January 2014

Chapter 75 claims have rarely fared well in the Business Court, though there is not much doubt about why they are included in almost every Complaint in the Court.  The prospect of treble damages (per G.S. §75-16) and attorneys’ fees (per G.S. § 75-16.1) is too tempting for many to pass up.

But this week in Powell v. Dunn, 2014 NCBC 3, Judge Gale provided some clear guidelines about when these claims don’t fit in the business litigation context because they are not "in or affecting commerce," an essential element under the statute.

The Plaintiffs in the case were holders of the common stock of Engenious Software, based in Cary, North Carolina.  The Defendants were former directors of the company who held preferred stock.  The directors negotiated a sale of the company, which had involved two potential acquirers and the services of an investment banker, for $40 million.  That sale apparently yielded nothing for the common shareholders.  The Plaintiffs made a claim for unfair and deceptive practices per Section 75-1.1 over the way the sale was handled, alleging a breach of fiduciary duty.

Judge Gale dismissed the claim, holding that:

when the unfair or deceptive conduct alleged only affects relationships within a single business or market participant, and not dealings with other market participants, that conduct is not “in or affecting” commerce within the meaning of Section 75-1.1,

Op. Par. 17.

He based that ruling on two North Carolina Supreme Court decisions construing the statute: HAJMM Co. v. House of Raeford Farms, Inc., 328 N.C. 578, 403 S.E.2d 483 (1991)  and White v. Thompson, 364 N.C. 47, 691 S.E.2d 676 (2010).

The White case was featured on this blog when it was decided, but the HAJMM case was decided before the idea of a blog was invented.  In HAJMM, the Court said that the statute extended only to “the manner in which businesses conduct their regular, day-to-day activities, or affairs, such as the purchase or sale of goods, or whatever other activities the business regularly engages in and for which it is organized.”  It affirmed the dismissal of 75-1.1 claims premised on unfair or deceptive acts related to the corporation’s capital raising efforts.

The Powell decision is also noteworthy for its rejection of  the Plaintiffs’ argument that the involvement of an investment bank in the transaction, and that another potential buyer was involved, made the claim one "in or affecting commerce."

Is a breach of fiduciary duty a per se violation of Section 75-1.1?  Judge Gale didn’t reach that question because the claim was not "in or affecting commerce."  Op. ¶ 20 & n.4.

Section 6-21.5 of the North Carolina General Statutes is the closest thing the State has to "loser pays." It allows for the award of attorneys’ fees to a prevailing party "if the court finds that there was a complete absence of a justiciable issue of either law or fact raised by the losing party in any pleading."

The plaintiff in Jacobson v. Walsh, 2014 NCBC 2, decided by Judge Murphy this week, didn’t ever give up on his claims for breach of fiduciary duty and fraudulent concealment (which depended on there being a fiduciary duty) even though he had virtually conceded those claims at his deposition. As a result, the Judge awarded fees in an amount to be determined to one of the Defendants.

Why?  The Plaintiff based his fiduciary duty claim against one of the Defendants on his "past investment experiences" with that Defendant (Walsh), as he had alleged in the Complaint.  But at his deposition, the Plaintiff said that he had no prior dealings at all with Defendant Walsh, and that his contrary allegation in the Complaint was "an oversight."  He even conceded at his deposition that there was no fiduciary relationship between him and Walsh.

Notwithstanding those concessions, the Plaintiff did not dismiss his fiduciary duty claim. Judge Murphy concluded that "the losing party persisted in litigating the case after a point where he should reasonably become aware that the pleading he filed no longer contained a justiciable issue." Op. ¶94 (quoting Sunamerica Fin. Corp. v. Bonham, 328 N.C. 254, 258, 400 S.E.2d 435, 438 (1991)).

So how much will Walsh recover in attorneys’ fees?  That remains to be determined.  Walsh was directed to submit an accounting of the the fees "reasonably incurred in defending against" the fiduciary duty and fraudulent concealment claims.  Op. ¶97.  Since there were multiple claims in the Complaint which were dismissed in the Order, the fees attributable to the fiduciary duty claim and the fraudulent concealment claim will be only a portion of the fees charged by Walsh’s lawyers.

If you are wondering, this isn’t the first time that the Business Court has socked an unduly persistent plaintiff with attorneys’ fees per Section 6-21.5.  Judge Gale did that in an Order in McKinnon v. CV Industries, Inc., which I wrote about in June 2012.

Just because an expert says something is so doesn’t mean that it is.  That’s the lesson of Judge Gale’s ruling last week in Carter v. Clements Walker, 2014 NCBC 1.  He rejected the evidentiary value of an expert’s report stating that Plaintiff’s damages were $33 million, saying that it was insufficient to create a genuine issue of material fact on whether Plaintiff had suffered any damages at all.

Some background will help.  The case is for legal malpractice.  Plaintiff, an inventor, alleged that the Defendant law firm committed malpractice by allowing a domestic patent application to be published before it filed an application for international patent rights.  Since some foreign countries require "absolute patent novelty" before granting a patent, Plaintiff couldn’t obtain a patent in those countries given the filing of the U.S. application.

The case has been up and down from the Court of Appeals.  The COA reversed the previous dismissal of the case.  It’s been the subject of blog posts here twice before, in 2010 and last year.

So now that the COA had breathed new life into the case, how was Plaintiff damaged by the alleged malpractice?  By the loss of the opportunity to sell or license his invention in those foreign countries in which he couldn’t secure a patent. What was the value of those potential revenues? If Plaintiff had had revenues in the U.S. from his invention, those might have served as a benchmark, but the invention had never been manufactured or licensed in this country.

Plaintiff relied on the report of an expert witness, which concluded that he had "lost total gross profits of approximately $33 million between the years of 2010 and 2020" as a result of not obtaining foreign patent rights.

Think that was enough to get to a jury as evidence of damages?  it wasn’t.  Judge Gale ruled that:

In light of the overwhelming evidence that [the Plaintiff]  had [not], at the time of [the expert’s] opinion, ever realized or reasonably projected any commercial value from the invention (even though it had domestic patent protection), [the expert’s] speculative, bare-bones conclusion is insufficient to create a genuine issue of material fact on whether [Plaintiff] suffered damages.

Op. ¶22 (emphasis added).

This isn’t the first time in the Business Court that an expert’s inadequate report has resulted in the dismissal of a case.  Judge Tennille dismissed a malpractice claim in Inland American Winston Hotels, Inc. v. Winston, 2010 NCBC 19 because the expert wasn’t qualified to testify.

And in Blythe v. Bell, 2013 NCBC 8, Judge Gale said in refusing to consider an expert’s report, saying that:

[w]hile the courts do not demand mathematical certitude in calculating lost profits, they do not countenance conjecture or speculation, and conjecture or speculation does not become admissible simply because it is presented by an expert. 

Op. ¶19 (emphasis added).

The Plaintiff didn’t rely solely on the expert’s report.  He also offered documents from the internet which he said showed that other products similar to the invention were being offered in foreign markets.  That didn’t provide admissible evidence in opposition to the motion for summary judgment.  Relying on an opinion from the COA, Judge Gale held that:

Unauthenticated “internet printouts . . . do not constitute admissible evidence for purpose of the analysis required in connection with . . . [a] summary judgment motion[.]”

Op. ¶25 (quoting Rankin v. Food Lion, 706 S.E.2d 310, 316 (N.C. App. 2011).