February 2016

Disclosure only settlements are in deep trouble in Delaware based on the Court of Chancery’s decision last month in In re Trulia Inc. Stockholder Litigation.  That decision is said to have sounded a "death knell" in Delaware for such settlements.

If you are not familiar with disclosure only settlements, David Wright provides a good explanation on Robinson Bradshaw’s Carolinas Class Action blog.

In the Trulia Opinion, Chancellor Bouchard concluded after an extended analysis (on pages 25-43) of each of the disclosures on which the settlement (and fee) were based that "none of the supplemental disclosures  were material or even helpful to Trulia’s stockholders" and declined to approve the settlement, which would have involved a fee to the lawyers obtaining the disclosures of up to $375,000.  The Chancellor said that the Chancery Court would be "increasingly vigilant in scrutinizing the ‘give’ and the ‘get’" of  disclosure only settlements.  Op. at 2.

How will this affect disclosure only settlements in North Carolina?  Hardly at all, at least based on how I read the recent Order by Judge Gale in Corwin v. British American Tobacco PLC, 2016 NCBC 14 which certified a class, approved a disclosure only settlement, and awarded Plaintiff’s counsel nearly $400,000 in fees.

The Objection To The Corwin Settlement

The Corwin case was brought by a Reynolds shareholder attacking the transaction by which Reynolds American, Inc. (formerly R.J. Reynolds Tobacco) acquired Lorillard Tobacco.  Mr. Corwin originally sought to enjoin the transaction from proceeding, but he dropped that Motion in exchange for a settlement involving a limited group of additional disclosures.

Only one objection to the settlement was filed.  It was by a Lorillard shareholder named James Snyder.  I read Mr. Snyder’s Objection at the time it was filed and thought it was well done, especially coming from a person who I assumed was not a lawyer, as he said in his Objection that he was "in the process of retaining counsel."

Later, I found out (from the Plaintiff’s response to the Objection) that Mr. Snyder was not only a lawyer, but that he had previously been General Counsel for Family Dollar Stores, and in-house counsel for Home Depot, Inc.  Before that, he was a partner at King and Spalding in Atlanta.

Mr. Snyder fired off his most potent attack on the settlement through an Affidavit from a law professor/expert witness he retained named Sean Griffith.  Professor Griffith’s CV is very impressive (he has just about everything in it but a Supreme Court clerkship). 

Professor Griffith’s Affidavit excoriates the value of the additional disclosures obtained by Corwin.  Say you were a Reynolds shareholder interested in reviewing the Reynolds proxy statement and the additional disclosures obtained via the class action.  Here’s what you got:

  • The "unlevered free cash flow projections" for Reynolds and Lorillard.  Given the wealth of financial data in the original proxy statement, this probably was useless additional information for a "reasonable investor."
  • A statement that Reynolds had not, at the time the transaction was announced, entered into a "technology-sharing initiative" with British American Tobacco.  You knew that there was no agreement in place even before the additional disclosures, as Reynolds referred in its original proxy statement only to "an agreement in principle" with BAT.  That was a pointless additional disclosure.
  • A statement that Reynolds "could not predict future regulatory action with regard to menthol" cigarettes.  Well, duh, who can predict future regulatory action?

The Business Court Said That It Had Carefully Assessed The "Give" And The "Get" of The Settlement

I was looking forward to Judge Gale weighing the value of these seemingly worthless disclosures, and dealing with Professor Griffith’s Affidavit, but he didn’t.  He covered the disclosures in a mere 15 words, saying that "[t]he Court has carefully balanced the ”give’ and the ‘get” of the proposed Partial Settlement," and he overruled the Objection. Order 11(f).  There wasn’t any discussion of whether the "give" (the $379,389.65 in fees) was an appropriate exchange for the "get" (the additional disclosures and a release by the class).

The applicability of the Trulia decision in North Carolina as a basis for disapproving disclosure only settlements was dealt with in this way:

the Court noted that there are differences between Delaware law and North Carolina law that may be relevant to Chancellor Bouchard’s favored approach of reviewing fee requests based on supplemental disclosures. . . . That approach is possible because Delaware courts employ the common-benefit doctrine when approving attorneys’-fee requests.  North Carolina does not.

Order 11(f).  I have puzzled over the significance of the lack of recognition of the common-benefit doctrine in NC, and I just don’t get it.  Even though our state doesn’t recognize the "common-benefit doctrine" — which means that when a shareholder obtains a substantial benefit (though nonmonetary) for other shareholders, a fee can be awarded —  it still is settled in NC that a court certifying a class action and approving a settlement is bound to assess the reasonableness of fees to be awarded to class counsel.  See, e.g., Ehrenhaus v. Baker (N.C. App. 2015)(a trial court considering a class action settlement "must ascertain whether the proposed settlement is fair, reasonable and adequate.").

Judge Gale did take steps towards assessing the reasonableness of the fee.  He said that the hourly rate yielded by the fee was $325.00 per hour, which he said was "reasonable, and clearly not an excessive rate."   Order  ¶11(n).  And he also said that the fee award was "consistent with, and in fact less than, the amount of fees awarded in connection with other disclosure-based settlements that have come before this Court for approval" and that the amount of the fee was also in line with "what a Delaware court would award in similar litigation," Order ¶11(o),  Whether that statement regarding what the Delaware Court of Chancery would have done if this settlement had been before it is open to debate, given the Trulia decision.

But there is absolutely nothing contained in this Order about whether the additional disclosures provided any meaningful new information to the Reynolds shareholders.  Maybe, in North Carolina, the Business Court is not going to bother to consider whether additional disclosures traded in exchange for a at fee award are really worth anything.

What Would Judge Tennille Have Done With This "Stinky Fee"?

I”m disappointed by the lack of analysis of these disclosures.  I think that Judge Tennille, the first Judge to serve on the Business Court, would have handled this differently.  Five years ago, in an unpublished Order, he railed against what he referred to as the "stinky fees" paid to the lawyers challenging merger transactions and settling for getting the disclosure of "additional information."

But if the result of the Business Court’s decision in Corwin is that it is seen as a welcome mat for lawyers to bring more class actions in North Carolina courts challenging merger transactions, that’s probably at least good for the North Carolina lawyers defending those actions.

It is worthwhile to point out that this blog does not represent the views of Brooks Pierce.  These views are only my own and they shouldn’t be interpreted as a criticism of Judge Gale.  Only . . .  disappointment in the Corwin decision.

The Business Court issued a significant Order last week, in Composite Fabrics of America, LLC v. Edge Structural Composites, Inc., 2016 NCBC 11 that Judge Gale said was an "opportunity to clarify. . .how the Court interprets the statutory mandates for designating a case as a mandatory complex business case"  and that the Business Court is not a court of separate jurisdiction.  Order 2.

Some Guidance About Designating A Case To The Business Court As A Mandatory Business Case Based On A Counterclaim

A counterclaim can be the basis for a notice of designation.  That Is true even though the statute governing a designation of a case to the Business Court (N.C. Gen. Stat. §7A-45.4(d)) does not mention a counterclaim as a basis for a designation.  It says only that a notice of designation may be filed:

by the plaintiff, the third-party plaintiff, or the petitioner for judicial review contemporaneously with the filing of the complaint, third party complaint, or the petition for discretionary review in the action.

N.C. Gen. Stat. §7A–45.4(d)(1).

Notwithstanding the absence of any mention of a counterclaim in the statute, Judge Gale ruled that the Court interpreted that language to include counterclaim plaintiffs and counterclaims as well as the party against whom a counterclaim is being asserted.  Order 18.

Thus, he concluded, that "a party may use its counterclaim as the basis for a notice of designation.  Order 9. 

If a party wants to base its notice of designation on both the Complaint and its own counterclaim, it needs to act quickly. The thirty day time limit on filing a notice of designation (contained in G.S. §7A-45.4(d)(3) plays a role here. Judge Gale said that:

if a counterclaimant wishes to rely on the opposing party’s complaint as well as its own counterclaim as a basis for mandatory designation, the notice of designation would need to be filed within thirty days of service of the complaint and contemporaneously with the counterclaim.

Order 19.  That would require the Answer containing the counterclaim (and the contemporaneous notice of designation) to be filed more quickly than they might ordinarily be filed given the general practice of getting a thirty day extension of time to file an Answer.

If the counterclaim is the first pleading to warrant a designation, then the opposing party has thirty days from the date of service of that pleading to file a notice of  designation.  But things are different if the counterclaim is the first pleading to raise an issue that qualifies for mandatory designation.  Then, the thirty day period is measured from the filing of the counterclaim.  That’s so long as the new pleading "is not being made for an improper purpose."  Order 21.

Things can be tricky if the notice of designation is based on the Complaint, before the counterclaim is filed.  But what if the notice of designation is filed based upon the Complaint, and the party seeking designation then files a counterclaim that would warrant a designation?  That was the situation faced by Judge Gale in the case before him. He said that "[w]hether [this type of situation] involves material issues within the scope of section 7A-45.4(a) must therefore depend on the allegations in the . . . Complaint."  Order 22.  But even so, the Business Court would consider the counterclaims "to inform it" whether [the claims made in the Complaint] necessarily include material issues that fall within the scope of the matters upon which a designation is allowed.  Order 23.

You can lose your right to designate a case on a counterclaim. If you forego designating a case which would have been appropriate for a mandatory designation based on the Complaint and let the thirty day period for designating lapse, you can’t "renew [your] right to designation by filing a counterclaim."  Order ¶20.

Beware of Business Court Rule 3.2

Business Court Rule 3.2 is titled "Contents of Notice of Designation."  It directs the party filing a notice of designation "to not only describe how the case falls within one or more categories of section 7A-45.4, but to further identify factors that demonstrate why the Business Court is the appropriate venue for that case."  Order 24.

The portion of that  Rule requiring the designating party to "further identify factors" warranting designationis a survivor from the early days of the Business Court, before the NC General Assembly enacted the statute specifying "mandatory designations."  Cases were then designated to the Business Court through a discretionary assignment by the Chief Justice of the NC Supreme Court.

Judge Gale said of BCR 3.2 that its factors:

are useful in managing and assigning cases among the Business Court judges and may be useful in resolving requests for discretionary assignments.  But those factors do not provide a stand-alone basis for mandatory designation.  For a case to be certified as a mandatory complex business case, the pleading upon which the designation is based must raise a material issue that falls within one of the categories specified in section 7A–45.4.

Order 25.

Business Court Rule 3.2 is not long for this world.  Amended Rules are in the works.  The new Rule 3.2, which I’ve had an opportunity to see, not longer deals with the "contents of a designation."  The proposed new rule is captioned "Who may file", covering who can use the Court’s electronic filing system..

The Business Court Is Not A Court Of "Separate Jurisdiction"

Judge Gale observed that "litigants often refer to the ‘Business Court”s jurisdiction" and to its "subject-matter jurisdiction."  Order 26. 

But he questioned the use of those terms, stating that the Business Court is "merely an administrative division of the superior court in the General Court of Justice."  And a Business Court Judge is just a type of Superior Court Judge:

Just as a special superior court judge may be assigned to matters in any of these counties, when a Business Court judge is assigned to a case that has been designated as a complex business case, whether by a mandatory or discretionary assignment, he is commissioned to preside over that entire case until its conclusion, and he proceeds with the same authority as any other superior court judge who may be commissioned to hear matters in that case.

Order 27.

Coincidentally, the North Carolina Court of Appeals observed this week that the Business Court "is a superior court."  .  It said in American Mechanical, Inc. v. Bostic that:

while the Business Court is tasked with the adjudication of cases involving specialized subject matters by judges who have been designated for this purpose, it remains a part of the superior court division of the General Court of Justice.

Id. at 14.

The Terms "Removal" And "Remand" Don’t Apply To Business Court Designations

I”m not sure why Judge Gale found it necessary to discuss the nature of the Business Court’s jurisdiction, but he did use the Composite Fabrics Order to point out that the words "removal" and "remand" shouldn’t be used when discussing a designation to the Business Court or a successful opposition to a designation.  Those words are concepts of the process by which cases commenced in state court are transferred to federal court  Cases are "removed" from state court to federal court per 28 U.S.C. §1446(a), and they can be sent back to state court (remanded) per 28 U.S.C. §1447

Lawyers in the Business Court often pick up on those terms, saying that a case is "removed" to the Business Court upon a successful designation, and "remanded" when an Opposition to a designation is granted.

Judge Gale pointed out that the designation of a Business Court case does not "remove" a case, as it always remains venued in the county in which it originated.  For that same reason — that "the case has never left its county of origin" — the withdrawal of a designation "does not constitute a ‘remand’." Order 28.

So avoid using those terms when designating a case to the Business Court, or contesting a designation via an Opposition.


The NC Business Court’s decision last month in Krawiec v. Manly, 2016 NCBC 7, illustrates a couple of things not to do in the Court.

Don’t Make "Aiding and Abetting" Claims

The Plaintiff made a claim against some of the Defendants for aiding and abetting the other Defendants in their alleged breach of contract.  It didn’t withstand a Motion to Dismiss.

Judge Bledsoe observed that there was only one mention of such a cause of action in a reported North Carolina decision.  That was in an unpublished 2011 Superior Court Order that dismissed the claim.  Although there was an appeal of that Order, the Court of Appeals didn’t consider that cause of action.  Op. ¶71 (citing Pete Fortner, PLLC v. Koonce Wooten & Heywood, LLP, 2011 N.C. App. LEXIS 130).

If the lack of North Carolina authority was not enough of a basis to dismiss the Plaintiffs’ aiding and abetting claim, Judge Bledsoe also stated that numerous states had refused to recognize a claim for aiding and abetting a breach of contract (like New York, Illinois, Pennsylvania, and Arizona).  Op. ¶71.

If you are wondering why North Carolina’s Courts would even need to recognize a claim for aiding and abetting a breach of contract when our Courts already recognize a claim for tortious interference with contract, you are dead on target.  Judge Bledsoe recognized that "some courts have noted that ‘aiding and abetting breach of contract’ is akin to a claim for tortious interference with contract." Op ¶71 & n.15.

But the tortious interference counterclaim that the Plaintiffs had brought was dismissed along with their aiding and abetting claim.  Why?  There was no allegation that the Defendants had knowledge of the contract that was interfered with, an essential element of the tort.

The breach of contract claim was not the only aiding and abetting claim that the Court dismissed.  It also dismissed an aiding and abetting breach of fiduciary claim.  The validity of those claims has repeatedly been questioned by the Business Court and even by the NC Court of Appeals.  Judge Bledsoe described the validity of such a claim as an "open question."  Op. ¶72.

The Court didn’t have to address whether such a claim exists because the Plaintiffs had not alleged that any of the Defendants owed them a fiduciary duty.  There has to be a breach of a fiduciary duty before it can be "aided and abetted."  Op. ¶72.

It is probably a waste of time to make an aiding and abetting claim in the Business Court.  At least for aiding and abetting a breach of contract or aiding and abetting a breach of fiduciary duty.

You might remember the name of the Krawiec case.  It generated an Opinion from the Business Court last year holding that the filing of an amended Complaint moots a previously filed Motion to Dismiss.  That win last year for the Plaintiffs only delayed the Business Court’s review of their claims following the filing of a Motion to Dismiss the Amended Complaint.

But these Plaintiffs only delayed the inevitable consideration of a Motion to Dismiss by filing their Amended Complaint.  Judge Bledsoe dismissed a substantial number of their claims, based on a Motion to Dismiss the Amended Complaint.  But several claims survived the renewed Motion to Dismiss like: the breach of contract claim, as well as claims for fraudulent misrepresentation, unjust enrichment, and punitive damages.

Don’t Make A Trade Secrets Claim Without Pleading Every (Yes, EVERY) Aspect Of It With Specificity

I have written several blog posts on the requirement that a trade secrets claim be pled with specificity,  like here, here, and here.  These Plaintiffs failed to do that.

Among the claims dismissed by Judge Bledsoe was the Plaintiffs’ claim of trade secrets in their "original ideas and concepts for dance production." That claim was dismissed because it was, as Judge Bledsoe put it,  "so non-specific and generalized as to be meaningless." Op. ¶46. 

The allegation that some of the Defendants had "unlawfully disclosed" the claimed trade secrets was also deemed inadequate. Op. ¶48.  The requirement of specificity in trade secrets pleadings also extends to "the acts by which the alleged misappropriation was accomplished."  Op. ¶49.