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  In 2008, in Workplace Benefits, LLC v. Lifecare, Inc. (unpublished), Judge Tennille held that "every suit based upon a breach of a restrictive covenant .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.

Continue Reading...

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

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

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

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

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

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

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

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

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

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

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

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

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

 Op. ¶28.

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

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

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

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

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

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

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

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

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

NCRCP 63.

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

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

Op. ¶16.

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

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

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

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

 

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

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

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

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

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

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

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

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

FRCP45(a)(1)(C).

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

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

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

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

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

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

Standing: Were The Fiduciary Duty Claims Direct Or Derivative?

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

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

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

Securities Fraud Claims: Primary and Secondary Liability

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

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

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

Op. ¶34.

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

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

Op. ¶35.

 

 

Continue Reading...

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

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

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

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

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

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

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

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

Supreme Court Justices Box The Fourth Circuit's Ears

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

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

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

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

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

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

Denial at 7.

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

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

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

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

FRAP 32.1.t

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

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

Denial at 7.

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

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

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

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

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

This month's ruling is in 2015 NCBC 1

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

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

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

"Control and Domination"

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

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

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

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

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

Order ¶31.

"Inadequate Capitalization"

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

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

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

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

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

 

Reading Before Signing Is Advisable

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

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

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

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

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

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

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

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

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

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

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

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

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

 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Op. ¶26.

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

 

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

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

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

But, as Judge McGuire held:

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

Op. ¶10.

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

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

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

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

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

 

 

 

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

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

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

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

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

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

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

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

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

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

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

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

 

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

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

What Constitutes A 'Substantial Benefit"?

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

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

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

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

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

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

Id. at  396.

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

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

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

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

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

Op. ¶18.

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

Recovering For Rule 11 Type Violations In A Derivative Action

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

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

N.C. Gen. Stat. §57D-8-05(3).

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

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

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

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

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

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

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

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

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

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

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

 

Continue Reading...

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Section 1-294 says that:

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

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

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

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

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

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

Order 17 citations omitted).

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

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

 

 


 

 

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

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

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

The "Indispensible Requirements" For Forming A Partnership

Judge McGuire stated that:

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

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

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

A Partnership Must Include An Agreement To Share Losses

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

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

Co-Ownership Was Lacking

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

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

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

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

A Question About Suing An Entity Operating Under An Assumed Name

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

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

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

Op. Par. 29.

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

 

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

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

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

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

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

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

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

Op. ¶18.

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

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

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

Judge Bledsoe held that Dyneema had to:

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

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

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

 

 

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

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

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

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

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

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

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

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

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

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

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

 Op. ¶35.

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

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

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

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

Op. ¶¶35(iv) and (ix).

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

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

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

 

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

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

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

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

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

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

 

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

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

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

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

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

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

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

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

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

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

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

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

Op. ¶41.

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

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

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

Op. ¶59.

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

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

 

 

 

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

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

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

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

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

Case Of First Impression In North Carolina

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

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

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

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

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

The Court Adopts A Burden-Shifting Approach

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

That approach goes like this:

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

Op. 13 (citations omitted).

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

Subject Matter Waiver Applies When The Waiver Is Not Intentional

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

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

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

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

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

 

 

When Winding Up A Corporation Don't Do This

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

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

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

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

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

Op. 7.

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

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

 

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

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

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

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

Order 10 (emphasis added).

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

You can read those e-mails here.

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

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

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

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

 

 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Op. 12.

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

 

 

 

 

 

Welcome Judge Bledsoe To The NC Business Court

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

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

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

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

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

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

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

Complying With The Rules Is Important In The Business Court

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

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

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

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

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

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

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

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

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

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

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

It Depends On The Meaning Of The Word "With"

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

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

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

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

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

Op. ¶16.

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

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

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

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

Op. ¶b20.

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

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

 

Collateral Estoppel Sinks LLC Members' Claim

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

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

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

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

Nonmutual Collateral Estoppel

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

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

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

The LLC Members Had Control Over The Arbitration

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

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

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

Op. ¶36.

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

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

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

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

Op. ¶42.

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

What Counts In Collateral Estoppel Is ISSUES, Not Claims

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

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

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

The Remaining Elements For Collateral Estoppel Were Met

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

* * *

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

 

 

 

General Assembly May "Modernize" The NC Business Court

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

This is a summary of the proposed changes:

Appeals From Business Court

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

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

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

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

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

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

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

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

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

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

Increase In Designation Fee

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

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

Additional Reporting On The Activity In The Business Court

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

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

 

Corporate Shield Holds Up Against Creditor

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

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

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

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

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

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

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

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

 

 

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

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

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

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

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

But  Business Court Rule 6.7 goes on to say that:

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

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

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

 

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

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

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

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

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

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

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

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

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

Op. ¶16.

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

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

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

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

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

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


 

NC Court Of Appeals: Foreclosures and Immutability

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

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

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

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

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

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

Op. 7.

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

 

 

 

 

Collecting On Judgments Against A Member's LLC Interest

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

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

The Old LLC Act

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

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

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

First Bank had obtained a charging order against Donald Rhine, a member of S&R Grandview, an LLC.  The charging order said that the Plaintiff "shall hereafter have the rights of an assignee" of Mr. Rhine's interest of the LLC, and that Mr. Rhine then had no remaining membership interest in the LLC.  The charging order said that his membership right would "lie fallow" until the judgment against him was satisfied.

Mr. Rhine appealed, arguing that the charging order did not operate to assign his LLC interest.  First Bank rejoined that the effect of  the charging order under Section 57C-5-03 was that Mr. Rhine was no longer a member of the LLC to which the order applied.

There was some plausibility to First Bank's argument.  Section 57C-5-03 said that "[t]o the extent so charged, the judgment creditor has . . . the rights of an assignee of the membership interest." And Section 57C-5-02 said that "a member ceases to be a member upon assignment of all of his membership interest."

A Charging Order Does Not Work An Assignment Of An LLC Interest

The Court of Appeals disagreed with First Bank's position, holding that "[n]owhere in these provisions does the General Assembly mandate an assignment of membership interests from a debtor to a judgment creditor through a charging order." Op. 8.  It added that "[h]ad the General Assembly intended a charging order to assign all membership interests and terminate a debtor’s membership in an LLC, as plaintiff contends, it could have easily included language to that effect." Op. 8-9.

The changes in the LLC Act through Chapter 57D bolstered the Court's conclusion.  The new provision dealing with charging orders states that "this Chapter does not deprive any interest owner of a right."  N.C. Gen. Stat. §57D-5-03(c).  I'm not sure whether statutory interpretation lets a court look at the subsequent actions of a Legislature to determine what the Legislature meant the first time around.

But anyway, why did this Defendant care whether his LLC interest was assigned and whether he had lost his membership rights?  Remember that an LLC member has an ownership interest that includes both an economic interest and a right to participate in the management of the LLC.  N.C. Gen. Stat. §57D-1-03(25).

A charging order can affect only the economic interest.  The charging order in First Bank went too far.  It took away Mr. Rhine's management rights.

What happens if those with management rights in the LLC decide to defer distributions from the LLC because of a dislike for the judgment creditor?  That's undoubtedly a risk, and it will probably be the subject of a yet to be decided court decision.

Why Should You Care About The Old LLC Act?

The NC General Assembly repealed the Old LLC Act, in Chapter 57C and replaced it with the New LLC Act through Chapter 57D.  That change became effective three months ago, on January 1, 2014.

Do you need to worry about the repealed Act?

Maybe.  In the "Savings Provisions" in the New Act, the General Assembly said that "[a]ny proceeding commenced before January 1, 2014, may be completed in accordance with the law then in effect."  N.C. Gen. Stat.  §57D-11-03(d)

.

 

 

The "Bright Star" Fades: The NC Business Court On Letters Of Credit

I've resolved this year to blog about every numbered decision of the Business Court, as opposed to past years, where my lack of enthusiasm about the more boring decisions has left me writing about less than 100% of the Court's decisions.

My resolve was tested with Judge Murphy's decision last week in Speedway Motorsports Int'l , Ltd. v. Bronwen Energy Trading, Ltd., 2014 NCBC 5, but I have bitten the bullet and I have laboriously produced this post.

What's the new Speedway decision about?  A complicated international dispute over oil contracts, letters of credit, a guarantee of letters of credit, and claims for fraud, conversion, negligent misrepresentation, and unfair and deceptive practices.

You might remember the Bronwen case.  It's been pending in the Business Court since 2008 and has been up and back from the Court of Appeals over that 5+ years.  I wrote about the Court of Appeals decision affirming  the Business Court in 2011 (and reversing it in another decision issued at the same time).  In the affirming decision, the COA held that the "one bright star" in letter of credit transactions was that "every letter of credit involves separate and distinct contracts."

The effect of that ruling was that the COA affirmed the dismissal of claims against Defendant BNP-Suisse, which had issued a demand guarantee to BNP-France on a letter of credit issued by France.  The Suisse guarantee was secured by $12 million which Plaintiff had on deposit with Suisse.  When Plaintiff sued over the draw on its letter of credit with Suisse, France argued that the case was governed by a choice of forum provision in the Suisse guarantee calling for resolution in Switzerland.

The COA held that Plaintiff, which was not a party to the guarantee given by Suisse in connection with the letter of credit transaction,  was barred by the "independence rule"  from availing itself of the choice of forum provision because the contracts surrounding a letter of credit transaction must be "separate and distinct."

So in last week's ruling, France sought to push the COA ruling in support of a new motion for judgment on the pleadings.  France argued that Plaintiff couldn't make any claims at all against it based on its draw on the guarantee because the guarantee was "separate and distinct" from the obligations between Suisse and the Plaintiff.

That seems to fit with the independence principle, doesn't it?  Not the way Judge Murphy saw it. France might have prevailed if the claims against it were based in contract.  But they were tort-based claims, for fraud, negligent misrepresentation, conversion, unfair and deceptive practices, and for an accounting.

Judge Murphy therefore denied the Rule 12(c) claim, holding that:

The Court of Appeals’ description of the “independence principle” was grounded in principles of contract. See Speedway I, 209 N.C. App. at 564, 706 S.E.2d at 263; see also Speedway II, 209 N.C. App. at 485, 707 S.E.2d at 392. Specifically, the Court of Appeals was concerned with maintaining the separateness of the multiple contracts that are characteristic of letter of credit transactions. See id. However, nothing in the Speedway opinions shields a defendant from purely tort-based claims like those alleged by Plaintiff. See id. Furthermore, France cites no authority that forecloses non-contract, purely tort-based claims by application of the independence principle. The import of the independence principle is that France is not bound by and cannot seek the benefits of the contracts that Plaintiff made with others.

Op. 28 (emphasis added).

 

What Happens To A Covenant Not To Compete Upon The Sale Of A Business?

Be careful with covenants not to compete when you buy or sell a business.  That's the lesson from Amerigas Propane, LP v. Coffey, 2014 NCBC 4, decided this week by Judge Jolly.

The Plaintiff had Defendant Coffey, an employee of the company which it was acquiring, sign a "Confidentiality and Post-Employment Agreement" after the acquisition.  The Agreement contained a non-solicitation provision and a section protecting the buyer's "confidential information." 

The Plaintiff fired Coffey a year later, and he went to work for a competing propane company.

Plaintiff moved for a preliminary injunction enforcing the restrictive covenants, which was denied by the Court.

You all know that there must be consideration for a covenant not to compete.  Those types of agreements ordinarily are entered into at the start of an employment relationship, and the new employment itself constitutes the consideration.  In North Carolina, continued employment can't satisfy the consideration requirement.

So did the acquisition work a termination of Coffey's employment with the selling company so that he had a new employment with the buyer?

Here's where it gets interesting.  The type of acquisition makes a difference. If it had been an asset purchase it might have been a new employment which could have served as consideration. Judge Jolly observed that:

an employment contract signed at the time of a business acquisition may only use employment with the acquiring company as consideration if the old employment relationship is deemed terminated as a result of the transaction. In this regard, North Carolina courts previously have stated that acquisition of another company by asset purchase will act as a termination of existing employment relationships, and existing employees of the acquired business do not necessarily become employees of the acquiring entity.

Op. 5 (relying on Calhoun v. WHA Med. Clinic, PLLC, 178 N.C. App. 585, 597 (2006) (citing
QSP v. Hair
, 152 N.C. App. 174 (2002)); and Better Bus. Forms & Prods., Inc. v. Craver, 2007 NCBC 34 (2007) ("[W]hen an employer sells its assets . . . the employment relationship has been terminated." Id. ¶38.).

But an acquisition via a stock purchase (or by purchasing membership interests, as happened in this case) doesn't have the same effect.  It does not automatically terminate existing employment relationships "and therefore ordinarily will not constitute new employment for purposes of consideration."  Op. 6.

So the Plaintiff was left to argue that there was other consideration for the restrictive covenants, like "new benefits" made available to Coffey, and a raise in salary shortly after the acquisition.  Judge Jolly didn't buy that.  He found the "new" benefits to be essentially the same as Coffey would have received with the selling employer.

 

The Business Court Takes A Narrow View Of When Claims Are "In Or Affecting Commerce" Under Chapter 75 Of The General Statutes

Chapter 75 claims have rarely fared well in the Business Court, though there is not much doubt about why they are included in almost every Complaint in the Court.  The prospect of treble damages (per G.S. §75-16) and attorneys' fees (per G.S. § 75-16.1) is too tempting for many to pass up.

But this week in Powell v. Dunn, 2014 NCBC 3, Judge Gale provided some clear guidelines about when these claims don't fit in the business litigation context because they are not "in or affecting commerce," an essential element under the statute.

The Plaintiffs in the case were holders of the common stock of Engenious Software, based in Cary, North Carolina.  The Defendants were former directors of the company who held preferred stock.  The directors negotiated a sale of the company, which had involved two potential acquirers and the services of an investment banker, for $40 million.  That sale apparently yielded nothing for the common shareholders.  The Plaintiffs made a claim for unfair and deceptive practices per Section 75-1.1 over the way the sale was handled, alleging a breach of fiduciary duty.

Judge Gale dismissed the claim, holding that:

when the unfair or deceptive conduct alleged only affects relationships within a single business or market participant, and not dealings with other market participants, that conduct is not “in or affecting” commerce within the meaning of Section 75-1.1,

Op. Par. 17.

He based that ruling on two North Carolina Supreme Court decisions construing the statute: HAJMM Co. v. House of Raeford Farms, Inc., 328 N.C. 578, 403 S.E.2d 483 (1991)  and White v. Thompson, 364 N.C. 47, 691 S.E.2d 676 (2010).

The White case was featured on this blog when it was decided, but the HAJMM case was decided before the idea of a blog was invented.  In HAJMM, the Court said that the statute extended only to “the manner in which businesses conduct their regular, day-to-day activities, or affairs, such as the purchase or sale of goods, or whatever other activities the business regularly engages in and for which it is organized.”  It affirmed the dismissal of 75-1.1 claims premised on unfair or deceptive acts related to the corporation's capital raising efforts.

The Powell decision is also noteworthy for its rejection of  the Plaintiffs' argument that the involvement of an investment bank in the transaction, and that another potential buyer was involved, made the claim one "in or affecting commerce."

Is a breach of fiduciary duty a per se violation of Section 75-1.1?  Judge Gale didn't reach that question because the claim was not "in or affecting commerce."  Op. ¶ 20 & n.4.


North Carolina COA Refuses To Award Attorneys' Fees Based On "New York Rates"

There's enough of interest in the North Carolina Court of Appeals' decision this week in GE Betz, Inc. v. Conrad for five posts. It's got a couple of good rulings on covenants not to compete, a few points about trade secrets issues, and an interesting matter of a violation of a protective order.  The opinion, a unanimous sixty-four pager written by Judge Robert C. Hunter, is worth reading.

The attorneys' fee aspect of the case was the most interesting part of the opinion to me.  The trial court awarded $5.77 million in fees to GE Betz, a General Electric subsidiary.  GE Betz had been successful, after trial, on its claims that the Defendants violated G.S. §75-1.1 and misappropriated trade secrets.

Over $3 million of the fees were billed by GE Betz's prestigious New York-based law firm -- Paul Hastings.  The hourly rate of Paul Hasting's lead counsel ranged from $633.25 to $675.75 during the course of the litigation.  The North Carolina firm that tried the case -- Ward & Smith -- charged significantly less, at rates between $270 and $390 an hour.  The trial court said that Ward & Smith was "a highly capable and qualified law firm."  Op. 51.

A trial court must make findings regarding the reasonableness of the fees in making an award.  A key factor to be considered is the "customary fees for like work."

The COA recognized that the question whether local rates should be a benchmark for reasonableness was one of first impression.  Judge Hunter said:

our appellate courts have not had occasion to decide whether fees must be awarded in light of the rates typically charged in the geographic region where the litigation takes place.

Op. 48.  He looked to a Fourth Circuit decision which "held that the community where the court sits is “the appropriate starting point for selecting the proper rate.” Nat'l Wildlife Fed'n v. Hanson, 859 F.2d 313, 317 (4th Cir.1988).

Judge Hunter refused to weigh in on whether it was reasonable for GE to hire its out-of-state counsel.  He held:

we decline to adopt a test that forces courts to assess the reasonableness of a litigant’s decision to hire counsel generally.  Parties, including GE, are free to hire as counsel whomever they wish at whatever rates they are willing to pay. The issue is whether the fees awarded against an adverse party are reasonable, not whether it was reasonable for those fees to be incurred by the prevailing party.

Op. 50.

On the issue of the reasonableness of the fees, Judge Hunter observed that "[i]t appears that much of the work performed by Paul Hastings' attorneys could have just as effectively been performed by local counsel at local rates.  The trial court did not attempt to make this distinction."  Op. 52.  He gave this example:

in April 2007, associate attorneys at Paul Hastings charged $500.00 per hour – double the $250.00 fee charged by attorneys at Ward and Smith – for “factual investigation and development; obtaining and analyzing [c]lient documents; [and] interview[ing] witnesses”. These duties clearly did not require a prior relationship or intimate knowledge of GE’s employment contracts [which was part of GE's argument as to the reasonableness of the fees], because GE paid the attorneys at Ward and Smith to perform almost identical work during the same time period.

Op. 52-53.

In the end, the COA ruled that it was unreasonable to force the unsuccessful Defendants to pay a fee "that includes rates double those billed in the community where the litigation took place for work that seemingly did not require such a premium."  Op. 53. 

It gently chided GE for its excess, saying that " [u]ltimately, GE’s willingness to pay significantly higher rates for work that they could have procured for much less does not necessitate a finding that those fees are reasonable when awarded against" the Defendants.  Id. 

The case was remanded to the trial court for further findings.

 

Business Court Says "Rule Of Reason" Analysis Appropriate To Antitrust Claim By Chiropractors Against Their Independent Practice Association

I can think of only three reasons why you might want to know about the Business Court's decision in Sykes v. Health Network Solutions, 2013 NCBC 53:

  • You are a chiropractor or you live with one.
  • You are fascinated by the subject of the management of health care costs.
  • You are interested in antitrust law.

If you don't fit those qualifications but are still willing to continue reading, the case is about Plaintiff Sykes' claim that Defendant HSN violated antitrust laws by fixing prices for chiropractic services through its operation of an "independent practice association" of chiropractors.

If you are already asleep, skip to near the end of this post, under the heading "Why The Injunction Was Denied."

Some Medical Terminology

To start, you'll need to know some healthcare terminology.  HSN is an IPA (an independent practice association).  Independent chiropractors each enter into a PPA (practitioner participation agreement) with HNS.  HNS negotiates with Payors (insurance companies like Blue Cross/Blue Shield and other third party purchasers of chiropractic services) to establish reimbursement rates for its members.  The chiropractors who are members of the network agree to be reimbursed by the negotiated rates.

HNS follows a QMI (Quality Management and Improvement Plan) to ensure that the services provided by its members are delivered in "the most effective and cost-efficient manner."  Op. Par. 20.

HNS established a maximum allowable average cost per patient for its providers (the chiropractors) of 151% of the HNS network average.  A provider exceeding this benchmark following review per the QMI faces probation, then termination by the network. 

The Antitrust Issues

Sykes contended this practice of controlling chiropractic costs was anti-competitive and illegal.  The illegality argument rested on North Carolina's insurance laws, which say that a review of a medical provider's costs must be based solely upon "medical necessity" and performed by a licensed entity.

The Court observed that of the 1,667 chiropractors licensed in North Carolina, 1,006 were HSN members.  Op. ¶16.  Though the Plaintiff's alleged that HSN had monopoly power, Judge Gale did not reach that issue.

He did rule, however, that the Plaintiffs did not present a case of per se violations, but that he would rule on a future motion to dismiss through a rule of reason analysis.   Op.  ¶57. 

If it has been thirty years since you took antitrust law in law school, here's q quick refresher.  Some categories of anti-competitive behavior are conclusively presumed to be violations of the antitrust laws, and are known as per se violations. A rule of reason analysis looks at all the surrounding circumstances of the alleged violation to determine whether the practice promotes or represses competition.

Judge Gale held:

[t]he mere presence of price related agreements in the various contracts at issue or exclusion of Plaintiffs from the HNS network do not necessarily lead to anticompetitive findings or per se violations.  Certain price related agreements may be appropriate when necessary to achieve efficiencies that achieve procompetitive effects for consumers.  Others may be so egregious and unaccompanied by other provisions so as to lead to illegality.  But, in appropriate circumstances pricing related agreements may also be a necessary component of a more comprehensive set of undertakings that on the whole lead to beneficial and procompetitive efficiencies.

Op. ¶58.

Judge Gale did not need to plow new ground on whether to follow a rule of reason analysis for the matter before him.  The Federal Trade Commission has taken the position since 2009 that IPAs should be evaluated on a case by case basis, taking into account an array of factors, like:

a definition of the market to which the analysis will be applied, the competitive nature of and the allocation of power within that market, whether the network under attack is an exclusive provider, the degree of sharing of financial risk by network participants, the degree of practice integration to achieve efficiencies or that are instead barriers to efficiencies, and other evidence of other anticompetitive purpose.

Op. ¶61 (quoting U.S. Dep't of Justice and Federal Trade Commission, Statements of Antitrust Enforcement Policy in Health Care, Statement 8: Enforcement Policy on Physician Network Joint Ventures §B(1)(known as "Policy Statement 8")

The Court ruled that the record before it was not fully developed enough for it to follow the four-step process recommended by Policy Statement 8 in determining the anti-competitive effect of the HSN procedures.  Those steps involve "defining the market; evaluating the competitive effects of the physician joint venture; evaluating the impact of procompetitive efficiencies; and examining collateral agreements.

 

Why The Injunction Was Denied

One of the Plaintiffs, another chiropractor, was facing termination of his membership in HSN and was seeking an injunction barring his termination.  Since the Complaint of Sykes' co-Plaintiff, Dr. Lynn, requested money damages, you don't need to understand antitrust law to see why Judge Gale denied the motion.  He held:

If Dr. Lynn is able to prove that he has suffered a compensable loss, he may be compensated with money damages; indeed, his requested relief is for money damages. (Am. Compl. ¶¶ 169, 174, 179.)While his damages might ultimately be difficult to calculate, the court does not conclude that they are of such a “peculiar nature that compensation in money cannot atone for it.” Hodge , 137 N.C. App. 247, 252, 528 S.E.2d 22, 26 (2000).

Op. ¶66.

Congratulations to my partner Jennifer Van Zant, a renowned antitrust lawyer, for her representation of the Defendants.  Also involved from Brooks Pierce were Ben Norman and Mike Dowling.

A Prevailing Party Can't Recover The $1,000 Fee For Designating A Case To The Business Court As A "Cost"

If you think like me, you were thinking that the $1,000 fee for designating a case to the Business Court would be recoverable as an item of costs if you were successful in the case.

But I'm wrong.  Last Thursday, in an Order in Prospect Marketing Group, Inc. v. Chasnan, Inc., Judge Jolly ruled that there is no statutory basis for the recovery of the designation fee as a cost.

In looking at the statute governing costs, that is absolutely correct.  Section 7A-305 of the General Statutes, which is titled "Costs in civil actions," says in subsection (d) that "[t]he following expenses, when incurred, are assessable or recoverable, as the case may be. The expenses set forth in this subsection are complete and exclusive and constitute a limit on the trial court's discretion to tax costs pursuant to G.S. 6-20." 

The designation fee is not included in the items listed in Section 7A-305(d).  So that's out as an item of recovery.

And what did the prevailing party in Prospect Marketing Group recover on its application for $2,248.19 in costs, which included the $1,000 designation fee?  A whopping $7.56, which represented the only recoverable amount: the cost incurred for service of process by certified mail, which is specifically allowed by G.S. §7A-305(d)(4).

I'm sure that the Prospect application for costs cost more than $7.56 to prepare, making it a losing exercise financially.  It seems like that is true for most applications for costs -- that they generate so little that they are not worth pursuing.

North Carolina Court of Appeals Says: We Don't Fear The Turtle

You've no doubt heard about the University of Maryland's withdrawal from the Atlantic Coast Conference and the University's unwillingness to pay the $50 million withdrawal fee required by the Constitution of the ACC.

This week, in Atlantic Coast Conference v. University of Maryland, the NCCOA rejected the U of M's contention that it was entitled to sovereign immunity from suit in North Carolina to collect the fee. The case will go forward on the issue of whether that sizeable fee is an appropriate measure of liquidated damages or an unconstitutional penalty.

The withdrawal fee is three times the ACC's total annual operating budget.  It adds up precisely to $52,266,342.  We are unfortunately well away from the time when the courts will rule on whether the withdrawal fee is enforceable as a liquidated damages provision.

Under NC law:

A stipulated sum is for liquidated damages only (1) where the damages which the parties reasonably anticipate are difficult to ascertain because of their indefiniteness or uncertainty and (2) where the amount stipulated is either a reasonable estimate of the damages which would probably be caused by a breach or is reasonably proportionate to the damages which have actually been caused by the breach.

E. Carolina Internal Med. v. Faidas, 149 N.C. App. 940, 945-46, 564 S.E.2d 53, 56 (2002).

The $52 million fee is said to be the largest to be assessed upon a team leaving an athletic conference.  Syracuse, for example, was assessed $7.5 million upon leaving the Big East conference to join the ACC. 

But the opinion doesn't assess at all the enforceability of the fee.  Instead, the opinion focuses on whether the trial court's decision not to dismiss the case was immediately appealable and whether North Carolina should extend comity to its "sister state" on the University of Maryland's sovereign immunity request.

The decision of the trial court that it would not allow the University of Maryland the defense of sovereign immunity was immediately appealable because it affected the University's "substantial right" to be free from defending a case from which it might be immune.

But why shouldn't the State of North Carolina accord the University of the State of Maryland the defense of sovereign immunity?  Apart from what might be a general dislike of the Terrapins, the reason was that the ACC's claim is one for a breach of contract.  The Court said:

public policy is violated in North Carolina when the State is allowed to assert sovereign immunity as a defense to causes of action based on contract. It would seem plain, then, that because the ACC is seeking a declaration as to the parties’ rights and obligations under the terms of the ACC Constitution, it would violate public policy to extend comity to Defendants' claim of sovereign immunity.

Op. 19-20.

In an earlier decision, the NC Supreme Court  had said that allowing a State to walk away from its contractual obligations and to claim sovereign immunity "would be judicial sanction of the highest type of governmental tyranny."  Smith v. State, 289 N.C. 303, 320, 222 S.E.2d 412, 423 (1976).

Maryland is a member of the ACC through the 2013-14 season and will play in the 2014 ACC basketball tournament here in Greensboro.  I only live a few miles from the Greensboro Coliseum.  The Terps can drop that $52 million on my front lawn if they would like.

Two Things To Avoid When Opposing A Motion For Summary Judgment

There aren't any great business law proclamations in Allran v. Branch Banking & Trust Corp., 2013 NCBC 41, decided late last week, but there a couple of procedural points that might help you avoid having summary judgment entered against your client.

Be Careful Which Defendants You Decide To Dismiss, And How You Dismiss Them

Judge Murphy granted summary judgment on Plaintiff's unfair and deceptive practices act claim against Defendant BB&T. The ruling was entered pretty much because Plaintiff submarined his own case in two ways. 

First, he dismissed his claims with prejudice against BB&T's employee, Corbett.  Plaintiff's claim against BB&T rested on his allegation that Corbett had forged his initials on his financial statement and loan application leading to the defaulted loan at issue.

Be aware that a dismissal with prejudice is equivalent to a disposition on the merits, and it has res judicata effect.  Thus, because "[a] judgment on the merits in favor of the employee precludes any action against the employer where . . . the employer's liability is purely derivative."  Op. 38 (quoting Wrenn v. Maria Parham Hosp., 135 N.C. App. 672, 681, 522 S.E.2d 789, 794 (1999), the dismissal of Corbett's employer, BB&T, was appropriate.

Be careful of which Defendants you dismiss from your case, and try to avoid dismissing them with prejudice.

Don't Try To Contradict Your Own Client's Deposition Testimony

The second way in which the Plaintiff did in his case was by his own deposition testimony, in which he admitted that he had placed his initials on the documents which he had said carried his forged initials.  He attempted, after discovery closed, to avoid summary judgment by presenting affidavits designed to contradict that testimony.

Judge Murphy rejected those affidavits, holding:

‘[A] non-moving party cannot create an issue of fact to defeat summary judgment simply by filing an affidavit contradicting his prior sworn testimony[.]’   Having
acknowledged in his deposition that the initials on the Retail Loan Application and
Personal Financial Application were his, Plaintiff should not now be allowed to offer
affidavits that call his testimony into question.

Op. 35 (quoting Carter v. W. Am. Ins. Co., 190 N.C. App. 532, 539, 661 S.E.2d 264, 270 (2008).

The YMCA Wins Case In NC Business Court

It's hard to conceive of a more unlikely Business Court case than Keister v. National Council of the Young Men's Christian Assocation of the United States of America, a purported class action by YMCA members.  The Opinion, 2013 NCBC 36,  was issued late last week.

Keister and his family joined the YMCA in Asheville, North Carolina.  They said they did so based on advertisements that the YMCA provides a "healthy and safe environment" for families.

The environment turned out to be anything but healthy and safe, according to Mr. Keister.  The allegations in the Complaint were so graphic that Judge Jolly struck it in April 2012 and ordered it sealed.  He said it contained "unnecessary, extremely offensive, outrageous and explicit allegations."

The toned down Amended Complaint alleged that Mr. Keister observed homosexual behavior in the men's locker room showers, and that he was twice thereafter sexually assaulted on the Y's premises by fellow members of the Asheville YMCA.  He complained to the management and was told that the issue would be addressed.

The lead claim against the YMCA was that it engaged in an unfair and deceptive practice, in violation of G.S. § 75-1.1, by marketing its facilities as safe and healthy despite its knowledge of illicit sexual activities occurring at its facilities.  Plaintiffs said that the Y had been aware of such conduct for decades.

In law school, we would have called statements like "safe and healthy" mere "puff," and Judge Jolly indeed said that "such phrases defy precise definition and are not capable of objective verification."  Op. ¶27.  He ruled that the advertising by the Y was "neither false nor misleading on its face."  Op. ¶28.

He also dismissed a pretty weak claim for breach of fiduciary duty.  Plaintiffs said that "they placed a special confidence" in the YMCA to provide a safe and healthy environment and that the Y therefore owed them a fiduciary duty.  Judge Jolly said that Plaintiffs had "allege[d] nothing more than a traditional business-consumer relationship" (Op. ¶33) and that there was no fiduciary relationship.

 

NC Business Court Dismisses All Of Brazilian Plaintiff's Claims

The Plaintiff in Martinez v. Reynders, 2013 NCBC 35, had all of her claims dismissed last week in an Opinion from the Business Court.  The case illustrates why you might want to think twice about incorporating a business in Brazil, and how hard it is to make a fraud claim over a broken promise.

The Plaintiff is a Brazilian citizen.  She incorporated a pharmaceutical research and development company in Brazil in 2000.  The Brazilian company was sold to a Delaware corporation several years later.  Plaintiff became the sole manager of the purchased company.

Her claims arose from personal liability she claims she incurred as a result of her reliance on misrepresentations she claimed were made to her.  She personally guaranteed a lease in Brazil based on alleged representations that the Defendants would raise sufficient capital over a 90-day period to relieve her of her guaranty obligation.  She also became exposed to further liability because she was a "quota holder" of the Brazilian company.  (In Brazil, a quota holder is like a stockholder, but a quota holder can have personal liability for the corporation's debts).

She claimed that she had become a quota holder at the Defendants' request, allegedly upon repesentations that her status as a quota holder would be temporary and that the Defendants would replace her as a quota holder.  They didn't, and the Plaintiff said that the Brazilian government was holding her personally liable for unpaid corporate taxes.  Plaintiff said she was also on the hook under Brazilian law for the wrongful termination of the Brazilian company's employees due to the manner in which they had been terminated.

To the extent that the Plaintiff's liability rested on her being conned into becoming a quota holder, she premised her claims on a fraud theory.  Judge Jolly was buying none of that.  He held:

the allegation that [one of the Defendants] asked Plaintiff to become a quota holder for three months, until a new quota holder was found, on its face is not a misrepresentation of a past or existing fact. Defendants' assurance that it would replace Plaintiff as a quota holder within three months is, at most, a statement of future intent or promissory representation which cannot typically serve as the basis of a fraud claim. Leftwich v. Gaines, 134 N.C. App. 502, 508 (1999). A promissory representation may only serve as the basis of a fraud claim where the promissory representation is made with a present intent not to carry it out and may therefore be said to be a statement of existing fact. Id. In order for a promissory representation to be the basis of an action for fraud, facts must be alleged from which it may reasonably be inferred that the defendant did not intend to carry out such representation when it was made. Whitley v. O'Neal, 5 N.C. App. 136, 139 (1969). The court finds no facts alleged in the Complaint from which it might reasonably be inferred that Defendants did not intend to remove Plaintiff as a quota holder at the time they represented they intended to do so.

Op. Par. 29.

The claim that the guaranty was fraudulently induced failed for the same reason.  Judge Jolly said that:

Similar to the representations discussed above, there are no facts alleged from which it may reasonably be inferred that Defendants did not intend to relieve Plaintiff of her personal guaranty at the time they represented they would do so.

Op. Par. 37.

The photo above is by my daughter Juliet, who happens to be in Brazil right now.  Unfortunately, she left before I could warn her not to become a quota holder in a Brazilian company.  But she's pretty savvy. . . .

Do You Need Those Stinkin' Signatures? Maybe Not.

Let's say you are a corporate lawyer.  You spend your pitiful and lonely life surrounded by marked up papers and red pens, drafting or revising agreements.  You send your final versions out to your clients to sign, with those annoying little "sign here" stickers.

Then, the big day finally comes.  Your work is in court and the case turns on an agreement that you drafted.  But it wasn't signed by everybody concerned.  It's a nightmare.  What's going to happen?

Your astonishingly bright (and good looking) litigation partner says "No sweat.  We don't need no stinkin' signatures."  Is he or she right?

He or she might be, based on Judge Gale's decision last week in Hawes v. Vandoros, 2013 NCBC 31.  The parties were all joint owners of two investment beach houses.  When they refinanced the houses, most of them signed "contribution agreements" providing that they would each pay a pro rata share of the monthly payments due under the new loans.  

There were eleven signature lines on the Contribution Agreements, but two of the owners (the Schemerhorns) did not sign.  Two of those who had signed defaulted on their payments, and argued that the Agreements were not valid because all of the co-owners had not signed.

Judge Gale held that "a signature is not always essential to the binding force of an agreement . . . and .  . . in the absence of a statute it need not be signed, provided it is accepted and acted on, or is delivered and acted on."  Op.  29 (quoting Fidelity & Casualty Co. of NY  v. Charles W. Angle, Inc., 243 N.C. 570, 575-76, 91 S.E.2d 575, 579 (quoting W.B. Coppersmith & Sons v. Aetna Ins. Co., 222 N.C. 14, 21 S.E.2d 838 (1942)).

Those who hadn't signed the Agreements had abided by them -- they consistently made the payments due from them and had accepted the Agreements via their performance.  Op. 29.  Therefore, all signatures were not required.

Judge Gale also rejected the argument that obtaining all signatures was a condition precedent to the validity of the Agreements.  He said that "[a]bsent plain language, a contract ordinarily will not be construed as containing a condition precedent."  Op.  30 (quoting Craftique, Inc. v. Stevents & Co., Inc., 321 N.C. 564, 566-67, 364 S.E.2d 129, 131 (1988)).

I wouldn't give up those signatures just yet.

Fourth Circuit On LLC Law And Fried Chicken And Waffles

The Fourth Circuit doesn't get into matters of LLC law very often, but it did last week in Painter's Mill Grille, LLC v. Brown. The LLC and its members were suing their landlord for discriminating against them on the basis of race.

The LLC was operating a restaurant which served an African-American clientele. The Plaintiffs said that the Defendants became hostile to them as a result and referred to their business in a racially disparaging way and interfered with their sale of the business.

One of the comments by the Defendants, when the Plaintiffs attempted to sell their business, was whether they were going to open another "chicken and waffle shack."

Let me say that I love [fried] chicken and waffles for breakfast. If you haven't tried that dish, Dame's Chicken & Waffles, in Greensboro's Southside neighborhood, is outstanding.  If you don't get the racial animus alleged to be behind that term, the dish is said to have originated with African-American southerners.

But could the LLC members, who alleged that they suffered "personal out-of-pocket losses" as a result of the Defendants' discriminatory conduct, state a claim against them?

No, said Judge Niemeyer, since they were LLC members.  He held that:

[i]n advancing their arguments [the members] failed to account for the fact that they elected to conduct their business through a limited liability company ("LLC") and that, just as they received protection of their personal assets from liability in doing so, they also assumed a role as agents for the company. At bottom, they gave up standing to claim damages to the LLC, even if they also suffered personal damages as a consequence. The Supreme Court’s decision in Domino’s Pizza, Inc. v. McDonald, 546 U.S. 470 (2006), forecloses just such claims.

Op. at 7 (emphasis added).

I wasn't familiar with the Supreme Court's decision in Domino's Pizza, but it rejected in that case a shareholder's personal claims for race discrimination, holding that they belonged solely to the corporation.  Justice Scalia held there that:

it is fundamental corporation and agency law—indeed, it can be said to be the whole purpose of corporation and agency law—that the shareholder and contracting officer of a corporation has no rights and is exposed to no liability under the corporation’s contracts.

546 U.S. at 477.

I will hold off on my pizza recommendations.

 

The Fourth Circuit On "Accidents" And Drunken Driving

The issue in Johnson v. American United Life Insurance Co., decided last week by the Fourth Circuit. was whether the Plaintiff's husband's death from a car wreck while driving intoxicated was an "accident" under his life insurance policy from Defendant American United which provided "Accidental Death and Dismemberment" coverage .

The policy didn't contain a definition for an "accident," making it necessary for the Court to interpret the term. It noted in passing that     "[t]here are probably not many words which have caused courts as much trouble as 'accident' and 'accidental.'" Op. at n.1.

In the end, Judge Traxler ruled that the dead husband was covered by the policy, though he said that:

Reaching this result gives us no great pleasure. Drunk driving is reckless, irresponsible conduct that produces tragic consequences for the thousands it touches annually. But our task in this case is not to promote personal responsibility or enforce good driving habits. We must focus on the terms of the policies issued under the Plan and determine whether Richard died as a result of an accident without 'allowing our moral judgments about drunk driving to influence our
review.'

Op. 3-4.

The Court's analysis began with two competing definitions of the term "accident."  The Plaintiff argued that the "most natural and common understanding of the term . . . is an unintentional, unplanned incident that occurs as a result of a careless error."  Op. at 12.  She said that unless an intoxicated driver intended to crash his car and die, that his death would be an accident under the policy.

Another definition of "accident" would "exclude any incident where the consequences of intentional conduct are expected or reasonably forseeable."  Op. at 13.

Finding the term ambiguous, the Court applied "the rule of contra proferentum and construed the term[] strictly in favor of the insured." Op. at 15.   It found no evidence that the driver intended to have an accident and deemed the insured's death to be an accident.

The District Court had ruled that a death caused by intoxication was not an "accident."  It relied on Section 58-3-30(b) of the North Carolina General Statutes, which says that

"Accident", "accidental injury", and "accidental means" shall be defined to imply "result" language and shall not include words that establish an accidental means test.  "

You might not be familiar with some of those terms.  I wasn't.  The "accidental means" definition provides that there is no coverage when the loss "occurs by reason of an insured's intentional act" or "is the natural and probable consequence of a voluntary actor course of conduct."  Op. at 21 (quoting Collins v. Life Ins. Co. of Va., 393 S.E.2d 342, 343 (N.C. Ct. App. 1990)).

The "accidental result" standard is more liberal. 

a policy that pays benefits based on an 'accidental result' standard does not categorically exclude from the definition of 'accident' losses resulting from intentional acts; rather, "accidental" under this standard means a loss occurred 'fortuitously without intent or design' and was 'unexpected, unusual and unforeseen.'

Op. at 21 (quoting Henderson v. Hartford Accident & Indem. Co., 150 S.E.2d 17, 20 (N.C. 1966)).

Judge Traxler looked to a 1992 North Carolina Supreme Court decision -- North Carolina Farm Bureau Mutual Ins. Co. v. Stox, 412 S.E.2d 318 (N.C. 1992) -- which held:

 

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Business Court Sanctions Parties For Disobeying Discovery Order

 When you think of sanctions, your mind probably goes to Rule 11 of the Rules of Civil Procedure.  But what about Rule 37(b)(2)?  It says that: 

if a party . . . fails to obey an order to provide or permit discovery, . . . a judge of the court in which the action is pending may make such orders in regard to the failure as are just . . . . In lieu of any [such order] or in addition thereto, the court shall require the party failing to obey the order to pay the reasonable expenses, including attorney’s fees, caused by the failure . . . .

Judge Murphy applied the teeth in Rule 37 to sanction two of the parties -- Allison and Stathopoulos -- in an Order this week in BOGNC v. Cornelius Self-Storage LLC to the tune of almost $10,000 for failing to comply with an earlier discovery order in the case.

 He had entered that Order in December 2011, ruling that the attorney-client privilege did not apply to communications between Allison (an attorney) and Stathopoulus, both of whom were LLC members.  He directed those two parties to produce the documents they had withheld on the basis of privilege within thirty days, and to produce a privilege log for documents they continued to maintain as privileged within the same time frame.  If disputes continued, Allison and Stathopoulus were to deliver the documents in camera for the Court's review.

The deadlines passed without compliance.  Although the Order did not state a deadline for production of the documents for an in camera review, they were not provided until eight months after the entry of the Order.  Judge Murphy said that the production was "riddled with deficiencies" and  the parties had acted in "blatant disregard" of his Order.   Order 18.

The sanctions were equivalent to the reasonable expenses incurred by the Plaintiff as a result of the parties' failure to comply with the Court's 2011 Order, which were ruled to be $9,614.00.

It is worth mentioning that these sanctions didn't run against the lawyers for Allison and Stathopoulus.  They ran directly against the parties.



 

 

Arbitration Compelled Based On Unsigned Arbitration Agreement

If you were thinking that an arbitration agreement needs to be signed in order to get an order compelling arbitration, your world may have been turned on its ear by the Order from the Business Court last week in Morton v. Ivey, McClellan, Gatton & Talcott, LLP, 2013 NCBC 23..

 There's certainly a fair amount of North Carolina authority that an arbitration agreement can't be enforced if it was never signed (noted in 20 of the Order), but Judge Gale held that the Revised Uniform Arbitration Act relaxes this requirement.

The RUAA became effective in 2004, and provides that "[a]n agreement contained in a record to submit to arbitration . . . is valid, enforceable, and irrevocable except upon a ground that exists at law or in equity for revoking a contract."  N.C. Gen. Stat. §1-569.6(a).  

A "record" is defined by the Act as "information that is inscribed on a tangible medium."  N.C. Gen. Stat. §1-569.1(6).  The predecessor statute -- the Uniform Arbitration Act -- carried a more stringent standard.  It said that "parties may agree in writing to submit to arbitration . . . or they may include in a written contract a provision for the settlement of arbitration of any controversy. . . . "

Even though the Plaintiffs had never signed the partnership agreement containing the arbitration provision, they had known of the agreement and taken a significant role in drafting it.  Judge Gale found that:

the draft Partnership Agreement circulated by [one of the Plaintiffs] and assented to by [the Defendants], is a sufficient 'record' to satisfy the requirement of § 569.6(a) of the RUAA.

Order 23.

Congratulations to my partners Jeff Oleynik and John Ormand for pulling off this magic trick and getting the Order compelling arbitration.  (And no, that's not Jeff or John in the picture.  Or their rabbit.)

 

 

Developments In NC State Trademark Law

When I last wrote about SCI North Carolina Funeral Services, LLC v. McEwen Ellington Funeral Services, Inc., Judge Murphy had entered a TRO against the Defendants for trademark infringement over their use of the McEwen name in their funeral home business.  The case seemed cut and dried then, and it looked like that the Defendants had no defense to the infringement claim.

Last week, Judge Murphy entered a preliminary injunction in the same case in 2013 NCBC 11, this time over the Defendants' vigorous defense.  The second time around was a much closer call. 

The case involves the McEwen name, which is the middle name of Defendant Carl Ellington. When the Defendants sold the funeral homes that they had operated under the McEwen name to the Plaintiffs, they included in the sale the rights to all "trademarks, tradenames (including all trade names under which [they] did business."  McEwen was the last name of Carl J. McEwen, the founder of McEwen Funeral Services, Inc.

Several years after their sale, the Defendants opened a new, competing funeral home under the McEwen name and this trademark infringement lawsuit ensued.

 

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North Carolina Securities Act Claims Take Shape In The Business Court

There is little case law under the North Carolina Securities Act.  But last week, in NNN Durham Office Portfolio 1, LLC v. Highwoods Realty Limited Partnership, 2013 NCBC 12, Judge Gale took several steps into that uncharted territory.

TIC Interests Are Securities

The first issue addressed in NNN was whether the "TIC interests" purchased by Plaintiffs fell within the definition of a "security."  If you've never heard of a TIC interest, it is "an undivided share in real property 'with each person having an equal right to possess the whole property. . . .'" Op. ¶42.

There's been a good bit of litigation about whether a TIC interest can  be considered a security.  It's not a security if it simply involves the sale of fractional real estate shares, but it can be if it is coupled with a management contract.

That was the situation before the Court in NNN.  Plaintiffs had purchased TIC interests in several office buildings in Durham.  Two of the primary tenants of the buildings were affiliates of the Duke University Health System.  The properties were to be managed by Triple Net Properties, LLC, which is a defendant in a separate lawsuit also before the Business Court.

Plaintiffs alleged that Triple Net and Highwoods, the former owner of the properties, obtained their investment by making material misstatements which misled them into making their purchases. The alleged misstatements concerned Duke's intention to remain as a tenant.  After the purchases of the TIC interests, Duke decided not to renew its leases.  The properties which it had occupied then went to foreclosure. 

The State Scheme For Civil Liability Under The Securities Act

Section 78A-56(a) imposes "primary liability" on the seller or offeror of a security.  There are two "pathways" to primary liability.  One lies in fraud, generally comparable to federal 10b-5 claims. That's in N.C. Gen. Stat. §78A-8, (Section 78A-56(a) creates civil liability for a violation of section 78A-8.)  The other pathway is through making false or misleading statements, comparable to federal claims under 12(a)(2) of the Securities Act of 1933.  That's in N.C. Gen. Stat. §78A-56(a)(2).

Note that the remedies under the NCSA are less generous than those under the corresponding federal claims.  The recovery under NC law is generally limited to the consideration paid for the security.  N.C. Gen. Stat. §78A-56(a).

Pleading, Scienter, and Justifiable Reliance Under Sections 56(a)(1) and 56(a)(2)

Judge Gale ruled that a Plaintiff must prove scienter and justifiable reliance to make out a primary violation under Section 56(a)(1) of the NCSA.  Recall that Judge Murphy ruled last year that scienter is not necessarily a required element of a claim under Section 56(a)(2), which can be grounded on negligence.  

So, Judge Gale ruled, a claim under Section 56(a)(1) must be pled with particularity, in compliance with Rule 9(b) of the NC Rules of Civil Procedure.  Op. ¶¶62-63.

Section 56(a)(2) is different.  It provides for a claim against an offeror or a seller of a security "who (1) makes any untrue statement of a material fact, or (2) fails to state a material fact necessary for a statment which was made to not be misleading."  Op. ¶64.  There's a built-in defense in the statute.  A seller or offeror can avoid liability for such a statement or omission if he can prove that "he did not know, and in the exercise of reasonable care could not have known of the truth or omission."  N.C. Gen. Stat. §78A-56(a)(2).

On pleading requirements as to Section 56(a)(2),  Judge Gale ruled that "the heightened pleading standards of Rule 9(b) do not apply [to a claim under that Section] where the action is grounded on negligence, but rather Rule of Civil Procedure 8(c) controls."  Op. ¶67.  The plaintiff also doesn't need to prove justifiable reliance under this Section.  Id.

Secondary Liability Under Section 56(a)(2)

North Carolina extends secondary liability under Section 56(a)(2) to "every other person who materially aids in the transaction."  But the "other person" must be shown to "actually [know] of the factual predicate of the primary liability."  Op. ¶69.

What does "materially aid" mean?  Judge Gale devoted several paragraphs of his decision to that issue (¶¶71-80), and concluded that:

for purposes of the present Rule 12(b)(6) motion the court will require allegations of conduct which rises to the level of having contributed substantial assistance to the act or conduct leading to primary liability under the NCSA, and, when later assessing plaintiff’s proof, will apply the concept of 'substantial assistance' restrictively.

Op. ¶79.

The Liability Of One Of The Defendants

The last part of the opinion deals with the liability of the Defendant Highwoods.  Highwoods conveyed the fractional interests in the properties directly to the Plaintiffs, but hadn't been involved in the peddling of the management contract.  That wasn't enough to make it liable as a seller of the security and make it primarily liable, so there was no claim for liability under Section 78A-56(a)(1).

Highwoods did not fare as well on Plaintiffs' claims that it was secondarily liable under Section 78A-56(a)(2).  Judge Gale ruled that "[w]hether a person’s participation in the sale of a security constitutes 'material aid' and whether that person 'actually knew of the existence of the facts by reason of which the liability is alleged to exist' are necessarily fact-intensive inquiries. " Op. ¶91.

The facts about Highwoods' knowledge that Duke planned to vacate the sold properties are to be the subject of "further proceedings."  Op. ¶90.

Being a Tar Heel fan, I have to say It's a shame that no one can figure out a way to sue Duke.

 

Business Court Excludes Testimony Of Financial Expert On Lost Profit Damages

The case of Blythe v. Bell is like the gift that keeps on giving.  It generated two significant opinions last year, and this week a third and a fourth.  The July 2012 opinion was a major e-discovery decision, and the December 2012 opinion addressed an important issue about the assignment of LLC interests.

Today's post is about the Blythe v. Bell opinion numbered 2013 NCBC 8, on the subject of expert testimony.  In this third Blythe opinion, Defendants had moved to exclude the testimony of Plaintiffs' expert witness, Barbee, on the grounds that he was not qualified to render his opinion and that his methodology was deficient.

Barbee, a CPA, had offered testimony that the Plaintiffs' damages were lost profits consisting of more than ten million dollars, including  “historic lost profits” of about $3.3 million;  and “additional lost profits” of about $7.4 million.  Defendants' Motion to Exclude at ¶7.

Remember that it is very tough to prove lost profit damages in North Carolina.  As Judge Gale held, 

[w]hile the courts do not demand mathematical certitude in calculating
lost profits, they do not countenance conjecture or speculation, and conjecture or
speculation does not become admissible simply because it is presented by an expert.

Op. ¶19.  He also said that while the amount of damages to be awarded is for the jury to determine, "the court determines as a matter of law whether the evidence would allow a jury to calculate lost profits with reasonable certainty."  Op. Par. 20.

Furthermore, the expert testimony must "pass the realm of conjecture, speculation, or opinion not founded on facts, and must consist of actual facts from which a reasonably accurate conclusion regarding the cause and the amount of the loss can be logically and rationally drawn." Op. ¶20 (quoting Overnite Transp. Co. v. Int'l Brotherhood of Teamsters, 257 N.C. 18, 30, 125 S.E.2d 277, 286 (1962). 

The Defendants attacked Barbee's expertise, saying that he was not a qualified expert on the subject of marketing and that the method he had used to calculate lost profits was not reliable enough to pass muster.

Judge Gale gave a nod of approval to Barbee's expertise, saying that he was well qualified in the field of damages calculations.  He had the qualifications many of us look for when hiring a financial expert, like certifications from the American Institute of Certified Public Accountants in the areas of business valuation and financial forensics.

The AICPA puts limitations on a CPA's methods of calculating lost profits.  One of its publications counsels against speculation, saying that "damages for lost profits are recoverable only if the plaintiff can prove the damages related to lost profits are reasonable and that they have been calculated using reliable factors without undue speculation."  Op. ¶16 (quoting Richard A. Pollack, et al, AICPA, Calculating Lost Profits, Ch. 58 ¶¶ 52-53 (2006)).

Judge Gale ruled that Barbee's calculation of lost profits crossed the line into "conjecture and speculation" and that it should be excluded from evidence.  Op. ¶5.  

So where did Barbee leave the terra firma of "reliable factors" and enter the world of "conjecture and speculation"?  His calculation assumed that one of the Plaintiffs would have increased its sale of the socks that were central to the lawsuit and thereby its profits.  He based that calculation upon an assumption that the Plaintiffs would have had more dollars available to spend on marketing to increase sales.  He didn't specify how the dollars would have been spent or how they would have generated new sales.

But if you are cheering for the Blythe side of this case, all wasn't lost.  Part of Barbee's calculation of lost profits withstood Judge Gale's scrutiny.  That portion (the "historic" lost profits of $3.3 million) didn't involve a projection of sales which hadn't happened, but instead was based on actual sales.  Even so, the Blythe side of the case had their damages reduced by 75%.

 

 

 

 

 

 

NCCOA: The Constitution Reins In The Uniform Enforcement Of Foreign Judgments Act

If you've been practicing law for more than a few years, you've undoubtedly been asked to "domesticate" in North Carolina's courts a judgment entered in another state. A pretty easy task you think, covered by North Carolina's adoption of the Uniform Enforcement of Foreign Judgments Act, N.C. Gen. Stat. Sec. 1C-1701 to -1708.

Let's say that the lawyer defending against the domestication tells you that the out-of-state judgment was obtained based on "intrinsic fraud, misrepresentation, and misconduct."  Those would probably be grounds for setting aside a North Carolina judgment under Rule 60(b) of the North Carolina Rules of Civil Procedure.  Can the foreign judgment be enforced in North Carolina under the Uniform Act?

Those of you who are particularly sharp are wondering about the constitutional principle of Full Faith and Credit.  Article IV, Section 1 of the Constitution says that "Full Faith and Credit shall be given in each State to the public Acts, Records, and judicial Proceedings of every other State."  Not surprisingly, there is a good bit of judicial discussion of the interplay between the Uniform Act and the Constitution, with the most recent comment this week from the North Carolina Court of Appeals, in DOCRX, Inc. v. EMI Services of NC, LLC.

DOCRX was on the receiving end of a judgment in Mobile County, Alabama, of nearly half a million dollars.  When EMI sought to have its Alabama judgment enforced in North Carolina, DOCRX argued per NCRCP 60(b) that the judgment  could not be enforced because it was obtained on the basis of intrinsic fraud.  

The trial judge refused to enforce the judgment based on the Rule 60(b) argument and the Court of Appeals noted that this interpretation was "warranted from the plain language of the statute." Section 1C-1703(c) states that a foreign "judgment so filed has the same effect and is subject to the same defenses as a judgment of this State and shall be enforced or satisfied in like manner[.]"  And Rule 60(b) refers to "[f]raud (whether heretofore denominated intrinsic or extrinsic)" as a ground for setting aside a judgment.

But the Constitution intervenes here.  The core of the Court of Appeals' holding was that:

We hold that postjudgment relief from foreign judgments under N.C.G.S. § 1A-1, Rule 60(b) is limited to the following grounds: '(1) the judgment is based upon extrinsic fraud; (2) the judgment is void; or (3) the judgment has been satisfied, released, or discharged, or a prior judgment upon which it is based has been reversed or otherwise vacated, or it is no longer equitable that the judgment should have prospective application.

Op. at 9 (quoting Craven v. Southern Farm Bureau Cas. Ins., 117 P.3d 11, 14 (Colo. App. 2004))(emphasis added)

These were the only grounds on which the trial court could have denied enforcement.  The arguments of "intrinsic fraud, misrepresentation and misconduct" were insufficient.  So, the Court of Appeals reversed the trial judge and remanded the case "for further proceedings."  Op. at 11.

Oh, and what about "intrinsic" fraud anyway?  What is that and how is it different from "extrinsic" fraud?  The federal Third Circuit called the terms a "most unfortunate" distinction, in Averbach v. Rival Mfg. Co., 809 F.2d 1016 (3d Cir. 1987).  Intrinsic fraud is fraud deceiving the court in obtaining a judgment. Extrinsic fraud is conduct which happens outside of court, but which deprives an adversary of the opportunity to present his case.

 

Funeral Homes In Charlotte Battle Over Trademark Infringement

You don't see a trademark infringement action in the Business Court every day, let alone a TRO decision, but a case with both came along last Friday in SCI Carolina Funeral Services, LLC v. McEwen Ellington Funeral Services, Inc.  Moreover, this was a common law trademark case, with no federal registration -- or even a state registration -- involved.

The Defendants had previously operated funeral homes under the McEwen name in the Charlotte, North Carolina area.  In 1986, they sold those funeral homes, and their trademarks and trade names, to the Plaintiffs.

Then, notwithstanding their agreement, the Defendants opened a funeral home under the McEwen name and began advertising under that name as well.  They also registered a trade name with the North Carolina Board of Funeral Services as McEwen Ellington Funeral Services.  

There's very little North Carolina state law on trademark infringement, but Judge Murphy found enough to enter a temporary restraining order against the Defendants.

He held, relying on a 1907 North Carolina Supreme Court decision, that "North Carolina common law protects corporations' trade names," stating that

It is well settled that an exclusive right may be acquired in the name in
which a business has been carried on, whether the name of a partnership or
of an individual, and it will be protected against infringement by another
who assumes it for the purpose of deception, or even when innocently
used without right, to the detriment of another; and this right, which is in
the nature of a right to a trade-mark, may be sold or assigned. 

Op. ¶9 (quoting Blackwell’s Durham Tobacco Co. v. American Tobacco Co., 145 N.C. 367, 374, 59 S.E. 123, 127 (1907).

Then, although there's no reported state court decision on when a trademark infringement plaintiff has shown the likelihood of confusion necessary to prevail, Judge Murphy relied on a federal decision from the Western District of North Carolina holding that the factors to be considered are:

1) the strength or distinctiveness of the mark; 2) the similarity of the two
marks; 3) the similarity of the goods/services the marks identify; 4) the
similarity of the facilities the two parties use in their businesses; 5) the
similarity of the advertising used by the two parties; 6) the defendant’s
intent; and 7) actual confusion.

Op. ¶10 (quoting Wachovia Bank & Trust Co. v. Crown Nation Bancorporation, 835 F. Supp. 882, 886(W.D.N.C. 1993)).

If that standard sounds familiar, that's because it is, and drawn from the Fourth Circuit Court of Appeals' often cited opinion in Pizzeria Uno v. Temple, 747 F.2d 1522, 1527 (4th Cir. 1984)).

Given that the Plaintiffs had shown that their McEwen mark was distinctive, the marks in question appeared to be similar, the funeral services provided by the parties were identical, the parties use similar facilities, the parties' advertising is similar, and that one of the Defendants had registered and operated under the challenged mark with the intent to cause confusion among the consuming public, it was any easy step to enjoin the Defendants from using the McEwen name in connection with funeral services.

It's hard to tell how the Defendants defended this pretty clear case of infringement, given that they didn't even file a brief in opposition to the motion for a TRO.

 

The Middle District Of North Carolina Okays Cellphones (With Cameras!)

If you are a lawyer practicing in the Middle District of North Carolina, you will be excited about Standing Order #2, issued by the Judges of the Court on January 8th.

The Order authorizes the use of cellphones -- even those with cameras -- in the courthouses of the District.  The banning of cellphones with cameras has long been a bugaboo for lawyers practicing here.  And after all, can you even buy a cellphone without a camera anymore?

Here are the answers to some of the questions you may have about this sea change in Middle District procedures:

When is the new policy effective?  It is effective immediately.

What about my clients?  Can they bring their cellphones to Court?  No, the policy applies only to attorneys, including out of state attorneys who are appearing with local counsel per Local Rule 83.1(d).

What about paralegals and personnel of my law firm?  They are not covered by this policy.

Can I let someone with me use my cellphone in the courthouse?  No, the Standing Order says that "[p]ermitted attorneys shall maintain sole custody over the electronic device and shall not allow it to be used by anyone else unless they have been given court permission."

Is there anything I need to do to get my cellphone into the courthouses?  Yes, you need to fill out a form for an "Electronic Device Permission Card."  Submit the form with a self-addressed stamped envelope.  You'll need to show the card upon entering a courthouse with your cellphone.

But I already have a Laptop Authorization Card.  Do I need to reapply for an Electronic Device Permission Card?  Yes. Here's the form.

Does this new policy apply in the Bankruptcy Court courthouses?  Yes, it applies to all of the federal courthouses in the Middle District.

What about my iPad and other electronic devices?  They are all included.  The new policy extends to "cell phones, laptops, tablets [and] other electronic devices."

Are there any other restrictions I should know about?  Yes, you need to make sure that your device is not emitting any sounds while in the courtroom.  In most situations, it should be turned off while in the courtroom. As always, you are prohibited from "record[ing], broadcast[ing] or transmit[ting] any video images or audio sounds of the proceedings or the environs."  You agree in advance to these restrictions (and others) when applying for an Electronic Device Permission Card.

What if I violate the restrictions?  You might forfeit your privileges, have your device confiscated, or be held in contempt of court.

What about the Eastern and Western Districts?  The policy on electronic devices varies from District to District.  I wrote about the Eastern and Western District's policies a couple of years ago.

 

 

Hotels.com And Other Online Travel Vendors Don't Have To Pay Occupancy Taxes To North Carolina Counties

It's hard to like the result in Wake County v. Hotels.com, LP, 2012 NCBC 61.  The case is a consolidation of cases brought by several North Carolina counties (Mecklenburg, Wake, Dare, and Buncombe) against Hotels.com and other internet travel sites (like Orbitz.com, priceline.com, and travelocity.com).  Hotels.com, the first named Defendant, is an online booking service that promises the lowest available rates for a multitude of hotels.

The NC County Plaintiffs allege that Hotels.com and the other Defendants contract with hotels for rooms at a discounted rate, and then sell the rooms to consumers at a higher rate.  Their beef is over the non-payment by hotels.com of the Occupancy Tax ordinarily paid by hoteliers.  They allege that Hotels.com and the other Defendants charge their customers for tax at the higher rate at which the hotels actually sell the room, but then only remit taxes based on the discounted rate they pay the hotel operator.

What happens to the difference?  Hotels.com and the other Defendants pocket it.  Shouldn't they pay the excess collected to the counties or the North Carolina Department of Revenue?  The Counties thought so.

But the upshot of Judge Murphy's decision in the Wake County case is that the Counties had no cause of action against the Defendants.  He granted summary judgment in favor of the Defendants.

The why of it took 30 pages of statutory analysis of North Carolina's taxation scheme.  The Occupancy Tax is not contained in the General Statutes.  Instead, the General Assembly passed statutes authorizing counties to levy an Occupancy Tax.  The counties levy the Occupancy Tax via resolutions or ordinances.

So the cases turned on the counties' ordinances, and upon whom they placed the obligation to collect the tax.  In Mecklenburg and Wake Counties, it was the "operator of a taxable establishment."  In Dare and Buncombe Counties, it was the "operator of a business subject to a room occupancy tax."

Judge Murphy concluded that the Defendants were not responsible for collecting the Occupancy Tax.  If you are curious about how he reached that conclusion -- and you must be a state taxation junkie if you are -- you can read about it in Paragraphs 33 through 53 of the Opinion.

Other Interesting Things About This Opinion

For those of you who aren't enamored  by the Occupancy Tax, you might find interesting Judge Murphy's discussion of Rule 8 of the North Carolina Rules of Civil Procedure and his disposition of a conversion claim.

 

Continue Reading...

An Important Opinion On Assigning LLC Interests From The NC Business Court

Today's post is really a thank you to Judge Gale for delivering the Christmas gift I requested in last week's post: a decision from the North Carolina Business Court on an open question of North Carolina's corporate law to write about because I was tired of writing about Delaware law on this North Carolina blog.

The gift came in the decision in Blythe v. Bell, 2012 NCBC 60, decided Monday by the Business Court.  The Blythe opinion is the first decision under North Carolina's Limited Liability Company Act construing the effect of a transfer of an LLC interest by an LLC member.

What's Included in a LLC Member's Interest

The definition of a membership interest is in G.S. §57C-1-03.  As Judge Gale observed, the statute recognizes the distinction between a member's 'economic interest' (the right to receive distributions from the LLC) and the member's 'control interest' (the right to vote or to participate in the management of the LLC).  Op. 27. 

Assigning an LLC Member's Interest Doesn't Make The Assignee A New Member Of The LLC

The LLC Act deals in N.C. Gen. Stat. §57C-5-02 with "assignment of membership interests."  Section 57C-5-04(a) covers the "right of assignee to become a member."

It's worth a look at the statutes, which you can read by clicking on the links, as they were too long to quote.  As Judge Gale observed, Section 57C-5-02 makes it clear by its wording that "an assignment in and of itself does not entitle the assignee to become a member or to exercise a
member’s rights if he is not already a member. "  Op. 33.  

If there is an assignment of an LLC interest to someone who is not already a member of the LLC, then Section 57C-5-04(a)(2) requires the unanimous consent of the other members before the assignee can become a member.

What Happens To The Control Interest When There's An Attempted Assignment To A Non-Member?  

The issue of the control interest's assignability was the nub of the Blythe case.  One of the Defendants, Joseph, had assigned his membership interest in an LLC to HBI, which was not a member of the LLC.  Plaintiff said this meant that neither Joseph nor the assignee had a right to vote the 30% interest.

The effect of this argument, if accepted, was that the Plaintiff's control interest went from 40%  to 57% (based on 40% of the 70% remaining with Joseph's 30% out of the equation).  That turned a minority member into the controlling majority member.

Judge Gale rejected that argument focusing on the LLC Act as a whole.  He said that the control rights continued to reside with the assigning member until the assignee was admitted as a new member per the terms of Section 57C-5-04.  In particular, he relied on G.S. §57C-5-06, which prohibits a member from voluntarily withdrawing from the LLC without an express agreement from the other members allowing the withdrawal.  Accepting Plaintiff's argument would have allowed a member to withdraw via assignment which Judge Gale found to be contrary to the Act.

The effect of this ruling was that Joseph had transferred his economic interest, but he remained a member of the LLC with voting rights unless and until until his assignee was admitted as a member by unanimous consent. 

It's worth noting that the same result would have been reached under the terms of the Revised Uniform Limited Liability Company Act, Section 502(g).

There's A Difference If The Assignment Is To An Existing LLC Member

 Here's another part of the ground-breaking LLC news from Blythe:  Judge Gale held that he "interprets the Act to allow members, absent a contrary agreement, to transfer both their economic and control membership interests to existing members without unanimous member consent."  Op. 44. 

How Do You Avoid This Type Of Problem?

Is there a way to avoid this type of wrangling over assignments of LLC interests?  Of course.  The default provisions of the LLC Act control "unless otherwise provided in the articles of organization or the operating agreement of a North Carolina LLC."  Op. 24.  The LLC in Blythe had no operating agreement.  If there had been one, the assignment provisions of the LLC Act might have been varied.

 

 

Parol Evidence Rule Barred Defendants' Interpretation Of Earn-Out Provision

Premier, Inc. v. Peterson, 2012 NCBC 59, decided last Friday by Judge Murphy, turned on a strict application of the parol evidence rule.

At issue was whether the defendants were entitled to a substantial earn-out payment under a Stock Purchase Agreement.  The Plaintiff had purchased the Defendants' software business of selling a Web-based surveillance and analytic services to healthcare providers.

Interpretation of the Contract

The Stock Purchase Agreement called for the earnout payment to be made on a series of five year anniversaries of the acquisition date.  The calculation was to be based on the number of hospitals at which a "Product Implementation" of the software products purchased by the Plaintiff had occurred.

The SPA contained a definition of "Product Implementation," and Judge Murphy not surprisingly held that "[b]ecause the goal of construing a contract is to arrive at the intent of the parties when he contract was executed, where a contract defines a term, 'that definition is to be used.'"  Op. 31(quoting Woods v. Nationwide Mut. Ins. Co., 295 N.C. 500, 505-06, 246 S.E.2d 773, 777 (1978)).

The definition called for the hospital in question to have subscribed to or licensed the product and to have implemented it as well.  A representative of the sellers said that notwithstanding the definition, the parties had agreed during  the negotiations that a "Product Implementation" would include instances where the product was merely provided to the hospital, even without a subscription or license.

Judge Murphy rejected this argument, holding:

 this agreement, at best, adds to the unambiguous terms of the contract requiring a
subscription or license. As such, the parol evidence rule bars consideration of this
proffered agreement, and the Court must enforce the language as written. In doing
so, the Court concludes that Plaintiff’s interpretation construes all the terms
harmoniously, giving effect to the entire provision. Therefore, the Court concludes
that the language is unambiguous, and that Plaintiff has presented a reasonable
interpretation of “Product Implementation.”

 Op. 35.

Attorneys' Fees?

Maybe you are thinking that the Defendants' argument was so beyond the pale of the parol evidence rule that the Plaintiff should have been awarded attorneys' fees.  And the Stock Purchase Agreement called for fees to be awarded to the "prevailing party."

So were fees awarded to the Plaintiff?  No, because of the NC Supreme Court's decision in Stilwell Enter. v. Interstate Equip Co., 300 N.C. 286, 266 S.E.2d 812 (1980), in which it held that:

[e]ven in the face of a carefully drafted contractual provision indemnifying a party for such attorneys' fees as may be necessitated by a successful action on the contract itself, our courts have consistently refused to sustain such an award absent statutory authority therefor.

Id. at 289, 266 S.E.2d 815-16 (emphasis added).

Statutory authority?  Wait a minute.  What about N.C. Gen. Stat. sec. 6-21.6(c), which says that:

If a business contract governed by the laws of this State contains a reciprocal attorneys' fees provision, the court or arbitrator in any suit, action, proceeding, or arbitration involving the business contract may award reasonable attorneys' fees in accordance with the terms of the business contract.

No to attorneys' fees, said Judge Murphy, notwithstanding Section 6-21.6.  That statute applies only to business contracts entered into on or after that statute's effective date, which was October 1, 2011.  This Stock Purchase Agreement was entered into five years before that effective date, in 2006.  Op. ¶46 & n.2.

 

 

 

Does A Trial Judge Have The Discretion To Deny Costs To A Prevailing Party?

If you've ever made a Motion for Costs following a win at summary judgment or a win at trial you know that the law on such motions is a quagmire.   Does the trial court have discretion in determining whether to award costs to a prevailing party?  Section 6-20 of the General Statutes implies that the Court always has discretion (it's titled "Costs allowed or not, in discretion of Court"), but the answer is muddy.

Judge Gale ruled in a post-judgment ruling last Friday in Dunn v. Dart that the costs listed in and allowed by G.S. N.C. Gen Stat.§7A-305(d) must be awarded to a prevailing party, and that a trial judge lacks any discretion in determining to deny them.  He interpreted a less than year old Court of Appeals decision, Khomyak v. Meek, 720 S.E.2d 392 (2011), "[t]o eliminate that discretion and to compel awarding the prevailing party those costs allowed by N.C. Gen Stat.§7A-305(d)"

The Khomyak case represented an admirable effort by Judge McCullough of the Court of Appeals to harmonize the cases laying in the "troublingly divergent path" taken by the COA  in ruling on motions for costs that have come to it on appeal.

That "troubling path" includes Smith v. Cregan, 178 N.C. App. 519, 632 S.E.2d 2006 (2006), which held that a trial court does have discretion whether to award costs:

this Court's decision explicitly holds that, for actions governed under section 6-20, such as negligence actions like the present case, the trial court has the discretion to determine whether or not to award costs to the prevailing party, and if the trial court chooses to exercise that discretion, then the trial court is confined to those costs expressly enumerated under section 7A-305(d) or any other statute." Id. at 222 (emphasis added).

Id. at 734, 596 S.E.2d 895.

Since one panel of the Court of Appeals can't overrule another, and since the North Carolina Supreme Court hasn't ruled on the discretion issue, the Smith case is still out there as good (but now questionable) law.

It doesn't take much reading between the lines of the one page Order in Dunn v. Dart to take away that Judge Gale did not look kindly on this  Motion for Costs.  In fact, he stated that "[i]f the court did have discretion to do so, it would exercise its discretion here to deny all costs."  

And he certainly exercised some discretion, in awarding only about five thousand dollars in costs against Defendants' request for more than $130,000 in fees and costs.  

Don't forget that this case is a fight between lawyers to carve up a big fat fee about which I wrote last year.  There's obviously no love lost between those lawyers, and maybe the Court of Appeals will get another chance to consider the law on Motions for Costs if there is an appeal of this ruling.

The Fourth Circuit Says Don't Do This

In a case decided last week, McKenzie v. Hall, the Fourth Circuit sent a clear message that it does not tolerate Motions to Strike.  The Appellants had filed such a Motion to strike portions of an adversary's brief which they said were objectionable.

The Court struck back, quoting a Seventh Circuit decision, Redwood v. Dobson, 476 F.3d 462, 471 (7th Cir. 2007), and holding that:

  • "Motions to strike sentences or sections out of briefs waste everyone’s time. . . ."
  • "Motions to strike words, sentences, or sections out of briefs serve no purpose except to aggravate the opponent. . . . -- and . . .  this goal is not one the judicial system will help any litigant achieve."
  • "Motions to strike disserve the interest of judicial economy. The aggravation comes at an unacceptable cost in judicial time."

Op. 9 & n.3.

The proper way to deal with an objectionable brief is not a Motion to Strike.  The Court said that:

The Federal Rules of Appellate Procedure provide a means to contest the accuracy of the other side’s statement of facts: that means is a brief (or reply brief, if the contested statement appears in the appellee’s brief), not a motion to strike.

Id.  (emphasis added).

In case you were wondering, there's no provision for a Motion to Strike in the Federal Rules of Appellate Procedure.
 

Hurricane Sandy Reaches The North Carolina Business Court

North Carolina has had more than its fair share of hurricanes over the years, but Hurricane Sandy, which hit New Jersey and New York City, even reached the North Carolina Business Court.

It came in the most mundane of motions, one to expand the word limitation for a brief.  The Order is in Gusinsky as Trustee for the Vladimir Gusinsky Living Trust v. Duke.  

The Motion was filed by the Plaintiffs on the same day an overly long brief was filed.  That violates Business Court Rule 15.8, which says that:

Requests for expansion of word limitations shall be made five (5) business days prior to filing the brief for which expansion of word limitations is sought. Requests for expansion of word limitations that are filed simultaneously with the brief shall be denied.

But this Motion was granted notwithstanding the untimely filing.  Why?  Plaintiff's counsel said that they couldn't comply with the Rule due "to communication issues among counsel caused by Hurricane Sandy."  Order 4.  Plaintiff;s counsel are located in New York City.

Judge Jolly recognized the havoc caused by the storm, saying:

The court acknowledges that Hurricane Sandy caused flooding, power outages and devastating damage along the East Coast of the United States, and the court is sensitive to issues created by this natural disaster. However, the court encourages counsel to recognize that compliance with the BCR promotes efficiency and fairness in case administration.

Op.h 4 & n.1.

In this case, though, the hurricane trumped the Business Court Rules.  But don't look for this pass to be given out again.  That was a thousand year storm.  Follow the Rules in the absence of severe weather conditions.

 

 

 

Fourth Circuit Gives a Latin Lesson On Nunc Pro Tunc Orders

You've undoubtedly had a Judge announce that she was entering an order "nunc pro tunc."  In case you didn't have your Latin-English dictionary with you at the time, that literally means "now for then."

A nunc pro tunc order is a way for a Judge to correct an order previously made which was improperly entered or expressed.

The Fourth elucidated the boundaries of "this rarely used device" last week in Glynne v. Wilmed Healthcare.  Op. 6.  It reversed a nunc pro tunc ruling by Judge Malcolm Howard of the Eastern District of North Carolina.

The purpose of the reversed order was to extend the statute of limitations for the Plaintiff to refile state law claims.  The limitations period as to those claims had expired during the pendency of a federal court lawsuit.

A federal statute (28 U.S.C. sec 1367(d)) provides that the limitations period on any supplemental claim "shall be tolled while the claim is pending and for a period of 30 days after it is dismissed unless State law provides for a  longer tolling period."  The North Carolina Court of Appeals ruled in Huang v. Ziko, 511 S.E.2d 305, 308 (N.C. App. 1999) that North Carolina has no applicable "grace period" longer than the 30 days meted out by Section 1367(d).

Plaintiff let the 30 days expire and missed refiling her state law claims by six days.  She asked Judge Howard to revise his Order dismissing her state law claims, and to give her 40 days to refile her claims in state court.  Judge Howard complied, entering an Order nunc pro tunc giving the Plaintiff 60 days from the date of the original Order to refile her claims.

If you are thinking that Judge Howard didn't have the power to extend the 30 day grace period of Section 1367(d), the Fourth Circuit didn't weigh in on that question.  It said instead that he had "unquestionably erred" by entering the Amended Order, and held:

Because the doctrine of nunc pro tunc may only be employed to correct mistakes or omissions in the record sothat the record properly reflects the events that actually took place, the district court’s attempt to modify its earlier order for the first time under the guise of nunc pro tunc was error.

Op. 7-8.

The use of nunc pro tunc orders in driving under the influence cases in Wake County has led to indictments and the resignation of a district court judge,

 

 

Not An Oscar Winner: A Case About Indemnification

It's hard for me to think of a case I'd rather not write about than GR&S Atlantic Beach, LLC v. Hull, 2012 NCBC 52.  It's not just  that it's deathly boring or that it involves the interpretation of poorly written transaction documents.  It's also that it centers on an indemnification agreement, one of the most stultifying areas of the law.

So, with those caveats, here's the Reader's Digest version of the GR&S case.  That is, if you haven't stopped reading already.

Indemnification For Unforeseeable Events

The indemnification concerned losses relating to a water treatment fahcility purchased by one of the Plaintiffs.  One of the two tanks at the facility collapsed.  The collapse, which was totally unexpected, caused a release of untreated wastewater and substantial damage.  Defendants said that the indemnity should not be extended to cover losses which were not intended to be within the scope of the indemnity.

Judge Gale found the language of the indemnity to be clear and unambiguous -- covering future claims arising from the use or operation of the facility -- and he ruled that he would not consider any parol evidence regarding the unforseeability of the collapse.

Statute of Limitations For Indemnification Agreements

The Judge also sided with the Plaintiffs on a statute of limitations issue.  He rejected the argument that each claim under the indemnity was governed by a single limitations period, finding the indemnity agreement to be a severable contract including multiple undertakings.  

Doctrine of the Last Antecedent

This opinion gets even more interesting upon the Court's consideration of whether the Indemnification Agreement was assigned to one of the Defendants.  By a general assignment one of the Defendants had assigned a variety of contracts, with an exclusionary phrase at the end of several subparagraphs that might have excluded the Indemnification Agreement.  

The Court looked to something called the doctrine of the last antecedent in wrestling with this contract interpretation.

Never heard of that doctrine?  Really?  It says that 

relative and qualifying words, phrases, and clauses ordinarily are to be applied to the word or phrase immediately preceding and, unless the context indicates a  contrary intent, are not to be construed as extending to or including others more remote.

Op. 74 (quoting Novant Health, Inc. v. Aetna U.S. Healthcare, 2001 NCBC 1 at 17-18).

Judge Gale found that even applying the doctrine of last antecedent didn't lead to a clear contract interpretation and that the issue could only be resolved at trial.

Attorneys' Fees Redux

Closing out this opinion, Judge Gale revisited his earlier ruling in the case on whether Plaintiff could recover attorneys' fees incurred in defending "ancillary" litigation brought by the Utilities Commission.  He didn't change his ruling, but took note of the intervening Court of Appeals decision in Robinson v. Hope, __ N.C. App. __, 719 S.E.2d 66 (2011) in which the appellate court held that attorneys' fees in ancillary litigation caused by a tortfeasor's wrong could not be recovered as an element of tort damages.

 

Under Those Blue Ridge Mountain Skies

 If you dip in to Judge Murphy's Wednesday opinion in Blue Ridge Pediatric & Adolescent Medicine, Inc. v. First Colony Healthcare, LLC, 2012 NCBC 51, you'll find a little bit of everything.  It's a ruling on a Motion to Dismiss a Complaint that alleged everything under the sun.  Here are the high points:

Quick Facts

The Plaintiffs entered into a deal with the Defendants for them to develop office space for the Plaintiffs' medical practice.  Plaintiffs were to share in the profits from the sale of the property, but none were ever paid.  There were also allegations of misrepresentations by the Defendants as to their financial stability and claims of unauthorized changes to the transaction documents.

The Complaint sets out 23 causes of action against multiple defendants.

Piercing the Corporate Veil

The lesson here is that rote pleading won't get you there on a piercing the corporate veil claim.  Plaintiffs recited the bare bones of the "instrumentality rule" in their Complaint, but Judge Murphy said that "these bare legal conclusions are not entitled to the presumption of truth afforded factual allegations on a motion to dismiss."  Op. 37.  Plaintiffs needed to point to specific acts of control or domination to state a valid claim.

Fraud

Plaintiffs said they relied on Defendants' representations of their financial stability.  The truth was that Defendants were teetering on the brink of insolvency.

Judge Murphy nevertheless dismissed the claims for fraud, fraud in the inducement, negligent misrepresentation and negligence.  He found that the Plaintiffs had failed to show reasonable reliance because they had failed "to allege facts in support of their own investigation and due diligence."  Op. 48.

Securities Fraud

After determining that the Plaintiffs had stated a claim for securities fraud under the North Carolina Securities Act, Judge Murphy ruled that the individual defendants, employees of the corporate defendants, could be personally liable for the securities fraud, notwithstanding their argument that they had acted as corporate agents.

He held:

Defendants misapprehend the well-settled rule that 'one is personally liable for all torts committed by him, including negligence, notwithstanding that he may have
acted as agent for another or as an officer for a corporation.' Strang v. Hollowell, 97 N.C. App. 316, 318, 387 S.E.2d 664, 666 (1990) (citing Palomino Mills, Inc. v.
Davidson Mills Corp
., 230 N.C. 286, 52 S.E.2d 915 (1949)).

Op. 64.

What about the lack of justifiable reliance which doomed the common law fraud claim, you may be thinking.  Judge Murphy disposed of that in a footnote, saying: "The Court is unaware of any case law asserting that the common law fraud requirement for alleging justifiable reliance extends to statutory claims for securities fraud. And, the Court declines to extend such a requirement to this claim at this stage."  Op. 63 & n.2.

Derivative Action

A member of an LLC who wants to file a derivative action is required by statute to allege "with particularity the efforts, if any, made by [him] to obtain the action [he] desires from the  managers, directors, or other applicable authority and the reasons for [his] failure to obtain the action, or for not making the effort."  N.C. Gen. Stat. §§ 57C-8-01(a)–(b) (2011). 

The efforts of these Plaintiffs to make the LLC aware of their claims were limited to sending a letter outlining their claims along with the contemporaneously filed Complaint.  Judge Murphy found that to be "insufficient" to meet the requirements of the statute and he therefore dismissed the derivative claims.

And More

There are many more claims discussed in this Opinion, including an unfair and deceptive practice claim, a civil conspiracy claim, and a constructive trust claim.  There is also discussion of equitable estoppel and a request for an accounting.

 

Getting A Covenant Not To Compete Case Into The Business Court

Long time readers of this blog know that you can't designate a case limited to a covenant not to compete to the Business Court.  That's the Lifecare case, from 2008, in which Judge Tennille said "every suit based upon a breach of a restrictive covenant . . . [will not] give rise to a mandatory business case based upon 'unfair competition.'"

Judge Tennille intimated in Lifecare that additional allegations surrounding the breach of the covenant might give rise to the Business Court's mandatory jurisdiction.  He said:

For example, allegations of the theft of trade secrets which provide a competitive advantage to one party could give rise to a mandatory case. See e.g., Analog Devices v. Michalski, 157 N.C. App. 462, 579 S.E.2d 449 (2003). Also, actions designed to unfairly damage another’s business would give rise to an unfair competition claim. See, e.g., Sunbelt Rentals, Inc. v. Head & Engquist Equip., LLC, 174 N.C. App. 49, 620 S.E.2d 222 (2005).

Late last week, Judge Jolly refined the contours of the Business Court's unfair competition jurisdiction, in an Order on Notice of Designation in New Breed, Inc. v. Golden.  The New Breed complaint alleges that the multiple defendants, all former IT professionals with New Breed, were lured away by a competitor in violation of covenants contained in their employment agreements.

So what pushed New Breed over the hurdle and into the jurisdiction of the Court?  Judge Jolly said that the Complaint alleged unfair competition, which is a basis for mandatory jurisdiction under G.S.§7A-45.4(a)(4).  He said that the styling of that particular cause of action as "unfair and deceptive practices," which are excluded from the Court's unfair competition jurisdiction under Section 7A-45.4(a)(4), made no difference. 

He held:

Under North Carolina's current scheme of notice pleading, in examining a claim alleged in a complaint, neither the court nor party litigants are limited to the technical label given to the claim by the pleader. Rather, the reader appropriately should examine the actual facts alleged.

Op. Par. 13.

Upon examining the "actual facts alleged," Judge Jolly concluded the Complaint stated a claim for common law unfair competition, which he said was "a wrongful act done in the context of competition between business rivals."   Order 11. He read the Complaint to make allegations that "Defendants were guilty of unfair competition in that they wrongfully intended to (a) raid Plaintiff of its IT employees, (b) harm Plaintiff's business and (c) acquire Plaintiff's trade secrets and confidential and proprietary information." Id.

Also noteworthy in the Order is Judge Jolly's ruling that it isn't necessary to sue the competing business to make out a claim for unfair competition.  He held that "[t]he court cannot find a requirement that a competing business be a party litigant as a condition precedent to alleging a common law claim for unfair competition." Order 12.  New Breed sued only its former employees, not their new employer.

 

COA Sets Aside $2.1 Million Unfair and Deceptive Practices Verdict Against Bank

You all know that there is no Chapter 75 claim for a breach of contract unless there are "substantial aggravating circumstances."  What if you have the substantial aggravating circumstances but you don't have a breach of contract?  The Court of Appeals answered that question Tuesday in SunTrust Bank v. Bryant/Sutphin Properties, LLC.

The answer is you might not have anything.  That's why the COA set aside the Defendants' $2.1 million verdict against SunTrust. 

Here's how Judge Stroud summed it up:

the jury found that although there was not a breach of contract there were “[s]ubstantial
aggravating circumstances” that took place. Mitchell, 148 N.C. App. at 75, 557 S.E.2d at 623-24. While this was a logical conclusion for the jury to make, as they could properly find that a breach of contract had not taken place and that plaintiff had committed the acts listed in [the verdict question covering the allegedly unfair and deceptive acts]. . . it was error for the trial court to determine as a matter of law that these acts constituted a Section 75-1.1(a) violation where the only acts alleged were “[s]ubstantial aggravating circumstances” to a breach of contract when there was no breach of contract. Id. Without an independent Section 75-1.1(a) claim based upon some conduct outside the scope of the contracts, an award for a Section 75-1.1(a) claim could be entered only if the jury found a breach of contract accompanied by “[s]ubstantial aggravating circumstances.” Id. As the jury did not find a breach of contract, the inquiry should have ended because there was no breach of contract. Id.

 Op. 15-16.

If you can't understand that unusual result, and you don't want to slog through Judge Stroud's 23 page opinion to figure it out, here's the story: 

The jury found that the Bank had frozen one of the Defendant's money market accounts without any notice of a default or making any demand for repayment of a separate loan it had made, which action the Defendants said had destroyed their business.  The jury also found, somewhat inconsistently, that the Bank hadn't breached the contract that governed the money market account by freezing the account.  The trial judge had determined those actions to be an unfair and deceptive practice and had trebled the $700,000 damages awarded by the jury for those actions, per G.S. §75-16.

The reversal was based on the lack of breach of contract to accompany the "substantial aggravating circumstances."

The moral of this story seems to be that if you are trying to morph a breach of contract claim into a treble damage claim under Chapter 75, you'd better be able to prove the breach of contract.

The SunTrust decision marks the second time this month that Judge Stroud has tangled with Chapter 75.  In the other opinion, Green v. Freeman, the Judge affirmed the dismissal of Chapter 75 claims made by investors in a business.  She ruled that this was "raising capital," which "is not a business activity contemplated within the Act."  Op. 37.  By the way, that case is headed to the Supreme Court of NC based on a dissent, though the majority and the dissent agreed on the Chapter 75 issue.  The issue for the appeal concerns the sufficiency of the evidence to support a breach of fiduciary duty claim on which the Plaintiffs prevailed.

The Last Word On That Thirty Days

I hope you don't think I am harping on this recent change in the procedure for designating a case to the Business Court, but on Friday Judge Jolly withdrew his Order in the Kight v. Ganymede Holdings II, Inc. case, recognizing that it was "a change in the previous practice relative to certain time requirements for designating an action as a mandatory."  It's just not fair to change the rules in the middle of the game.

[If you haven't followed this important issue, up until recently a plaintiff had thirty days after filing his or her complaint to file a Notice of Designation to the Business Court.   Beginning August 10th, Judge Jolly said that the Notice of Designation had to be filed at the same time as the Complaint (or the Amended Complaint if the amended document raises Business Court issues)].

Judge Jolly's New Order lets Kight slip into the Business Court despite filing his Notice of Designation twenty-seven days after filing his Amended Complaint.  Nevertheless, Judge Jolly sent up a clear signal that the rule has now changed.  He said in the New Order in the Kight case that:

Notwithstanding any previous rulings of this court or any procedural guidelines that may be found on the North Carolina Business Court website or elsewhere on the Internet, as of this date and pursuant to N.C. Gen. Stat. § 7A-45.4(d)(1), any Notice of Designation by a plaintiff, third-party plaintiff or petitioner for judicial review that is based upon a complaint, third-party complaint or petition for judicial review, respectively (collectively, "Complaint") that is not filed on the same day as the Complaint shall not be considered filed contemporaneously with the Complaint and will be deemed untimely.

New Order 2.

This should be the last word on that now vanished thirty days.

 

 

 

Change In Business Court Designation Procedure: A Plaintiff No Longer Has 30 Days From Filing A Complaint To Designate The Case To The Business Court

There was one thing I could have told you for sure about Business Court procedure before August 10th.  That was that a Plaintiff had 30 days from the filing of his Complaint to designate the case to the Business Court per N.C. Gen. Stat. §7A-45.4.

That certainty was based on a decision from Judge Tennille over four years ago, in Ross v. Autumn House, Inc. He reached that conclusion notwithstanding the language of the statute, which says that "[t]he Notice of Designation shall be filed: (1) By the plaintiff or third-party plaintiff contemporaneously with the filing of the complaint . . . in the action." N.C. Gen. Stat. § 7A-45.4(d)(1)(emphasis added). 

The Autumn House decision was based on Guidelines still available today on the Business Court's website which say that the Plaintiff could file a Notice of Designation within 30 days of filing the Complaint.

So what's changed?  Chief Judges of the Business Court for one thing.  Judge Jolly, who took over the chiefship after Judge Tennille's retirement in early 2011, issued an Order on August 10th in Foster v. Bell Mini-Storage, Inc. in which he said the statute requires that:

a plaintiff must file a notice of designation at the same time the complaint is filed.

Order Par. 5

So now, after Foster v. Bell Mini-Storage, Inc., if you are a Plaintiff wanting to designate your new case to the Business Court, you'd better file that Notice of Designation at the same time you file your Complaint.

Note that Judge Jolly found the designation in Foster to be valid even though it was made more than thirty days after the complaint was filed.  He did that because the answer raised issues of corporate governance.  Section 7A-45.4(d)(3) says that any party has "30 days of receipt of service of the pleading seeking relief from the defendant or party" to file a Notice of Designation.  The Notice was filed six days after the Answer was filed, so it was timely in that regard.

But there's no doubt now that the thirty day largesse granted by the Autumn House decision to Plaintiffsd has been laid to rest.  Judge Jolly referenced that decision yesterday in an Order in Kight v. Ganymede Holdings II, Inc., 2012 NCBC 46, and held that:

In Ross v. Autumn House, Inc., Caldwell County No. 07 CVS 2172 (N.C. Super. Ct. Order Feb. 26, 2008), this court interpreted "contemporaneously" in this context to mean within thirty days of the filing of the complaint, relying on certain "guidelines" published on the website for the North Carolina Business Court.


The court now reconsiders the requirement that a notice of designation be filed contemporaneously with the complaint. To comply with this requirement, a plaintiff must file a notice of designation at the same time the complaint — or amended complaint — is
filed.

Op. at 2.  This disagreement between Judge Tennille and Judge Jolly over the meaning of "contemporaneous" reminds me of Humpty Dumpty's statement to Alice (in Through the Looking Glass) that "When I use a word, it means just what I choose it to mean — neither more nor less."

For now, the Business Court's definition of "contemporaneous" means what Judge Jolly chooses it to mean: "at the same time."

 

 

Please Nominate This Blog For The ABA "Blawg 100"

Do me a favor.  Take five minutes and fill out an American Bar association form (link here) nominating this blog to be included on the ABA's list of the 100 best legal blogs.

The blog fits pretty well the criteria set out by the ABA for a nomination.  The ABA says:

  • We're primarily interested in blawgs in which the author is recognizable as someone working in a legal field or studying law in the vast majority of his or her posts.
  • The blawg should be written with an audience of legal professionals or law students—rather than potential clients or potential law students—in mind.
  • The majority of the blawg's content should be unique to the blawg and not cross-posted elsewhere or cut and pasted from other publications.
  • We are not interested in blawgs that more or less exist to promote the author's products and services.

There's a box on the form where you have to explain your reasons for supporting the blog.  The question is "Why Are You A Fan Of This Blawg?'  If you are dry on reasons, here are a few suggestions:

  • This blog changed my life.  [fill in how and tell me about that too]  [Ex: In addition to feeling knowledgeable and up-to-date, I  am taller and better-looking when I go to Court as a result of reading the blog.]
  • It's like a Cliffs Notes for the NC Business Court.  Mack reads the cases and summarizes them. and I don't have read them.
  • Everybody I know reads this blog.  If that's not true, tell everybody you know to read it. 

Please take the few minutes this will take.  After all, it is Friday.

Note that lawyers and personnel associated with Brooks Pierce are discouraged by the ABA from voting.  But I am specifically encouraged by the ABA to invite non-Brooks Pierce readers to send it  messages on behalf of this blog.

The deadline for nominations is September 7th.

Now, this is just the first step.  If I make the list I'll ask you later in the year to vote for me.

Thanks in advance for your support of this blog.

 

You Need All Your Ducks In A Row To Prove Default Under A Security Agreement

The Plaintiff in Kreich, Inc. v. Tarheel Publishing Co. thought he had all of his ducks in a row for summary judgment and a preliminary injunction.  But he didn't.

Defendant was in serious default under promissory notes given in connection with its acquisition of the Plaintiff's interest in an LLC.   Payments were due on the first day of each month, with a ten-day cure period.  The payments were chronically between 25 and 70 days late for almost an entire year.

Plaintiff wanted to exercise his rights under a Membership Interest Pledge Agreement, which was his security for the promissory notes.  The Pledge Agreement gave the Plaintiff equal control of the LLC it had sold to Defendant Hayes in the event of a default.

Given the repeated acceptance of delinquent payments, Judge Gale saw questions of fact on whether the Plaintiff had waived his right to timely payments.  Well, you might be thinking, didn't he have a provision in his agreement saying that acceptance of late payments wasn't a waiver of a right to call a default?

No difference, said Judge Gale, holding that:

a party that has consistently accepted late payments can only enforce timely payment by first giving notice to the other party of his intention to enforce the terms of the agreement in the future. Meehan v. Cable, 135 N.C. App. 715, 719, 523 S.E.2d 419, 422 (1999). This rule can apply even when the contract contains a non-waiver provision, as a non-waiver provision can itself be waived or modified through the conduct of the parties. See 42 E., LLC v. D.R. Horton, Inc., ___ N.C. App. ___, ___, 722 S.E.2d 1, 6-7 (2012).

Op.