May 2010

The sealing of a complaint due to confidentiality concerns is more than an administrative exercise, according to a Business Court order last week.  Parties seeking to maintain a complaint under seal will face a heavy burden, and the Court signaled a willingness to revisit orders of other courts, both inside and outside North Carolina.

In Smith v. Raymond, a shareholder derivatively sued various directors and officers of a corporation.  Procedurally, the dispute began in the Delaware Chancery Court, in which the Plaintiff sued the corporation itself to obtain access to the company’s books and records.  Under the terms of a stipulation in that case, if the Plaintiff relied on information obtained in that case to file derivative claims later, he was required to obtain the Chancery Court’s permission and to file the complaint under seal.

The Plaintiff followed the Delaware court’s order and filed his complaint under seal in Mecklenburg County.  He obtained an order from a resident Superior Court judge approving the sealing of the complaint, then designated the case as a mandatory complex business case.  Like many Superior Court orders, the sealing order did not recite any findings of fact or conclusions of law.  It read in its entirety:  "Plaintiff having moved the Court for leave to file his Complaint under seal, and good cause appearing therefore [sic], IT IS HEREBY ORDERED that Plaintiff may file his Complaint in the instant action under seal."

Judge Diaz held that he was not bound by either the Delaware stipulation or the pre-designation Mecklenburg County order.  First, the Business Court has the inherent authority to modify orders entered by a pre-designation judge.  Second, although the parties contemplated that the lawsuit would be brought here, the stipulation itself was entered by the Delaware Chancery Court.  "Put bluntly, the Stipulation does not bind this Court."

The Court stated that sealing of court documents "is inconsistent with the North Carolina Public Records Act."  Under existing law, "Absent ‘clear statutory exemption or exception, documents falling within the definition of ‘public records’ in the Public Records Law must be made available for public inspection.’"  (See News & Observer Publ’g Co. v. Poole, 330 N.C. 465, 486, 412 S.E.2d 7, 19 (1992)).  Court records are public records, and their sealing is appropriate 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.”  (See Virmani v. Presbyterian Health Servs., 350 N.C. 449, 476, 515 S.E.2d 675, 693 (1999)). 

After examining the complaint, the Court concluded that it was "hard pressed" to find such a countervailing public interest to support sealing the entire complaint.  There were no documents attached to the complaint, so the express terms of the stipulation were not violated.  Although there were quotes from some documents in the complaint, most of those quotes were taken from letters between the CEO and other officers and directors of the corporation.

The Court gave the parties ten days to file supplemental briefs if they insisted that the entire complaint needed to remain under seal.

(The image is the 1981 cover from the single "Our Lips Are Sealed" by the superfluously-apostrophed band The Go-Go’s).

Full Order

We can’t say it better than Mack Sperling did about eight months ago:  "If you are thinking of designating a case to the Business Court because the Complaint raises allegations that the corporate veil should be pierced, stop.  Those types of allegations, without more, aren’t enough to invoke the mandatory jurisdiction of the Court. "

In case you’re wondering, the Business Court has not changed its mind since November.  Earlier today, in Bullard v. Liberty Healthcare Services of Mary Gran Nursing, LLC, Judge Tennille on his own motion denied the Defendants’ designation of the matter as a mandatory complex business case.  As the Court stated unequivocally, "Piercing the corporate veil alone is insufficient to establish mandatory jurisdiction."  It is not the first time, or even the second time, the Court has made that statement.

The Notice of Designation contained a number of allegations regarding the potential complexity of the matter.  By remanding the case, the Business Court has reiterated that, when it comes to mandatory jurisdiction, the question is whether the matter fits into one of the "business" categories of Section 7A-45.4 of the General Statutes, regardless of complexity.  Rule 2.1 designation remains available for cases in which complexity (plus some business relationship) makes up for a case not fitting within the statute.

An award of damages for breach of a noncompete agreement, like any other damages award, requires evidentiary support.  In a judgment issued yesterday after a bench trial, the Business Court awarded the plaintiffs nominal damages absent such evidence.

In HILB Rogal & Hobbs Co. v. Sellars, the Court faced a common factual scenario:  a former vice president of the plaintiffs resigned and went to work for a direct competitor.  The businesses in question were insurance companies targeting building materials suppliers.  The plaintiff and defendant executed an employment agreement that contained standard restrictions on post-employment competition and on the use of confidential business information.

Two days after interviewing for the competitor’s job, the defendant

copied the entire hard drive of his work computer, which contained, among other things, confidential and proprietary information about [plaintiffs’] Lumber Program accounts and business strategies, including account files and lists, policy expiration dates, policy terms, conditions and rates, internal and external pricing and profit margins, information relating to accounts’ risk characteristics, and carrier information.

He resigned two weeks later and went to work for the competitor, taking the confidential information with him.  (The Court ordered him to return the confidential information in 2008).

Plaintiffs asserted claims for breach of fiduciary duty, breach of contract, and unfair & deceptive trade practices, and defendant counterclaimed for breach of contract for unpaid salary.  Judge Diaz applied New York law to the claims.

During the lawsuit, the defendant took two Rule 30(b)(6) depositions of the plaintiffs concerning their claimed damages.  At those depositions, the witness, another vice president of plaintiffs, disclaimed lost profits, as did counsel for the plaintiffs.  The witness did not know of the origin or calculation of two summary exhibits that plaintiffs attempted to use at the bench trial — those exhibits were prepared by other employees, none of whom testified at trial.  Judge Diaz noted at least eleven unexplained discrepancies between the two exhibits.  Moreover, the Rule 30(b)(6) witness "could not rule out the possibility that the damages exhibits contained amounts for lost revenues for business that Plaintiffs could not underwrite, irrespective of [defendant’s] alleged breach of the Employment Agreement."

The damages witness suddenly became unavailable for trial due to the pre-trial but post-discovery termination of his employment — he declined to appear voluntarily, and he was outside the Court’s subpoena power.  The plaintiffs attempted to notice a de bene esse deposition less than one month before trial.  The Court quashed the notice of deposition based on a month-long delay between plaintiffs’ awareness of the witness’s unavailability and the issuance of the notice, as well as the fact that the Court already had continued the trial once to allow de bene esse depositions to occur.  Thus, plaintiffs had to rely upon his deposition testimony.

Although the plaintiffs proved that the defendant breached his fiduciary duty and breached the employment agreement by copying the contents of his hard drive before resigning, the Court held that there was insufficient evidence of damages.  Under New York law, breach of fiduciary duty damages "are limited to profits lost from the actual diversion of customers," a damages theory that the plaintiffs waived. The Court awarded $1 in damages for the breach of contract claim.

Although the plaintiffs attempted to rely on a liquidated damages formula in the employment agreement, the Court similarly held that they had not provided sufficient evidence of the components of that formula.  Specifically, the Court rejected the argument that the summary exhibits were admissible business records under Rule 803(6) because the Rule 30(b)(6) witness did not lay any foundation for admissibility or for the reliability of the figures contained in the exhibits.  The Court awarded $1 in damages for the breach of contract claim.

The Court rejected the unfair and deceptive trade practices claim, holding that North Carolina’s Chapter 75 was inapplicable under the "most significant relationship test" and that, even if it applied, the lack of actual damages was fatal to a UDTP claim.  Likewise, the Court found no basis to award punitive damages or attorneys’ fees.

As for the counterclaim, the employee asserted that he was entitled to over $94,000 in unpaid salary.  The plaintiffs responded that an interim $50,000 payment constituted an accord and satisfaction.  The Court rejected plaintiffs’ defense on the grounds that they failed to prove that the $50,000 was intended to settle all compensation claims or that the defendant was informed of that intention before he accepted the check.  Instead, the Court offset the $50,000 payment from the employee’s salary claim and awarded him the balance.

Although the claims on both sides arose under New York law, there is no apparent reason why the result would be different under North Carolina law.  In either event, enforcement of a noncompete provision can prove to be an expensive proposition (here, two and a half years of litigation), particularly where the former employee has counterclaims.

Full Order and Judgment

[UPDATE:  In an Order dated July 6, 2010, Judge Diaz denied the company’s motion to reconsider the ruling on the employee’s counterclaim].

The North Carolina Business Court was formed in 1995, largely inspired by Delaware’s Chancery Court.  Our state recently returned the favor:  Delaware now has created its own business court division of its Superior Court, sparked by the experiences of North Carolina and sixteen other states.  Delaware’s new Complex Commercial Litigation Division (“CCLD”) shares some common elements with our Business Court, but differs in other aspects.

For the core details of the CCLD, we recommend the summaries from two blogs that you should be reading anyway:  the Delaware Corporate and Commercial Litigation Blog and the Delaware Business Litigation Report.  In addition, if you’d like to see how business courts in other states are structured, you should check out the appendix to the report of the Delaware special committee that was appointed to survey such courts.

Like our Business Court, the CCLD features assignment of a case to a single judge from cradle to grave and more uniform, intense, and proactive case management than in the courts of general civil jurisdiction.  Here are a few interesting comparisons and contrasts between the CCLD and our Business Court:

Topical Definitions of Jurisdiction:  To qualify for mandatory complex business designation in North Carolina, a case must fit into at least one of seven defined categories:  corporate or other entity law, securities law, antitrust law, state trademark or unfair competition law, intellectual property law, Internet / e-commerce / biotechnology, and certain tax cases.  The CCLD, on the other hand, has a list of categories that will be excluded per se from its jurisdiction:   personal, physical, or mental injury cases; mortgage foreclosure cases; mechanics’ lien cases; condemnation proceedings; and any case involving an exclusive choice of court agreement where a party to the agreement is an individual acting primarily for personal, family, or household purposes or where the agreement relates to an individual or collective contract of employment.

Choice of Court Agreements:  Speaking of that last clause, the CCLD has jurisdiction over any case not otherwise excluded in which the parties have selected the CCLD through an exclusive choice of court agreement.  There is no corresponding provision in our statutes or rules that permits parties to contractually "select" the Business Court if a case does not qualify through mandatory jurisdiction or Rule 2.1 practice, although it would be interesting to see how many North Carolina businesses would utilize such clauses in their contracts if permitted.

Amount in Controversy:  As long as the subject matter is not excluded, the CCLD will have jurisdiction over any case with $1 million or more in controversy.  North Carolina does not have any such qualifying amount.  Nevertheless, a large amount in controversy may influence the decision of a Senior Resident Superior Court Judge to recommend complex business designation under Rule 2.1 (or exceptional case designation under Rule 2.1).

Judicial Assignments:  North Carolina has three Special Superior Court Judges who focus on cases assigned to the Business Court.  They occasionally are drafted to fill in for other Superior Court judges for regular civil or even criminal trial calendars, but that is an irregular occurrence.  The three judges of the CCLD, in contrast, apparently will continue to hold regular civil terms hearing both CCLD cases and cases that do not qualify for CCLD designation.  CCLD cases automatically will take priority over non-CCLD cases on a judge’s calendar.

Designation Procedure:  In North Carolina, a mandatory complex business case is designated by filing a Notice of Designation with the Clerk of Superior Court, with copies to the Chief Justice and the Chief Business Court Judge.  Cases outside mandatory complex business jurisdiction can be assigned to the Business Court upon motion to the Senior Resident Superior Court Judge, who makes a recommendation to the Chief Justice, who ultimately determines whether or not such a case will be assigned.  Delaware makes it easier:  a qualifying case can be designated by typing the appropriate four-letter code on Delaware’s equivalent of our AOC’s Civil Action Cover Sheet (AOC-CV-751, for those of you scoring at home).  In both states, a party opposing designation can challenge it by filing the analogue of a federal court motion to remand, and in both states, such a motion is resolved by the presiding judge of the specialized court.