December 2008

Business Court Rule 15.12, which is titled "Determination Of Discovery Motions Through Oral Argument Without Briefs" states that "with the consent of both parties and as allowed by the Court, the parties may present motions and the Court may resolve disputes regarding discovery matters through the use of an expedited oral argument procedure. Such motions will routinely be limited to matters which can be argued and determined in one hour or less."

The Court will not consider the use of this expedited procedure without the consent of the non-moving party, as required by the language of the Rule.

In Hilb, the Court struck the Motion to Compel filed by the Plaintiff because consent had not been obtained.

Full Opinion

Can a confidentiality agreement be too broad to be enforced?  The North Carolina Business Court said it can be, under some circumstances, in Covenant Equipment Corp. v. Forklift Pro, Inc.

Before you keep reading, know that the case involved South Carolina, not North Carolina, law. North Carolina law on this point looks to be pretty different, as discussed at the very end of this post, but the case is still worth a look.

The facts are typical for a lawsuit against a former employee: Caldwell had sold his forklift business to the Plaintiff and became Plaintiff’s employee. As a part of the sale, Caldwell agreed that he “w[ould] not, directly or indirectly, disclose or furnish any non-public, proprietary or confidential information obtained from or relating to the Business.” 

Caldwell left the Plaintiff and started a new competitive business. The Plaintiff sued, arguing that Caldwell had breached his confidentiality obligations. Caldwell moved to dismiss this claim, arguing that under South Carolina law the confidentiality provision was overly broad and unenforceable.

The motion to dismiss was based on the South Carolina Supreme Court’s 1996 decision in Carolina Chemical Equipment Co. v. Muckenfuss, 471 S.E.2d 721 (S.C. 1996), where it held that a broad confidentiality agreement, which would have the effect of a covenant not to compete, will be subject “to the same scrutiny as a covenant not to compete.” The confidentiality agreement at issue in Muckenfuss prohibited the use of virtually all of the knowledge which Muckenfuss had gained during his employment with the plaintiff. The South Carolina Supreme Court held that this broad provision was tantamount to a covenant not to compete, and that it was invalid because it contained no restrictions as to time or territory.

The following year, however, the South Carolina Legislature overruled Muckenfuss, at least in part, by enacting the South Carolina Trade Secrets Act. A provision of that statute provides that “a contractual duty not to disclose or divulge a trade secret, to maintain the secrecy of a trade secret, or to limit the use of a trade secret must not be considered void or unenforceable or against public policy for lack of a durational or geographical limitation.” S.C. Code Ann. §39-1-30(D) (2007). (There is no counterpart to this provision in the North Carolina Trade Secrets Protection Act). 

Judge Tennille, finding no definitive guidance from South Carolina’s courts on the interplay between the court decision and the statute, interpreted South Carolina law to be as follows:

South Carolina law, as it applies to this case, prohibits an employer (or business purchaser) from enforcing a restriction on the use of information that would amount to an unlawfully broad restrictive covenant preventing a person from using the general skills and knowledge acquired as an owner or employee of a business. On the other hand, expiration of a restrictive covenant does not permit a former employee or business owner to use proprietary and confidential information or trade secrets of a business that are otherwise protectible.

Thus, Judge Tennille observed, South Carolina law would permit the Plaintiff to restrict Caldwell from using “specific customer or supplier pricing information” he had learned before leaving the company. But South Carolina law would not permit the Plaintiff to restrict Caldwell “from using his general knowledge of how prices are set in the forklift repair business to compete.”

The Court then denied the motion to dismiss, interpreting the confidentiality provision to be permissibly  limited to prohibiting Caldwell’s use of non-public, proprietary information to which he had access at the business he had sold, and which had been part of the assets purchased by the Plaintiff. 

There is no North Carolina appellate decision I’m aware of which analyzes a confidentiality agreement under the same factors applicable to non-compete agreements.  That approach was rejected by the Court of Appeals In Chemimetals Processing, Inc. v. McEneny, 124 N.C.App. 194, 476 S.E.2d 374 (1996), where the Court held:

An agreement is not in restraint of trade, however, if it does not seek to prevent a party from engaging in a similar business in competition with the promisee, but instead seeks to prevent the disclosure or use of confidential information. Such agreements may, therefore, be upheld even though the agreement is unlimited as to time and area, upon a showing that it protects a legitimate business interest of the promisee.

Chemimetals might leave room for a North Carolina court to say that a confidentiality agreement seeking to protect all information of a former employer is invalid because the breadth of such a restriction doesn’t protect "a legitimate business interest" of the former employer.  The Covenant decision might be of some help in an argument like that.

The photo at the top came from Tom Arthur’s Photostream on Flickr.

When a Plaintiff files a Rule 41 dismissal, and then refiles his action, Rule 41(d) of the North Carolina Rules of Civil Procedure requires that he must pay the costs of the first action as a prerequisite to pursuing the new action.  "[T}his section establishes a mechanical condition precedent that must be satisfied before that plaintiff may commence a new action based upon the same claims against the same defendant."

Full Opinion

Wachovia and Wells Fargo have probably reached a settlement with the Plaintiff in the class action lawsuit over the merger between the two banks.  The settlement, announced in Wachovia’s Form 8-K filed with the Securities and Exchange Commission yesterday evening, will if finalized require approval by the North Carolina Business Court.

The 8-K filing references a Memorandum of Understanding setting out the anticipated terms of the settlement.  The Memorandum wasn’t a part of the SEC filing, but the filing says that Wachovia and Wells Fargo will agree not to appeal the (pretty insignificant) win by Plaintiff on the invalidity of the 18 month "tail" in the Merger Agreement, and Wachovia will agree to make additional disclosures in its proxy statement.

The filing says the following:

Wachovia and Wells Fargo agreed not to appeal from the portion of the Court’s Order dated December 5, 2008 that enjoins the 18 Month Tail Provision. Wells Fargo for its part also agreed to waive the enforceability by Wells Fargo of the 18 Month Tail Provision to the extent enjoined by the Court’s Order. Wachovia and Wells Fargo also agreed to make certain additional disclosures related to the proposed merger, which are contained in this Form 8-K. The memorandum of understanding contemplates that the parties will enter into a stipulation of settlement.

The stipulation of settlement will be subject to customary conditions, including court approval following notice to Wachovia’s shareholders. In the event that the parties enter into a stipulation of settlement, a hearing will be scheduled at which the Court will consider the fairness, reasonableness, and adequacy of the settlement. There can be no assurance that the parties will ultimately enter into a stipulation of settlement or that the Court will approve the settlement even if the parties were to enter into such stipulation. In such event, the proposed settlement as contemplated by the memorandum of understanding may be terminated.

The Form 8-K also contains the additional disclosures which Wachovia agreed to make in its proxy statement. There’s nothing particularly new or revealing in those.

The picture of the Wachovia sign at the top is from CounterBreak, on Flickr.  

In this case, the Court rejected the unopposed motion of the plaintiff to place the entire contents of a case which had been settled under seal.  

The Court’s rationale ran like this:

  • It is inconsistent with the North Carolina Public Records Act, N.C. Gen. Stat. §§ 132-1 to 132-10 (2007), to put everything in a case file under seal.
  • The Public Records law provides that there should be "liberal access to public records," and that public records "must be made available for public inspection" in the absence of a “clear statutory exemption or exception."
  • Civil and criminal case filings are public records.  The public has a statutory right of inspection of court filings pursuant to N.C. Gen. Stat. § 7A-109(a) (2007).
  • The public’s right of access to court filings can be limited only “when there is a compelling countervailing public interest and closure of the court proceedings or sealing of documents is required to protect such countervailing public interest,” per the North Carolina Supreme Court’s decision in Virmani v. Presbyterian Health Servs., 350 N.C. 449, 476, 515 S.E.2d 675, 693 (1999).

Judge Diaz indicated that he would consider the arguments of the parties as to the need for sealing particular documents in "due course."

This isn’t the first time that the parties to this case tried to keep their dispute out of the public eye.  Back in September 2008, Judge Diaz entered an Order denying their request for a blanket protective order permitting them to file all exhibits to their briefs and pleadings under seal.  The rationale of that Order was pretty much the same as the order entered in December.

Full Opinion

All lawyers know, from first year torts class, that if you are hit by a baseball at a baseball game, you are unlikely to have any claim against the operator of the baseball stadium.  There’s a well developed body of law to that effect.

Today in Allred v. Capital Area Soccer League, Inc., the North Carolina Court of Appeals held that the rules of the game may be different when it’s a soccer game being played.  The Allred case is apparently one of only three cases in the country that deals with injuries suffered by spectators from soccer balls kicked into the stands.

The Plaintiff in Allred was attending a women’s professional soccer game at State Capital Soccer Park in Cary, North Carolina.  She was sitting in the stands behind one of the goals, and was hit in the head by a ball during warmups, when "many balls were directed towards the nets in a relatively short period of time."  Op. at 4..  She suffered "substantial head injuries."   Op. at 2. 

The trial court granted Defendant’s Motion to Dismiss on Plaintiff’s claim of negligence, but the Court of Appeals reversed.  Judge Steelman began the unanimous opinion of the Court by observing that there were no reported cases in North Carolina involving injuries to spectators at soccer games, but that the cases involving baseball games "have been uniformly decided against the spectator, either on the basis that the stadium operator was not negligent or that the spectator assumed the risk of being hit by a baseball."  Op. at 5.

The Court’s analysis then turned to two issues: the duty owned by the sports facility operator to the spectator, and whether the Plaintiff had assumed the risk by attending the game.

Continue Reading Watch Out For Soccer Balls, They Can Be Dangerous

The Court allowed a stay of discovery while it considered the Defendants’ Motions to Dismiss, stating that "a brief stay of discovery initiatives has the laudable potential of minmizing fees, expenses and the various costs of litigation for the parties in this matter.  Such a stay is in the best interests of justice."

Full Opinion

Brief in Support of Motion to Stay Discovery

Brief in Opposition to Motion to Stay Discovery

Bonus: Delaware Court of Chancery Letter Opinion staying discovery

The Internet advertising activities of the Defendants, including the use by Defendants of Plaintiff’s trademark to generate "sponsored links" in a Google AdWords campaign and the use of the Plaintiff’s trademark in metatags, supported personal jurisdiction in an infringement action.  The case, Market America v. Optihealth Products, Inc,  was decided by Magistrate Judge Eliason of the Middle District of North Carolina on November 21, 2008.

The parties compete in the sale of food supplements containing oligomeric proanthocyanidins, an antioxidant which is presumably good for you.  The Plaintiff’s product is OPC-3, for which it has a registered trademark. The Defendants sell a competing product under the trademark OPCXtra. 

The Defendants had sold some of their product in North Carolina, but argued that none of their allegedly infringing activity had occurred in this State because none of the product shipped to the State included Plaintiff’s trademark. The Court disagreed, however, and denied the Motion to Dismiss for lack of jurisdiction.  It found that "Defendants engage in a number of activities using Plaintiff’s trademark, which is intended to draw individuals to their website, which, in turn, is used to make out-of-state sales." 

Among those activities was the Defendants’ participation in Google’s AdWords program.  The Defendants had purchased through AdWords the word OPC3, the name of Plaintiff’s trademarked product.  That meant that if a person using Google searched for OPC3, a link to Defendants’ website would be returned. 

The Defendants had also placed metatags on their website which used the Plaintiff’s trademark.  Metatags aren’t visible, but if a person searched for "OPC" or "OPC3," that person would be directed to the Defendants’ website due to the metatags being "seen" by the search engine.

With regard to the metatags, Magistrate Judge Eliason held that "the mere fact that a defendant did not visually display the plaintiff’s trademark through the use of a metatag is not determinative on the issue of use, but rather is more properly a factor to be used in deciding whether there is a ‘likelihood of confusion’ caused by defendant’s activity." The Court declined to follow a Second Circuit decision, 1-800 Contacts v. WhenU.Com, Inc., 414 F.3d 400 (2nd Cir. 2005), which holds that the use of a metatag does not amount to use of a trademark.

The Court further held that the Defendants’ use of the OPC3 metatags was "for the express purpose of increasing the chance that Internet search engines will point potential customers, including customers from North Carolina, to their website."

Another factor in the denial of the Defendants’ Motion to Dismiss was their purchase of the domain name “www.opc3.com” so that Internet users typing in the “opc3” mark owned by Plaintiff would be directed to Defendants’ website and Defendants’ competing products.

The Court found the use of Google AdWords, metatags, and the OPC3 website were not "inadvertent choices," but rather "intentional activity seeking to use Plaintiff’s trademark in order to draw potential customers of Plaintiff to Defendants’ website. . . ."  That made out sufficient minimum contacts for personal jurisdiction, and the New York Defendant will as a result be defending this case in the Middle District of North Carolina.

The North Carolina Supreme Court reversed the Court of Appeals today in a case involving a claim of negligent misrepresentation over a realtor’s Multiple Listing Service (MLS) listing.

The Plaintiffs had purchased a home thinking it was connected to the city sewer system.  That’s what the MLS listing said.  That was wrong, the home actually had a septic tank, which repeatedly overflowed after the purchase.

Plaintiffs won a jury verdict, but the Court of Appeals reversed.  The basis for the reversal was that the version of the MLS listing given to the Plaintiffs was not the same version as put on the service by the Defendant real estate brokers. The Defendants’ listing stated "Information deemed RELIABLE but not GUARANTEED."  The version seen by the Plaintiffs did not have this language.

The Court of Appeals majority in Crawford v. Mintz, 653 S.E.2d 222 (N.C. App. 2007) held that "a buyer cannot demonstrate reliance on a representation made in an MLS listing unless that buyer relied on a version of the MLS listing containing the same qualifying language as was originally entered by the listing agent."

The Supreme Court’s reversal was based on Judge Steelman’s dissent.  He reasoned that the absence of the qualifying language "rather goes to the question of whether the plaintiffs relied upon the MLS listing, and whether any reliance was justifiable.  It was for the jury to determine the credibility of the witnesses, and the weight to be given to the evidence."

The Supreme Court didn’t write much of an opinion, it ruled Per Curiam, stating only that it was "reversing for the reasons stated in the dissenting opinion."

There were other several other rulings from the Supreme Court today, you can find them here.

The Plaintiffs in Fisher v. Communications Workers of America, 2008 NCBC 18 (N.C. Super. Ct. Oct. 30, 2008), a pending Business Court case involving the North Carolina Identity Theft Protection Act, are live and on YouTube, talking about their claims.

The Fisher case is the first court decision under the Act. It involves whether the posting of social security numbers on a bulletin board is a violation of the Act.  In his October 30th opinion, Judge Diaz denied the Defendants’ Motion to Dismiss.

The YouTube video (at the bottom of this post) brings out an interesting element of the case that isn’t mentioned in the Complaint. The Plaintiffs contend in the video that the bulletin board posting of their social security numbers was done by the defendant Union intentionally, to retaliate against them either because they wouldn’t join the Union, or because they wanted to (or had) quit the Union.  They say that the Union deliberately posted their social security numbers in order to expose them to the risk of identity theft. 

The video is on Freedom@Work, a blog associated with the National Right to Work Legal Defense Foundation.  The Foundation is representing the Plaintiffs and is publicly promoting their case, starting with a Press Release issued at the time the lawsuit was filed.

The use of YouTube in this way struck me as an unusual, and potentially risky, litigation strategy.  If you put your clients out on YouTube talking about their claims, you are not only creating deposition fodder for opposing counsel, you are also taking the risk that what they say about the lawsuit may not receive the absolute privilege that covers statements made in court proceedings. That’s true even if you put a faux courtroom background in your video, as the Foundation did in theirs.

https://youtube.com/watch?v=0AE4HnM7cSE%26color1%3D0x11645361%26color2%3D0x13619151%26hl%3Den%26feature%3Dplayer_embedded%26fs%3D1