  It rejected the Defendant's argument that she was just an "ordinary" human being who shouldn't have to fight a large corporation in a "special court" designed for sophisticated business entities.  The Defendant had argued:

that requiring her 'to defend a case filed against her by a large, public corporation in a special court established primarily for disputes between businesses' denies her the substantial right to 'have this matter heard in the same manner as ordinary disputes involving ordinary citizens.'

Op. at 5.

I wonder if a "substantial right" would be affected if the Business Court were to grant an Opposition to a Designation in a case appropriate for designation, requiring the designating party to litigate its case outside of the Business Court.  That would involve being in regular NC Superior Court, a Court without electronic filing, without law clerks to assist the Judge in ruling on its claims, without a Judge with the business expertise of a Business Court Judge dedicated to the case from start to finish and without a blog focused on the Court.  If that's not "substantial" enough, it is at least probably unconstitutional.

Before the Business Court was "modernized," the General Statutes allowed precisely that sort of appeal.  Section 7A-45.4(e) used to say that a party dissatisfied with an Order kicking a case out of the Business Court "may appeal to the Chief Justice of the Supreme Court."  There was no procedure for that unique kind of appeal to a single Judge.  The only time I think that it was exercised resulted in nothing more than a form Order from the NC Supreme Court.  I wrote about that case back in 2012.

But even looking back at that no longer effective statute, it seems unlikely that there ever was a right of appeal to the NC Supreme Court for an Order refusing to overturn a designation.

I would not  have been aware of the interesting Hanesbrands decision but for my partner Jennifer Van Zant emailing it to me a couple of days ago.  Thanks, Jennifer.

Who Knew That A Motion To Transfer Venue Could Be So Complicated?

North Carolina cases that are filed in an "improper county" can be transferred to the "proper county" if the "defendant, before the time of answering expires, demands in writing that the trial be conducted in the proper county."  N.C. Gen Stat. §§1-83.

Multiple Claims With Different Venue Requirements

Well, what if there's a multiple count complaint, and only one of the claims was filed in an "improper county?"  That was the situation dealt with by Judge Robinson last week in Aldridge v. Kiger, 2016 NCBC 83.

Plaintiff a resident of Union County, sued the Defendants, including a corporation and an LLC which were based in Mecklenburg County, in Union County.  If there wasn't a specific venue provision applicable to the claims, the case was appropriately filed in Union County.  That would be so per G.S. §1-82, which says that an "action must be tried in the county in which the plaintiffs or the defendants, or any of them, reside at its commencement."

Dissolution Claims Have Their Own Venue Requirement

But Plaintiff's county of residency didn't control, because his complaint included a claim for dissolution of the corporate Defendant.  That claim has a specific venue provision which applies to it.  That provision isn't in Subchapter 4 of Chapter 1 of the General Statutes (G.S. §§ 1-76 to -87), where most of the provisions relating to venue are contained.

Instead, there is a provision regarding proper venue for corporate dissolution claims buried in the North Carolina Business Corporation Act.  Section 55-14-31(a) says that:

Venue for a proceeding to dissolve a corporation lies in the county where a corporation's principal office (or, if none in this State, its registered office) is or was last located.

Maybe you were aware of that provision.  I wasn't, and the attorneys for the Plaintiff obviously weren't either.

So Judge Robinson had no choice but to transfer the venue of the dissolution claim from Union County to Mecklenburg County.  But what about the other claims, which were properly venued in Union County?  Should they stay there?

The Court Did Not Sever The Claims So As To Let the Properly Venued Claims To Remain In The County Of Filing

Rule 42(b)(1) of the NC Rules of Civil Procedure allows the trial court to sever claims and it specifically speaks to venue considerations.  It says:

The court may in furtherance of convenience or to avoid prejudice and shall for considerations of venue upon timely motion order a separate trial of any . . .  number of claims.

While that Rule would seem to allow a severing of the claims, with one to be transferred to Mecklenburg County and the others to remain in Union County, Judge Robinson found the outcome to be dictated by one of the other venue statutes.  Section 1-87(a) of the General Statutes says that:

When a cause is directed to be removed. . .  all other proceedings shall be had in the county to which the place of trial is changed,

He ruled that  "[b]ecause all claims were brought in a single action in Union County , and Union County is an improper venue for the judicial dissolution claim, the entire action must be transferred to Mecklenburg County."  (emphasis added).

For those of you familiar with North Carolina geography, you know that there is not much inconvenience to the Plaintiff in having to litigate all his claims in Mecklenburg County as opposed to Union County.  Those two counties are right next to each other. The courthouses are about 25 miles apart!  The inconvenience is even less, since the case is in the Business Court, and will be overseen by the same Judge until conclusion.

It's hard to see how the Defendants will see this "win" as accomplishing anything much.  They might have thought that they would succeed in getting a dismissal of the case due to improper venue, but "North Carolina case law is clear that a motion to dismiss based on improper venue made pursuant to Rule 12(b)(3) shall be treated as a motion to transfer, rather than a motion to dismiss."  Op. ¶14 (citing Coats v. Sampson Cty. Mem’l Hosp., Inc., 264 N.C. 332, 334, 141 S.E.2d 490, 492 (1965)).

Can You Compel An Insurance Carrier Representative To Attend A Mediation In Person?

You've undoubtedly been in a mediation where the lawyer on the other side has asked for a break so she can call her client's insurance carrier in order to get a response to your latest settlement offer.  You wait -- reliant on her summary of your devastating statement in the mediation about how the carrier will have to pay out to the policy limits after the verdict -- but your demand is rejected.

If only that insurance representative had been there to hear you, rather than getting a watered down version of your position.  Can you get a Court to order that an insurance representative attend the mediation in person?  What do the mediation rules say about a physical attendance at mediation?

Well, they are pretty clear.  Rule 4 of North Carolina's Revised Rules Implementing Statewide Mediated Settlement Conferences designates an "insurance company representative" as a person who "shall attend a mediated settlement conference."  It also specifies that: 

Each such carrier shall be represented at the conference by an officer, employee or agent, other than the carrier's outside counsel, who has the authority to make a decision on behalf of such carrier or who has been authorized to negotiate on behalf of the carrier and can promptly communicate during the conference with persons who have such decision-making authority.

But the Rules don't specifically give a Court the power to order attendance by an insurer representative.  Judge McGuire nevertheless ruled in an unpublished Order last month in Elliott v. KB Home North Carolina, Inc. that the Business Court "has the requisite authority to issue an Order to compel [an insurance carrier to mediation]."  Order ¶9.

He found that power in NC appellate decisions "which have recognized the discretion of the trial court to issue sanctions against parties and those obligated to appear in mediation under the Mediation Rules, but who failed to appear without good cause."  Order ¶9.  Judge McGuire said that "[i]t follows from these cases that the Court has the authority to issue an order to compel attendance at a mediated settlement conference."  Id.  Decisions from Courts in California and West Virginia bolstered his conclusion.  Order ¶10.

If you have that Order in your pocket, how easy is it to get the Business Court to order the representative of an insurance carrier to attend a mediation?  It's most likely tough.  The circumstances of the Elliott case were pretty unique.  The parties had met for mediation four times.  Three insurance carriers had potential liability for Plaintiffs' claims.  A fifth mediation was on the horizon at which the parties said a "global resolution" could not be reached without all carriers being in the room.  One carrier had said that its representative would appear.  That carrier had attended all four of the previous sessions.  Another carrier, whose representative had appeared at two of the previous mediations, opposed the requirement that it attend again.  The third carrier said that its representative would be on vacation during the scheduled fifth mediation, but that he could be available by telephone.

Judge McGuire recognized the costs that the carriers would incur by attending and that they had all attended at least some of the previous mediations, but said that:

the spirit of the Mediation Rules requires that the necessary parties continue to participate in the mediation process until either a resolution has been reached or the mediator has determined that an insurmountable impasse has occurred.

Order ¶10.

Judge McGuire's Order required the attorneys for all three carriers to attend what will hopefully be the final mediation session. and for representatives of two of the carriers to appear in person.  The representative who had an already planned vacation?  He doesn't have to appear in person, but was ordered to be available by telephone "from the starting time of the mediated settlement conference until such time as the mediator declares the mediation closed."  Order ¶14. That requirement could still ruin a vacation.

 

 

 

Does A Petition For Discretionary Review Divest A Trial Court Of Jurisdiction?

The place where a a trial court's jurisdiction over a case on appeal meets the competing jurisdiction of the appellate court over that same case is is a busy intersection.  It is often hard to tell when the trial court no longer has the jurisdiction to make rulings in a case that has been appealed. That power was the issue in two rulings from Business Court Judge Robinson, one in a published Opinion, in SED Holdings, LLC v, 3 Star Properties, LLC, 2016 NCBC 62, and the other in an unpublished Order in that case which followed several weeks later.

The General Rule And Its Exception

The "general rule", as observed by Judge Robinson, is that "an appeal divests the lower court of jurisdiction."  Op. ¶33.  So you would think that once an appeal is filed (and docketed) that the trial court is powerless.  But, that's not so:

the lower court nonetheless retains jurisdiction to take action which aids the appeal, and to hear motions and grant orders, so long as they do not concern the subject matter of the suit and are not affected by the judgment appealed from.

Id.

In the situation before Judge Robinson  last month in the SED case there were two separate appeals pending.  Neither were appeals from rulings of the Business Court, but were from rulings of the Superior Court for Durham County, made during the extended period of time before the case was designated to the Business Court.

Appeal Number One 

Appeal #1 is a long running appeal.  At the time of Judge Robinson's ruling the Court of Appeals had affirmed the trial court's grant of a preliminary injunction and its denial of a Motion to Dismiss.  Those appellate rulings were the subject of a PDR (a Petition for Discretionary Review) pending before the NC Supreme Court.

Appeal Number Two

Appeal #2 was filed this year, and has yet to be ruled on by the COA.  It is an appeal of several orders issued by the trial court holding the Defendants in civil contempt for not complying with the injunction that was the subject of Appeal #1. The Defendants are arguing that the trial court lacked jurisdiction to find them in contempt while the first appeal was pending.

Did The Business Court Still Have Jurisdiction Given The Two Appeals?

Whether the Business Court still had the authority to deal with the Plaintiff's Motion that he enter a mandatory injunction against a recently added Defendant (Charles A. Brown & Associates, PLLC) was the question faced by Judge Robinson.  Did he have any jurisdiction over the case with the two pending appeals? 

Appeal #2 was pretty easy to knock down as an impediment to the Business Court's jurisdiction.  Judge Robinson said that:

the issues presently before it are not embraced within the issues presently before the Court of Appeals in the [Appeal #2] and, thus, do not divest this Court of subject matter jurisdiction to consider and decide the Motion relating to newly added defendant Charles A. Brown.

Op. ¶32.

The Effect of A Petition for Discretionary Review On A Trial Court's Jurisdiction

But the rulings that were the subject of Appeal #1 were fundamental to a North Carolina court having jurisdiction over the entire case, since they concerned the validity or invalidity of a forum selection clause dictating that the case be litigated in Harris County, Texas.  The ruling from the Court of Appeals in Appeal #1 had affirmed the trial court's ruling that the forum selection clause was invalid.

The NC Supreme Court hadn't ruled on the PDR before Judge Robinson's first ruling.  I've observed in the past that your chances of getting the state supreme court to grant a PDR are on the same level as finding a four leaf clover.

Judge Robinson said:

with regard to Defendants' filing of the PDR, the Court concludes that, absent a motion to stay filed with and granted by the appropriate court, the filing of a petition for discretionary review with our State's highest court, by itself, does not divest the trial court of jurisdiction to consider matters after the Court of Appeals has determined a matter on appeal and has issued its mandate.

Op. ¶26.  By the way, what is the "appropriate court" in which to file a Motion to Stay?  Rule 8 of the North Carolina Rules of Appellate Procedure, titled "Stay Pending Appeal" says that:

After a stay order or entry has been denied or vacated by a trial court, an appellant may apply to the appropriate appellate court for a temporary stay and a writ of supersedeas in accordance with Rule 23.

Judge Robinson probably assumed that the NC Supreme Court would do the expected thing and deny the PDR.  Or he might have felt bound to follow the mandate from the Court of Appeals affirming the trial court's ruling that the forum selection clause calling for litigation to take place in Texas was invalid..  An "inferior court must follow the mandate of an appellate court in a case without variation or departure."  In re RAH, 641 S.E.2d 404, 407 (2007). 

But a few weeks after Judge Robinson delivered the published Opinion in 2016 NCBC 62, the NC Supreme Court did the nearly unthinkable and granted the PDR.  That made all the difference to Judge Robinson.  He held that the Business Court had been "divested of jurisdiction to proceed with the Injunction Hearing" because of the granting of the PDR.  Order ¶10.  That sua sponte reversal from Judge Robinson came in an unpublished Order.

So what Should You Do If You Don't Want The Trial Court To Rule Because Of Your Pending PDR?

So what do these rulings mean about the vitality of an NC Superior Court's jurisdiction in a case that is the subject of a pending PDR?  That if you want the Superior Court to refrain from ruling in your case in which a PDR is pending, that you should move for a stay "in the appropriate court" or argue that the PDR will be granted and that the Superior Court therefore no longer has jurisdiction and should not move forward in the case until the NC Supreme Court has made its ruling.  It's probably safer to request a stay given the four leaf clover nature of the granting of PDRs.

You might be wondering whether this case has been "over-appealed." Maybe it has.  In addition to the two appeals already pending, the Defendant has also appealed from Judge Robinson's ruling in 2016 NCBC 62.  That's the third appeal.  Even before that, it had filed a Petition for Rehearing in the COA following the Court of Appeals' decision.  (Good grief Charlie Brown).

But given that the successful PDR is likely to generate an opinion from the NC Supreme Court on the validity of a forum selection clause, all those appeals might be worthwhile.  Maybe the Appellants will ultimately be successful.

It Takes More Than Just $5 Million To Get A Case Into The NC Business Court

This week, I published a post on this blog in which I suggested that a case involving $5 million in controversy could be designated to the Business Court without the Court having to analyze the nature of the claims before it to see if they met any of the bases for mandatory jurisdiction contained in G.S.