July 2008

The Business Court denied the Plaintiff’s Motion for Expedited Discovery, without discussion, in its Order in this covenant not to compete case.  From looking at Defendant’s brief in opposition, what probably doomed the motion was that the one year non-compete period had nearly expired when Plaintiff requested expedited discovery.  The same Order was entered on the same day in a companion case, Robert Half Int’l Inc. v. Flood.

Full Opinion

Brief in Support of Motion for Expedited Discovery

Brief in Opposition to Motion for Expedited Discovery

The Court found that the Noerr-Pennington doctrine did not apply to the false submission of data to a public agency.  The Court further found this conduct was not entitled to free speech protection under the First Amendment and the North Carolina Constitution.  Nor were the Defendants entitled to state action immunity, or the protection of the filed rate doctrine. 

Full Opinion

The Court granted a Motion for Protective Order preventing Defendant from determining the identity of a confidential informant to the Department of Environment and Natural Resources.  The Court found that the identity of the confidential informant was "of no consequence to the issues in this case."  The Court further found that there was good cause for the entry of the Protective Order, holding:

Here, the burdens of the proposed discovery greatly outweigh any benefits, and Plaintiffs have demonstrated good cause for the entry of a protective order. The most significant burden of forcing DENR to reveal the identity of the informant is the chilling effect such a ruling would have on potential informants. The Court wishes to encourage individuals who believe a fraud is being committed on the state to present such information to the proper authorities. Without the promise of confidentiality, such individuals are less likely to come forward. There may be instances in which circumstances require disclosure of the identity of a confidential informant under the discovery rules, but this is not one of them. Here, where the Defendants already know the substance of the informant’s communications and have demonstrated no genuine need for the informant’s identity, the Court is unwilling to erode the incentives offered to the public to speak out when they observe a possible fraud on their government.

Full Opinion

Brief in Support of Motion for Protective Order

Reply Brief in Support of Motion for Protective Order

Plaintiff sought an injunction preventing Defendant from selling its assets in North Carolina.  The Motion was filed pursuant to N.C. Gen. Stat. § 1-485, which permits an injunction when "the defendant threatens or is about to remove or dispose of his property, with intent to defraud the plaintiff." 

The Court denied the injunction, finding that it would be a detriment to the Defendant’s ability to sell its assets, and might result in Defendant’s operation being forced to close.  The Court required, however, that the Defendant give sixty days notice before the closing of a sale of all or substantially all of its assets.

Full Opinion

This opinion dealt with subpoenas to a party’s attorney and its accounting firm.  The Court quashed the subpoena to the law firm (Gray Layton), holding:

Service of a subpoena duces tecum on a law firm seeking documents from the firm’s client files clearly raises worrisome issues of attorney-client and work product privilege. The attorney-client privilege protects confidential communications between attorney and client “made on the faith of the relationship between them.” Kenneth S. Broun, Brandis & Broun on North Carolina Evidence § 129 (4th ed. 1993). The work product privilege prevents disclosure of the “mental impressions, conclusions, opinions, or legal theories of an attorney or other representative of a party concerning the litigation in which the material is sought.” N.C. R. Civ. P. 26(b)(3). The Court may quash a subpoena if it “requires disclosure of privileged or other protected matter.” N.C. R. Civ. P. 45(c)(3)(b), (c)(5). Gray Layton’s files may well contain materials protected by one or both of these privileges.

 The Court enforced the subpoena to the accounting firm, however, holding:

In 2001, the Court of Appeals restated that “[a]n accountant-client privilege is not recognized in North Carolina.” Miles v. Martin, 147 N.C. App. 255, 261, 555 S.E.2d 361, 365 (2001) (citing State v. Agnew, 294 N.C. 382, 394, 241 S.E.2d 684, 692 (1978)). In the absence of such a privilege, the Court finds no reason to quash the subpoena served on McCannon Rogers.

Full Opinion

The personal representative of a decedent was not required to give personal notice of the deadline for filing claims against the estate to a claimant, as required by N.C. Gen. Stat. § 28A-14-1, where she did not have actual knowledge of the claim.  The Court also determined that she had no obligation to conduct an investigation to determine whether there was a potential claim.  The Plaintiff therefore had not properly presented its claim as required by N.C. Gen. Stat. § 28A-19-3(a). 

The Court also dealt with a statute of limitations issue: whether the three year statute for breach of contract or the ten year statute for a contract signed under seal should apply.  The Court found this to be a question of law as to the defendant who had passed away, who had not signed the agreement in question, but a question for the jury as to other defendants, who had.   It determined that the deceased defendant could not be bound by the sealed signatures of others on the basis that he was a member of a joint venture and that he had therefore adopted the signatures of the others as his own.

Full Opinion

Brief in Support of Motion for Summary Judgment

Brief in Opposition to Motion for Summary Judgment

Reply Brief in Support of Motion for Summary Judgment

 

The Business Court overruled an objection to its mandatory jurisdiction over a Complaint alleging breach of a trademark license agreement.  It held "this case involves both the right to use trademarks and the right to use designs previously sold under the trademarked names at issue. It involves issues which fall within the mandatory issues supporting assignment to the Business Court."

Full Opinion

If a case involves only a breach of a covenant not to compete or a confidentiality agreement, it is not within the mandatory "unfair competition" jurisdiction of the North Carolina Business Court, based on two recent decisions.

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

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

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

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

every suit based upon a breach of a restrictive covenant or breach of a Confidentiality Agreement [will not] give rise to a mandatory business case based upon “unfair competition.” In order to raise a material issue of unfair competition, some additional factors must be alleged. For example, allegations of the theft of trade secrets which provide a competitive advantage to one party could give rise to a mandatory case. See e.g., Analog Devices v. Michalski, 157 N.C. App. 462, 579 S.E.2d 449 (2003). Also, actions designed to unfairly damage another’s business would give rise to an unfair competition claim. See, e.g., Sunbelt Rentals, Inc. v. Head & Engquist Equip., LLC, 174 N.C. App. 49, 620 S.E.2d 222 (2005).

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

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

Today, in its Order and Opinion in Bolick v. Sipe, the North Carolina Business Court rejected a novel argument regarding the validity of post-employment consideration for a covenant not to compete.  It also dealt with the issue of the validity of a summons issued in the wrong name.

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

Judge Tennille disagreed, holding:

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

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

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

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

* * *

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

Brief in Support of Motion for Summary Judgment

Brief in Opposition to Motion for Summary Judgment

Brief in Support of Motion to Amend Summons

Brief in Opposition to Motion to Amend Summons

A minority member (Kaplan) of a limited liability company, who was the LLC’s only source of funds and who controlled the LLC’s checkbook, did not have fiduciary duties to the LLC and its 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.

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).

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).

Full Opinion

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