In all seriousness, it turns out that "hot tubbing" of experts had its origin in Australian courts, and it is becoming something of a "hot" subject here in the U.S.  There's an article in ABA Journal about it, and also an article in the New York Times.

What it means is that all of the experts on a particular subject are sworn in at the same time, and then sit as a panel to be examined jointly by the lawyers for the parties and the Court. The procedure even allows for one expert to question another expert directly. 

Given the way the procedure works, it makes sense that hot tubbing is also known as "concurrent evidence."  If you are interested in exactly how this procedure works, you can keep reading below.

Here is how Peter McClellan, the Chief Judge of the New South Wales Land and Environment Court described his favorable experience with hot tubbing in a presentation:

At the same time as the Court has moved to appoint experts, we have also changed the process by which expert evidence is given in Court. This is now done concurrently and all experts in relation to a particular topic are sworn to give evidence at the same time. What follows is a discussion, which is managed by the judge or commissioner, so that the topics requiring oral examination are ventilated. The process enables experts to answer questions from the Court, the advocates and, most importantly, from their professional colleagues. It allows the experts to express in their own words the view they have on a particular subject. There have been cases where as many as six experts have been sworn to give evidence at the same time.

For hearings in my court, the procedure commonly followed involves the experts being sworn and their written reports tendered together with the document which reflects their pre-trial discussion - matters upon which they agree or disagree. I then identify, with the help of the advocates and in the presence of the witnesses, the topics which require discussion in order to resolve the outstanding issues. Having identified those matters, I invite each witness to briefly speak to their position on the first issue followed by a general discussion of the issue during which they can ask each other questions. I invite the advocates to join in the discussion by asking questions of their own or any other witness. Having completed the discussion on one issue we move on until the discussion of all the issues has been completed.

Experience shows that provided everyone understands the process at the outset, in particular that it is to be a structured discussion designed to inform the judge and not an argument between the experts and the advocates, there is no difficulty in managing the hearing. Although I do not encourage it, very often the experts who will be sitting next to each other, normally in the jury box in the courtroom, end up referring to each other on first name terms. Within a short time of the discussion commencing, you can feel the release of the tension which normally infects the evidence gathering process. Those who might normally be shy or diffident are able to relax and contribute fully to the discussion.

This change in procedure has met with overwhelming support from the experts and their professional organisations. They find that they are better able to communicate their opinions and, because they are not confined to answering the questions of the advocates, are able to more effectively respond to the views of the other expert or experts. They believe that there is less risk that their expertise will be distorted by the advocate's skill. It is also significantly more efficient. Evidence which may have required a number of days of examination in chief and cross-examination can now be taken in half or as little as 20% of the time which would have been necessary.

As far as the decision-maker is concerned, my experience is that because of the opportunity to observe the experts in conversation with each other about the matter, together with the ability to ask and answer each others questions, the capacity of the judge to decide which expert to accept is greatly enhanced. Rather than have a person's expertise translated or coloured by the skill of the advocate, and as we know the impact of the advocate is sometimes significant, you actually have the expert's own views expressed in his or her own words.

I am sometimes asked, particularly by advocates, whether concurrent evidence favours the more loquacious and disadvantages the less articulate witness. In my experience, the opposite is true. Because each expert must answer to their own professional colleague, the opportunity for diversion of attention from the intellectual content of the response because of the manner of its delivery is diminished. Being relieved of the necessity to respond to an advocate, which many experts see as a contest from which they must emerge victorious rather than a forum within which to put forward their reasoned views, the less experienced or perhaps shy witness becomes a far more competent witness in the concurrent evidence process. In my experience, the shy witness is much more likely to be overborne by the skilful advocate in the conventional evidence gathering procedure than by a professional colleague who under the scrutiny of the courtroom must maintain the debate at an appropriate intellectual level. Although I have only rarely found it necessary, the opportunity is, of course, available for the judge to step in and ensure each witness has a proper opportunity to express his or her opinion.

The Business Court today threw out, on a Motion for Judgment on the Pleadings, an unfair and deceptive practices claim stemming from a dispute between members of a limited liability company. The Reid Pointe, LLC v. Stevens case also addresses a question of first impression involving an unlicensed general contractor.  There was a judicial dissolution issue as well.

CDC, a minority member of the LLCs, argued that the member owning a 70% interest, Grimmer, had removed CDC as a manager and had made unnecessary capital calls in order to force CDC out of the LLC.  CDC also alleged that it had been defamed by Grimmer, that Grimmer had taken steps to cause banks to freeze the accounts of the LLCs, favored his son on a contract with the LLCs, and caused an improper $100,000 payment to be made by the LLCs.  CDC claimed these facts made out a claim under Chapter 75. 

Judge Diaz granted the Motion on the unfair and deceptive practices claim, holding that the actions involving removal and capital calls were "primarily matters of internal corporate governance that do not relate to the day-to-day business activities of the LLCs.  Accordingly, these matters are not sufficiently 'in or affecting commerce' to sustain an UDTPA claim."  Op. at 16. (There have been a series of cases from the Business Court reaching similar conclusions in cases involving disputes between members of LLCs or between corporate shareholders.  Those cases are Kaplan, Walters & Zimmerman, Schlieper, and Slickedit.)

The defamation claim met with dismissal because Judge Diaz found it had not been described with sufficient particularity, and the other claims were dismissed because they belonged to the LLCs, not to the members.

Plaintiff's claims seeking judicial dissolution of the LLCs survived, but barely. Judge Diaz found that Plaintiffs' allegations of waste and mismanagement were insufficient because they "fail to allege any specific action or conduct on the part of Grimmer that constitutes waste or demonstrates the misapplication of the LLC's assets."  Op. at 11.He ruled, however, that allegations Grimmer was refusing to pay CDC for services provided, badmouthing CDC to vendors and banks, making capital calls, and refusing to provide information regarding the operation of the LLCs might make out a claim for dissolution.  The Court held:

Applying an indulgent standard to Defendants' pleading, these allegations relating to the deteriorating relationship between Grimmer and CDC are sufficient to allow Defendants to pursue their claim that liquidation is reasonably necessary to protect Defendants' rights and interests in the LLCs.

Op. at 12.

Last but not least, one of CDC's claim was for breach of a construction contract.  CDC, however, wasn't licensed as a general contractor in North Carolina, and our law is pretty clear that an unlicensed general contractor can't recover for its work.  The twist here was that CDC's contract called for some work that required a general contractor's license, and some that didn't.

Grimmer argued that CDC was barred from recovering anything at all on the contract, but Judge Diaz held that:

Although the Court's research has not disclosed any binding precedent on point, there is persuasive authority suggesting that the denial of contract remedies to unlicensed general contractors or construction managers should properly be restricted to circumstances where the contractor seeks compensation for work falling within the statutory definition of general contracting or construction management.

Op. at 13.  Given the "indulgent standard" of inquiry required on a Motion for Judgment on the Pleadings, the Court denied the Motion because the contract extended to matters for which a license wasn't necessary, like selling lots in the development, hiring sales managers, developing budgets and implementing marketing plans.

Brief in Support of Motion for Judgment on the Pleadings

Brief in Opposition to Motion for Judgment on the Pleadings

Reply Brief in Support of Motion for Judgment on the Pleadings

I'm writing this post about the Business Court's past decisions involving tortious interference with contract because "tortious interference" is one of the most common searches leading readers to this blog. 

So, here's a summary of more than a dozen Business Court decisions which involve that tort, with links to the summaries of the cases on this blog, which in turn have links to the full opinion and also to the briefs if they were available. 

Tortious interference claims survived dispositive motions in these cases: 

In Webb Builders, LLC v. Jones, January 24, 2002 (unpublished), a homebuilder was pursuing tortious interference claims against a dissatisfied customer.  The customer had complained to others for whom the builder was working, and some of those customers had terminated their relationships with the builder.  The customer also complained to prospective customers, some of whom declined to do business with the builder.  The Court considered the factors set out in the Restatement (Second) of Torts §767, which include "(a) the nature of the actor's conduct, (b) the actor's motive, (c) the interests of the other with which the actor's conduct interferes, (d) the interests sought to be advanced by the actor, (e) the social interests in protecting the freedom of the actor and the contractual interests of the other, (f) the proximity or remoteness of the actor's conduct to the interference, and (g) the relations between the parties." The Court held that this tort does not require a showing of of force, or threat, or intimidation, and also that it does not require independently tortious conduct.

In Sunbelt Rentals, Inc. v. Head & Engquist Equipment LLC, 2002 NCBC 4 (N.C. Super. Ct. July 10, 2002), the Court engaged in a thorough discussion of the tort of interference with prospective economic advantage (or prospective economic relations) and let survive a claim between two competitors.  It found that there were issues of fact "whether defendants prevented plaintiff from making contracts by means other than legitimate methods of competition."  Those facts, generally, involved the defendant's use of the plaintiff's confidential information and a deliberate pattern of undermining the plaintiff's business.  The Court also allowed a claim for tortious interference for the manner in which defendant had recruited plaintiff's employees.  (The Sunbelt case, which was affirmed by the North Carolina Court of Appeals, is probably the most significant North Carolina case involving tortious conduct between competitors).

In CNC/Access, Inc. v. Scruggs, 2006 NCBC 20 (N.C. Super. Ct. Nov. 15, 2006), the Court found issues of material fact whether the plaintiff had interfered with the defendant's prospective relationships with certain customers.  The Court dismissed plaintiff's claims for tortious interference, finding that the covenants not to compete on which those claims were based were unenforceable.  The parties were competitors.

The Business Court has dismissed tortious interference claims on multiple occasions, including cases involoving lenders, competitors, trust beneficiaries, and insurance agents:

In Reeve and Assocs., Inc. v. UCB, 1997 NCBC 2 (N.C. Super. Ct. Oct. 6, 1997), the Court held that there was no tortious interference claim by a junior lender against a senior lender which had required the borrower to sell off its collateral in order to pay down the senior debt.

In Praxair v. Airgas, Inc., 1999 NCBC 5 (N.C. Super. Ct. May 26, 1999) and Praxair v. Airgas, Inc., 1999 NCBC 9 (N.C. Super. Ct. Oct. 20, 1999), the Court dismissed a tortious interference claim between competitors.  It held (in the second opinion) that "absent proof that a competitor has acted maliciously or otherwise unlawfully, courts should be reluctant to impose liability for conduct that can be characterized fairly as legitimate competition."  The defendant therefore had a legitimate right to bid to acquire a business in which plaintiff had a right of first refusal.  The Court let survive, however, a tortious interference claim that the defendant had enouraged others to breach their rights to the plaintiff under that right of first refusal.

In Staton v. Brame, 2001 NCBC 5 (N.C. Super. Ct. May 31, 2001), the Court dismissed a tortious interference claim against the beneficiary of a charitable trust who had terminated a contract between a foundation formed by the trust and the defendant.  The Court noted the differing treatment under North Carolina for "outsiders" and "non-outsiders" to contracts, and determined that plaintiff was a non-outsider who had acted with what she believed was a legitimate interest in protecting her trust income, and who therefore had a qualified right to terminate the contract in question..

In Hinson v. Trigon Healthcare, Inc., August 23, 2001 (unpublished), the lawsuit was between parties in the business of insurance.  Defendant had sent letters to persons for whom the plaintiffs, insurance agents, had written policies informing them that it was exiting the business and that they should find substitute insurance.  The Court held that the defendant had a "legitimate business purpose in sending the letters" so that its policyholders could avoid gaps in their coverage, and dismissed the tortious interference claim. 

The case of Durham Coca-Cola Bottling Co. v. Coca-Cola Bottling Co., 2003 NCBC 3 (N.C. Super. Ct. Apr. 28, 2003) involved a letter of intent, which the Court found to be an agreement to agree at a future date, and subject to a future, more complete acquisition agreement.  The letter of intent therefore could not form the basis for a tortious inteference claim.  The Court went on to say, however, that summary judgment would have been appropriate in any event on the basis of justification. The defendant, a competitor of plaintiff, was competing with plaintiff for the purchase of the business in question and plaintiff therefore could not show that it was acting with bad faith or malice so as to justify its tortious interference claim.

In Sports Quest, Inc. v. Dale Earnhardt, Inc., 2004 NCBC 3 (N.C. Super. Ct. Feb. 12, 2004), the claim was dismissed because the action was between two competitors, and the Court held that interference with contract is justified if motivated by a legitimate business purpose, as when the parties are competitors.

In Epes v. Healthsouth Corp., February 8, 2008 (unpublished), the Court dismissed the claim because it found that the contract upon which the claim was based lacked mutual assent as to material elements necessary to create an enforceable contract, including the price to be paid, identification of the parties, and the subject matter of the contract. The letter merely expressed the intent and desires of the parties, rather than their agreement.

In Webb v. Royal American Company, LLC, March 17, 2008 (unpublished), the Court dismissed a tortious interference claim against a lender.  Although Plaintiffs had recited all of the elements of that claim, the face of the complaint demonstrated that there was a valid business justification for the Defendant's actions.  The Court held that a lender exercising its rights to collateral under a standard commercial financing arrangement ordinarily has justification for its actions, and the plaintiff must make something more than conclusory allegations about justification. 

In Gateway Management Services, Ltd. v. Advanced Lubrication Technology, Inc., June 19, 2008 (unpublished), the Court granted a motion to dismiss a tortious interference claim between the plaintiff and its former supplier.  The plaintiff alleged that the defendant had acted improperly by selling product to plaintiff's competitor.  The Court held that the defendant "had the right to do so," and that "competition does not in and of itself represent tortious interference."  The Court held that it is a legitimate justification to seek business from common customers.   

The subject was ethical issues in e-discovery.  You can download the whole presentation on the ABA website for a more than nominal fee.  But if you don't want to do that, here's some of what Judge Tennille had to say:

As Judge Tennille sees it, the "most important rule for lawyers' from an ethical perspective is Rule 1.1, which is "Competence."  That Rule requires "the legal knowledge, skill, thoroughness, and preparation reasonably necessary for the representation."  According to Judge Tennille, state court judges are looking to the lawyers and expecting them to present solutions to e-discovery issues.  As he put it, Judges are saying “I expect you to have the knowledge to handle this problem. I expect you to meet and confer with each other and tell me how you’re going to solve this problem.”

Judge Tennille referenced a Business Court case where the lawyers for a party turned over a mirrored hard drive to opposing counsel, and then had to scramble when it turned out that there were privileged documents on the hard drive.  Using that example, Judge Tennille said “You really have a very basic obligation to be compeltent in this area. And in my view, being competent does not mean turning your client’s hard drive over to the other side.”  So, reaching agreement in advance to deal with this type of situation, and including a clawback provision providing for the return of privileged documents, is a part of that competence.  (Although Judge Tennille didn't name the case, it is Judge Diaz' opinion in International Legwear Group, Inc. v. Legassi International Group, Inc.)

The seminar turned to a discussion of the California case (Qualcomm) sanctioning lawyers for their failure to turn over a substantial quantity of emails and misrepresenting the situation to the Court, and Rule 3.3's duty of "Candor Toward The Tribunal."  Judge Tennille said “I think the best rule for you to keep in mind is not to follow the old suggestion that it is easier to ask foregiveness than permission. If you have a question, you ask for permission first. Because it’s really not worth risking your law license to ask for foregiveness later.”

On the subject of lawyers who play fast and loose with e-discovery, Judge Tennille said: “I think judges generally try to look at it from the standpoint of when we’re trying to determine if somebody is gaming the system, we look at process and motivation and if you’ve got a good process and we don’t have any question about your motivation, you’re not going to be in trouble. If you haven’t used a good process or we have any question about your motivation or the client’s motivation and what they did, chances are that we’re going to determine that you were gaming the system and your client will suffer from that, 99 times out of a 100.”

And then Judge Tennille said something that seems so easy to understand: "The best test is your common sense. And if you use it you’ll stay out of trouble. if you don’t, there’s going to be a judge somewhere who will penalize you for not using your common sense.”

Judge Tennille has written two Business Court opinions on the subject of e-discovery, Analog Devices, Inc. v. Michalski, 2006 NCBC 14 (N.C. Super. Ct. Nov. 1, 2006) and Bank of America Corporation v. SR International Business Insurance Company, Ltd., 2006 NCBC 15 (N.C. Super. Ct. Nov. 1, 2006), but that is still a largely uncharted territory in North Carolina's state courts.

The image at the top is from xkcd.com, edited.

The North Carolina Business Court has set out an explicit set of procedures to be followed when parties take a voluntary dismissal of a class action before a decision on class certification. 

This Order yesterday by Judge Tennille in the Moody case comes following the Court of Appeals decision in that case last month, which reversed the Business Court and held that full faith and credit should have been accorded to an Illinois court's approval of a nationwide class action.

The new opinion from the Business Court requires that counsel taking a pre-certification dismissal of a class action must file a statement which includes:

(1) the reason for dismissal, (2) the personal gain received by the plaintiffs in any settlement, (3) a statement of any other material terms of the settlement, specifically including any terms which have the potential to impact class members, (4) a statement of any counsel fees paid to plaintiff’s counsel by defendants, and (5) a statement of any agreement by plaintiff(s) restricting their ability to file other litigation against any defendant. 

Op. at ¶2.  In addition, counsel for the Plaintiff is required to "file a statement either detailing any potential prejudice to putative class members or representing to the Court that no prejudice exists."  Judge Tennille indicated that the Court would "be particularly concerned about issues related to tolling of the statute of limitations."

In a case involving the dismissal of a North Carolina class action resulting from the approval of a nationwide class action settlement in another state, which was the situation in Moody, there is a different requirement.  Then:

counsel shall file with the Court a copy of the order approving settlement and sufficient information concerning the notice provisions so that the Court can ascertain if jurisdictional and due process issues have been addressed by the foreign court and whether North Carolina citizens have been represented in the proceeding. 

Op. at ¶4.  Judge Tennille indicated that this filing would permit the court to "raise any concerns with the foreign court," and that "once those concerns have been addressed, the foreign court’s order will be entitled to full faith and credit whether or not this Court would have granted approval of the settlement."  Op. at ¶4.  (It doesn't appear that in a case involving an out-of-North Carolina settlement that the statement regarding the reasons for the dismissal is necessary.)

In all cases, the Business Court will require a final accounting of the distribution of any settlement proceeds and attorneys fees.  This is not a new requirement of the Court.  As Judge Tennille stated, "it has been the practice of this Court to require class representatives to file and publish a copy of the final accounting detailing the amount of money (or coupons) actually received by the class, the amount of administrative fees, and the amount of attorney fees received."  Op. at ¶6.

The Court noted two reasons for the requirement of an accounting.  First, the Court said that this would "promote greater transparency that will fill the 'informational black hole' concerning final distributions and make administration of class actions more efficient and effective and thus more beneficial to class members."  Op. at ¶8.

Second, the Court said it would use this information for other purposes, including an assessment of the qualifications of class counsel:

This Court would add to that list of benefits from transparency, the benefit of judges being able to assess the past performance, abilities and commitment of those lawyers who seek to be class counsel in other cases. A history of final results in other cases would also alert judges to scrutinize settlements proposed by defendants who have settled their class action in ways that resulted in no benefits to class members. This Court can think of no reason why the final results should not be made known to the Court and the citizens affected. 

Op. at ¶9.  The accounting information will be available on the Business Court's website. 

The accounting in Moody is that the members of the class in North Carolina received $66 in cash and coupons, the nationwide class members received $2,402 in cash and coupons, and Plaintiff's counsel received $1,100,000 in cash and coupons.  Notwithstanding its reversal of the Business Court's opinion of the original decision in Moody (which you can read about here) the Court of Appeals expressed concern about the adequacy and fairness of the Illinois settlement, stating "we share the trial court's serious concerns regarding the final accounting in the . . . settlement."

The Court rejected a number of arguments made by Blue Cross as to why a proper class did not exist and why the class representative would not adequately represent the class.

Hamm was enrolled in a plan with Blue Cross that provided for "in-network providers" to charge a contracted-for amount for their services, referred to as the "allowed amount."  Hamm's contention was that the plan provided that Hamm would not be responsible for any charge over the allowed amount.

In Hamm's situation, however, she hit the "benefit period maximums," which included a cap on the dollar amount that a member could receive in paid benefits from Blue Cross for certain services.  She claimed that the in-network providers then began charging her at full rates, not the lower, negotiated-for allowed amount.  Hamm disputed that the plan permitted these additional charges, which led to her lawsuit.

The main arguments against class certification made by Blue Cross, and rejected by Judge Jolly, were as follows:

Blue Cross argued that the class had no injury.  As the insurer interpreted its agreement, in-network providers were entitled contractually to charge more than the allowed amount when a member exceeded the number of visits allowed by her policy (the "visit maximum").  But when a member exceeded the monetary amount that Blue Cross would pay for covered services (the "benefit maximum"), as opposed to the visit maximum, Blue Cross said that a provider was required to charge only the allowed amount, and it disputed that it had allowed the practice of a higher charge in those circumstances.  The Court wrote that there was "pragmatic appeal" to this argument (Op. at 12 n.8), but said that the construction of the contract was "not as clear to the court as it is to Defendant," and found these were both "merit-based defense(s) not properly before the court at this stage. . . ."  (Op. at 11 and 12). 

The insurer also argued that a member would have no claim unless he or she had actually paid an amount over and above the allowed amount.  The Court rejected this argument, stating that a class member would have at least a claim for nominal damages for a breach of the contract, and noting that Plaintiff sought a declaration regarding the future rights of the class members, which would not require a showing of any actual damages.

Blue Cross argued that the Court would have to make "extensive individualized inquiries" whether a class member had actually paid more than the allowed amount and whether administrative remedies had been exhausted.  The Court held that these inquiries did not predominate over the common liability issue.  It said that there would be "uniform, mechanized and documented evidence" of these matters given the nature of Blue Cross' record-keeping.  (Op. at 12 n.9).

On the point of adequacy, Blue Cross argued that the Plaintiff was subject to unique defenses regarding the amounts she claimed to have been charged over the allowed amount.  Blue Cross contended that the only charges to Plaintiff over the allowed amount had come from an out-of-network provider, not an in-network provider, and that the services received were not a "covered service."  The Court disagreed that these arguments precluded class certification, stating that "the focus of class certification 'is properly on the typicality of the plaintiff's claim as it applies to the general liability issues [and] not on the plaintiff's ultimate ability to recover.'"  (Op. at 15).

The Court concluded its analysis by ruling that a class action was a superior method for adjudicating the claims before it.  It held "the controversy is over a contract of insurance that is standardized over hundreds of thousands of North Carolinians.  The interpretation of such standardized agreement on a class-wide basis will provide certainty and prevent inconsistent adjudications."

My partners Jennifer Van Zant and Charles Marshall represent Blue Cross.

Brief in Support of Motion for Class Certification

(All other briefs were filed under seal)

It was a busy opinion day today in the North Carolina Court of Appeals: there were 44 published opinions, three of which I'm commenting about briefly below.  The three involve a range of issues, including arbitrator immunity, Rule 11 sanctions, and an technical point about subpoenas in state tax refund litigation and also work product privilege.

The arbitrator case, Dalenko v. Collier, addressed an issue of first impression in North Carolina, whether an arbitrator is entitled to judicial immunity.  Plaintiff, a pro se litigant who had been unsuccessful in an arbitration heard by former Judge Collier, sued him for allegedly being personally interested in the case and biased.  The Court of Appeals held (relying on Burns v. Reed, 500 U.S. 478 (1991)) that whether a private citizen acting as an arbitrator is entitled to judicial immunity depends upon a "functionality test."  It stated:

defendant was sitting as an arbitrator to resolve a dispute pending in the courts of Wake County. Under the functionality test, defendant was entitled to judicial immunity and was immune from the claims asserted in the instant case. Plaintiff's complaint alleges conduct which was clearly within the course and scope of the arbitration proceeding. Plaintiff's claims were barred by arbitrator immunity, and the trial court correctly found them to be frivolous.

The Dalenko case also affirmed an award of Rule 11 sanctions against the Plaintiff, and also found that Plaintiff was collaterally estopped from pursuing her claims against the arbitrator since she had raised those same claims in seeking a vacation of the arbitration award.

In Ward v. Jett Properties, LLC, the Court affirmed the entry of Rule 11 sanctions against a pro se litigant who had sued his landlord for allowing other tenants to play football "within striking distance of his car" and to "dart around" on "metal skooters." To me, the significant point worth noting about Ward is that one of the reasons the Court found the Complaint to be "legally insufficient" for Rule 11 purposes was that it had been dismissed on a Rule 12(b)(6) motion.  The Court held "though the mere fact that a cause of action is dismissed upon a Rule 12(b)(6) motion does not automatically entitle the moving party to have sanctions imposed. . . . it is often indicative that sanctions are proper."  The fact that Ward had filed forty two other lawsuits in the past six years, at least one of which was identical to the one before the Court, was undoubtedly a factor in the affirmance.

Last, the work product case is In the Matter of the Summons Issued to Ernst & Young, LLP.  It involves a subpoena issued by the North Carolina Department of Revenue to the accounting firm of Ernst & Young for documents relating to the tax refund lawsuit between the DOR and Wal-Mart.  Wal-Mart intervened and challenged the subpoena. 

Before it got to the work product issue, the Court resolved a threshold issue whether the Rules of Civil Procedure apply to subpoenas issued by the DOR pursuant to N.C. Gen. Stat. § 105-258.  The DOR argued that the Rules didn't apply, the Court of Appeals disagreed and said that they did.  The applicability of the Rules made a difference to Wal-Mart, which was arguing that the Court didn't have subject matter jurisdiction because the DOR hadn't issued a summons and filed a Complaint.  Although Wal-Mart prevailed on its argument about the application of the Rules, the Court denied the Motion to Dismiss because "the statute provides jurisdiction to the Wake County Superior Court upon application by the Secretary of Revenue."

On the work product side of things, the issue was whether some of the documents prepared by E&Y had been done "in anticipation of litigation."  Wal-Mart argued that the documents had been prepared by the accountants specifically for its restructuring, not for tax return purposes and not for purposes of its audit; that it had been billed separately for the work; that the partner who had done the work anticipated that there might be litigation from various tax authorities; and that the documents were not prepared in the ordinary course of business.  The Court found this insufficient to determine the applicability of the privilege, and remanded the case for an in camera review by the trial court.

The North Carolina Business Court on August 4th denied a Motion for Judgment on the Pleadings on a counterclaim for reformation of an asset purchase agreement.  Judge Diaz, in denying the Motion, held that if the reformation were allowed, the remedies of the Defendants under the agreement would be broad.  The opinion in A-1 Pavement Marking, LLC v. APMI Corp, for which the link is at the top of this post, also dealt with an unfair and deceptive practices claim.

Defendants' contention was that a page was inadvertently left out of the asset purchase agreement.  The missing page detailed long term liabilities which Defendants claimed the Plaintiff was obligated to pay.  Defendants argued that the failure to pay constituted a violation of the Promissory Note and Security Agreement, and relieved them from their obligations under their non-compete agreements.

The Motion for Judgment on the Pleadings filed by the Plaintiff asserted that even if reformation was allowed, the only remedy for Defendants was for Plaintiffs to pay the liabilities listed on the missing page.  Judge Diaz held:

The Court disagrees. While there is a strong presumption in favor of correctness of an instrument as written, Hice, 301 N.C. at 651, 273 S.E.2d at 270, a “court’s principle [sic] objective is to determine the intent of the parties to the agreement.” Holshouser v. Shaner Hotel Group Props. One Ltd. P’ship, 134 N.C. App. 391, 397, 518 S.E.2d 17, 23 (1999).'

Moreover, when a court reforms an instrument, the general rule is that ‘”[t]he rights of the parties are measured by the instrument as originally intended, and the effect of the reformation, as a whole, is to give all the parties all the rights to which they are equitably entitled under the instrument that they intended to execute.” 66 Am. Jur. 2d Reformation of Instruments § 9 (2007) (citing Gurske v. Strate, 87 N.W.2d 703 (Neb. 1958)).

Thus, if Defendants establish by clear, cogent and convincing evidence that, because of a mutual mistake, the APA does not reflect the true intention of the parties at the original date of execution with respect to the long-term liabilities to be assumed by Plaintiff, they would be entitled to (1) have the agreement judicially reformed to correct the mistake, and (2) seek full relief for Plaintiff’s alleged breach of the APA and related contract documents. Long, 178 N.C. at 506, 101 S.E. at 13 (stating that when reformation is granted, the court not only corrects the contract as written, but enforces it in its amended form).

The Court dismissed, however, an unfair and deceptive practices claim by one of the Defendants, who asserted that the Plaintiff had diverted funds rendering the Plaintiff unable to meet its contractual obligations to him.  The Court held that "A-1’s alleged accounting misdeeds arguably relate to matters of internal corporate governance, which are insufficient to sustain a UDTPA claim."  The Court further held that the claim was nothing more than one for breach of contract, stating "it does not matter that the purported breach resulted from A-1’s alleged accounting irregularities, as that fact alone is insufficient to elevate a contract dispute into an UDTPA claim."

Brief in Support of Motion for Judgment on the Pleadings

Brief in Opposition to Motion for Judgment on the Pleadings

Reply Brief in Support of Motion for Judgment on the Pleadings

The Defendant LLC was an investor and member of three limited liability companies.  It alleged in a counterclaim that the Plaintiff, the manager of three of the LLCs, owed it a direct fiduciary duty, and that Plaintiff had violated that duty by comingling funds of the LLCs and using them for his personal benefit. 

Plaintiff pitched its Motion to Dismiss on the argument that a co-manager of the LLC does not have a fiduciary duty to its members under N.C. Gen. Stat. Sec. 57C-3-22, which sets out the duties of LLC managers.  The Court declined to decide the case on this basis, noting that there was no North Carolina state court authority on the point and stating that it had an obligation to approach an issue of first impression cautiously, and to avoid it if possible. 

The Court instead framed the issue as follows: "the more important question in this case is to whom is that duty owed-to the LLCs or to the member individually."  The Court found that the breaches of duty alleged by the Defendant would have affected all of the members of the LLC, not just the Defendant, and that the Defendant therefore was not entitled to assert a direct claim for breach of fiduciary duty.

The Court concluded as follows in granting the Motion:

In the instant case, Defendant fails to make any allegations of a special duty owed only to it and not the other members of the LLCs, nor has it shown that it suffered a special loss, separate and distinct from the harm to the LLCs and other members of the LLCs. Consequently, Defendant has no standing to bring a direct or individual action against a member-manager of the LLCs. For this reason, Defendant's claims alleging breach of fiduciary duty should be dismissed.

This case was decided about a month ago, I picked it up from this week's North Carolina Lawyers Weekly.

The first case is Workplace Benefits, LLC v. Lifecare, Inc, decided by the Court on July 14, 2008.  In that case, which the Defendant designated to the Court, the Plaintiffs were a former employee of the Defendant and her new employer.

The Complaint asserted that the Defendant was improperly using a Confidentiality Agreement signed by the individual Plaintiff to threaten her so she wouldn't call on potential customers.  The Plaintiffs further alleged that potential customers had been impeded from doing business with the corporate Plaintiff as a result. 

The Complaint sought a declaratory judgment that the Confidentiality Agreement was invalid, and also made claims for tortious interference with contract and a breach of the duty of good faith and fair dealing.

The case was designated to the Business Court (by me) based on the Court's mandatory jurisdiction over cases involving "unfair competition law."  Judge Tennille disagreed that there was mandatory jurisdiction, and held:

every suit based upon a breach of a restrictive covenant or breach of a Confidentiality Agreement [will not] give rise to a mandatory business case based upon “unfair competition.” In order to raise a material issue of unfair competition, some additional factors must be alleged. 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).

The Court determined that those additional factors were lacking in the Workplace Benefits complaint. 

In the Order in the second case, decided yesterday, the Court remanded a lawsuit in which the plaintiff sought a declaratory judgment that a covenant not to compete was invalid. Judge Tennille remanded the case on his own motion, before any Answer had been filed, and referenced the Workplace Benefits decision.

On the non-compete side, Plaintiff signed the non-compete with the cleaning company for which she had worked three years after she began employment.  Defendant argued that it had held off from firing the Plaintiff in exchange for her execution of the agreement, and that this was valid consideration.

Judge Tennille disagreed, holding:

"The Court is not aware of any prior decisions holding that a decision not to fire someone is adequate consideration for a non-compete. Instead, this state has found that '[w]hen the relationship of employer and employee is established before the covenant not to compete is signed there must be consideration for the covenant such as a raise in pay or a new job assignment.' Whittaker Gen. Med. Corp. v. Daniel, 324 N.C. 523, 527, 379 S.E.2d 824, 827 (1989) (citing Chemical Corp. v. Freeman, 261 N.C. 780, 136 S.E.2d 118 (1964)). That consideration can NOT be the continuation of employment. Mach. Co. v. Miholen, 27 N.C. App. 678, 686–87, 220 S.E.2d 190, 196 (1975). Indeed, under Defendants’ theory, every employer could offer an employee the option of being fired or signing a non-competition agreement and argue that 'consideration' had been paid. That is not the law in North Carolina. The restrictive covenant in this case was invalid."

The issue involving the validity of the summons arose because Plaintiff had sued a company called Molly Mops, LLC, but had meant to sue a different company, Molly Mops Cleaning Service, LLC.  Plaintiff discovered the error promptly, and amended her complaint before any responsive pleading was filed, but never had a new summons issued.

Plaintiff sought leave to amend the original summons to properly name Molly Mops Cleaning Service, LLC.  Judge Tennille denied the Motion, even though the right party had notice of the lawsuit, holding:

This is not a case of misnomer. The wrong entity was named in the summons which was never amended. There is no doubt that MMCS had notice; however, that does not cure the defect. It may well be that plaintiff intended to sue MMCS and was confused; however, that does not cure the defect. Plaintiff did file an amended complaint; however, that did not cure the defect. A proper summons was never served on MMCS and thus no action has been commenced against it.

* * *

In this case, Plaintiff made a substantive mistake and sued the wrong entity. That mistake was fatal. The court does not have jurisdiction over MMCS because no valid summons was issued and served on MMCS.

Brief in Support of Motion for Summary Judgment

Brief in Opposition to Motion for Summary Judgment

Brief in Support of Motion to Amend Summons

Brief in Opposition to Motion to Amend Summons

This is an interesting case (and a long post), but the Reader's Digest version is that: (a) Rule 23 of the North Carolina Rules of Civil Procedure doesn't require court approval before a class action which has not yet been certified is dismissed, but (b) a court nevertheless has the authority to conduct a review of a pre-certification dismissal and should exercise it, and (c) a court's review of a foreign court's approval of a class action settlement is limited to a consideration of whether the foreign court addressed issues of jurisdiction and due process.

The core of Judge Tennille's May 2007 opinion in the Business Court (summarized here) was that there was a "shocking incongruity between the class benefit [of about $2400 to the entire nationwide class] and the fees afforded counsel and the representative [of more than $1 million]."  He held that this "leave[s] the appearance of collusion and cannot help but tarnish the public perception of the legal profession."

The class notice and claims process agreed to by Moody and Sears also came under Judge Tennille's fire.  He held that the class notice was poorly distributed and uninformative, did not provide sufficient time for class members to opt out, and made no mention of the million dollar fee for the lawyers. He held that "it is hard to imagine a more inadequate notice plan and claims process."

The effect of the ruling was that Judge Tennille refused to allow the class plaintiff to dismiss its North Carolina class claims with prejudice, even though Sears had joined in the motion.  Judge Tennille allowed the dismissal of the class claims without prejudice. 

The class plaintiff and his adversary then both appealed Judge Tennille's decision. So, the Court of Appeals was faced with the curious situation of Appellant and Appellee both arguing that the lower court was wrong. 

Each side filed its own brief, and each side filed a response to the other's brief. There was an Appellant's Brief from Plaintiff which said that Judge Tennille's order was "bizarre and unbelievable" (on p. 17), an Appellant's Brief from Sears saying that the Order was "astonishing" (on p. 12); and an Appellee's Brief from Plaintiff and an Appellee's Brief from Sears also urging reversal. So, in the end, the Court had four briefs saying how very wrong the Business Court had been.

A pivotal issue was whether Judge Tennille's approval was even required for the dismissal to be taken.  The Business Court had held in a number of cases, including Moody, that when a claim is made on behalf of a class, court approval is required before any dismissal, even if the class hasn't yet been certified.  Moody presented the first opportunity for the Court of Appeals to deal with that issue, and it rejected the argument that the North Carolina Rules of Civil Procedure require approval before a pre-certification dismissal.

The Court further held, however, that "our holding does not imply that a trial court wholly lacks authority to review a motion for pre-certification dismissal of a class-action complaint."  The Court observed that "[w]ithout some level of pre-certification court supervision, there is an unacceptable risk that parties may abuse the class-action mechanism in myriad ways."  It set out the following standard:

We therefore hold that when a plaintiff seeks voluntary dismissal of a pre-certification class-action complaint, the trial court should engage in a limited inquiry to determine (a) whether the parties have abused the class-action mechanism for personal gain, and (b) whether dismissal will prejudice absent putative class members. If the trial court finds that neither of these concerns are present, the plaintiff is entitled to a voluntary dismissal. However, if the trial court finds that one or both of these concerns are present, it retains discretion to address the issues.

The inquiry is narrower, however, when a foreign court, like the Illinois court which had approved the settlement questioned by Judge Tennille, has already addressed these issues.  The issue, then, the Court determined, is one of full faith and credit. The Court of Appeals observed that the due process and jurisdictional issues considered by the Business Court had been "heard and answered" in the Illinois Court.  [The Illinois Judge had received a letter from Judge Tennille raising his concerns about the settlement and had inquired into those matters at a fairness hearing.]

The Court of Appeals held that any review of the approval of a class action by the courts of another state was "limited" to a consideration of whether jurisdictional and due process issues had been addressed by the foregin court.  It stated:

limited review serves important judicial interests in the efficiency and finality of class-action litigation, and ensures that no "waste of judicial resources" occurs by reason of "reviewing courts . . . conduct[ing] an extensive substantive review when one has already been undertaken in a sister state." Further, "second-guessing the fully[-]litigated decisions of our sister courts would violate the spirit of full faith and credit," and could make North Carolina the jurisdiction of choice for plaintiffs wishing to launch collateral challenges to other states' judicial proceedings. While North Carolina courts surely have an important interest in not enforcing constitutionally infirm foreign judgments, the appropriate manner of correcting foreign trial court errors is "by appeal within the [foreign] state system and by direct review in the United States Supreme Court."

The Court of Appeals concluded that "the jurisdictional and due process conclusions contained in the trial court's 7 May 2007 order were 'fully and fairly litigated and finally decided' in Illinois Circuit Court," and that "[t]his finding concludes our review and forecloses any reconsideration of the merits of the legal issues decided by the Illinois Circuit Court. . . .While we share the trial court's serious concerns regarding the final accounting in the . . . settlement, we are constrained to hold that the trial court erred by refusing to accord full faith and credit to the . . . settlement. We therefore reverse the trial court's 7 May 2007 order and remand this case to the trial court with instructions to dismiss the class-action allegations with prejudice."

The Business Court's opinion had gotten a lot of attention.  The Rand Institute for Civil Justice had called it "fascinating," and a Harvard Law School Professor who writes frequently about class actions had applauded it.

Despite the reversal, the Business Court opinion in Moody remains significant for other reasons.  It is a primer from Judge Tennille's perspective on what are acceptable class action settlements and notice procedures and certainly worth reading before presenting a settlement for approval in his court.

Today, the North Carolina Business Court ruled in Hill v. StubHub, Inc. that the Communications Decency Act didn't provide a defense to on-line ticket seller StubHub against claims that it had violated North Carolina's anti-scalping laws.

In his opinion, Judge Tennille allowed Plaintiffs to proceed on their unfair and deceptive practices claims against StubHub.  He dismissed, however, several other claims brought by the Hills, who were frustrated purchasers of Hannah Montana concert tickets for their eight year old daughter. 

According to the Amended Complaint, the Hills' daughter had  repeatedly told her parents that she had a "sincere and strong" wish to see this show.  Mrs. Hill tried buying tickets on-line when they went on sale, but they sold out in moments. The Hills, probably under unrelenting “sincere and strong” pressure from their daughter, bought four tickets to the concert on StubHub, at a price nearly $100 per ticket higher than the $56 face value of each ticket.

Then, the Hills sued, alleging that  StubHub, along with the unnamed John Doe defendants who actually owned the tickets, had violated North Carolina’s anti-scalping law. The Hills sought class certification, not just for those who had to purchase tickets via StubHub for the Hannah Montana show, but also for the purchasers of tickets to the “many concerts, sporting events and other events and at numerous venues throughout the State of North Carolina” for which tickets had been sold through StubHub. The Hills made multiple claims: (1) violation of North Carolina's anti-scalping statute (2) civil conspiracy, (3) tortious action in concert, (4) unfair and deceptive practices, and (5) punitive damages.

The first issue before the Court on StubHub's Motion to Dismiss was whether StubHub was immune from liability under the Communications Decency Act. The "seminal case," under that statute, according to Judge Tennille, is Zeran v. America Online, Inc., 129 F.3d 327 (4th Cir. 1997), where the Fourth Circuit held that the CDA “creates a federal immunity to any cause of action that would make service providers liable for information originating with a third-party user of the service.”

The Business Court found, however, that it could not resolve the issue of immunity at the Motion to Dismiss stage, given the allegations that StubHub was not merely an interactive computer service or interactive service provider (an "ISP"), entitled to immunity, but also an "information content provider," (an "ICP") which could be liable for the creation or development of information provided through the internet. Judge Tennille held:

Plaintiffs have alleged that StubHub was an ICP as well as an ISP. There was no answer to the Court’s question at the hearing as to whether StubHub actually did or did not sell the tickets in question or if it sold its own tickets to the concert. There are allegations that StubHub controls the events for which these tickets are being offered. Plaintiffs alleged that StubHub only offers to sell tickets for hot acts, thereby guaranteeing high commissions and ticket re-sale prices above the statutory limit. While StubHub argues that the prices on the website reflect the market value for the tickets, there are allegations that the market value is created by StubHub either through its association with multi-ticket holders or through its own sales. There are also questions over the movement of the tickets and money through or by StubHub. These allegations amount to an allegation of control over the tickets and prices that is sufficient to defeat a motion to dismiss. See Hy Cite Corp. v. Badbusinessbureau.com, LLC, 418 F. Supp. 2d 1142, 1148–49 (D. Ariz. 2005) (finding that allegations that an ISP created the alleged wrongful content was enough to deny a motion to dismiss based on the ISP’s immunity under the CDA “at this stage of the case”).

The Court then turned to the substantive allegations of the Amended Complaint, finding first that there was no private cause of action under North Carolina's anti-scalping statute.  It therefore dismissed the scalping claim.  The Court also dismissed Plaintiffs' claim for "tortious action in concert," holding that such a claim could not be based upon a statute that did not provide for a private cause of action.  The claim for civil conspiracy was also dismissed, because the allegations were of a conspiracy to commit a crime.  The Court held that such allegations were therefore of a criminal conspiracy, not a civil conspiracy.  The Court dismissed Plaintiffs' claim for punitive damages because there was no remaining tort claim on which punitive damages could be based.

The Court did not dismiss, however, Plaintiffs' claim for unfair and deceptive practices.  It held, based on Kewaunee Scientific Corp. v. Pegram, 130 N.C. App. 576, 581, 503 S.E.2d 417, 420 (1998), that the violation of a criminal statute can form the basis for an unfair and deceptive practices claim.  As Judge Tennille put it:

In this case, Plaintiffs allege that StubHub has violated the [anti-scaping statute] which regulates the sale of tickets to consumers. Violation of a statute regulating business constitutes an unfair and deceptive trade practice. The activity being regulated undoubtedly falls within the broad definition of “commerce” under the UDTP. . . .  Plaintiffs have alleged that they were injured by StubHub’s actions. Plaintiffs have therefore alleged the elements of an UDTP claim.

My partners Jeff Oleynik and Charles Coble represent the Plaintiffs in this case.

The photo at the top is from Niall Kennedy's photostream on Flickr.  I modified it slightly.

Brief in Support of Motion to Dismiss

Brief in Opposition to Motion to Dismiss

Reply Brief in Support of Motion to Dismiss

In addition to complimenting the Business Court, the Annual Guide gave North Carolina's litigation climate a green light, indicating that the "state's liability climate encourages growth and job creation."   It gave North Carolina a high national ranking, much higher than the State's ranking in the U.S. Chamber of Commerce rankings issued earlier this year.

The State's litigation climate ranking was sixth (behind Tennesse, Utah, Indiana, Ohio, and North Dakota), against twenty-first in the U.S. Chamber report.

Depending on your perspective, the litigation weather in North Carolina according to the Guide is partly cloudy or partly sunny.  The Guide said that North Carolina

"has maintained a fair and predictable liability climate that leads to growth and job creation.  It ranks among the three best states for monetary tort losses, improving from 7th in 2006.  However, North Carolina's product liability losses rank 36th, which indicates heightened litigation activity and a rise in jury verdicts.  Further, the state's plaintiffs' bar is very active in the state legislature: a bill defeated last year extending the statute of repose from 6 to 15 years would have made North Carolina one of three states with the longest period for filing claims.  There is a rule of law majority on the state Supreme Court and the state business court serves as a model for the nation.  North Carolina, however, is a state to be watched because of aggressive trial bar legislative efforts." 

The Directorship Magazine rankings took the U.S. Chamber of Commerce rankings and evaluated them in conjunction with the U.S. Tort Liability Index prepared by the Pacific Research Institute, blending the two into its own ranking.  North Carolina was ranked third in the Pacific Research Institute's study, which evaluates a myriad of empirical evidence.  The Institute's complete spreadsheet, containing data for all 50 states, is here.

There are, by my count, fifteen Business Court decisions on appeal to the Court of Appeals.  The cases involve class actions, derivative actions, forum selection clauses, motions to stay, and antitrust law, among other matters.

The list of cases on appeal is below, with links to earlier posts or case summaries on this blog about the Business Court decision as well as the dates of the most recent filings in the Court of Appeals.

Antitrust

Teague v. Bayer AG (Appellant's Brief filed November 21, 2007; Appellee's Brief filed January 23, 2008).  Antitrust case involving issues of indirect purchaser standing. 

Class Actions

Blitz v. Agean (Record on Appeal filed June 16, 2008).  Denial of class action under the Federal Telephone Consumer Protection Act.

Moody v. Sears Roebuck and Co. (briefing concluded January 2008, argued March 5, 2008).  Need for court approval before dismissal of class action.

Derivative Actions

Egelhof v. Szulik  (Appellant's Brief filed June 5, 2008).  Sanctions against derivative action plaintiff and his lawyers.

Gaskin v. J.S. Proctor Co. (Record on Appeal filed June 24, 2008).  Whether claims of limited partners against general partner were derivative, or direct.

Regions Bank v. Regional Property Development Corp. (Notice of Appeal filed May 20, 2008).  Dismissal of derivative action by members of limited liability company. 

Employment

Kornegay v. Aspen Asset Group, LLC (Notice of Appeal filed June 18, 2008).  Appeal from jury verdict finding breach of contract to pay bonus compensation and existence of bonus agreement and violation of North Carolina Wage and Hour Act.  Post-trial, the Court refused to award liquidated damages under the Act.

Motions To Stay

Signalife, Inc. v. Rubbermaid Inc. (Appellants' Brief filed June 13, 2008).  Grant of Motion to Stay based on case filed earlier, through electronic means, in federal court. 

Wachovia Bank v. Harbinger Capital Partners Master Fund I (Record filed May 30, 2008).  Grant of Motion to Stay of North Carolina action in favor of a subsequently filed New York lawsuit. 

Forum Selection Clause

Sony Ericsson Mobile Communications USA, Inc. v. Agere Systems (Record on Appeal filed May 9, 2008).  Enforceability of forum selection clause.

Trusts

Heinitsh v. Wachovia Bank (Appellant's Brief filed 11/13/2007; Appellee's Brief filed January 14, 2008).  Dispute over distribution of trust proceeds, propriety of attorneys' fees incurred by trustee.

Miscellaneous Issues

Eleanor B. Johnson Limited Partnership v. Ball (Record on Appeal filed May 29, 2008).  Issues involving receivership and arbitration. 

Kintz v. Amerilink LTD (Notice of Appeal filed May 27, 2008).  Appeal of jury verdict in breach of contract case.

Media Network, Inc. v. Long Haymes Carr, Inc. (Notice of Appeal filed May 1, 2008).  Appeal of jury verdict regarding breach of advertising contract.

Schlieper v. Johnson (Appellant's Brief filed February 15, 2008; Appellee's Brief filed April 15, 2008).  Dismissal of claims for fraud, negligent misrepresentation, unfair and deceptive trade practices, and breach of contract regarding sale of business.

The photo at the top of this post is from Lance McCord's photostream on Flickr.

The discovery Order was entered two years ago in a multidistrict proceeding formerly pending in Charlotte.  The case, just recently settled, involved the alleged price fixing of polyester staple fiber. 

The law firm of Kaye Scholer represented CNA Holdings, Inc. and Celanese Americas in that litigation.  Judge Vorhees sanctioned Celanese for failing to produce a significant quantity of responsive documents. 

According to the Amended Complaint filed on June 25th against Kaye Scholer, Judge Vorhees ruled from the bench that:

[T]he efficient disposition of a case like this one depends on full and candid discovery and [Celanese has] withheld that compliance with their obligations . . . . The efforts by [Celanese] do not meet the requirements of the discovery rules or the court’s directives . . . . The court is not unmindful of the positions urged by [Celanese], but in the context of the trove of documents it held in the wings just out of sight of the non-class plaintiffs, these positions can’t be seen as coherent or compelling. And they don’t encourage the court to rely on the good faith of [Celanese]. . . . The efforts by [Celanese] to play cat and mouse with the court and with the non-class plaintiffs since at least 2004 is unbecoming . . . to say the least.

The sanction entered by the Court in the antitrust litigation was that Celanese had to pay opposing counsel's attorneys' fees in pursuing the discovery motion, which were more than $100,000, and that the Court would consider further sanctions.  Shortly after that, Celanese fired Kaye Scholer.

New counsel then conducted a comprehensive review of Celanese's records which resulted in the production of hundreds of thousands of additional documents.  The Plaintiffs in the North Carolina case responded by asking for an array of additional sanctions, including (a) a default judgment against Celanese, (b) a finding of fact that Celanese had engaged in “bad faith, willful and deliberate discovery misconduct,” (c) instructions to the jury that this misconduct reflected consciousness of guilt, and (d) adverse inferences against Celanese on claims that it engaged in an illegal price-fixing conspiracy.

Judge Vorhees withheld ruling on the sanctions requested by Plaintiffs, but stated that he "did not take lightly the allegation that material false written and oral misrepresentations were knowingly and intentionally made" to the Court and the Plaintiffs. 

Celanese settled the antitrust claims in May 2008 for $107 million.  In the new lawsuit, Celanese says it was forced to pay this substantial settlement because "[t]he North Carolina Federal Court's sanctions rulings and the threat of additional severe sanctions at trial resulting from Kaye Scholer's conduct materially changed Celanese's likelihood of success at trial."  As Celanese put it, "the inflated $107 million settlement forced by Kaye Scholer's misconduct was essential to avoid the potentially devestating impact of sanctions that would have undermined Celanese's defense on the merits and would have exposed Celanese to catastrophic treble antitrust damages."

Celanese is seeking from Kaye Scholer a return of the legal fees it paid the firm, plus the difference between the $107 million settlement and what it claims would have been a "nominal settlement" in the absence of the discovery issues.  Celanese bases its claim that the antitrust claims had minimal value on memoranda in which Kaye Scholer opined that the case presented little risk.

The lawsuit is pending in federal court in Texas.  Kaye Scholer has filed its own lawsuit in the Southern District of New York seeking the recovery from Celanese of unpaid legal fees, and a declaration that its legal work was properly performed. 

The 2-1 decision today by the North Carolina Court of Appeals in Rossetto USA, Inc. v. Greensky Financial, LLC, in which two Georgia LLCs challenged personal jurisdiction, illustrates that pretty clearly.  The Court actually split twice on the jurisdiction question, reaching different conclusions on whether there was jurisdiction over the two defendants.

The Georgia companies were Greensky Financial, LLC and Furniture Retailers, LLC.  The trial judge found that it had jurisdiction over both of them.  The Court of Appeals majority found that it had jurisdiction over Greensky, but not over Furniture Retailers.  The dissent found that there was no jurisdiction over Greensky, but that there was jurisdiction over Furniture Retailers.

The facts underlying these conflicting jurisdictional conclusions were fairly routine.  Greensky was a financing company, which had funded a company called EclecticGlobal's purchases of furniture from the Plaintiff, a North Carolina company.  Greensky had made frequent payments on Eclectic's behalf to the Plaintiff and had frequently communicated to Plaintiff's representatives in North Carolina.  That was enough to find jurisdiction for the majority, but not enough for the dissent.

Furniture Retailers had taken over the business of Eclectic.  It had accepted one shipment of furniture sent by Plaintiff to Eclectic and tried to sell that furniture.  It had also made one telephone call to Plaintiff's North Carolina office. Those were insufficient contacts to the majority, but sufficient for the dissent.

I wish I could tell you where to go from here. 

Clint Pinyan and John Buford of Brooks Pierce represent Greensky and Furniture Retailers.

The case, Kaplan v. O.K. Technologies, arose following the dissolution of a company formed to commercialize a process for filtering hog waste.  Kaplan, a minority member of the LLC, was its only source of funds and controlled the LLC's checkbook.  Over time, he lent the LLC nearly $2 million, which the company used to pay salaries and legal expenses, among other things.

When the company's prospects faded, Kaplan stopped funding the company and asked for repayment of his loans.  The other members responded by voting to dissolve the LLC, which was placed in receivership.  Kaplan sued to collect his substantial debt.

The other members of the LLC claimed that because Kaplan had "complete control over all expenditures," and because he knew that the LLC was completely reliant on his contributions, he had an "enhanced fiduciary duty" to the LLC and the other members.

Judge Tennille held:

Being an investor in a company does not create a fiduciary relationship. . . . Kaplan, as a minority shareholder, had no fiduciary duty to the other shareholders even though he was the sole financial contributor to O.K.  Like an investor in a corporation, Kaplan's position as the holder of the purse strings did not create a fiduciary duty.  At all pertinent times, Kaplan was a minority shareholder without dominance or control over either O.K. or any of the other shareholders and therefore without a fiduciary duty.

Op. at 5-6. Judge Tennille stated that, in any event, it was "unclear what Defendants believe Kaplan's fiduciary duty required him to do."  (Op. at 9).  The Court held that Kaplan was not required to provide "limitless funding" and he was entitled to seek to collect the debt owed to him.

The LLC members also contended that Kaplan had not followed the procedures set forth in the LLC's Operating Agreement in making his loans.  The Court ruled, however, that these claims were barred by ratification and estoppel.  It held "Defendants are estopped from objecting to the loans by their continued acceptance of reimbursement and salary made possible by the loans, as well as their inaction when O.K. creditors were paid with the loaned money."  (Op. at 8).

Two other claims made by the Defendants, for negligent misrepresentation and unfair and deceptive practices, are worth mentioning.

Summary judgment was granted on Defendant's claim of negligent misrepresentation, because the Court found that Defendants, as majority shareholders of the LLC, could have investigated any questions of the validity of the representations made by Kaplan.  As members of the majority, the Defendants had "the opportunity to question and determine for themselves whether any documentation provided was inaccurate."  (Op. at 14).

Last, the Court granted summary judgment on Defendant's unfair and deceptive practices claim.  The Court held that "the dispute here arises from an internal dispute over the direction of O.K. by its shareholders.  Commerce is not affected by the parties' inability to work together as an LLC."  (Op. at 14).

Plaintiff's Brief In Support Of Motion For Summary Judgment

Defendants' Brief In Opposition To Motion For Summary Judgment

Plaintiff's Reply Brief In Support Of Motion For Summary Judgment

The case is University of Louisville v. Duke University, pending in Franklin County, Kentucky.   Louisville filed its Complaint against Duke when Duke backed out of a contract to play four games against the Cardinals.  Duke had lost the first game in 2002 by a score of 40-3, and decided for some reason that it didn't want to play the remaining three games in the series, due to be played in 2007-2009.

Louisville didn't appreciate losing a record-padding opponent of the quality of Duke.  It sued, based on a provision in the Athletic Competition Agreement which called for a $150,000 payment for each game not played.  Duke's defense was a provision in the contract which stated that it had to pay only if Louisville was unable to find a replacement opponent of "similar stature" to Duke.  The Agreement didn't define the term.

Louisville, in discovery, asked Duke what NCAA football teams were of "similar stature."  Duke's response was that every single team in former Division I-A and a lot of teams in former Division I-AA were.  The only teams that weren't, to Duke, were junior varsity teams.  Here is Duke's response from Interrogatory No. 1:

Duke states that any and all college varsity teams in the Football Bowl Subdivision (formerly Division I-A) are teams of a 'similar stature' to Duke. . . . Additionally, Duke states that any and all college varsity football teams in the Football Championship Subdivision (formerly Division I-AA) that would be considered as good or better than Duke in football. . . are teams of a 'similar stature' to Duke. . . . [J]unior varsity programs of any of the aforementioned teams would not be teams of a 'similar stature' to Duke's varsity college football team.

Louisville's definition of "similar stature" was narrower, but maybe not narrow enough.  It said the term should be defined as "any school that is a member of a Bowl Championship Series conference whose champion automatically qualifies for a BCS bowl game," plus Notre Dame.  Louisville had been unable to find such a substitute opponent.

Duke moved for judgment on the pleadings, and won.  Its argued at the hearing that the standard for "similar stature" was very low because the quality of Duke football was as low as it gets.  As Judge Phillip J. Shepherd of the Franklin Circuit Court described the argument in his June 19th Opinion:

The term 'team of similar stature' simply means any team that competes at the same level of athletic performance as the Duke football team.  At oral argument, Duke . . . persuasively asserted that this is a threshold that could not be any lower.  Duke's argument on this point cannot be reasonably disputed by Louisville.  Duke won only one football game, and lost eleven, during the 2007 football season.

Jim Chen, who's the Dean of the Law School at the University of Louisville, has a good point about Judge Shepherd's opinion.  The issue wasn't whether Louisville could find a replacement opponent better than Duke.  That would be easy.

The real issue was whether there was a team as bad as Duke to line up across from the Cardinals.  As Dean Chen put it on the Cardinal Lawyer Blog:

Strictly as a football fan, albeit one who is a Louisville Cardinals partisan, I respectfully disagree with Judge Shepherd. There is no adequate substitute for Duke football, a patsy nonpareil in college football. There simply is no other (1) Division I-A team (2) that plays such appallingly bad football (3) so consistently and persistently (4) all while maintaining its membership in a Bowl Championship Series conference.

[W]hat I really want is a series of virtually guaranteed wins against the worst major college football team. And that team, despite its university's immense wealth and its city's sports tradition (think of Bull Durham and the 1942 Rose Bowl), is the Duke Blue Devils.

Echoing that analysis, if Duke football were real estate, this case would cry out for specific performance.  There is no substitute for having a near lock on a win against a BCS conference team, and that's the benefit of the bargain that Louisville lost.

Here are links to Duke's Brief, Louisville's Response, and Duke's Reply Brief for those who are interested in digging deeper. 

In Dailey, the plaintiff claimed that Popma had posted statements about him on the Internet accusing him of theft, embezzlement, and being the "equivalent" of a child molester, among others.

Popma asserted that the postings had been made by him in Georgia, and that the North Carolina courts could not exercise personal jurisdiction over him.

The Court held, relying on Young v. New Haven Advocate, 315 F.3d 256 (4th Cir. 2002), cert. denied, 538 U.S. 1035, 155 L. Ed. 2d 1065, 123 S. Ct. 2092 (2003), that "the dispositive question in such cases should be whether the defendant 'through the Internet postings, manifest[ed] an intent to target and focus on [the forum state's] readers.'"

After assessing the record, the Court found that plaintiff had "failed to establish that defendant posted the material in the bulletin board discussions with the intent to direct his content to a North Carolina audience" and that there was no basis for personal jurisdiction.

The Dailey decision isn't the first time the Court of Appeals has addressed the interplay between personal jurisdiction and the Internet.  In 2005, in Havey v.Valentine, 172 N.C. App. 812, 616 S.E.2d 642 (2005), the Court of Appeals had adopted the Fourth Circuit's analysis in ALS Scan, Inc. v. Digital Serv. Consultants, Inc., 293 F.3d 707 (4th Cir. 2002), cert. denied, 537 U.S. 1105, 154 L. Ed. 2d 773, 123 S. Ct. 868 (2003).  

The ALS formulation calls for the Court to consider whether the Defendant (1) directs electronic activity into the State, (2) with the manifested intent of engaging in business or other interactions within the State, and (3) that activity creates, in a person within the State, a potential cause of action cognizable in the State's courts.

The decision in Havey also established that  "a person who simply places information on the Internet does not subject himself to jurisdiction in each State into which the electronic signal is transmitted and received."  That the postings have an effect on a North Carolina resident is not enough to support jurisdiction.