4th Circuit High-Fives Georgia Pacific in enMotion Towel Dispenser Case

If you have visited the restroom in an office building in the last five years, chances are you've had the opportunity to use Georgia Pacific's hands-free paper towel dispenser known as "enMotion."  In a published opinion released yesterday, the Fourth Circuit generally ruled in GP's favor on trademark infringement, tortious interference, and unfair and deceptive trade practices claims.

The enMotion dispenser (pictured here) operates through an electronic motion sensor that dispenses towels without any physical contact from the user's hands.  The dispenser was designed for use with a proprietary paper towel sold exclusively by GP, one that the Fourth Circuit described as having "a soft-fabric like feel created by using a through-air-dried (TAD) process."  (Our own end-user experience confirms that these towels are quite supple, as commercial paper towels go).  The dispensers are not sold, they are leased to distributors, who are permitted to sub-lease them to end-users (like office buildings).  The leases and subleases require the end users to use only GP's towels in the dispensers.  The towels themselves are a non-standard size.

The defendant designed and manufactured a competing paper towel in the exact same non-standard size, but with a "slick, scratchy feel," and marketed it to users of the enMotion dispensers.  Those towels did not fit any other dispenser on the market.

GP sued in the Eastern District for trademark infringement, Lanham Act and common law unfair competition, and tortious interference with contract, and the defendant counterclaimed for unfair and deceptive trade practices.  Judge Boyle granted summary judgment in favor of the defendant on GP's claims and in favor of GP on the defendant's unfair & deceptive counterclaim.

The Fourth Circuit vacated and remanded everything except the counterclaim.  Without delving too deeply into the trademark issues, suffice it to say that the court was convinced that a fact issue existed due to statistical evidence of substantial consumer confusion as to the source of the towels, combined with evidence of the defendant's intent to "stuff" the GP dispensers with its own towels.

As for the tortious interference claim, the district court ruled that the defendant's conduct was legitimate competition and was therefore justified, creating a qualified privilege under North Carolina law.  The Fourth Circuit vacated that ruling with two caveats.  First, GP's claim would be limited to tortious interference with contracts between GP and its distributors because GP did not have contractual relations with the end users themselves.  Second, GP could prevail only if it also prevailed on its trademark claims.  Success on those claims would make the defendant's conduct illegal, which would destroy the qualified privilege.

Finally, the Fourth Circuit affirmed the dismissal of the defendant's unfair & deceptive trade practices counterclaim (describing the district court's reasoning with the Blackstonian phrase "right on the money").  Although the defendant claimed that GP's attempts to exclude other towel manufacturers from its dispensers was unfair or deceptive, the court held that GP entered into its leases "in good faith, openly, and transparently."  Moreover, the defendant had shown no actual injury because it had been successful in competing with GP in the marketplace.

Full Opinion

Frayed Yarn: Business Court Grants Summary Judgment Against Former CEO on Severance Claims

The Business Court granted summary judgment last week to a company and dismissed claims brought by its former CEO for breach of a severance agreement, fraud, and unfair and deceptive trade practices.

In McKinnon v. CV Industries, Inc., the defendant (CVI) owned a number of subsidiaries which manufactured, among other things, high-end residential furniture (Century) and mid- to high-end jacquard fabric (Valdese Weavers).  Plaintiff was an employee of the defendant or its subsidiaries for over twenty years, including five years as CVI's president and CEO.  In 2000, Plaintiff went to work for Mastercraft, a direct competitor of Valdese Weavers.

Plaintiff and Defendant entered into a severance agreement to modify certain incentive plans and benefit agreements.  Under that agreement, Plaintiff would not qualify for certain benefits (the "shadow equity plan") until he stopped directly competing with Valdese Weavers.  In addition, those benefits would not accrue if the company's ESOP stock price on the December 31 immediately preceding Plaintiff's cessation of competition was less than the ESOP stock price on December 31, 1999.

At some point in 2001 or 2002, Plaintiff stopped working for Mastercraft and started working for another company.  The stock price at that point was below the 1999 price, which would eliminate any benefits.  Plaintiff, however, contended that he continued to compete through 2007, at the end of which the stock price would have triggered benefits.

Judge Tennille granted summary judgment on each of Plaintiff's claims.  First, on Plaintiff's damages and specific performance claims for breach of contract, the Court held that Plaintiff's post-2001 employer (Basofil) was not a competitor of CVI.  On resigning from Mastercraft, Plaintiff entered into another noncompete agreement, one that expressly permitted Plaintiff to work for a company in Basofil's field -- supporting the conclusion that Basofil was not a competitor of Mastercraft or Mastercraft's competitors, i.e. CVI.  Plaintiff likewise admitted that his noncompete agreement with Basofil would not have prevented him from working for CVI.  Thus, competition with CVI was terminated on a date on which Plaintiff was ineligible for benefits under his CVI severance agreement.

Second, the Court dismissed Plaintiff's fraud claim, holding that he showed at best an unfulfilled promise, but failed to produce evidence that CVI intended at the time it signed the severance agreement that it would never perform.  CVI's intent to perform was demonstrated by its performance under other portions of the agreement and by the fact that it carried the disputed benefits as a liability on its books until 2002.

Third, the Court dismissed Plaintiff's unfair and deceptive trade practices claim.  The Court, again enforcing the "in or affecting commerce" limitation of the reach of N.C.G.S. § 75-1.1, cited its decision in Schlieper v. Johnson that "“[m]ost disputes between employers and employees are internal to the business organization and simply do not have an effect on commerce in the way required by section 75-1.1."  In this case, "the payment (or lack thereof) of these employment benefits would not be a practice that impacts commerce or the marketplace, nor would it be part of the day-to-day activities for which CVI was organized."

Full Order and Opinion

 

Business Court Awards Nominal Damages After Noncompete Bench Trial

An award of damages for breach of a noncompete agreement, like any other damages award, requires evidentiary support.  In a judgment issued yesterday after a bench trial, the Business Court awarded the plaintiffs nominal damages absent such evidence.

In HILB Rogal & Hobbs Co. v. Sellars, the Court faced a common factual scenario:  a former vice president of the plaintiffs resigned and went to work for a direct competitor.  The businesses in question were insurance companies targeting building materials suppliers.  The plaintiff and defendant executed an employment agreement that contained standard restrictions on post-employment competition and on the use of confidential business information.

Two days after interviewing for the competitor's job, the defendant

copied the entire hard drive of his work computer, which contained, among other things, confidential and proprietary information about [plaintiffs'] Lumber Program accounts and business strategies, including account files and lists, policy expiration dates, policy terms, conditions and rates, internal and external pricing and profit margins, information relating to accounts’ risk characteristics, and carrier information.

He resigned two weeks later and went to work for the competitor, taking the confidential information with him.  (The Court ordered him to return the confidential information in 2008).

Plaintiffs asserted claims for breach of fiduciary duty, breach of contract, and unfair & deceptive trade practices, and defendant counterclaimed for breach of contract for unpaid salary.  Judge Diaz applied New York law to the claims.

During the lawsuit, the defendant took two Rule 30(b)(6) depositions of the plaintiffs concerning their claimed damages.  At those depositions, the witness, another vice president of plaintiffs, disclaimed lost profits, as did counsel for the plaintiffs.  The witness did not know of the origin or calculation of two summary exhibits that plaintiffs attempted to use at the bench trial -- those exhibits were prepared by other employees, none of whom testified at trial.  Judge Diaz noted at least eleven unexplained discrepancies between the two exhibits.  Moreover, the Rule 30(b)(6) witness "could not rule out the possibility that the damages exhibits contained amounts for lost revenues for business that Plaintiffs could not underwrite, irrespective of [defendant's] alleged breach of the Employment Agreement."

The damages witness suddenly became unavailable for trial due to the pre-trial but post-discovery termination of his employment -- he declined to appear voluntarily, and he was outside the Court's subpoena power.  The plaintiffs attempted to notice a de bene esse deposition less than one month before trial.  The Court quashed the notice of deposition based on a month-long delay between plaintiffs' awareness of the witness's unavailability and the issuance of the notice, as well as the fact that the Court already had continued the trial once to allow de bene esse depositions to occur.  Thus, plaintiffs had to rely upon his deposition testimony.

Although the plaintiffs proved that the defendant breached his fiduciary duty and breached the employment agreement by copying the contents of his hard drive before resigning, the Court held that there was insufficient evidence of damages.  Under New York law, breach of fiduciary duty damages "are limited to profits lost from the actual diversion of customers," a damages theory that the plaintiffs waived. The Court awarded $1 in damages for the breach of contract claim.

Although the plaintiffs attempted to rely on a liquidated damages formula in the employment agreement, the Court similarly held that they had not provided sufficient evidence of the components of that formula.  Specifically, the Court rejected the argument that the summary exhibits were admissible business records under Rule 803(6) because the Rule 30(b)(6) witness did not lay any foundation for admissibility or for the reliability of the figures contained in the exhibits.  The Court awarded $1 in damages for the breach of contract claim.

The Court rejected the unfair and deceptive trade practices claim, holding that North Carolina's Chapter 75 was inapplicable under the "most significant relationship test" and that, even if it applied, the lack of actual damages was fatal to a UDTP claim.  Likewise, the Court found no basis to award punitive damages or attorneys' fees.

As for the counterclaim, the employee asserted that he was entitled to over $94,000 in unpaid salary.  The plaintiffs responded that an interim $50,000 payment constituted an accord and satisfaction.  The Court rejected plaintiffs' defense on the grounds that they failed to prove that the $50,000 was intended to settle all compensation claims or that the defendant was informed of that intention before he accepted the check.  Instead, the Court offset the $50,000 payment from the employee's salary claim and awarded him the balance.

Although the claims on both sides arose under New York law, there is no apparent reason why the result would be different under North Carolina law.  In either event, enforcement of a noncompete provision can prove to be an expensive proposition (here, two and a half years of litigation), particularly where the former employee has counterclaims.

Full Order and Judgment

[UPDATE:  In an Order dated July 6, 2010, Judge Diaz denied the company's motion to reconsider the ruling on the employee's counterclaim].

Illegal Briefs: Israeli Undergarment Importer Can Assert Chapter 75 Claim in M.D.N.C.

When do treble damages need a passport?  In a Middle District opinion Wednesday, the Court held that a foreign plaintiff may assert an unfair and deceptive trade practices claim in North Carolina under certain circumstances.

Ada Liss Group (2003) v. Sara Lee Corp. (M.D.N.C. No. 06-CV-610) involved a decade-long dispute between North Carolina's hosiery manufacturer and its exclusive distributor of certain products in Israel.  Under a 1994 Distributorship Agreement, Ada Liss bought the exclusive right to distribute Bali-branded women's intimate apparel to retailers in Israel.  (Although we at this blog normally include a topically appropriate image with every post, we'll exercise some restraint and discretion on this one).  Sara Lee agreed not to sell such products to anyone else in Israel or to sell them to anyone whom Sara Lee "knows or has reason to believe is likely to resell or deliver the Products to customers located in the Territory."

Beginning in 2000, Ada Liss noticed Bali imports other than its own in the Israeli marketplace ("parallel imports"), apparently the result of a Sara Lee distributor in Miami who purchased the products from Sara Lee at prices far lower than those charged to Ada Liss.   Later, a New York distributor began distributing the same products in Israel.

Sara Lee and Ada Liss entered into a Settlement Agreement and a 2004 Distributorship Agreement.  Under those agreements, Sara Lee agreed to "mark" products sold to the other distributors in order to determine the source if those products showed up in Israel.  Ada Liss, in turn, released its claims against Sara Lee from 1994 through the date of the Settlement Agreement.

The parallel imports problem continued, however.  Ada Liss sued under various contract and tort theories, alleging that Sara Lee was not marking the products, never intended to do so, and fraudulently induced Ada Liss to enter into the two 2004 agreements only to obtain the release of a multi-million dollar liability.  Ada Liss further alleged that Sara Lee continued to sell Bali products to the other distributors with actual knowledge that those distributors were sending the products to Israel.  The matter came before Judge Tilley on the parties' respective objections to a report and recommendation of Judge Dixon on Sara Lee's motion to dismiss and Ada Liss's motion for partial summary judgment.

Ada Liss asserted a Chapter 75 claim for unfair and deceptive trade practices based on allegations of Sara Lee's deceptive conduct as well as allegations of common law fraud.  Sara Lee challenged the Court's subject matter jurisdiction over this claim based on an earlier Middle District decision, The "In" Porters, S.A. v. Hanes Printables, Inc., 663 F. Supp. 494 (M.D.N.C. 1987).  In "In" Porters, Judge Gordon held that a foreign plaintiff may not assert a Chapter 75 claim in North Carolina absent "a substantial state interest in the litigation such that application of North Carolina’s law is ‘neither arbitrary nor unfair,’" which in turn required a showing of "'a substantial effect on the plaintiff’s in-state operations'" (emphasis in original) to trigger the jurisdictional requirements of North Carolina's long-arm statute.  The dispute in "In" Porters concerned an exclusive distributorship in France for products purchased from a defendant's Belgian subsidiary.  Although there were negotiations in North Carolina, none of those negotiations were tainted by fraud or gave rise to the Chapter 75 claim.

In Ada Liss, Judge Tilley affirmed that "In" Porters was still good law, but distinguished it on the facts.  As he described the earlier case, "The problem for the ‘In’ Porters plaintiff was that the record showed exclusively foreign misconduct with damages to the plaintiff’s exclusively foreign operations."  In contrast,

where Sara Lee–itself a North Carolina resident–is alleged to have committed fraud in North Carolina against Ada Liss, the question of extra-territorial application of the UDTP statute, which was fatal to the UDTP claim in ‘In’ Porters, is simply not at issue. Because the conduct alleged took place in North Carolina, the court does not have to search for an impact on the Plaintiff’s state operations or a strong state interest. There is no inquiry into the sufficiency of Plaintiff’s relationship to North Carolina in a case involving local acts under 1-75.4(3).

There were four other legal issues of note in the opinion.  First, both the 1994 and 2004 Distributorship Agreements contained an exculpatory clause for incidental or consequential damages and lost profits, but the Court rejected Sara Lee's attempted application of the clause to willful or intentional conduct.  The clause applied to contractual claims and, under certain circumstances, could have applied to ordinary negligence claims, but an exculpatory provision for intentional wrongdoing "not only lacks clear textual support in the agreement, it also has no basis in contract law and defies sound public policy."  The Court considered the absence of North Carolina case law on the subject to be a function of the clarity of the rule: 

[T]he issue is so obviously contrary to sound law and policy that courts simply have not written opinions on the subject. The precedent created if contracts with exculpatory clauses for intentional torts became enforceable would be noxious. Parties could simply circumvent tort law altogether, eliminating the natural check on intentional misconduct that comes from the potential for extensive tort liability.

Second, the Court held that Ada Liss stated a claim for fraud and negligent misrepresentation in addition to its contract claims.  Although the economic loss doctrine prevents tort recovery for purely contractual claims, the Court concluded that Ada Liss's allegations were sufficient to support its tort claims because they suggested a fraudulent scheme that commenced before the formation of a contract between the parties.

Third, the Court rejected Ada Liss's separate claim for breach of the covenant of good faith and fair dealing, holding that there was no "special relationship between the parties" that would give rise to such a claim independent of a breach of contract claim.

Finally, Judge Tilley adopted the Magistrate's recommendation to award summary judgment to Ada Liss on the issue of breach of the 2004 Settlement Agreement for failure to mark products sold to third parties as required by the agreement.

 

Full Opinion

 

 

Supreme Court Rejects Chapter 75 Claim Between Partners

In modern business litigation in North Carolina, it is increasingly rare to see a complaint that does not contain a claim under G.S. § 75-1.1 for unfair or deceptive trade practices.  Courts that have prevented the statute from having almost unlimited application have done so by determining that particular activities are not "in or affecting commerce."  The Supreme Court continued that pattern last week, holding that a dispute between partners did not trigger Chapter 75 liability.

In White v. Thompson, partners in a Bladen County fabrication and welding business enjoyed initial success, but "eventually fell victim to disagreements and infighting among the partners."  Two partners filed suit alleging that the third partner started a competing business that diverted the business of the original partnership.  The plaintiffs asserted that their partner's conduct constituted breach of fiduciary duty and unfair and deceptive trade practices.  The jury found in plaintiffs' favor and awarded judgment in the amount of $138,195 against the former partner.  The trial court ruled that the acts were unfair and deceptive and trebled the judgment amount pursuant to G.S. § 75-16.

Both defendants appealed, and a divided panel of the Court of Appeals reversed as to the former partner.  (Mack Sperling reported the Court of Appeals' decision to you last May).  Plaintiff appealed to the Supreme Court as of right based on the dissent in the Court of Appeals.

Justice Newby examined several prior Chapter 75 cases, including HAJMM Co. v. House of Raeford Farms, Inc., 328 N.C. 578, 403 S.E.2d 483 (1991).  HAJMM established that securities transactions and other "capital-raising activities" are not "in or affecting commerce" so as to trigger Chapter 75 liability.  The Court also cited Bhatti v. Buckland, 328 N.C. 240, 400 S.E.2d 440 (1991), for the proposition that the General Assembly intended to regulate conduct between market participants in two categories:  "(1) interactions between businesses, and (2) interactions between businesses and consumers."  (The Business Court has relied on the HAJMM line of cases to reject internally-generated Chapter 75 claims on several occasions,  including J Freeman Floor Co., LLC v. Freeman (May 14, 2009) (unpublished) (usurpation of LLC opportunities, dismissed on basis of Court of Appeals' opinion in White); Reid Pointe, LLC v. Stevens, 2008 NCBC 15, 2008 WL 3846174 (Aug. 18, 2008) (discharging LLC manager and demanding capital call); Kaplan v. O.K. Technologies, LLC (June 27, 2008) (unpublished) (dispute among LLC members), and Maurer v. Slickedit, Inc., 2005 NCBC 1, 2005 WL 1412496 (May 16, 2005) (dismissal as CEO, denial of board participation, and failure to take action to sell company)).

As the Supreme Court stated, Section 75-1.1 "is not focused on the internal conduct of individuals within a single market participant, that is, within a single business. . . .  As a result, any unfair or deceptive conduct contained solely within a single business is not covered by the Act."  Because the dispute was between partners, the Court affirmed the decision of the Court of Appeals reversing the trial court judgment.

Justice Hudson, joined by Justice Timmons-Goodson, dissented.  She criticized the majority's holding for relying on an outdated statement of purpose contained in a disco-era version of the statute.  She also distinguished HAJMM  on the grounds that the capital-raising activities in that case were not the core function of the company, whereas the disputes in White involved two partnerships competing for the business of a particular customer.

The bottom line is that, although White doesn't exactly break new ground given that HAJMM has been the law of North Carolina for nearly 20 years, the Supreme Court declined the opportunity to retreat from HAJMM and expand the scope of the unfair and deceptive trade practices statute.  The upside for North Carolina businesses is that treble damages should continue to be unavailable in internal corporate disputes.

Supreme Court Opinion

Court of Appeals Opinion