Communications Decency Act Doesn't Insulate StubHub From Scalping Lawsuit

Posted on July 14, 2008 by Mack Sperling

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
Tags: ,

LLC Investor Did Not Owe A Fiduciary Duty To The LLC Or Its Members

Posted on June 30, 2008 by Mack Sperling

Today, the Business Court entered an Order granting summary judgment against members of a limited liability company who contended that an investor who was the principal source of funding to the LLC had a fiduciary duty to the LLC and its members.

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
Tags: , ,

No Unfair And Deceptive Practices Claim From Law Firm Dissolution, And More

Posted on June 2, 2008 by Mack Sperling

There's an old Jackson Browne album called "Lawyers in Love."  Lately, there have been a lot of cases involving lawyers out of love, and dissolving their firms.  One was decided by the Business Court on June 2nd, Walters & Zimmerman, PLLC v. Zimmerman.

Plaintiff, a lawyer in the dissolved law firm who was a manager of the Professional Limited Liability Company, brought claims on behalf of the PLLC and in her own name for breach of fiduciary duty and conversion.  She also asserted trade secrets claims and a claim for unfair and deceptive practices.  Defendant, another lawyer in the dissolved firm, moved to dismiss on a variety of grounds.

The only claim on which Defendant was successful was a claim for unfair and deceptive practices.  Judge Tennille held that the claims between the lawyers involved an "internal dispute," and that such disputes did not "affect commerce" as required by the statute. 

The roadblock to the other grounds asserted for dismissal was one of standing, and whether the proper parties were before the Court.  The members of the PLLC were not the individual lawyers themselves, but professional corporations that each of the individual lawyers had formed.  The Court found issues about whether the proper parties were before it, and directed the parties to consider the Court of Appeals' recent decision in Crouse v. Mineo, 2008 N.C. App. LEXIS 546, 658 S.E.2d 33 (N.C. Ct. App. 2008).  That case dealt with another law firm dissolution. 

That Court of Appeals held in Crouse that a manager of an LLC does not have the authority to bring suit on behalf of the LLC because such an action is not within the powers of a manager, which are limited to things necessary to "carry[] on in the usual way the business of the limited liability company."  Bringing a lawsuit against the LLC, the Court of Appeals held, was not within the course of usual business.  The Crouse court concluded, however, that the Plaintiff there had the right to make a derivative claim on behalf of the LLC under the circumstances presented.  You can click here for a more complete summary of the Crouse case. 

Turning back to the Walters & Zimmerman case, the Business Court also summarized when the moving party on a Motion to Dismiss can rely on documents outside of the pleadings.  It is good to know where the Business Court stands on that issue.  It held:

Furthermore, the Court may not consider “extraneous matter” outside the complaint, or else the Rule 12(b)(6) motion will be converted into a Rule 56 motion for summary judgment. See, e.g., Fowler v. Williamson, 39 N.C. App. 715, 717, 251 S.E.2d 889, 891 (1979). However, the Court may consider documents the moving party attaches to a 12(b)(6) motion which are the subject of the challenged pleading and specifically referred to in that pleading, even though they are presented to the Court by the moving party. See Oberlin Capital, L.P. v. Slavin, 147 N.C. App. 52, 60, 554 S.E.2d 840, 847 (2001) (considering a contract on a 12(b)(6) motion even though the contract was presented by the movant). The Court is not required to accept as true “any conclusions of law or unwarranted deductions of fact.” Id. at 56, 554 S.E.2d at 844. Thus the Court can reject allegations that are contradicted by the supplementary documents presented to it. See E. Shore Mkts., Inc. v. J.D. Assocs. Ltd. P’ship, 213 F.3d 175, 180 (4th Cir. 2000) (stating that the court “need not accept as true unwarranted inferences, unreasonable conclusions, or arguments”).

Brief in Support of Motion to Dismiss

Brief in Opposition to Motion to Dismiss

Reply Brief in Support of Motion to Dismiss

Tags: , ,

Who Cares What Judges Think?

Posted on April 30, 2008 by Mack Sperling

The answer to the question above is probably you, if you are reading this blog.

So, you might be interested in a powerpoint presentation that Judge Jolly and Judge Diaz made at the 2006 Conference of Superior Court Judges, on the Unfair and Deceptive Practices Act. 

It seems like a claim under that statute is part and parcel of nearly every business case filed in North Carolina.

There are some good "Practical Pointers" about the statute at the end of the presentation, including the one in the box at the bottom. (The Meineke case referenced is Broussard v. Meineke Discount Muffler Shops, Inc., 155 F.3d 331 (4th Cir. 1998), in which the Fourth Circuit threw out a $590 million unfair and deceptive practices verdict).

Notwithstanding my selection of excerpt from the powerpoint, this is by no means an anti-unfair and deceptive practices presentation.  It outlines a number of fact patterns that make out a UDPA claim, and has a good discussion of the respective roles of judge and jury in the trial of such claims and other useful information.

 

Tags: ,

Fiduciary Duty Claims Can Proceed Against Director And Employee Who Allegedly Sank $100 Million IPO

Posted on April 15, 2008 by Mack Sperling

Voyager Pharmaceutical Corp. v. Bowen, April 15, 2008 (Jolly)(unpublished)

Voyager, a company engaged in pharmaceutical research directed at slowing or halting Alzheimer's disease, was attempting a $100 million public offering in 2005.  It alleged in its Complaint that it was unable to complete the IPO due to the actions of one of its directors, Bowen, and one of its employees, Atwood.  It made a variety of claims, including claims for breach of fiduciary duty.

The allegations as to what Bowen had done are pretty interesting.  Here's how the Court characterized some of them:

While Voyager's management was in the 4:30 p.m. conference with Hambrecht, Bowen was in a hospitality suite in the Marriott Marquis Hotel that had been set up to accommodate Voyager's shareholders. (Compl. ¶ 66.)  There, Bowen told one or more shareholders that the IPO was not going to proceed because "God had told him so," and because Voyager had refused to add "the glorification of God" to its mission statement.  (Compl. ¶ 66.)  Bowen also told the shareholders present that day that any further attempts to complete the IPO would fail until his demands were met, including giving credit to God in Voyager's mission statement.  (Compl. ¶ 66.)  Bowen also asked one of the shareholders whether he would be willing to serve as a director of Voyager "when I regain control of the Company."  (Compl ¶ 66.)  Bowen also falsely told one or more shareholders that there was a problem with the Phase I data that had not been resolved and also falsely stated that when he raised this issue with management, management had locked him out of his office.  (Compl. ¶ 68.)

The Court first confronted the issue of choice of law on Voyager's claims for breach of fiduciary duty. The Court noted that there was little guidance in North Carolina as to the proper application of the internal affairs doctrine.  It determined that it would apply the law of Delaware, the state of Voyager's incorporation, to those claims.

It then rejected Bowen's argument that his actions were protected by the business judgment rule.  It held:

Voyager has alleged that Bowen, during his tenure as a board member and in his capacity as a director, made false statements designed to materially affect Voyager without consulting or informing other board members.  Such conduct, even if well-motivated, does not constitute the type of "business decision" the business judgment rule is meant to insulate.

The Court then turned to the breach of fiduciary duty claims against Atwood, who was formerly employed as a researcher with Voyager.  The Court noted that "an employer-employee relationship is not generally a fiduciary relationship," but held that this determination involved a fact-intensive inquiry, and denied the Motion to Dismiss. 

The unfair and deceptive practices claims brought by Voyager was dismissed, however.  The Court held that all of Voyager's claimed injuries related to the failed IPO, and that "the IPO, which is clearly a securities transaction, is beyond the scope of Chapter 75."

The Court let stand claims for aiding and abetting breach of fiduciary duty.

Bowen's Brief in Support of Motion to Dismiss

Atwood's Brief in Support of Motion to Dismiss

Voyager's Brief in Opposition to Motion to Dismiss
Tags: , , , ,

Court Of Appeals Affirms Dismissal Of Business Defamation Case

Posted on April 15, 2008 by Mack Sperling

Today, in Nucor Corp. v. Prudential Equity Group, LLC, the Court of Appeals affirmed the 12(b)(6) dismissal of a claim for libel per se against a securities firm. 

The firm had published a report about the plaintiff which stated that antitrust lawsuits against the company were possible, and that the company needed to give up its "monopoly dreams." 

The Court held that in order for words to be libelous per se, they "must be susceptible of but one meaning and of such nature that the court can presume as a matter of law that they tend to disgrace and degrade the party or hold him up to public hatred, contempt or ridicule, or cause him to be shunned and avoided."  The words must be defamatory on their face, "stripped of all insinuations, innuendo, colloquium and explanatory circumstances."

The Court ruled that the publication did not assert any illegal or wrongful conduct on the part of the company.  It further ruled that it could not consider the explanatory circumstances offered by the plaintiff to determine whether the words at issue were libelous.  The Court further found that it needed to consider the document as a whole, and that the "overall import" of the publication was not defamatory of the company.  It therefore affirmed the trial court's dismissal.

The Court also ruled that plaintiff could not base an unfair and deceptive practices claim as to the report on the alleged breach of a confidentiality agreement by an employee of the defendant, because that was a mere breach of contract without any "substantial aggravating circumstances."

Tags: , ,