February 2009

In the 1930’s, North Carolina began an ad campaign describing the state as "Variety Vacationland."  UNC’s Wilson library says that the advertising resulted in a "growing number of visitors to places like Asheville, Pinehurst, and the Outer Banks" and that it "heightened their reputation as excellent vacation areas."

What do places like Pinehurst and the Outer Banks have to do with business litigation in North Carolina?  The answer is in the Fourth Circuit Court of Appeals’ opinion yesterday in OBX-Stock, Inc. v. Bicast, Inc.  The OBX case involves a trademark referencing the Outer Banks, and it discusses an earlier Fourth Circuit opinion addressing the "Pinehurst" trademark.

The Plaintiff had conceived of the OBX abbreviation to designate the Outer Banks of North Carolina, placing it on stickers, t-shirts, and other items. The Plaintiff was so successful that a broad variety of businesses began using the term as a shorthand designation for the Outer Banks.  The result, said Judge Niemeyer, was that "[t]he initials OBX are omnipresent in the Outer Banks and are universally understood as an abbreviation for ‘Outer Banks.’"

The Defendant came into Plaintiff’s crosshairs when it began selling stickers using the term OBXtreme "to denote the wide variety of extreme sports available at the Outer Banks."  The Plaintiff, which held four federally registered trademarks for OBX, sued for infringement.  It lost at summary judgment and the Court of Appeals affirmed.

The reason was that OBX wasn’t identified with any product.  Instead, it was merely descriptive of a geographical location.  The Court held that the term had become so widely and generally used that it had "entered the ‘linguistic commons’ as an often-used, everyday abbreviation of ‘Outer Banks.’"  Thus, In order to prevail, the Plaintiff needed to show that its descriptive mark had secondary meaning associated not with the Outer Banks, but with Plaintiff’s products.  The Court said that there was no such evidence.

In an interesting sidelight, the Fourth Circuit held that OBX couldn’t rely on its federal registrations because "the PTO only grudgingly issued the registrations after intervention by North Carolina’s congressional delegation."  The registrations had been rejected five times by the PTO based on its determination that OBX "had become nothing more than an alternative to Outer Banks and the terms were used ‘interchangeably.’"  The Court said that "quick process through the PTO," conversely, would "weigh[] in favor of validity."

In the earlier case involving the "Pinehurst" trademark, Resorts of Pinehurst, Inc. v. Pinehurst Nat’l Corp., 148 F.3d 417 (4th Cir. 1998), the Fourth Circuit held that Defendant had infringed by using "Pinehurst" in connection with its competing golf resort.  Pinehurst is a geographic location also, so what was the difference from the OBX case?  In Resorts of Pinehurst, the Court found the secondary meaning lacking in OBX, holding that the "Pinehurst" mark "had a clear secondary meaning in consumers’ minds, making it an enforceable trademark even if it might have been geographically descriptive.  Resorts of Pinehurst communicated its name to the consuming public effectively to associate the name with a private provider of golf courses and golf services, and not the geographical location in North Carolina."

My partners Reid Phillips and David Sar represented the prevailing Defendant.

The excitement from the Business Court today is a ruling on, of all things, the Rule Against Perpetuities.  The Opinion is in Brown Brothers Harriman Trust Co. v. Benson.

The subject of perpetuities is addressed in the North Carolina Constitution.  It says that "perpetuities and monopolies are contrary to the genius of a free state and shall not be allowed."  N.C. Const. Art. I, §34.

In 2007, however, the Legislature enacted G.S. §41-23, which repealed the common law Rule Against Perpetuities as well as the Uniform Statutory Rule Against Perpetuities (N.C. Gen. Stat. §41-15) as they apply to trusts created or administered in North Carolina.  N.C. Gen. Stat. §41-23(h).

The constitutionality of that statute was at issue in the Brown Brothers case, which involved a Trust formed by the grantor as a "perpetual or dynasty trust." With this type of trust, the principal is never transferred to any beneficiary.  Successive generations receive distributions, and the beneficiaries potentially avoid generation skipping taxes.  In the case of the Trust formed by Mrs. Benson, the Trustee had the specific authority to transfer title to the property owned by the Trust, a key factor in the Court’s ruling.

Mrs. Benson’s children instructed Brown Brothers to terminate the Trust immediately, contending that it violated the Rule and that the 2007 statute was unconstitutional.  This gave rise to the controversy before the Business Court, which held the Trust valid and the statute constitutional.

The Opinion by Judge Diaz is quite short.  It holds as follows

1. Section 41-23 of the North Carolina General Statutes, denominated as Perpetuities and Suspension of Power of Alienation for Trusts, (hereinafter the “Act”) is a valid exercise of the General Assembly’s legislative power to repeal both the common law Rule Against Perpetuities and the Uniform Statutory Rule Against Perpetuities, as they apply to trusts in North Carolina;

2. The prohibition against “perpetuities and monopolies” found at Article I, Section 34 of the North Carolina Constitution applies only to unreasonable restraints on the alienation of property and not to the vesting of remote interests; and

3. Because Plaintiff (as trustee of the Benson Trust) has the power to transfer title to any and all property that is part of the corpus of the Benson Trust, either by sale or by distribution to the trust beneficiaries, the Court holds that the Benson Trust is valid under the Act and does not violate the North Carolina Constitution.

The classic book on the Rule Against Perpetuities was written in 1886 by John Chipman Gray, a Professor at Harvard Law School who is pictured at the top.  You can imagine my great delight in discovering that Google has digitized the third edition of his book, published in 1914.  You can download the whole thing and read it at your leisure.

Plaintiff’s Brief in Support of Motion for Summary Judgment

Defendant’s Brief in Opposition to Motion for Summary Judgment

Plaintiff’s Reply Brief in Support of Motion for Summary Judgment

Amicus Brief of North Carolina Bankers Association

The Court struck Defendants’ Motion for Summary Judgment because it violated Business Court Rule 15.2, which requires that "[]ll motions, unless made orally during a hearing or trial, . . . be in paper writing or electronic form and . . . be accompanied by a brief . . . set out in a separate paper."  Defendants had incorporated their Motion and the arguments in support of the Motion into a single filing. 

The Court granted leave to refile the Motion, but observed that it had been filed before the close of discovery, and stated that "[w]hile it is true that, pursuant to Rule 56, ‘[a] party seeking to recover upon a claim . . . may, at any time after the expiration of 30 days from the commencement of the action . . . move with or without supporting affidavits for a summary judgment in his favor[,]’ N.C. R. Civ. P. 56(a) (2007), a ‘motion filed at the outset of a case that is not limited to purely legal issues should be carefully scrutinized because at least some discovery is usually warranted where factual contentions are in dispute,’ 2 G. Gray Wilson, North Carolina Civil Procedure § 56-7 (3d ed. 2007)."

The Court said that it would "carefully scrutinize any such Motion to determine whether it should be heard before the close of discovery."

Full Opinion

The Court ruled that Defendants’ appeal, following an adverse judgment on liability, did not affect a substantial right even though the damages phase of the trial remained.  The Court found that it had continued jurisdiction over the case and that it could proceed with the damages phase notwithstanding the pendency of the appeal. The Court also ruled that it would not stay the case during the pendency of the appeal. 

The Court denied the Plaintiffs’ request for the appointment of a receiver, but held that it would impose conditions on the Defendants’ operation of their business.  It held that:

The Court’s greater power to appoint a receiver for the Company logically includes the lesser power to require the parties who are in control of the Company’s assets to maintain those assets in an appropriate and businesslike manner, including hiring an independent accountant to maintain the books and records of the company pendente lite and directing [the Defendants] to cease making personal use of Company assets.

Full Opinion

 

You’ve certainly been caught in the gap between a trial court proceeding that isn’t completely over, and an interlocutory appeal. One side wants to proceed ahead in the trial court, but the other wants a reversal in the appellate court. Can the trial court proceed?

The Business Court entered an Order today in the case of Land v. Land which involved exactly this situation.  The Court had bifurcated the trial on liability and damages, and the liability phase had ended with a verdict for the Plaintiffs.  The Defendants, wanting to avoid the damages phase of the trial, filed an interlocutory appeal.  The Plaintiffs objected, pushing for a resolution of the damages issue in the Business Court before heading to the Court of Appeals.

The issue was whether the Defendants would be deprived of a "substantial right" which would be "lost absent immediate review."  The authority to make this decision rests initially with the trial court, and the Court of Appeals ultimately makes the determination whether it will hear an appeal.

Judge Tennille concluded that the Defendants’ appeal did not affect a substantial right permitting an immediate appeal.  He held:

In this case, the only right affected by denial of the interlocutory appeal would be the Defendants’ right to avoid the second phase of the bifurcated proceedings. While this may be inconvenient for the Defendants, it clearly does not trigger the substantial right provision for interlocutory appeals, since “[t]he avoidance of a rehearing or trial is not a substantial right.” . . .  There is no possibility of inconsistent verdicts present and no risk of an irreparable loss of any substantial right if the Defendants must await final judgment before pursuing their appeal. In short, the Court concludes as a matter of law that the Defendants’ appeal does not affect a substantial right.

The Court noted that it had the discretion to stay the case pending the conclusion of the appeal, but it declined to do so.  Judge Tennille observed that the bifurcation of the issues had come at the Defendants’ request, over the Plaintiffs’ objection, and that there would be a long delay before a final conclusion if he were to stay the case.  He stated:

The jury found liability.  It is time to complete damage discovery and have a trial on damages so that the appellate courts can review the case as a whole rather than in a piecemeal process that could result in the case lasting a decade.  It would be manifestly unjust if this case did not move forward.

The successful result for the Plaintiffs in the liability phase of the trial was the product of the great work of my partners, Reid Phillips and Jennifer Harrod.

The Business Court on its own motion remanded a case which had been designated to the Court based on its mandatory jurisdiction over cases involving unfair competition.

In the Notice of Designation, the Defendant asserted that "as a case between two direct competitors focused on slander and libel claims, this lawsuit meets the criteria for designation as a mandatory complex business case because it expressly involves state ‘unfair competition law’ separate and apart from section 75-1.1." The Defendant further alleged the Plaintiff’s allegations of false statements by the Defendant regarding the Plaintiff’s "methods of business and corporate integrity" brought the case within the mandatory jurisdiction of the Court.

The Court disagreed, stating in its brief Order that the case was "primarily concerned with libel and slander claims."

Full Opinion.

Notice of Designation and Complaint

There weren’t any opinions from the Court of Appeals last week which would have been considered for the legal equivalent of an Oscar, but three cases are worth an honorable mention.  They involve arbitration, the statutory requirements for contracting with a municipality, and a healthcare law case involving Certificates of Need.

Arbitration

The arbitration case is WHD v. Mayflower Capital, LLC, in which the Court made a rare reference to the Commercial Arbitration Rules of the American Arbitration Association. The Defendant argued that the arbitrator had erred by failing to require the Plaintiff to produce a settlement agreement. The Court disagreed, noting the authority that an arbitrator has under AAA Rule 21 (permitting an arbitrator to direct the production of documents, and authorizing an arbitrator "to resolve any disputes concerning the exchange of information”) and AAA Rule 31 (stating that the parties “shall produce [at the hearing] such evidence as is relevant and material to the dispute.”).

The Court also rejected the Defendant’s argument that the arbitrator had made a mistake by permitting the introduction of a criminal conviction of the Defendant which would not have been admissible under the Rules of Evidence.  It said twice in its opinion that “if an arbitrator makes a mistake, either as to law or fact, it is a misfortune of the party, and there is no help for it,” quoting an 1895 Supreme Court decision, Patton v. Garrett, 116 N.C. 848, 21 S.E. 679 (1895).  John Ormand in Brooks Pierce’s Raleigh office represented the Plaintiff.

Contracting With Municipalities

The municipality case is National Railroad Museum and Hall of Fame, Inc. v. City of Hamlet.  Hamlet was the home of the National Railroad Museum and Hall of Fame.  According to the Court’s opinion, the Museum housed "exhibits, antiques, artifacts, and general materials relating to the development of the railroad industry in North Carolina and the United States as a whole." 

The Museum operated in a building leased from the City, but the parties appeared to have agreed that the building would be torn down and that they would attempt to obtain financing to build a new home for the Museum’s artifacts.  When that didn’t happen, the Museum sued. 

Blocking the tracks for the Museum was Section 160A-16 of the General Statutes, which requires contracts by or on behalf of a city to be in writing, and which says "a contract made in violation of this section shall be void and unenforceable unless it is expressly ratified by the council."  Although the City Council had adopted a resolution supporting "the depot project," and it had submitted a funding application to the Department of Transportation, the Court of Appeals held that these facts didn’t make out either an express contract or a duly ratified agreement.

Certificate of Need

Last, the CON decision is Total Renal Care of NC, LLC v. North Carolina Dept. of Health and Human Services, The Court held that when a party awarded a CON completes the construction of the facility and it becomes fully operational, an appeal challenging the award of the CON is moot.  The Court relied on a 2005 per curiam decision of the North Carolina Supreme Court in Mooresville Hosp. Mgmt. Assocs. v. N.C. Dep’t of Health & Human Services, 360 N.C. 156, 622 S.E.2d 621 (2005), and held:

Both parties recognized during the pendency of this appeal that, as in Mooresville,  the appeal could become moot upon the completion of BMA’s facility. We must presume that the General Assembly recognized such a possibility in enacting the CON Law. Even if the General Assembly failed to recognize this possibility prior to the Supreme Court’s decision in Mooresville, in the more than three years since that case was decided, the General Assembly has not revised the CON Law to provide for a stay of either the construction or operation of a facility for which a CON has been issued pending an appeal from a final agency decision.

So if you are awarded a CON, build fast.  Or at least faster than the Court of Appeals can rule.

Members of a "pretended corporation" may have personal liability as individuals when a plaintiff has extended credit to the corporation, but they are not personally liable for all contractual obligations of the corporation.  In this case Defendant, a shareholder of a corporation that had not been formed, was not personally liable for the pretended corporation’s failure to make a capital contribution to an entity formed by the Plaintiffs. 

Full Opinion