There are two words that have been in virtually every covenant not to compete that I have looked at. They are “directly or indirectly.” Banish those words from your covenant drafting! The covenant not to compete considered by the NC Business Court in Prometheus Group Enterprises, LLC v. Gibson, 2023 NCBC 23, and found unenforceable contained the following language:

I will not directly or indirectly engage in (whether as an employee, consultant, proprietor, partner, director or otherwise), or have any ownership interest in, or participate in the financing, operation, management or control of, any person, firm, corporation or business that engages in a Restricted Business in a Restricted Territory. Op. ¶7.

But as Judge Earp pointed out in the case, “North Carolina courts have repeatedly warned the drafters of restrictive covenants about the dangers of using the phrase “directly or indirectly” when defining the scope of a non-compete.” Op. ¶35. Opinions from the Court of Appeals and the Business Court have been “routinely refus[ing]” to enforce covenants with that language, calling it “particularly problematic” and “unreasonably broad” for the last few years.

Op. ¶35.

Those words were only a part of the basis for the Business Court’s refusal to enforce the covenant not to compete signed by Defendant Gibson. It suffered from a number of other defects. The non-compete was pegged to competition with a “Restricted Business.” That was a problem, as was the definition of the “Restricted Territory.”

The language used in the covenant not to compete defining “Restricted Business” would have “”prohibit[ed] [the Defendant] from taking a wholly unrelated position with a company that produces and services IT products if one of its products falls within the definition of Restricted Business. Consequently, even working as a line cook in the cafeteria at IBM, Oracle, or SAP would be forbidden.” Judge Earp said “[t]his is unquestionably overbroad.” Op. ¶¶36-37.

Another criticism of the covenant lay in its definition of the territory in which Defendant Gibson could compete. It sought to cover the “entire world.” Worldwide restrictions are “not per se invalid,” Op. ¶39, but there must be facts showing that such a restriction is “reasonable and necessary.” Plaintiff presented no facts supporting the breadth 0f the restriction.

The Plaintiff argued that the Court could “blue pencil” the language of the geographic restriction, but the wording did not permit that. Here’s how the territory was defined as:

(i) the entire world; (ii) North America; (iii) the United States of
America; (iv) each state in which the Company does business or did
business at any time within two (2) years prior to the termination of my
employment with the Company; (v) the States of Maryland, Virginia,
North Carolina, South Carolina and Georgia; (vi) the State of North
Carolina; and (vii) Wake County.Op. ¶9 /

The Court refused to “blue pencil” the covenant because ” North Carolina’s strict blue pencil doctrine allows the court to “avoid scrapping an entire covenant” by “enforc[ing] the divisible parts of [the] covenant that are reasonable.” Op. ¶42

This language was not “distinctly separable” because the “geographical restrictions are presented as a list, but they are joined by the conjunctive “and”—preventing them from being “distinctly separable.” Op. ¶45.

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When a Court enters sanctions against a party, it is usually the result of the opposing party filing a Motion for Sanctions or the Court becoming so outraged at one party’s conduct that it delivers a punishment. But in Davis v. Davis Funeral Service, Inc., 2024 NCBC 20, Judge Conrad sanctioned both the Plaintiff and the Defendants sua sponte.

What led to this Order by the Business Court? Well, it was a repeated disregard by both sides for deadlines established by the Court. First, the parties did not submit their proposed pretrial order on time. Then, when the Court ordered them to cure their failure immediately or possibly have their claims dismissed, they missed another deadline, for a proposed jury verdict form and jury instructions.

Judge Conrad was obviously annoyed by this. He said:

This second violation was one too many. The Court canceled the pretrial hearing, canceled the trial, and directed both sides to appear and show cause why they should not be sanctioned for disregarding its orders. The Court also advised that it was ‘considering severe sanctions, including the dismissal of Plaintiff’s claims and Defendants’ counterclaims,’ and gave these parties a chance to explain their conduct in writing.

Op.  ¶6

Continuing their agnosticism towards the deadlines imposed by the Court, the Plaintiffs did not submit the written statement, or offer any explanation for missing the deadlines.

Judge Conrad then turned to the importance of court-set deadlines. He said:

Disobedience to court orders is no small matter. That is why the Rules of Civil Procedure authorize trial courts to dismiss a claim or action when a party fails to comply with ‘any order of court.’ N.C. R. Civ. P. 41(b). Op.  ¶ 8.

As federal courts have stressed, ‘[t]his principle applies with undiminished force to scheduling orders.’ Op.  ¶9.

‘A scheduling order is not a frivolous piece of paper, idly entered, which can be cavalierly disregarded by counsel without peril.’ (quoting Johnson v. Mammoth Recreations, Inc., 975 F.2d 604, 610 (9th Cir. 1992)). Op.  ¶9.

Think of the disruption to the Business Court’s internal procedures:

Jury trials are demanding: they take time, tax judicial resources, and crowd out other cases on the docket. One purpose of a pretrial scheduling order is to conserve resources by ensuring that a case set for trial is ready to proceed without delay. The parties’ repeated failures to comply with the pretrial scheduling order in this case thwarted that purpose, necessitating the cancellation of a trial that had been scheduled for months and forcing the Court to spend its time policing their compliance instead of attending to other matters.

Op.  ¶10. Lurking in the background of this delayed trial was a third party’s claim for damages against the Plaintiffs. The Business Court had deferred trying those matters pending the jury trial that was cancelled. The Court noted that “[t]hrough no fault of [the third party defendant], her right to resolve her claims expeditiously has been frustrated.” Op.  ¶11.

In the end, the Business Court decided that “the dismissal of the delaying parties’ claims with prejudice would be too harsh.” Op.  ¶14. Judge Conrad dismissed the parties’ claims without prejudice. If these parties decide to restart their lawsuit, I doubt that they will ever miss another deadline set by the Business Court.

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Can you file a Motion for Summary Judgment too soon? The Plaintiffs in Wright v. LoRusso, 2023 NCBC 34 did exactly that, and were called out by Business Court Judge Conrad for violating Business Court Rules.

The Plaintiffs, members of an LLC called Cinch.Skirt, alleged that Defendant LoRusso, the majority member of the LLC, had improperly distributed cash from the LLC to herself. This alleged misconduct formed the basis for a dozen direct and derivative claims against LoRusso.

Plaintiffs filed a motion for partial summary judgment as to one of the twelve claims. This claim was for a declaratory judgment that LoRusso’s alleged improper distributions triggered a buy-sell event under the LLC’s Operating Agreement.

Judge Conrad outlined a number of defects in the Motion. First, the Motion had a timing problem, being filed before the close of discovery.

He said:

Courts rarely enter summary judgment before the end of discovery. A basic premise of modern civil litigation is that all parties deserve a full and fair opportunity to pursue discovery that is germane to the dispute. A motion for summary judgment is premature “when discovery procedures, which might lead to the production of evidence relevant to the motion, are still pending and the party seeking discovery has not been dilatory in doing so.”

Id. at  ¶3 (quoting Conover v. Newton, 297 N.C. 506, 512 (1979))(emphasis added).

Another stumbling block for the Plaintiffs lay in their status as Plaintiffs. As such, they carried the burden of proof on their Motion. Judge Conrad stated that courts rarely “enter summary judgment in favor of the party having the burden of proof.” Op.  ¶4 (quoting Blackwell v. Massey, 69 N.C. App. 240, 243 (1984)). All that the Plaintiffs offered were their own affidavits and an unsworn letter from an expert witness. The expert witness said that the Defendant had received more than $100,00 in excess distributions. The Court said that the letter was “unsworn, inadmissible, and cannot be considered for summary judgment.” Op. ¶6. As for the Plaintiffs’ affidavits, they said that the Defendant had improperly distributed LLC funds to herself, but they said that they did not know the “amounts or dates” of the payments. The Defendant, disputed this via her own affidavit stating that she had received only legitimate compensation.

This was inadequate to carry Plaintiffs’ burden of proof. Not only did they have to establish that there were no genuine issues of material fact, they also had to show that there were “no gaps in their proof; that no inferences inconsistent with his recovery arise from the evidence; and that there is no standard that must be applied to the facts by the jury.” Op.  ¶4. Judge Conrad said that “they simply had not put forward the kind of airtight case that could support entry of summary judgment.” Op.  ¶5. He said that “cross-examination will be essential here.” Op.  ¶7.

The Plaintiffs also drew criticism from Judge Conrad for attempting to solve their factual problems by filing what they referred to as a “Supplemental Brief” referencing additional evidence they learned during discovery after the Motion had already been filed. The Judge refused to consider the additional material, stating that “[t]hese new matters, if anything, confirm that the motion was premature. The Court declines to consider the reply brief and the untimely arguments and evidence within it. See BCR 7.7 (‘[T]he Court may decline to consider issues or arguments raised by the moving party for the first time in a reply brief.’).” Op.  ¶9.

The denial of the deficient motion was not the only criticism that Judge Conrad levelled at the Plaintiffs. In an Order entered the same day as the Opinion, Judge Conrad pointed to prior Business Court Rule violations by the Plaintiffs. He said “the Plaintiffs have failed to comply with procedural rules throughout this case, wasting judicial resources and unnecessarily prolonging the litigation.” Order ¶5. The newest Rule violation was of BCR 7.5 and 7.8. Plaintiffs had violated BCR 7.8 by filing summary judgment briefs of more than 7,500 words and by failing to include pinpoint cites to the supporting evidence, as required by that Rule.

The errata sheet. You’ve probably never given it a second thought. It is baked into the Rule of Civil Procedure governing the taking of depositions. NCRCP 30(e) gives the deponent the right to review her deposition and to make “changes in form or substance” by completing an errata sheet and stating the reason for the changes.

But are there limits on a deponent’s right to revise her testimony? Surely, having testified that the “traffic light was green,” the witness can’t backtrack and revise her testimony about the light color to red. Can she?

Well, yes, she can. Judge Davis of the NC Business Court ruled in Relation Insurance, Inc. v. Pilot Risk Management Consulting, LLC, 2023 NCBC 21 that “North Carolina Rule 30(e) . . . places no limits on a deponent’s ability to make substantive changes to his prior deposition testimony on an errata sheet.” Op. ¶19. The changed testimony at issue in Relation Insurance wasn’t as dramatic as red lights becoming green, but it was close. There was a lot of “no’s” becoming “yeses” and vice-versa. The explanations for the about face were “I was mistaken” or “I misunderstood the question.”

The Business Court didn’t break any new ground in making its ruling. The Business Court has given the same interpretation to Rule 30(e) at least three times, in BB&T Boli Plan Tr. v. Mass. Mut. Life Ins. Co., 2017 NCBC 235 (N.C. Super. Ct. 2017), Window World of Baton Rouge, LLC v. Window World, Inc., 2018 NCBC 79, and in an unpublished Order in Bueche v. Noel. I wrote about those cases when they were decided, in 2008, 2009, and 2018.

If you’re having a difficult time accepting this generous interpretation of Rule 30(e), you’re not alone. Several federal courts “have refused to allow changes on an errata sheet that contradict the witness’s testimony.” The Eastern District of North Carolina is one of them. See, e.g., Thorp Revocable Tr. v. Ameritas Inv. Corp., 57 F. Supp. 3d 508, 518 (E.D.N.C. 2014) (“A change in ‘form’ would include correcting a typographical error or a spelling error. A change in ‘substance’ would include the substantive correction of a court reporter’s transcription (i.e., the witness answers ‘No,’ but the court reporter records ‘Yes’).”)

If you are thinking that this witness got off unaffected by his “corrected” deposition testimony, you’re wrong. Judge Davis said that he built in “two safeguards,” (though I count three, not two), making the deponent’s change of heart virtually worthless to him.

The Two (or three)”Safeguards”

The first safeguard installed by Judge Davis was that the “original answers to the questions posed at her deposition will remain part of the record and may be used for impeachment, as contemplated under the applicable North Carolina Rules of Evidence, or for any other relevant or proper purpose. Op. ¶21.

Second, Judge Davis gave counsel challenging the deposition changes a second crack at the flip flopping deponent. Counsel was given the opportunity to “re-depose [the deponent] for a period of no more than two (2) hours of on-the-record time—at Plaintiffs’ expense—with regard to any substantive changes to his prior deposition testimony that are contained on his Errata Sheet on the pages of his deposition transcript referenced herein.” Op ¶21.

Next, although he did not call it a third safeguard, Judge Davis said that Defendants’ counsel could “seek to challenge Cooper’s substantive corrections as contained in his Errata Sheet to the extent that Plaintiffs offer those corrections for the purposes of advancing or defeating summary judgment later in this case.” Op. ¶25.


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I couldn’t pass on writing about a Business Court Order that the Court itself described as “Sua Sponte Order on Abusive Language.”  This is In re SE Eye Ctr, 2023 NCBC Order 15.

Abusive language?  That might be too complimentary a description of the stream of vitriol let loose by Mark McDaniel, a “contingent debtor” of Southeastern Eye Center, in his court filings.  McDaniel, not a physician (nor a lawyer), is the former Executive Director of the Center. He is proceeding pro se.

Judge Bledsoe laid out a long list of abusive statements by McDaniel in his order. Most of the abuse was targeted by McDaniel against what he referred to as the “Trio,” who were the Receiver appointed in the case, the Receiver’s attorney, and one of the major creditors of the Center.  Judge Bledsoe’s itemization of the abusive statements goes on for pages (2-5) in the Order, but here are some of the gems:

  • That the Trio have acted with ‘complete disregard for facts’ and in a ‘flippant and cavalier manner’;
  • That the Trio have committed extortion;
  • That one member of the Trio ‘has no regard for the law [and is willing] to commit outright felonies’ ;
  • That the Trio are willing to ‘ruin lives with fake evidence’ with this Court’s connivance;
  • That one member of the Trio is professionally incompetent;
  • That one member of the Trio has defrauded the Internal Revenue Service;
  • That the Trio have operated a ‘scam’;
  • That the Trio have committed federal bank fraud;
  • That the Trio are guilty of ‘[g]reed and ethical failures.’

Here’s how Judge Bledsoe summed up McDaniel’s invective:

Even a cursory review of the Objections shows that each is replete with personal vitriol against the Receiver and other parties in this case, ad hominem attacks against the Receiver and others, and egregious accusations of misconduct against others with virtually no citations to evidence, the developed record, or to applicable law.

Order  ¶4.

If you are underwhelmed by ther abusive nature of McDaniel’s statements, this was apparently a longstanding approach by McDaniel of which Judge Bledsoe obviously was tired. He said “[u]nsupported and unwarranted personal attacks and vitriol have been a hallmark of McDaniel’s advocacy before this Court, certainly since he was permitted” to appear in the case. He said that it was “beyond the bounds of zealous advocacy.” Order  ¶8.

Lawyers have an ethical obligation to “foster civility among members of the bar.” That’s from the Rules of Professional Conduct  As Judge Bledsoe put it, “[t]he principles of professional courtesy that forbid such language are . . . crucial to the proper administration of justice.” Order  ¶9. McDaniel didn’t have a pass from the obligation of civility because he was proceeding pro se. The Rules which govern attorney conduct apply to anyone appearing on a pro se basis.  Order  ¶11

Despite its annoyance with McDaniel’s conduct, the Business Court actually went fairly lightly on him.  It did not sanction him, but ordered him to “cease and desist further abusive and invective-based advocacy, either in writings filed with the Court or in oral presentations before the Court.”  Order  ¶16(a).  Judge Bledsoe reserved his right to sanction McDaniel in the future.  Order  ¶17.

Can McDaniel clean up his act? I’ll keep an eye out.

Plaintiffs asked for an award of attorneys’ fees in Vanguard Pai Lung, LLC v. Moody, 2022 NCBC 48.  They had been awarded $3 million in compensatory and punitive and thjeir lawyers sought $2.5 million in fees.  The motion for fees was not successful, for a number of reasons, but what sticks out in Judge Conrad’s opinion is his assessment that the fees applied for were excessive.

How much were Plaintiffs asking per hour? More than $700 per hour, with two of the lawyers billing more than $1,000 per hour.  (Note that these lawyers weren’t from around here, they were from California and Texas.)  Judge Conrad stated that the request was “not reasonable,” and said:

These rates may be typical of firms and attorneys based in California and Texas but are significantly higher than rates customarily charged in North Carolina for cases of this type.

Op. ¶21.

“Typical And Customary” Hourly Rates For Complex Commnercial Litigation In North Carolina

Judge Conrad observed that the Business Court had previously concluded “that a typical and customary hourly rate charged in North Carolina for complex commercial litigation ranges from $250 to $475.”  Op. ¶20 (quoting Bradshaw v. Maiden, 2018 NCBC LEXIS 98 at *12).

Did the complexity of the case warrant such high fees?  No, said Judge Conrad, holding:

Although this has not been a simple case, neither has it been inordinately complex. Commercial
litigation often involves the same mix of business torts at issue here. It would be unreasonable to award “a fee that includes rates double those billed in the community where the litigation took place for work that seemingly did not require such a premium.”

Op. ¶21

Adding insult to injury, Judge Conrad noted that the rates demanded by the out of state counsel “dwarf those charged by [Plaintiff’s] capable local counsel.  Id.

Don’t think that this Opinion from the Business Court was fueled by xenophobia.  In many respects it follows the Court of Appeals’ rejection of high hourly fees charged by New York lawyers in GE Betz, Inc. v. Conrad, 231 N.C. App. 214 (2013), which I wrote about a few years ago.

 

Other Deficiencies In The Fee Request

Would asking for a more reasonable hourly rate made a difference in Plaintiffs’ fee request?  Probably not.  The fee demand was based on G.S. §1-538.2, which says that a party prevailing on a claim for embezzlement is entitled to “reasonable attorneys’ fees.”  While one Plaintiff had obtained a judgment for embezzlement against one of the Defendants, that success came in a case in which sixteen claims for relief were made, and twelve counterclaims filed.  Thus, the Court stated, it was required to apportion fees among the myriad of claims and counterclaims.  Op. ¶18.

Apportionment would not be required if all of the claims and counterclaims were “inextricably interwoven with [the] embezzlement claim.  Op. 18-19.  These were not.

Another stumbling block for Plaintiffs was to provide nothing more in their fee application than “the total number of hours billed and the total amount charged by each attorney.”   Op. Par. 22.  That made it “impossible to determine whether Vanguard’s attorneys spent a reasonable or unreasonable amount of time drafting or responding to motions, preparing for and conducting depositions, and
handling other discovery matters, for example.”  Op. Par. 22.

Plaintiffs get another crack at their fee request, as Judge Conrad denied the request without prejudice to a renewal of the motion after “the entry of judgment, the resolution of any postjudgment motions, and the exhaustion of any appeals.” Op. Par. 23.  I expect that Plaintiffs will take another run at obtaining fees, but it won’t be a request for $2.5 million the next time around.

The parties in Leonard v. Ast, 2022 NCBC 35, decided by the NC Business Court last week, were collaborators in a business venture they named Barks and Recreation.  Barks was a dog training business which the Defendants felt would funnel business to their already existing dog grooming business, “Just Dog People.”

As anyone interested in the NC Business Court can already guess, there was a falling out among the parties.  It happened less than a year after Barks began operations with $100,000 invested by the Plaintiff from her retirement account.  (The Defendants contributed no cash, only “sweat equity.”) One of the individual Defendants (Jason Ast) told the Plaintiff to leave the premises of the business and “never return.”  Op. ¶13.  He also removed her from the email system of the business, its phone lines and cut off her access to the security system cameras.

Continuing their campaign to oust the Plaintiff from the business, the Defendants then called a special shareholders meeting and voted to dissolve Barks.

But Was Barks Really A Corporation?

Plaintiff objected to the special meeting, arguing that Barks was not a corporation.  She said that shares had never been issued and that corporate bylaws had never been adopted by the shareholders.  Plaintiff’s Complaint included a claim for declaratory relief that Barks was not a corporation but was in fact a partnership.

You might think that a business entity without shares and bylaws could not be a valid corporation (like I did), but you would be wrong.  As Judge Earp pointed out:

The North Carolina Business Corporation Act (the “Act”) states that “[c]orporate existence begins when the articles of incorporation become effective[,]” and that “[t]he Secretary of State’s filing of the articles of incorporation is conclusive proof that the incorporators satisfied all conditions precedent to incorporation[.]” N.C.G.S. § 55-2-03(a)–(b)

Op. ¶40.

The Defendants had filed Articles of Incorporation.  Given that “conclusive proof” of incorporation, Judge Earp held that “failure to adopt bylaws or issue shares, while problematic in other ways, does not convert a corporation to a partnership.”  Op. ¶42.

The Court also rejected Plaintiff’s argument that Barks was not entitled to dissolve itself as a corporation due to the non-issuance of shares.  That argument is foreclosed by G.S. §55-14-01(a), which says that “a majority of the incorporators of a corporation that has not issued shares may dissolve the corporation by . . . filing articles of dissolution.”  Op. ¶43.

So the claim to have Barks declared a partnership  was dismissed.

Business litigation sharpies are undoubtedly wondering about a piercing the corporate veil claim, as disregarding corporate formalities is often the basis for a veil piercing claim.  That sort of claim was unnecessary, as the Business Court allowed a breach of fiduciary duty claim to go forward against the individual Defendants.

Plaintiff Did Better With Her Breach Of Fiduciary Duty Claim

Plaintiff’s claim for breach of fiduciary duty ran into a familiar roadblock, the “well-settled principle of North Carolina law that shareholders of a corporation cannot pursue individual causes of action for wrongs or injuries to the corporation.”   Op. ¶30.  But a shareholder can bring a direct claim “when there is a special duty between the wrongdoer and the shareholder.  Op. ¶31 (quoting Barger v. McCoy Hillard & Parks, 346 N.C. 650, 659 (1997)).

Since the individual Defendants claimed to own two-thirds of the (never issued) shares in Barks, Judge Earp observed that “North Carolina courts ha[ve] recognized that individual minority shareholders of a closely-held corporation who act in concert and collectively own the
majority interest in the corporation may owe fiduciary duties as the controlling shareholders.” Op. ¶33.

*  * *

That dog picture at the top of this post?  That dog has nothing at all to do with Barks and Recreation.  That’s Herschel, my dog.  He’s a very good dog.

Oh, and notwithstanding the click-baity title of this post, the NC Business Court is not “going to the dogs.”

This is Part 2 of an examination of the 100+ “Orders of Significance” dropped by the NC Business Court late last year.  Part 1 of this series (on designating cases to the Court) is here.  If you haven’t heard anything about the Orders of Significance, look here.

There are a couple of Orders of Significance dealing with attorney-client privilege that are significant enough to be written about on this blog.  The first is Judge Conrad’s Order on a Motion to Compel in Kelley v. Charlotte Radiology, P.A. 2019 NCBC Order 13.

Waiver By Disclosure To A Non-Client

The “general rule” is that the attorney-client privilege is waived “when an attorney and client communicate in the presence of a third party.”  Order ¶12.

Waiver doesn’t apply if the third party is “an agent of the client or the attorney.”  Id.  It also doesn’t apply “when the third parties are co-clients who are each represented by the same attorney.”  Id.

So who was the third party in the Kelley case who received the otherwise privileged communications?  There were actually two of them: the son of the Plaintiff, and the Plaintiff’s wife.

Judge Conrad concluded that the Plaintiff’s son was not acting as his agent.  There was nothing in the record showing that the son had the authority to act on the Plaintiff’s behalf, “an essential element of agency.”  Order ¶23.  As for the wife, the Court ruled that the wife had received the same communications as the son, so there was no need for a separate analysis as to her.

Waiver Of Privilege By Use Of Defendant-Employer’s Email System

The Plaintiff had used his employer’s email system to communicate with his attorneys.  A bad idea if you are wanting to protect privilege since the question of waiver turns on whether the employee “had a reasonable expectation of privacy and confidentiality in his email communications with his personal attorney.”  Order ¶38.

Judge Conrad said “[i]t is debatable whether an employee ever has an
expectation of privacy when using his employer’s e-mail system to communicate about a legal dispute against the employer.”  Order ¶38.

Moreover, the Plaintiff had received the Defendant’s Employee Handbook, which stated that the Defendant had the right to monitor employee emails.  That eliminated the possibility of any “reasonable expectation of privacy” in his emails.

Adequacy Of Privilege Logs

Privilege logs identifying documents withheld on the basis of privilege are required by Rule 26(b)(7)(ii) of the North Carolina Rules of Civil Procedure and Business Court Rule 10.5.

The Defendant challenged the adequacy of the privilege log provided by the Plaintiff, arguing that the descriptions of the withheld documents were “obtuse and uninformative.”  Judge Conrad disagreed, stating:

Kelley’s privilege log provides the date of each communication, the sender and recipients, a short description of the subject matter, and the type of privilege asserted. (See Kelley Privilege Log.) This is all the Case Management Order requires, (ECF No. 21), and it is the type of information courts usually find adequate for this purpose.

Order ¶17.

Plus, Judge Conrad added, even if the privilege log had been inadequate, the appropriate remedy would not have been to strike the entire log, but instead for the Court to conduct an in camera review.  Order ¶19.

It’s important to identify all the grounds for withholding documents in the privilege log.  The Defendant said that the Plaintiff had waived the claim that some of the documents listed in the log were entitled to work-product immunity by not originally referencing that immunity in the privilege log.

Judge Conrad rejected this argument of waiver, saying:

It is true that a belated assertion of immunity can result in its forfeiture. This usually occurs when a party asserts one ground for withholding documents, waits to see the other side’s motion to compel (or to see how the court decides the motion), and then asserts a different ground in an effort to get a second bite at the apple.  That type of gamesmanship is obviously prejudicial.

Order ¶20.  Since the Plaintiff had revised its original privilege log to include the work-product assertion before the Defendant filed its Motion to Compel, there was no “gamesmanship” or any prejudice to the Defendant, and no waiver of the work-product privilege.

Miscellaneous Privileged Items

Draft pleadings are subject to work-product protection.  Order ¶3.

Engagement letters cannot be withheld from production.  Though there is “little North Carolina law” on this point, Judge Conrad held that:

federal courts generally find that agreements outlining the general nature of the representation rather than the specific work that the attorney will perform are not protected by the attorney-client privilege or the work-product doctrine.

Order ¶4.

The remainder of the Kelley Order is an email by email review of whether those particular emails are privileged.

Appealing An Order Ruling on a Privilege Issue

You can appeal an Order affecting a privilege immediately, and you don’t need to wait for a final judgment in the case.

That was the situation before Judge McGuire in Global Textile Alliance, Inc. v. TDI Worldwide, LLC, 2019 NCBC Order 6.  Judge McGuire had entered an Order prevbiously in the case ruling that the Plaintiff had waived attorney-client privilege by permitting a third party to participate in conversations with its counsel.

Plaintiff appealed.  The Defendant sought to move forward with dispositive motions in the case.  Plaintiff argued that all proceedings in the case should be stayed pending the appeal.

Judge McGuire said that “[c]laims of privilege . . . are substantial rights that would be lost if orders affecting them were not immediately reviewed.”  ¶6.  Given that the immediate appeal was legitimate. Judge McGuire ruled that the Court was divested of jurisdiction to proceed in the case.

If the Order ruling that privilege had been waived had not been immediately appealable, the Court could have retained jurisdiction and proceeded with the case.

 

 

 

 

This is the first of several intended posts on the so far unexamined “Orders of Significance” handed down by the NC Business Court.  This one focuses on several Orders from Chief Judge Bledsoe on whether a case was properly designated to the Court.  It is embarrassingly long, sorry.

Intellectual Property Cases

A handful of these Orders involved a designation per G.S. § 7A-45.4(a)(5), which gives the Court jurisdiction over cases which relate to  a “dispute involving the ownership, use, licensing, lease, installation, or performance of intellectual property. . . . ”

You would think that a Complaint which mentioned intellectual property would be enough to support a Designation to the Court, but that’s not the case.  Chief Judge Bledsoe makes it clear that the mere presence of an agreement concerning intellectual property is not enough to support a Designation.

In Innovative Agriproducts, LLC v. Fins & Feathers Charter And Commercial Fishing, LLC, 2019 NCBC Order 11, the case involved an exclusive license granted to Plaintiff to extract oil from “any and all hemp harvested by Defendants.”  This case might have survived the Opposition to the Designation if Chief Judge Bledsoe had been persuaded that “hemp plant clones” were intellectual property.   He was not, although  Chief Judge Bledsoe observed that plants could constitute intellectual property.  Order ¶14.

Although he ruled that there had been no showing that the hemp plant clones were intellectual property, he also ruled that the lawsuit was not proper for designation to the Business Court since the substance of the allegations were contract-based, essentially a claim for failing to pay money owed.

He held that a party seeking designation of an intellectual property case must show  that it “involves a material issue relating to a dispute that is ‘closely tied to the underlying intellectual property aspects’.”  Order ¶15.

The same fault resulted in the rejection of a Designation in Grifols Therapeutics LLC v. Z Automation Co., 2019 NCBC Order 18.  The intellectual property involved there was a “cartoner,” which is “an automated machine that inserts products into their outer-packaging.”  Order ¶1.  Since the claims`only involved “the application of contract principles,” Chief Judge Bledsoe ruled that:

the mere fact that intellectual property (i.e, the cartoner here) is the subject of a purchase agreement is insufficient to permit designation under section 7A-45.4(a)(5).

Order at ¶6.  He rejected the Designation because:

the cartoner at issue here is simply a piece of equipment Plaintiff contends that it sold to Defendant and for which Defendant has failed to pay―any intellectual property aspects of the cartoner are not germane to the dispute as it is currently cast.

You might be befuddled at how to determine whether the dispute is “closely tied” to the “underlying intellectual property aspects.”  That language comes from a 2018 Opinion authored by then Chief Business Court Judge Gale, who said in an intellectual property case involving pharmaceuticals that:

It is. . .  difficult to define a bright line test to determine when a dispute is closely tied to the intellectual property aspects of a pharmaceutical. Rather, the determination requires an allegation-specific inquiry that will vary from case to case.

Cardiorentis AG v. IQVIA Ltd., 2018 NCBC 62 at ¶5.

I doubt that this language clarifies when a case involving intellectual property is appropriate for designation to the Business Court.  Clearly, simply using the words “intellectual property” in your Complaint is not enough.

Procedural Mistakes

A procedural mistake led to the rejection of a designation in MDG Constr. Servs. v. MDG Roofing & Contracting LLC, 2019 NCBC Order 12.  The Plaintiff filed its Complaint on April 24, 2019, but did not file its Notice of Designation until two days later, on April 26th.

The Designation statute, G.S. sec. 7A-45.4(d)(1) requires a Notice of Designation to be filed “contemporaneously with the filing of the complaint.”  Chief Judge Bledsoe observed that this contemporaneous filing requirement “is mandatory” and that the Notice of Designation therefore was untimely.

Doing things two days apart is not doing them “contemporaneously.”  Two hours?  Presumably yes.  The Business Court requiring that the Designation be filed at the same time as the Complaint is nothing new.  Judge Jolly issued a published Order to that effect in 2012, in Kight v. Ganymede Holdings II, Inc., 2012 NCBC 46.

Last of these Significant Orders on the subject of designation is Brown v. Caruso Homes, 2019 NCBC Order 30.  This Order reminds me that there is an alternative path to designating a case to the Business Court other than those specified in the designation statute (G.S. sec. 75A-45.4).  That path lies in Rule 2.1 of the General Rules of Practice.

You can still get a case into the Business Court (per Rule 2.1) by persuading a non-Business Court Judge in the County where the case originated that he or she should recommend to the Chief Justice of the NC Supreme Court that the case be treated as a complex business case.

The factors to be taken into account are:

the number and diverse interests of the parties; the amount and nature of anticipated pretrial discovery and motions; whether the parties voluntarily agree to waive venue for hearing pretrial motions; the complexity of the evidentiary matters and legal issues involved; whether it will promote the efficient administration of justice; and such other matters as the Chief Justice shall deem appropriate.

The Plaintiff in Brown had filed a Complaint against his employer alleging a single violation of the North Carolina Wage and Hour Act.  He designated the case to the Business Court the same day relying upon the discretionary factors set out in Rule 2.1.  Chief Judge Bledsoe rejected the arguments that the case was “complex,” that it would be “fact-intensive,” and that it would require “voluminous and complex” discovery and would need “focused judicial attention and oversight.”

Chief Judge Bledsoe didn’t mention that these arguments should have been addressed to a regular Superior Court Judge, not to a Business Court Judge.

In any event, he returned the case to the regular docket of the Wake County Superior Court.

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The next post in this series on the Orders of Significance should drop next week.

 

 

 

 

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If you ever look at the Business Court’s website, you’ve noticed that the Court added late last year a new category of rulings, which it has dubbed “Orders of Significance.”  There are 118 of these Orders, stretching back ten years, to 2010.

The Court is statutorily mandated to publicly post a number of its rulings, per N.C.G.S. § 7A-45.3, which obligates the Court to issue a written Opinion on rulings rendered per NCRCP 12, 56, 59, and 60, but these Orders of Significance don’t fall into those categories.

I asked Chief Judge Bledsoe (via email) what had prompted the posting of these Orders.  He responded that the Court thought that these Orders “would be of interest to the Bar” and that the Court had been contemplating adding them for a while.  As for their content, he said that these Orders “cover a wide variety of subject matters and include TROs, preliminary injunctions, discovery rulings, receivership orders, contempt orders, and designation orders, among others.”

I asked Judge Bledsoe if there were any “extra” Significant Orders in this sprawling body of work, because I don’t have the desire or the energy to plow unguided through 118 rulings.  To my disappointment, he said that he didn’t “know that any are more significant than the others.”

Nevertheless, he did advise that all of the Court’s orders regarding challenges to the designation of a case to the Business Court are in this group of rulings, and that he thought that these would be of interest to readers of this blog.  So I have elected to write about them as a start on these significant Orders.

But when I attempted to use the search function on the Court’s website to find the Orders regarding designation, it yielded nothing.  It looks to me like the search function will not get into the text of the Orders, but only the case names.

So, I have created my own searchable file of all of these Orders.  And coming Monday is the first of what will be several dives into these 118 Orders of Significance.  I’ll start with the Orders regarding designation to the Business Court.