The Business Court Opens Its Door Wide To "Intellectual Property" Disputes

The Business Court doesn't often discuss its interpretation of the statutory bases for a designation to the Court, all of which are contained in G.S. sec. 7A-45.4.  So its published Order this month in Southeastern Automotive, Inc. v. Genuine Parts Co. 2016 NCBC 61, is worth noting.

The issue in Southeastern Automotive was whether the Complaint qualified for designation to the Business Court under G.S. §7A-45.4(a)(5), which says that a party may designate as a complex business case:

Disputes involving the ownership, use, licensing, lease, installation, or performance of intellectual property, including computer software, software applications, information technology and systems, data and data security, pharmaceuticals, biotechnology products, and bioscience technologies.

The statute, before the amendments effective October 1, 2014, mentioned only "disputes involving '[i]ntellectual property law, including software licensing disputes." Op. 19 (referencing former version of G.S. §7A-45.4(a)(5)). 

The Southeastern Complaint did not directly raise issues regarding the ownership of intellectual property. It centered around the Defendant's acquisition of the Plaintiff, and Plaintiff's claims that it had not been fully compensated in the sale.  The shortfall, according to the Plaintiff, was caused by the inadequate operation of Defendant's software programs with respect to the inventory which the Plaintiff had sold.

Judge Gale saw the 2014 amendment as expanding the Court's role in intellectual property lawsuits.  He held:

The Court concludes that the 2014 amendment to section 7A-45.4(a)(5) expanded the scope of disputes within the statute’s purview to include a dispute that involves a material issue regarding the use or performance of intellectual property, including computer software and data, without requiring a dispute regarding ownership of the intellectual property or another dispute that may require application of principles of the body of law known as intellectual property law.

Order 20.

In the end, this analysis by Judge Gale was unnecessary, as the amount in controversy, per the Southeastern Complaint, was in excess of five million dollars.  That made this a case in which designation would be mandatory regardless of whether it was requested by one of the parties.  Order 4 (referencing G.S. §7A-45.4b)(2)).

I frequently look at the Orders from the Chief Judge of the Business Court on challenges to designations (the Chief Judge handles all of the Oppositions to Designation) and don't find much to write about as they usually say nothing more than something like "the allegations in the Complaint fall within the mandatory jurisdiction of the Business Court,"  I collected a number of those unpublished Orders in this 2008 post.

That said, every once in a while the Business Court says something significant about the scope of its mandatory jurisdiction.  For example, in its unpublished Order in  Sonic Automotive, Inc. v. Mercedes-Benz USA, LLC, the Court spoke about its broad approach to designations involving antitrust matters (per G.S. §7A-45.4(a)(3).  

You Can Designate A Case To The NC Business Court Based On A Counterclaim, But It Can Be Tricky

The Business Court issued a significant Order last week, in Composite Fabrics of America, LLC v. Edge Structural Composites, Inc., 2016 NCBC 11 that Judge Gale said was an "opportunity to clarify. . .how the Court interprets the statutory mandates for designating a case as a mandatory complex business case"  and that the Business Court is not a court of separate jurisdiction.  Order 2.

Some Guidance About Designating A Case To The Business Court As A Mandatory Business Case Based On A Counterclaim

A counterclaim can be the basis for a notice of designation.  That Is true even though the statute governing a designation of a case to the Business Court (N.C. Gen. Stat. §7A-45.4(d)) does not mention a counterclaim as a basis for a designation.  It says only that a notice of designation may be filed:

by the plaintiff, the third-party plaintiff, or the petitioner for judicial review contemporaneously with the filing of the complaint, third party complaint, or the petition for discretionary review in the action.

N.C. Gen. Stat. §7A--45.4(d)(1).

Notwithstanding the absence of any mention of a counterclaim in the statute, Judge Gale ruled that the Court interpreted that language to include counterclaim plaintiffs and counterclaims as well as the party against whom a counterclaim is being asserted.  Order 18.

Thus, he concluded, that "a party may use its counterclaim as the basis for a notice of designation.  Order 9. 

If a party wants to base its notice of designation on both the Complaint and its own counterclaim, it needs to act quickly. The thirty day time limit on filing a notice of designation (contained in G.S. §7A-45.4(d)(3) plays a role here. Judge Gale said that:

if a counterclaimant wishes to rely on the opposing party's complaint as well as its own counterclaim as a basis for mandatory designation, the notice of designation would need to be filed within thirty days of service of the complaint and contemporaneously with the counterclaim.

Order 19.  That would require the Answer containing the counterclaim (and the contemporaneous notice of designation) to be filed more quickly than they might ordinarily be filed given the general practice of getting a thirty day extension of time to file an Answer.

If the counterclaim is the first pleading to warrant a designation, then the opposing party has thirty days from the date of service of that pleading to file a notice of  designation.  But things are different if the counterclaim is the first pleading to raise an issue that qualifies for mandatory designation.  Then, the thirty day period is measured from the filing of the counterclaim.  That's so long as the new pleading "is not being made for an improper purpose."  Order 21.

Things can be tricky if the notice of designation is based on the Complaint, before the counterclaim is filed.  But what if the notice of designation is filed based upon the Complaint, and the party seeking designation then files a counterclaim that would warrant a designation?  That was the situation faced by Judge Gale in the case before him. He said that "[w]hether [this type of situation] involves material issues within the scope of section 7A-45.4(a) must therefore depend on the allegations in the . . . Complaint."  Order 22.  But even so, the Business Court would consider the counterclaims "to inform it" whether [the claims made in the Complaint] necessarily include material issues that fall within the scope of the matters upon which a designation is allowed.  Order 23.

You can lose your right to designate a case on a counterclaim. If you forego designating a case which would have been appropriate for a mandatory designation based on the Complaint and let the thirty day period for designating lapse, you can't "renew [your] right to designation by filing a counterclaim."  Order ¶20.

Beware of Business Court Rule 3.2

Business Court Rule 3.2 is titled "Contents of Notice of Designation."  It directs the party filing a notice of designation "to not only describe how the case falls within one or more categories of section 7A-45.4, but to further identify factors that demonstrate why the Business Court is the appropriate venue for that case."  Order 24.

The portion of that  Rule requiring the designating party to "further identify factors" warranting designationis a survivor from the early days of the Business Court, before the NC General Assembly enacted the statute specifying "mandatory designations."  Cases were then designated to the Business Court through a discretionary assignment by the Chief Justice of the NC Supreme Court.

Judge Gale said of BCR 3.2 that its factors:

are useful in managing and assigning cases among the Business Court judges and may be useful in resolving requests for discretionary assignments.  But those factors do not provide a stand-alone basis for mandatory designation.  For a case to be certified as a mandatory complex business case, the pleading upon which the designation is based must raise a material issue that falls within one of the categories specified in section 7A--45.4.

Order 25.

Business Court Rule 3.2 is not long for this world.  Amended Rules are in the works.  The new Rule 3.2, which I've had an opportunity to see, not longer deals with the "contents of a designation."  The proposed new rule is captioned "Who may file", covering who can use the Court's electronic filing system..

The Business Court Is Not A Court Of "Separate Jurisdiction"

Judge Gale observed that "litigants often refer to the 'Business Court''s jurisdiction" and to its "subject-matter jurisdiction."  Order 26. 

But he questioned the use of those terms, stating that the Business Court is "merely an administrative division of the superior court in the General Court of Justice."  And a Business Court Judge is just a type of Superior Court Judge:

Just as a special superior court judge may be assigned to matters in any of these counties, when a Business Court judge is assigned to a case that has been designated as a complex business case, whether by a mandatory or discretionary assignment, he is commissioned to preside over that entire case until its conclusion, and he proceeds with the same authority as any other superior court judge who may be commissioned to hear matters in that case.

Order 27.

Coincidentally, the North Carolina Court of Appeals observed this week that the Business Court "is a superior court."  .  It said in American Mechanical, Inc. v. Bostic that:

while the Business Court is tasked with the adjudication of cases involving specialized subject matters by judges who have been designated for this purpose, it remains a part of the superior court division of the General Court of Justice.

Id. at 14.

The Terms "Removal" And "Remand" Don't Apply To Business Court Designations

I''m not sure why Judge Gale found it necessary to discuss the nature of the Business Court's jurisdiction, but he did use the Composite Fabrics Order to point out that the words "removal" and "remand" shouldn't be used when discussing a designation to the Business Court or a successful opposition to a designation.  Those words are concepts of the process by which cases commenced in state court are transferred to federal court  Cases are "removed" from state court to federal court per 28 U.S.C. §1446(a), and they can be sent back to state court (remanded) per 28 U.S.C. §1447

Lawyers in the Business Court often pick up on those terms, saying that a case is "removed" to the Business Court upon a successful designation, and "remanded" when an Opposition to a designation is granted.

Judge Gale pointed out that the designation of a Business Court case does not "remove" a case, as it always remains venued in the county in which it originated.  For that same reason -- that "the case has never left its county of origin" -- the withdrawal of a designation "does not constitute a 'remand'." Order 28.

So avoid using those terms when designating a case to the Business Court, or contesting a designation via an Opposition.

 

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.

 

Business Court Gives Broad Interpretation To Its Mandatory Jurisdiction Over Antitrust Cases

The Business Court has mandatory jurisdiction under N.C. Gen. Stat. §7A-45.4 over claims involving "antitrust law, except claims based solely on unfair competition under N.C. Gen. Stat. §75-1.1.

The Court gave a broad reading to its grant of its antitrust jurisdiction in an Order today in Sonic Automotive, Inc. v. Mercedes-Benz USA, LLC, in which it denied an objection to a Notice of Designation of the case as a mandatory complex business case. 

Sonic, which already owned nine Mercedes dealerships, sued Mercedes-Benz for refusing to approve its purchase of another dealership in Charlotte.  According to the Complaint, Mercedes-Benz withheld its approval because of Sonic's alleged failure to comply with the terms of a letter agreement executed when Sonic had acquired other Mercedes dealerships. 

The case was designated to the Business Court by Mercedes-Benz as being within the Court's mandatory jurisdiction over antitrust cases and the law governing corporations.  Sonic filed a Motion to Remand objecting to the designation.

There's no claim in Sonic's Complaint denominated as an antitrust claim, and the word antitrust isn't even in the Complaint. 

Mercedes-Benz argued in its Opposition to the Motion to Remand that Sonic's claim was based on a "contract in restraint of trade," which implicated "antitrust and unfair competition issues squarely within the Business Court's jurisdiction."  The car manufacturer was helped in its arguments by public statements made by Sonic's President that Sonic was being "extorted" by Mercedes-Benz and that Mercedes-Benz had "tied" the sale of the Charlotte dealership to Sonic's compliance with the letter agreement.

Judge Tennille found that the Court's antitrust jurisdiction was implicated, and also held that its mandatory jurisdiction was appropriate for other reasons presented by Mercedes-Benz in its Opposition:

Plaintiff has asked the Court to remand this action because the case “does not involve any . . . issue” regarding antitrust law or the law governing corporations. (Pl. Br. Supp. Opp’n 1.) The Court disagrees. First, this case potentially involves violations of antitrust law. Section 75-1.1 of the North Carolina General Statutes does not cover simple breach of contract. N.C. Gen. Stat. § 75-1.1 (2007). Thus, the unfair trade practices claim may involve antitrust issues. Second, this case may involve issues with broad ramifications for automobile dealers and manufacture[r]s. Third, this case may also involve the interplay between courts and administrative agencies. These parties and agencies will benefit from a single judge hearing this case. Fourth, this case involves the sale of a business or business assets. Fifth, the case is likely to be motion intensive.

Covenant Equipment Corp. v. Forklift Pro, Inc., 2008 NCBC 10 (N.C. Super. Ct. May 1, 2008)(Tennille)

Service of process can be made by leaving the Summons and Complaint at the Defendant's residence, even though not in literal compliance with Rule 4, if the Defendant has evaded service.

The Defendant will waive an objection to service (and to jurisdiction) by filing a Notice of Designation to the North Carolina Business Court, because "the filing of a Notice of Designation in an action constitutes a general appearance for the purpose of personal jurisdiction."  To keep such objections alive, the Notice of Designation must contain an objection to personal jurisdiction. 

On a covenant not to compete issue, the Court followed the principle it set out in Better Bus. Forms & Prods., Inc. v. Craver, 2007 NCBC 34 (N.C. Super. Ct. Nov. 1, 2007) regarding the right of an asset purchaser to to enforce a non-compete entered into between the seller and an employee. The buyer has the option to enforce the noncompetition agreement or to enter into a new agreement. As the Court held: "a noncompetition agreement that has been sold as part of an asset sale, as opposed to the sale of a business, gives the buyer the right to enforce the noncompetition agreement as of the date of the sale but not to enforce the noncompetition agreement as if it had been entered into originally by the buyer."

Full Opinion

Brief in Support of Motion to Dismiss

Brief in Opposition to Motion to Dismiss

Reply Brief in Support of Motion to Dismiss

Ikerd v. Greenwood, 2008 NCBC 9 (N.C. Super. Ct. April 30, 2008)(Tennille)

A Notice of Designation must be actually filed in the county in which the case originated within thirty days of receipt of service of the Complaint in order to be timely, not just served within that time frame.

N.C. Gen. Stat.Sec. 7A-45.4(b) allows a defendant to designate an action as a complex business case "by filing a Notice of Designation in the Superior Court in which the action has been filed and simultaneously serving the notice" on opposing counsel, the Chief Judge of the Business Court, and the Chief Justice within thirty days after receipt of service of the Complaint.

"Filing" means actual filing within thirty days in the Court in the County in which the case was filed.  In counting the thirty days, a defendant does not get to count an additional three days if the Complaint was served by mail. 

Full Opinion