September 2008

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.

The Complaint in this case 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 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In another case, Brookhart v. ADT Security Services, Inc., July 23, 2008 (Tennille)(unpublished), the Court remanded a lawsuit in which the plaintiff sought a declaratory judgment that a covenant not to compete was invalid.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.

Full Opinion


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.

Full Opinion

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

Counsel taking a pre-certification dismissal of a class action must file a statement which includes:

(1) the reason for dismissal, (2) the personal gain received by the plaintiffs in any settlement, (3) a statement of any other material terms of the settlement, specifically including any terms which have the potential to impact class members, (4) a statement of any counsel fees paid to plaintiff’s counsel by defendants, and (5) a statement of any agreement by plaintiff(s) restricting their ability to file other litigation against any defendant. 

Op. at ¶2.  In addition, counsel for the Plaintiff is required to "file a statement either detailing any potential prejudice to putative class members or representing to the Court that no prejudice exists."  Judge Tennille indicated that the Court would "be particularly concerned about issues related to tolling of the statute of limitations."

In a case involving the dismissal of a North Carolina class action resulting from the approval of a nationwide class action settlement in another state, there is a different requirement.  Then:

counsel shall file with the Court a copy of the order approving settlement and sufficient information concerning the notice provisions so that the Court can ascertain if jurisdictional and due process issues have been addressed by the foreign court and whether North Carolina citizens have been represented in the proceeding. 

Op. at ¶4.  This filing will permit the court to "raise any concerns with the foreign court," and that "once those concerns have been addressed, the foreign court’s order will be entitled to full faith and credit whether or not this Court would have granted approval of the settlement."  Op. at ¶4.  (In a case involving an out-of-North Carolina settlement, the statement regarding the reasons for the dismissal is not necessary.)

In all cases, the Business Court will require a final accounting of the distribution of any settlement proceeds and attorneys fees.  This needs to include "the amount of money (or coupons) actually received by the class, the amount of administrative fees, and the amount of attorney fees received."  Op. at ¶6.

The Court noted two reasons for the requirement of an accounting.  First, the Court said that this would "promote greater transparency that will fill the ‘informational black hole’ concerning final distributions and make administration of class actions more efficient and effective and thus more beneficial to class members."  Op. at ¶8.

Second, the Court said it would use this information for other purposes, including an assessment of the qualifications of class counsel:

This Court would add to that list of benefits from transparency, the benefit of judges being able to assess the past performance, abilities and commitment of those lawyers who seek to be class counsel in other cases. A history of final results in other cases would also alert judges to scrutinize settlements proposed by defendants who have settled their class action in ways that resulted in no benefits to class members. This Court can think of no reason why the final results should not be made known to the Court and the citizens affected. 

Op. at ¶9.  The accounting information will be available on the Business Court’s website.

Full Opinion,

Defendants’ contention was that they were entitled to reformation of a contract because a page was inadvertently left out of the asset purchase agreement.  The missing page detailed long term liabilities which Defendants claimed the Plaintiff was obligated to pay.  Defendants argued that the failure to pay constituted a violation of the accompanying Promissory Note and Security Agreement, and relieved them from their obligations under their non-compete agreements.

The Motion for Judgment on the Pleadings filed by the Plaintiff asserted that even if reformation was allowed, the only remedy for Defendants was for Plaintiffs to pay the liabilities listed on the missing page.  Judge Diaz held:

The Court disagrees. While there is a strong presumption in favor of correctness of an instrument as written, Hice, 301 N.C. at 651, 273 S.E.2d at 270, a “court’s principle [sic] objective is to determine the intent of the parties to the agreement.” Holshouser v. Shaner Hotel Group Props. One Ltd. P’ship, 134 N.C. App. 391, 397, 518 S.E.2d 17, 23 (1999).’

Moreover, when a court reforms an instrument, the general rule is that ‘”[t]he rights of the parties are measured by the instrument as originally intended, and the effect of the reformation, as a whole, is to give all the parties all the rights to which they are equitably entitled under the instrument that they intended to execute.” 66 Am. Jur. 2d Reformation of Instruments § 9 (2007) (citing Gurske v. Strate, 87 N.W.2d 703 (Neb. 1958)).

Thus, if Defendants establish by clear, cogent and convincing evidence that, because of a mutual mistake, the APA does not reflect the true intention of the parties at the original date of execution with respect to the long-term liabilities to be assumed by Plaintiff, they would be entitled to (1) have the agreement judicially reformed to correct the mistake, and (2) seek full relief for Plaintiff’s alleged breach of the APA and related contract documents. Long, 178 N.C. at 506, 101 S.E. at 13 (stating that when reformation is granted, the court not only corrects the contract as written, but enforces it in its amended form).

The Court dismissed an unfair and deceptive practices claim by one of the Defendants, who asserted that the Plaintiff had diverted funds rendering the Plaintiff unable to meet its contractual obligations to him.  The Court held that "A-1’s alleged accounting misdeeds arguably relate to matters of internal corporate governance, which are insufficient to sustain a UDTPA claim."  The Court further held that the claim was nothing more than one for breach of contract, stating "it does not matter that the purported breach resulted from A-1’s alleged accounting irregularities, as that fact alone is insufficient to elevate a contract dispute into an UDTPA claim."

Full Opinion

Brief in Support of Motion for Judgment on the Pleadings

Brief in Opposition to Motion for Judgment on the Pleadings

Reply Brief in Support of Motion for Judgment on the Pleadings

Business Court Rule 9.2 says that "the movant shall have a good faith basis for requesting any . . . extension of time and, except in extraordinary cases, the movant shall first consult with any opposing party and reflect that party’s position in the motion and indicate whether the opposing party wishes to be heard on the motion."

If you don’t follow the Rules, you aren’t going to get your extension.  In Velocity Fiber Broadband, LLC v. Lang Management, Inc., the required consultation hadn’t occurred.  Judge Jolly, in denying the plaintiff’s motion to respond to a counterclaim, stated "notwithstanding that the . . . reporting requirements of Rule 9.2 of the Business Court Rules may be viewed by some as merely a technicality and not substantive, the requirements are clear and simple, and compliance with them promotes efficiency in case administration by the court and counsel."

Full Opinion

Other cases denying a Motion for Extension of Time for the same reason are TelSouth Solutions, Inc. v. Voyss Liquidation Co., October 17, 2008 (Diaz)(unpublished); Cape Fear Realty, LLC v. Cape Fear Trading Group, LLC, November 12, 2008 (Jolly)(unpublished); and A-1 Pavement Marking, LLC v. APMI Corp.January 2, 2009 (Diaz)(unpublished).

The Business Court dismissed on a Motion for Judgment on the Pleadings an unfair and deceptive practices claim stemming from a dispute between members of a limited liability company.

CDC, a minority member of the LLCs, argued that the member owning a 70% interest, Grimmer, had removed CDC as a manager and had made unnecessary capital calls in order to force CDC out of the LLC.  CDC also alleged that it had been defamed by Grimmer, that Grimmer had taken steps to cause banks to freeze the accounts of the LLCs, favored his son on a contract with the LLCs, and caused an improper $100,000 payment to be made by the LLCs.  CDC claimed these facts made out a claim under Chapter 75. 

The Business Court held that the conduct involving removal and capital calls were "primarily matters of internal corporate governance that do not relate to the day-to-day business activities of the LLCs.  Accordingly, these matters are not sufficiently ‘in or affecting commerce’ to sustain an UDTPA claim."  Op. at 16.

A defamation claim met with dismissal because Judge Diaz found it had not been described with sufficient particularity, and the other claims were dismissed because they belonged to the LLCs, not to the members.

Claims seeking judicial dissolution of the LLCs survived.  Judge Diaz found that Plaintiffs’ allegations of waste and mismanagement were insufficient because they "fail to allege any specific action or conduct on the part of Grimmer that constitutes waste or demonstrates the misapplication of the LLC’s assets."  Op. at 11. He ruled, however, that allegations Grimmer was refusing to pay CDC for services provided, badmouthing CDC to vendors and banks, making capital calls, and refusing to provide information regarding the operation of the LLCs might make out a claim for dissolution.  The Court held:

Applying an indulgent standard to Defendants’ pleading, these allegations relating to the deteriorating relationship between Grimmer and CDC are sufficient to allow Defendants to pursue their claim that liquidation is reasonably necessary to protect Defendants’ rights and interests in the LLCs.

Op. at 12.

The Court also held that CDC’s claim for breach of a construction contract could proceed even though CDC was not licensed as a general contractor.  CDC’s contract called for some work that required a general contractor’s license, and some that didn’t.  Judge Diaz held that:

Although the Court’s research has not disclosed any binding precedent on point, there is persuasive authority suggesting that the denial of contract remedies to unlicensed general contractors or construction managers should properly be restricted to circumstances where the contractor seeks compensation for work falling within the statutory definition of general contracting or construction management.

Op. at 13.  The contract extended to matters for which a license wasn’t necessary, like selling lots in the development, hiring sales managers, developing budgets and implementing marketing plans.

Full Opinion

Brief in Support of Motion for Judgment on the Pleadings

Brief in Opposition to Motion for Judgment on the Pleadings

Reply Brief in Support of Motion for Judgment on the Pleadings

 

In cases in the Business Court, the lawyers are often assisted by computer forensics experts in dealing with electronic discovery issues. That’s becoming almost essential in complicated business cases.

Anyone can do this type of work right now.  I get regular phone calls and emails from people pitching this type of work.  But there is regulation in the works in North Carolina to clamp down on who can provide computer forensic services.

The North Carolina Board which regulates private investigators is looking at proposing legislation that would require that someone be a licensed private investigator before being able to do computer forensics work. Regulation in this area isn’t a revolutionary idea. You have to be licensed in some states to analyze electronically stored information, although there are great variances from state to state. Kessler International recently did a national survey on state licensing requirements.  An American Bar Association Committee recently issued a report recommending against such licensing, as discussed below.

The driving force for the North Carolina legislation is the Private Protective Services Board, which regulates private investigators and others in the "private protective services professions."  The Board is working on amendments to N.C. Gen. Stat. Chapter 74C to require a private investigator’s license for anyone doing computer forensics consulting.

Here’s a draft of the legislation, which was recently approved by the Board’s Computer Forensics Committee. It creates a new license category for a "Digital Forensics Examiner," which it defines as "any person who, on a contractual basis, engages in the profession of or accepts employment to conduct examinations of digitally stored data in order to recover, image, analyze, or examine such data to determine responsibility and/or reconstruct usage of such data."  A person seeking such a license will need to have 3,000 hours of experience in digital forensics or a closely related field in order to be licensed, and to have completed basic training offered by the company supplying the analysis software used by the licensee.

The Board provided me with excerpts from other committee meetings at which the amendments were discussed, and also the draft minutes from the June 9, 2008 meeting of the committee.

Attorneys are exempt from the current statute, as are their agents, “provided the agent is performing duties only in connection with his or her principal’s practice of law.” G.S. §74C-3(b)(4). That exemption presumably would continue if the statute is amended, so this legislation may not prove to be a major issue for litigation matters if a lawyer retains the consultant, but if a client hires a consultant to perform analysis before litigation, that might be an issue. 

The proposed amendment also exempts accountants and others it defines, including "persons employed to conduct network security operations up to the point of responsibility for network security violations," and "members of network security compromise response teams."

The American Bar Association’s Section of Science and Technology Law is also looking at this issue, and has come to a completely different conclusion regarding the need for licensing. The Report from the Section concludes that there shouldn’t be licensing, and recommends that the ABA should take a position discouraging the states from enacting regulatory legislation. Their rationale is that this is a technical area outside the expertise of those regulating private investigators, that there are professional certification programs available for forensic specialists, and that judges can in the final analysis determine whether a person is qualified to testify about the forensic work that he or she did. (Thanks to the TechDirt blog for this information).

Novo Nordisk Pharmaceutical Industries, Inc. v. Carolina Power & Light Co., 2008 NCBC 16 (N.C. Super. Ct. Sept. 15, 2008)(Jolly)

As the North Carolina Business Court framed the issue in its opinion yesterday in Novo Nordisk Pharmaceutical Industries, Inc. v. Carolina Power & Light Co., it was "whether and to what extent a public utility contractually may limit its liability for subsequent acts pursuant to the filed rate doctrine, as adopted by the North Carolina Supreme Court."  The answer from Judge Jolly, in a case of first impression, was that such limitations of liability can be complete.

Novo Nordisk, a pharmaceutical manufacturer, asserted in its Complaint that CP&L had breached contracts to provide it with uninterrupted power.  The Plaintiff alleged that it had entered into these contracts because if it lost power, even briefly, the insulin it manufactured would be contaminated and a costly clean up process would be necessary.  The Complaint asserted that CP&L had breached those contracts on three occasions, causing it substantial damage, and made claims for breach of contract and negligence.

There were three contracts involved.  Two of them said that neither CP&L "nor its employees, its subcontractors, or suppliers shall be liable for any direct, indirect, general, special, incidental, exemplary, or consequential loss or damage of any nature arising out of their performance or non-performance hereunder."  The third contract contained similar language, but limited a recovery to "the total of monthly payments made by" Novo Nordisk.

Judge Jolly held that he was "forced to agree" that the limitations of liability in the contracts approved by the North Carolina Utilities Commission were valid as to both CP&L and its subcontractor.  He made this ruling based on the filed rate doctrine, "which provides that a plaintiff may not challenge a Commission-approved filed rate, including attendant contractual provisions, unless that challenge is made while the proposed rate is before the Utilities Commission for approval."

The Court noted that the liability limitations played a role in the rate being approved by the Utilities Commission, and stated that if the limitations were held invalid that the "price for the service . . . would remain the same.  This would effect an alteration of the relative position of the parties as approved by the Commission, and would constitute a collateral attack on the filed rate."

Novo Nordisk had argued that the limitations of liability should be void on public policy grounds, and that a public utility could not contract away liability for negligence in the regular course of its business.  The Court ruled, however, that the contracts involved "permanent on-site commercial power, which is not directly related to the public service," and that the limitations of liability in the contracts did not violate public policy.

There’s going to be a new Federal Rule of Evidence, approved by voice vote in the House this week and unanimously by the Senate earlier this year.  It’s on President Bush’s desk for signature (that’s him signing the baseball in the picture at the left), and should be on the books in the next few weeks.  

The new addition to the Rules is Rule 502, titled "Attorney-Client Privilege and Work Product: Limitations on Waiver."  New Rule 502 covers the scope of a waiver of privilege and the issue of inadvertent production of privileged documents, among other waiver related issues. 

The full text of the Rule is at the bottom, but here’s a synopsis:

  • If a waiver of privilege is found, the waiver extends to undisclosed communications or information only if (1) the waiver is intentional,  (2) the other communications involve the same subject matter, and (3) the communications "ought in fairness to be considered together."  Rule 502(a).
  • If the disclosure is inadvertent, it does not operate as a waiver in either federal or state court if (1) the disclosure was inadvertent, (2) the holder of the privilege took "reasonable steps to prevent disclosure," and (3) the holder "promptly took reasonable steps to rectify the error."  Rule 502(b)
  • If the disclosure was made in a state court proceeding, it doesn’t operate as a waiver in a federal proceeding if either the disclosure wouldn’t have been a waiver under the federal rule, or it wouldn’t be a waiver under state law. Rule 502(c).
  • If the Court enters an Order (like a consent Protective Order) that a disclosure will not be a waiver, that Order will bar any determination by another federal court or a state court that a waiver has occurred.  In other words, such a judicially approved non-waiver provision will have effect beyond the pending litigation, which isn’t the case now.  Since parties can provide by such an agreement that, for example, there will be no waiver irrespective of the care taken by the disclosing party, no-waiver provisions will no doubt become stock provisions in Protective Orders. An agreement between the parties on waiver issues won’t be effective unless it becomes part of a Court Order.  Rule 502(d) and (e).

The new Rule resolves conflict between courts throughout the country on whether an inadvertent production results in waiver.  North Carolina’s District Courts had reached different conclusions on that issue.  Scott v. Glickman, 199 F.R.D. 174 (E.D.N.C. 2001) and Parkway Gallery v. Kittinger/Pennsylvania H. Group, 116 F.R.D. 46 (M.D.N.C.1987) followed the flexible approach espoused by the new Rule, but the Western District had held that even an inadvertent production waived privilege, in Thomas v. Pansy Ellen Products, Inc., 672 F. Supp. 237 (W.D.N.C. 1987).

The Rule takes effect immediately upon the President’s signature.  It applies to all cases filed after its enactment, and applies to pending cases "insofar as is just and practicable."

I read about Congress’ passage of the Rule on the Electronic Discovery Law blog. The full text of the Rule is below, the explanatory note is here.

Continue Reading New Federal Rule of Evidence 502 Deals With Attorney-Client Privilege, Waiver, And Inadvertent Production

In North Carolina Superior Court, there is no civil procedure tradition more respected than the courtesy of a thirty day extension of time to answer a Complaint or to respond to discovery.  Like it or not, motions seeking the extra month are granted almost without exception, and are so routine that the requesting party usually doesn’t even bother to ask for the consent of opposing counsel.

The same courtesy applies in the Business Court, but there are rules to be followed.  Business Court Rule 9.2 says that "the movant shall have a good faith basis for requesting any such extension of time and, except in extraordinary cases, the movant shall first consult with any opposing party and reflect that party’s position in the motion and indicate whether the opposing party wishes to be heard on the motion."

If you don’t follow the Rules, you aren’t going to get your extension. That’s the message of a short ruling today in Velocity Fiber Broadband, LLC v. Lang Management, Inc., in which the required consultation hadn’t occurred.  Judge Jolly, in denying the plaintiff’s motion to respond to a counterclaim, stated "notwithstanding that the . . . reporting requirements of Rule 9.2 of the Business Court Rules may be viewed by some as merely a technicality and not substantive, the requirements are clear and simple, and compliance with them promotes efficiency in case administration by the court and counsel."

There are hyperlinked Business Court Rules available on the sidebar of this blog.  By hyperlinked, I mean that you can click on a section of the table of contents of the Rules and you’ll get taken to the particular Rule, and then you can click back again.