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Mack Sperling

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I’m a business litigator in North Carolina, with Brooks Pierce McLendon Humphrey & Leonard, LLP.

I grew up in New York, went to college there (at Union College in Schenectady), and then came to North Carolina to law school at UNC-Chapel Hill. I clerked for United States District Judge Frank Bullock of the U.S. District Court for the Middle District of North Carolina after graduating, and then joined Brooks Pierce.

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State law antitrust claims in North Carolina seem to go together with unfair and deceptive trade practices claims (Chapter 75 claims) like peanut butter and jelly.  Section 75-2 of the General Statutes says that “any act, contract, combination in the form of trust, or conspiracy in restraint of trade or commerce which violates the principles of the common law” is a violation of the unfair and deceptive trade practices law.

So why did Business Court Judge Robinson dismiss the UDTPA claim in the antitrust lawsuit (at the Rule 12 stage) in DiCesare v. Charlotte-Mecklenburg Hospital Auth., 2019 NCBC 13 ?

He did so because of his decision that quasi-municipal corporations are exempt from liability under Chapter 75.

Never heard of a quasi-municipal corporation?  It is defined as “a corporation vested with . . . municipal powers for the accomplishment of a limited municipal purpose.”  The Charlotte-Mecklenburg Hospital Authority, the Defendant, said that it was a quasi-municipal corporation and therefore not subject to a Chapter 75 claim.  The Plaintiff said that the Defendant didn’t have that status, and that the question of its status was a question of fact which couldn’t be resolved on a motion to dismiss.

Judge Robinson, before reaching the question of the Defendant’s legal status, decided whether quasi-municipal corporations were exempt from Chapter 75 claims.  He ruled that they were, relying on a 2018 decision from the North Carolina Court of Appeals, Badin Shores Resort Owners Ass’n v. Handy Sanitary Dist., 811 S.E.2d 198 (N.C. Ct. App. 2018).  The Badin Shores Court held that the Defendant there, “as a quasi-municipal corporation it cannot be sued for unfair and deceptive trade practices.”  Id. at 210.

What gives quasi-municipal corporations their special status?  They derive their existence from the State, and Chapter 75 applies only to persons, firms, and corporations.  N.C. Gen. Stat. § 75-16.  The State of North Carolina is none of those things, so it is exempt from the statute.  The question of the State’s exposure to unfair and deceptive trade practices claims has been decided since 1985, with the COA’s decision in Sperry Corp. v. Patterson, 73 N.C. App. 123, 125, 325 S.E.2d 642, 644-45 (1985)(“The State of North Carolina is not a ‘person, firm or corporation within the meaning of G.S. 75-16. . . .”)

Though the Badin case seemed to answer the question of the inapplicability of Chapter 75 to quasi-municipal corporations, Judge Robinson had to distinguish a possibly conflicting NC Supreme Court decision, Madison Cablevision, Inc. v. City of Morganton, 325 N.C. 634, 386 S.E.2d 200 (1989) to reach that conclusion.

The Plaintiff took a run at arguing that the Defendant wasn’t a quasi-municipal corporation anyway, and that this status was a question of fact which the Court couldn’t resolve at the Rule 12 stage.  The Business Court ruled that this was a question of law based upon statutory construction and not a question of fact.  The Defendant’s Certificate of Incorporation stated that it was “incorporated as a public body and a body corporate and politic.”  The legislation by which it was formed, the Hospital Authorities Act, declared it to be the same.  The term “body politic and corporate” encompasses quasi-municipal corporations. Op. ¶33.

With those issues decided, the Court dismissed the Plaintiff’s UDTPA claim.  But the Plaintiff’s core antitrust claim survived.

How Much Of The Market Does An Alleged Monopolist Need To Control?

The Defendant Hospital Authority argued that the Plaintiff’s antitrust claim was deficient because it did not allege that competition had been eliminated in the Charlotte area.  it further argued that the Complaint was self-defeating because it alleged that there were other healthcare providers in the Charlotte area which competed with the Defendant.

The need for total elimination of any competition is inconsistent with how the NC Supreme Court has defined an entity which holds a “monopoly.”  Judge Robinson observed that the NC Supreme Court has defined a “monopolist” as “an organization or entity so magnified that it suppresses competition and acquires a dominance in the market.” Op. at ¶38 (quoting American Motor Sales Corp. v. Peters, 311 N.C. 311, 315−16, 317 S.E.2d at 351, 355 (1985).

The Court therefore denied Plaintiff’s Motion for Judgment on the Pleadings as to the monopolization claim.  Op. ¶42.

Certification For Immediate Appeal

Judge Robinson, acting per NCRCP 54(b), certified his Opinion for immediate appellate review.  He wrote that “[t]he issue of the applicability of Chapter 75 to hospital authorities decided by the Court today has importance beyond this case.”  Op. ¶45.

I have no idea how many quasi-municipal corporations there are in North Carolina, but this decision may well have some impact.

A Notice of Appeal hasn’t been filed.  Yet.

 

 

 

Judge Robinson boldly went where no North Carolina Judge writing published Opinions had gone before last month in the case of Wheeler v. Wheeler, 2018NCBC117.  The subject was a corporate officer’s right to the advancement of legal fees incurred in defending against a lawsuit.

Judge Robinson noted that there was only “one case in which our appellate courts have dealt with the issue of advancement.”  Op. ¶1 & n.1.  That case was inapplicable to the Wheeler decision.

Advancement (the right for an officer, director, agent or employee of a corporation to be reimbursed for expenses incurred in litigation) is governed by G.S. §55-8-53.  The right to be indemnified for a liability resulting from such litigation is governed by G.S. §55-8-51.

The corporation of which Plaintiff (Gray Wheeler) was an officer, director, and shareholder had provided for advancement and indemnification rights in its Bylaws.  It was the Gray Wheeler who was seeking advancement.  The corporation refused to advance his legal fees and expenses, and Wheeler moved for a preliminary injunction forcing the Defendant corporation to pay his fees and expenses.

Why Was A Plaintiff Seeking Advancement?

Plaintiff Wheeler initiated the lawsuit before the Business Court, alleging a breach of fiduciary duty by one of his co-directors and shareholders, and also seeking dissolution of the corporation.  There was no advancement due for those claims.

Instead, Plaintiff sought advancement for counterclaims brought against him as well as a separate arbitration filed against him.

The corporation took the position that counterclaims are not “an action, suit or proceeding” for which advancement is allowed.

Judge Robinson didn’t waste much time in rejecting that argument, holding that the language in the Bylaws “contained no language excluding counterclaims . . . .”  Op. ¶80.

The Relationship Between Advancement And Indemnification

The General Statutes prohibit indemnification:

(1) In connection with a proceeding by or in the right of the corporation in which the director was adjudged liable to the corporation; or

(2) In connection with any other proceeding charging improper personal benefit to him, whether or not involving action in his official capacity, in which he was adjudged liable on the basis that personal benefit was improperly received by him.

N.C. Gen. Stat. §55-8-51(d).  Also, a corporation may not provide indemnification to a person for “activities which were at the time taken known or believed by him to be clearly in conflict with the bests interests of the corporation.”  N.C. Gen. Stat. §58-8-57(a).

The Defendant corporation argued that it was not obligated to advance Wheeler’s litigation expenses and fees.  It said it would not be permitted to indemnify him because Wheeler had to have known that the conduct at issue was in conflict with the best interests of the corporation.  In other words, its position was that the right to advancement is dependent on the right to indemnification.

Not so, said Judge Robinson, looking to the more well-developed Delaware law on this subject.  He held:

The Delaware Supreme Court has held that “[a]lthough the right[s] to indemnification and advancement are correlative, they are separate and distinct legal actions.” Generally, “[t]he right to advancement is not dependent on the right to indemnification.

Op. ¶58 (citations omitted).

 

Can A Corporate Officer Or Director Ever Obtain An Injunction To Force Advancement?

So after finding that Plaintiff Wheeler had shown a clear likelihood that he was likely to succeed on the merits on his claim for advancement, why didn’t Judge Robinson enter an injunction requiring the corporation to advance his legal fees?

The short answer is that Gray Wheeler hadn’t shown that he would be irreparably harmed if he did not receive an injunction.  On this point, there was no guidance from the Delaware courts because advancement claims in that State “are decided in separate, stand-alone proceedings and/or on summary judgment, not by means of a preliminary injunction” Op. ¶87.  That is a function of the Delaware statute governing advancement.  Del. Code Ann. tit. 8, § 145(k).

Wheeler’s pursuit of an injunction to assure his advancement rights was an issue of first impression in North Carolina.  Op. ¶86.

The injunction sought by the Plaintiff was a mandatory injunction as opposed to the more common prohibitory injunction.  If you missed learning about that distinction (maybe it was in first year Civil Procedure), here is the difference:

‘A prohibitory injunction seeks to preserve the status quo, until the rights of the parties can be determined, by restraining the party enjoined from doing particular acts.’. . .  In contrast, ‘[a] mandatory injunction is intended to restore a status quo and to that end requires a party to perform a positive act.’

Op. ¶35.

The burden for obtaining a mandatory injunction is greater than that for a prohibitory injunction.  Op. ¶101.  Thus, Wheeler was required to” show that the injury was “immediate, pressing, irreparable, and clearly established.”  Op. ¶84.

Wheeler ran into the well-established principle that “where an injury may be compensated by the payment of monetary damages, the injury is not irreparable, and an injunction should not issue.”  Op. ¶92.

Judge Robinson did not rule out the possibility that a person denied advancement might suffer irreparable harm warranting an injunction.
But the Plaintiff’s contention that he lacked the funds to “continue effectively defending himself” were not enough.  Wheeler said that his lawyers had already billed him more than half a million dollars for his defense.

Judge Robinson observed that Wheeler had “submitted no evidence showing that he has been unable to pay these fees as they became and become due.”  Op. ¶96.  Wheeler’s only effort in establishing his inability to pay his lawyers was to say that his net worth was “concentrated in illiquid assets.  That “illiquidity” was said to be tied up in an apartment he owned in New York City, a house in Asheville, NC, and his and his wife’s 401(k) accounts.

Judge Robinson was unimpressed by this claimed illiquidity, and said that  he was “unable to obtain loans or borrow against any of his illiquid assets to pay his legal fees as they become due.”

The Judge also brushed aside the argument that Wheeler’s litigation strategy had been affected because he could not afford to “take a more aggressive approach with expert witnesses.”  Op. ¶100.  Assuming that “more aggressive” meant “more expensive,” Wheeler hadn’t identified
who the “more costly expert witnesses” are, the claims on which they would testify, and how this testimony might improve Gray’s chances of ultimate success in defense of the . . . claims against him. Op. ¶100.

 

Wheeler Was Not Entitled To Advancement For Some Of The Claims Made Against Him.

The corporate Bylaws provided that Wheeler was entitled to indemnification for claims brought “by reason of the fact” that he was acting as an officer or a director.  The “by reason of the fact” language is contained in the Delaware indemnification statute (Del. Code. Ann. tit. 8, §145(a)-(b)), so Judge Robinson looked to Delaware law for interpretation of this phrase.

He held:

“[I]n order for one to be deemed a party to a proceeding ‘by
reason of the fact’ of one’s corporate position, there must be a ‘causal connection or nexus’ between the underlying proceedings and ‘the corporate function or “official [corporate] capacity. . . .  ‘The requisite connection is established ‘if the corporate powers were used or necessary for the commission of the alleged misconduct.’

Op. ¶72 (citations omitted).

The claim in question involved Wheeler’s breach of his obligation to tender his shares of the corporation per a Buy-Sell Agreement.  It therefore lacked any causal relationship to his status as a corporate officer or director.

The NC Business Court delivered a full Opinion last week on attorney-client privilege in Technetics Group Daytona, Inc. v. N2 Biomedical, LLC, 2018 NCBC 115.  It’s on the subject of the scope of attorney-client privilege accorded to corporate clients.

That a corporation is entitled to the protection of the attorney-client privilege is “generally accepted.”  Op. ¶13.  But how far down the corporate employee ladder does the privilege extend?  As Judge Conrad observed, “it is often a challenging task to decide who speaks for a corporation and whether that person’s communications with corporate counsel are subject to the privilege.”  Op. ¶13.

The law on this point is “particularly unsettled” in North Carolina.  Op. ¶14.  The issue in the Technetics case was whether the privilege could encompass communications between the Defendant’s lawyer and an independent contractor (Storey) working for it.

Mr. Storey had been included in communications between the Defendant and its patent counsel regarding a patent application which is at issue in the lawsuit.  The Defendant refused to produce those communications based upon the attorney-client privilege.

NC Business Court Says That The Consultant Was Not The “Functional Equivalent” Of An Employee Who Could Be Covered By The Privilege

Some courts extend the protection of the privilege to non-employees, “as long as they perform roles that are functionally equivalent to employees.”  Op. Par. 16.  Judge Conrad was unwilling to follow those cases, but held that even if North Carolina were to adopt that test, the Defendant hadn’t carrying the burden of showing that Mr. Storey was the functional equivalent of an employee.

Mr. Storey was retained “on a project-by-project basis and paid by the hour.”  Op. ¶15.  He didn’t have an office and didn’t spend much time working for the Defendant.  As Judge Conrad summed it up, “Storey’s role was ‘akin to that of an ordinary third-party specialist, disclosure to whom destroys the attorney-client privilege.’”  Op. ¶19.

NC Business Court Considers The “Kovel Doctrine” And Finds That It Doesn’t Apply

Another argument in favor of the privilege offered by the Defendant was also rejected by the Business Court.  This was a federal court approach known as “the Kovel doctrine.”  This doctrine “holds that the attorney-client privilege is not destroyed by the presence of a third party if the third party “is necessary, or at least highly useful, for the effective consultation between the client and the lawyer which the privilege is designed to permit.” Op. ¶21 (quoting United States v. Kovel, 296 F.2d 918, 922 (2d Cir. 1961)).

Judge Conrad said that although the Kovel doctrine was “widely embraced,” it had also been “carefully limited.”  Op. ¶22.  It is not enough that the participant’s consultation be “useful or convenient.”  It must instead be “nearly indispensible or serve some specialized purpose in facilitating the attorney-client communications.”  Op. ¶23 (quoting Cavallero v. United States, 284 F.3d 236, 249 (1st Cir. 2002).

In other words “the third party must function more or less as a “translator or interpreter” between the client and the lawyer.”  Op. 23.  Mr. Storey’s involvement in the claimed privileged communication did not rise to this level.

The Common Interest Doctrine Was Not Applicable

In a final run at claiming the privilege as to Mr. Storey, the Defendant argued that “the common-interest doctrine, which “extends the protection of the attorney-client privilege . . . to communications between parties sharing a common interest about a legal matter.”  Op. ¶27.

The Defendant lost out on this argument as well.  As Judge Conrad observed, an essential element of a common interest is that “the parties must ‘agree to exchange information for the purpose of facilitating legal representation of the parties.'”  Op. ¶28 (quoting Friday Invs., LLC v. Bally Total Fitness of the Mid-Atl., Inc., 247 N.C. App. 641, 648, 788 S.E.2d 170, 177 (2016).  Since Mr. Storey wasn’t represented by counsel, he wasn’t included in the Defendant’s privilege.

And if you’re thinking that the common interest doctrine really doesn’t fit here because Mr. Storey wasn’t involved in any litigation, you are right.  Judge Conrad said that “our appellate courts have not ‘extended the common interest doctrine to relationships formed primarily for purposes other than indemnification or coordination in anticipated litigation.’”  Op. ¶30 (quoting Friday Invs., supra, 247 N.C. App. at 6, 51, 788 S.E.2d at 178.

Issues Of Waiver Of Privilege

There’s more worth writing about from the Technetics Opinion.  It concerns whether the Defendant had waived the privilege by its production of a document prepared by its attorney regarding the negotiation of a “Confidential Development Agreement.”  Technetics argued that by disclosing this legal advice, the Defendant had made a subject matter waiver of all the negotiations regarding that Agreement.

You are probably familiar with the issue of the scope of a waiver coming up when there has been an inadvertent production of a privileged document.  I’ve written about that issue before.

But what if the waiver is intentional?  Then different considerations are in play.  Judge Conrad said:

It is patently unfair for a party to use the privilege as a sword and a shield in litigation, making selective disclosures for tactical gain.

Op. ¶36.  The document which Technetics was claiming had resulted in a subject matter waiver had been provided by the Defendant before the litigation began, in the course of negotiating the agreement.  While in the past this might have resulted in a subject matter waiver, there is a “modern trend” on the approach to this issue  Op. ¶37. And that trend is “to employ fairness considerations to decide the scope of waivers.”  Id.

Given that the Defendant had not produced this document to gain an unfair advantage, the waiver was limited to the communication which had been disclosed pre-litigation.

Note: The Defendant (N2) is represented by Brooks Pierce.

 

Detail of dirty hands – blacksmith

The  Business Court Opinion last month in Shaw v. Gee, 2018 NCBC 108,  deals with two interesting trial procedure issues: how to preserve all your arguments for making motions for judgment not withstanding the verdict and for a new trial.

Shaw had won at trial on one of his claims (that Gee had breached his fiduciary duty), but the jury had not considered damages (finding that Shaw’s claims were barred by his “unclean hands”).  Shaw moved for a judgment notwithstanding the verdict (a JNOV Motion), or alternatively, for a new trial.

JNOV Motions And Directed Verdict Motions

The problem with the JNOV Motion was that the Plaintiff hadn’t preserved the grounds stated in his earlier motion for a directed verdict.  What?  What does a motion during trial for a directed verdict (a DV Motion) have to do with a post-trial motion for JNOV?

Well, a JNOV Motion “is essentially a renewal of an earlier motion for directed verdict.”  Op. ¶21.  A DV Motion “must ‘state the specific grounds therefor’ in order to give “notice to the other party of possible defects and an opportunity to cure.”  Op. ¶21.

When you renew your DV Motion vioa a JNOV Motion, you can’t rely on grounds you didn’t assert during the trial.  In other words, no new grounds will be considered by the Court.  Since the Plaintiff had withdrawn the only basis on which his DV Motion as to the unclean hands defense was premised, he couldn’t argue the new ground that the evidence was insufficient to support the verdict.  But he did get to argue it when asking for a new trial.

Motion For A New Trial

The Motion for a new trial didn’t depend on what was said in moving for a directed verdict.  But it was still denied, after Judge Conrad said that the power to grant a new trial “must be used with great care and exceeding reluctance.”  Op. ¶32 (quoting In re Will of Buck, 350 N.C. 621, 626, 516 S.E.2d 858, 861 (1999)).

Shaw argued that the evidence was insufficient to support a finding that his hands were so “unclean” as to bar his fiduciary duty claim.  Judge Conrad said that this was a “classic jury question” and that “substantial evidence” supported the jury’s verdict.  Op. ¶¶ 38-39.

Can An LLC’s Derivative Claim Be Barred By The Unclean Hands Of An LLC Member?

The Opinion also devotes a good bit of discussion to whether a derivative claim (Shaw’s claim for breach of fiduciary duty was derivative, made on behalf of an LLC) can be barred by an individual  plaintiff’s unclean hands.

That’s a question of first impression in North Carolina, but Judge Conrad did not resolve it.  Instead, he ruled that Shaw had not preserved this issue.   He had not objected to the instructions to the jury, which had told the jury to consider whether Shaw’s conduct, not that of the LLC, had been sufficiently unfair to bar his claim.  Op. ¶53.

So maybe one day we will know the answer to that question, but not in this case.

This hurricane — Florence — has proved so far to be underwhelming in Greensboro.

But North Carolina is nevertheless taking this hurricane very seriously.  It’s seen as so devastating that the Chief Justice of the NC Supreme Court has issued blanket extensions of time in cases pending in 14 Counties, most on the coast or not far inland.  The Counties mentioned in his Order are Beaufort, Brunswick, Carteret, Craven, Currituck, Dare, Hyde, Jones, New Hanover, Onslow, Pamlico, Pender, Sampson, and Tyrrell.

Here’s the deal: if you have a case pending in any of those Counties, and you had a filing due between last Thursday (the 13th) and today, you have a nearly two week extension of time within which to make your filing, by the close of business on September 28th.

How could Chief Justice Martin even do that?  Section 39 of Chapter 7A, which is partly captioned “emergency orders in catastrophic conditions” gives him the power to extend deadlines, including tolling the statute of limitations.  Given the mandatory evacuations ordered in the fourteen Counties listed above,  Chief Justice Martin had the catastrophic conditions and the power to grant the extension of time which he did.  Per the statute, the extension of time had to be for at least ten days.

Chief Justice Martin also had the power to extend the statute of limitations in those Counties.  The statute gives him the power to:

[e]xtend . . . the time or period of limitation within which pleadings, motions,notices, and other documents and papers may be timely filed and other acts may be timely done in civil actions.

N.C. Gen. Stat. sec. 7A-39(b)(1).  Did he exercise that power?  Maybe, but I would be leery of relying on the language in his Order to extend the statute of limitations.  It says that “all pleadings. motions, notices, and other documents that were due to be filed [in the fourteen Counties] between the dates of 13 September 2018 and 17 September 2018 in civil actions, criminal actions, estates, and special proceedings shall be deemed to be timely done if they are done before the close of business on 28 September 2018.

Does this affect cases in the NC Business Court?  Yes, more so than you might think.  I counted nearly 200 “active” cases in the Business Court filed in those Counties.  There were one hundred from New Hanover County alone.  And 42 from Brunswick County.

But given the electronic filing system in the Business Court, did lawyers really need the benefit of this extension?  Nobody has to slog through flooded streets to make a filing in the Business Court.  But, given that Business Court Rule 3.11 requires a paper filing to be made in the County where the case originated within five days of the date of the electronic filing, maybe yes.  I hate that Rule.  It seems totally unnecessary.

Having a client required to arbitrate a case — even though that client never signed off on an arbitration provision — is nothing new.  Judge Conrad dealt with that situation late last month in Charlotte Student Housing DST v. Choate Construction Co., 2018 NCBC 88, where he said:

Because arbitration is a matter of contract, the usual rule is that “a party cannot be required to submit to arbitration any dispute which he has not agreed so to submit.” United Steelworkers of Am. v. Warrior & Gulf Nav. Co., 363 U.S. 574, 582 (1960). In an appropriate case, though, “a nonsignatory can enforce, or be bound by, an arbitration provision within a contract executed by other parties.”  Int’l Paper Co. v. Schwabedissen Maschinen & Anlagen GmbH, 206 F.3d 411 , 415 (4th Cir. 2000).

Op. ¶14.

Plaintiffs, who had acquired a Charlotte apartment complex from its original owner, were suing the architect, general contractor and two subcontractors over design deficiencies in the construction.

Plaintiffs had not signed the Construction Contract containing the arbitration provision, but Judge Conrad ruled that they were required to arbitrate their claims.

He said that:

estoppel is dispositive here. In short, “[a] nonsignatory is estopped from refusing to comply with an arbitration clause when it receives a direct benefit from a contract containing an arbitration clause.” Int’l Paper, 206 F.3d at 418 (quotation marks omitted). It would be manifestly unfair to permit a party to take the benefit of the contract “despite [its] non-signatory status but then, during litigation, attempt to repudiate the arbitration clause in the contract.” Hellenic Inv. Fund, Inc. v. Det Norske Veritas, 464 F.3d 514, 517–18 (5th Cir. 2006); see also Int’l Paper, 206 F.3d at 418. That is what Plaintiffs seek to do here, and they are therefore estopped from refusing to arbitrate their claims against [the Defendants].

Op. Par. 23

Since the Plaintiffs were claiming that the Defendants had not performed their work in accord with the “Contract Documents,” they were bound by the terms of those documents, which contained the arbitration provision.

But what about that tricky question: who decides whether a matter should be arbitrated: Judge or Arbitrator?  Judge Conrad here seized the right to make that decision for the Business Court.  I’ve written about a Business Court decision on that point once before.  The short answer is that it has to be “clear and unmistakeable” that the parties intended for the arbitrator, not the Court, to decide the question of arbitrability.

It was certainly clear and unmistakeable that the parties signing the contract containing the arbitration provision had delegated authority to determine arbitrability to the arbitrator.  The arbitration clause invoked the AAA’s Construction Industry Rules, expressly delegate to the arbitrator “the power to rule on his or her own jurisdiction, including any objections with respect to the existence, scope, or validity of the arbitration agreement.”

But that wasn’t enough to bind the Plaintiffs, who were not signatories to the document referencing the Construction Industry Rules.

Those of you who aren’t at home hunkering down in fear of the impending hurricane are wondering why the Plaintiffs, who were found to beobligated to arbitrate, weren’t also obligated to have the arbitrator (as opposed to the Business Court Judge) decide whether they had to  arbitrate the case in the first place.

Well, even though bound by the arbitration provision, there was nothing to show that the Plaintiffs shared the intent of the signatories to have the arbitrator decide the issue of arbitrability.  As noted by Judge Conrad, “[c]ourts have generally found that agreements that do not mention or reference a particular non-signatory do not clearly or unmistakeably evidence an agreement by that non-signatory to have an arbitrator determine whether the agreement is arbitrable.” Op. ¶19 (quoting McKenna Long & Aldridge, LLP v. Ironshore Specialty Ins. Co., 2015 U.S. Dist. LEXIS 3347 at *14-15 (S.D.N.Y. Jan. 12, 2015).

It is one of the most frustrating things you can have happen after concluding a successful deposition.  The witness backtracks on all the substantive admissions she has made during her testimony.

Can she really do that?  Well, yes.  Rule 30(e) of the North Carolina Rules of Civil Procedure says that the deponent can review her testimony and:

If there are changes in form or substance, the deponent shall sign a statement reciting such changes and the reasons given by the deponent for making them.
But are there no limits on the changes which may be offered?  Apparently not, based on Judge Bledsoe’s Opinion this month in Window World of Baton Rouge, LLC v. Window World, Inc., 2018 NCBC 78.
Plaintiffs’ lawyers were attempting to prevent one of the Defendants (Tammy Whitworth) from making wholesale changes to her deposition testimony via the presentation of an errata sheet.  Those proposed changes included “thirty-eight substantive changes to her deposition testimony.”  Op. Par. 5.
The Opinion contains no detail on the nature of the changes offered by Defendant Whitworth, but it is safe to assume that they are in the nature of her saying “the light was green” at her deposition, and changing that testimony to “the light was red.”
Can a deponent make an absolute about face from her deposition testimony?  Yes, in North Carolina and in the majority of federal jurisdictions.  Although the Eastern District of North Carolina is in that minority. William L. Thorp Revocable Tr. v. Ameritas Inv. Corp., 57 F. Supp. 3d 508, 517 (E.D.N.C. 2014) (concluding that Federal Rule 30(e) “does not permit a party to make changes that substantively contradict or modify sworn deposition [testimony]”).
This Opinion did not leave the Plaintiffs with no value from the original deposition testimony.  Judge Bledsoe said that he would “impose[] two safeguards. . . in light of the extensive substantive changes Whitworth has made to her deposition transcript.”  Op. ¶16.
The first “safeguard”was that Whitworth’s original answers would remain in the record and could be used for impeachment purposes. “or for any other relevant or proper purpose.”  Op. ¶16.
The second protection granted by Judge Bledsoe was to allow Plaintiffs another deposition of Defendant Whitworth.  He limited that new deposition to one hour on the record, limiting questioning to “the reasons for those changes and to ask reasonable follow-up questions that flow from Whitworth’s answers to these permitted inquiries.”  Op. ¶17.  The new deposition will be at the Defendants’ expense.

This isn’t the first time that the Business Court has allowed a deposition errata sheet to be allowed over objections that the proposed changes were excessive.  Judge Diaz ruled on this issue in an unpublished Order in Bueche v. Noel, as did Judge Bledsoe in an unpublished Order in BB&T Boli Plan Tr. v. Mass Mutual Life Ins. Co.

.
stopsign

North Carolina’s Unfair And Deceptive Trade Practices Act (G.S. sec. 75-1.1) carries with it the heady possibility of triple damages and attorneys fees.  So nearly every Plaintiff’s lawyer routinely includes a Chapter 75 claim in his or her Complaint.

But last week, in Brewster v. Powell Bail Bonding, Inc, 2018 NCBC 74, Judge Conrad cautioned against that practice,  calling it “a regrettable trend in North Carolina business litigation.”  Op. ¶36.

The practice of trying to turn “every shareholder dispute or disagreement between members of a limited liability company into a section 75-1.1 claim” (Op. ¶36) continues despite a plethora of Business Court Opinions (more than ten of which were cited by Judge Conrad in Op. ¶36) rejecting such claims.

The dangers of this knee jerk inclusion of unviable Chapter 75 claims are that it:

invites avoidable motions practice–driving up the cost of litigation, taxing the resources of the Court, and exposing the plaintiff to a potential award of attorneys fees under section 75-16.1.

Op. Par. 37.

If you haven’t caught this message by now you have been asleep with your Complaint drafting.  Take this to heart:”  Judge Conrad says “[b]y now, the message should be clear: section 75-1.1 plays no role in resolving these internal corporate disputes.”  Op. ¶37.

Although there were no sanctions imposed on this Plaintiff,  a minority shareholder in Defendant Powell Bail Bonding, Inc. who had included a Chapter 75 claim in his lawsuit seeking dissolution of the corporation, I think that we will see those in the next Business Court Opinion dismissing a Section 75 claim.  So don’t give me that to write about.

I have been complaining about  the fees approved by the NC Business Court for those lawyers obtaining disclosure only settlements since there was a Wachovia Bank.  Some of you may not be old enough to remember that venerable bank.

Now, at last, Judge Gale has found a disclosure only settlement to have yielded (almost) immaterial disclosures, and slashed the attorneys’ request for fees (by more than 50%) and expenses (to zero).  The Opinion, delivered last month, is In re Krispy Kreme Doughnuts, Inc. Shareholders Litig., 2018 NCBC 58.

Fee Request Slashed: From $350,000 Requested To $150,000 Awarded

Plaintiffs’ lawyers requested a fee award of $350,000.  They said that thirty lawyers from twelve different law firms had spent more than 800 hours in connection with the lawsuit.  Op. ¶26.  The lawyers said that the time spent would have yielded a lodestar fee of $533,038 based on their “normal hourly rates.”  Id.

Judge Gale, who scrutinized the bills carefully, said that he concluded:

that the total reasonable time spent on the litigation is significantly less than the total time sought to be compensated in the Motion.
Op. ¶37.
Judge Gale pointed out a few time entries which he found excessive (in Op. ¶37), and remarked particularly on class counsel spending more than fifteen hours of
research on North Carolina’s basic, easily-identified pleading requirements for shareholder derivative actions.
Op. ¶37.
Did The Class Need To Be Represented By Out-of-State Lawyers?
Were the issues in the class actions challenging the Krispy Kreme merger so complicated that heavy artillery from big (and non-North Carolina) class action sophisticates were needed?
Judge Gale didn’t think so:
The nature of this litigation required skilled counsel experienced in shareholder class actions.  See N.C. Rev. R. Prof. Conduct 1.5(a)(1) and 1.5(a)(7).  While Plaintiffs’ Counsel are certainly well-regarded, highly experienced counsel who have been involved in class actions that have generated significant results for shareholders in other litigation, the Court concludes that the litigation could have been competently handled by North Carolina counsel whose billing rates are significantly below the rates that Plaintiffs’ Counsel contend prevail in their home jurisdictions.
Op. ¶41.
North Carolina Rates, And The Quality Of The Result Achieved, Dictated A Reduction In Fees
After finding the services of non-North Carolina lawyers to be unnecessary, Judge Gale declared that a “typical and customary hourly rate” in North Carolina for complex commercial litigation” ranged from $250 to $550 per hour.  Op. ¶41.

Then he evaluated the quality of the supplemental disclosures that the class lawyers pried out of Krispy Kreme.  Those disclosures “included:

(1) the unlevered cash flows used in the financial advisor’s discounted cash flow (“DCF”) analysis; (2) Krispy Kreme’s management’s considerations regarding their potential post-merger employment; (3) the financial advisor’s potential conflict of interest; and (4) metrics used to evaluate comparable companies.”
Op. ¶43.
Judge Gale, in previously approving this settlement (in 2018 NCBC 1), had not ruled that these supplemental disclosures were material.  I wrote about that ruling in January 2018.  In the current case, he specifically observed that he had not found “that the materiality of the supplemental disclosures was plain or obvious.”  Op. ¶44.
This time, assessing the value of the obtained disclosures against the attorneys’ fees sought, Judge Gale rejected Plaintiffs’ counsel’s “argument that the value of the disclosures was so obvious as to justify a fee award based on a premium rate.”  Op. ¶46.  In other words, the disclosures achieved were not worth much.
I think that this is the first time that the NC Business Court has evaluated the materiality of disclosures in connection with a fee request and found them to be less than “material.”
If you think that was a pretty bad result for the lawyers applying for fees, it got worse.  They had run up nearly $20,00 in expenses in their vigorous pursuit of Krispy Kreme, and Judge Gale refused to allow them to collect a penny of those expenses.
Why did Judge Gale refuse to award any expenses, even though the Defendants had agreed to pay them as part of the settlement?  Because of an ethical defect in the lawyers’ fee agreements with their clients.
Their agreements with their clients said that their clients were “not liable to pay any of the expenses of the lawsuit” and that the law firm would “pay all costs and expenses in the litigation.”  Op. ¶60.
Lawyers frequently advance expenses for their clients, so why was there a problem with this fee agreement language?  Historically, lawyers could advance expenses  for their clients “provided the client remain[ed] ultimately liable for such expenses.”  Op. ¶57 .  The lawyer then had the option to forego recovering expenses from their client.
Rule 1.8 of the North Carolina Revised Rules of Professional Conduct, via Comment 10, “make clear that'[c]osts advanced for a client are the client’s financial responsibility.'”  Op. ¶58.
Although lawyers are free to waive their right to recover expenses, the applicable ethical Rule:
does not contemplate that clients can be absolved from any and all financial responsibility at the inception of the litigation and without regard to the litigation’s outcome. To the contrary,
RPC 1.8(e) ‘enable[s] a client to share the risk of losing with a lawyer,” thereby supporting one of the main functions of contingent fee arrangements.   Restatement (Third) of Law Governing Lawyers §35, cmt.b (Am. L. Inst. 2000).
Op. ¶59.

So what is the punishment for a violation of RPC 1.8?  As seen by Judge Gale, it is forfeiture of the right to recover the advanced expenses.  That’s based on the Restatement (Third) of Law Governing Lawyers.  It says that: “[a] lawyer engaging in a clear and serious violation of a duty to a client may be required to forfeit some or all of the lawyer’s compensation for the matter.”  Id. at §37.

What kind of message does this decision send to out-of-state lawyers thinking of filing a merger class action in North Carolina, hoping to settle on the basis of supplemental disclosures, and thinking that they will collect a big fat fee?  Well, they should be warned that the Business Court will closely scrutinize their bills. will likely apply what those lawyers think are penurious North Carolina rates,  scrutinize the value of the disclosures obtained, and may refuse to award any expenses, depending on the language of their engagement letters.  They may decide to look for greener pastures.

The title of Judge Bledsoe’s Opinion in Carolina Home Solutions 1, Inc. v. Crystal Home Solutions, Inc., 2018 NCBC 57, is ominous in itself.  It is titled “Order and Opinion Denying Pro Hac Vice Admission and Referral to the Georgia and North Carolina State Bars.”

How hard is it to get a pro hac vice (PHV) admission in the Business Court?  Not very.  You just have to comply with N.C. Gen. Stat. §84-4.1.  Who even gets denied pro hac admission to the Business Court?  (It happens.  Judge McGuire once revoked the previously granted pro hac admission of a lawyer and barred him from practicing in North Carolina for two years.  Judge Jolly once refused to admit a lawyer for the University of Maryland on a pro hac basis because of a conflict of interest.)  And what does one have to do that is so bad that they are referred to two separate state bars?

The attorney in question, trying to represent the Plaintiff and its President, is admitted in Georgia, not North Carolina.  He was not permitted to appear in any Court in North Carolina without being admitted PHV.  He was aware of this, because Judge Bledsoe warned him on multiple occasions.

I don’t think that I have ever criticized any lawyer by name on my blog for violating the Business Court Rules or for doing something stupid, and I won’t start now.  If you want to know the name of the lawyer who is the subject of this Opinion, you’ll have to look at the Opinion.  I’ll just refer to him as “Mr. Georgia Lawyer.”

Judge Bledsoe said in a written Order in the case earlier this year:

(i) that “unless Plaintiff is represented by a duly admitted and licensed attorney-at-law at trial, Plaintiff will not be permitted to participate in the trial,” and (ii) that “[Mr. Georgia Lawyer] may not represent Plaintiff in this action unless Plaintiff and he promptly comply with the requirements of N.C. Gen. Stat. § 84-4.1, including, in particular, Plaintiff’s retention of counsel duly licensed in North Carolina with whom Mr. [Georgia Lawyer] will be personally appearing in this action.”
Op. ¶12.
Mr. Georgia Lawyer did not immediately comply with the Court’s direction.  Though he did represent to the Court, via email, that he would associate with NC counsel and would file a Motion for pro hac admission the next day.  But he didn’t.
Meanwhile, pretrial deadlines were approaching.  One of the parties that Mr. Georgia Lawyer was supposed to represent went ahead and filed its portion of the Pretrial Order, signed by its President, not a lawyer.  The President also signed off on a trial brief.
Both the Pretrial Order and the Trial Brief appeared to Judge Bledsoe to have been prepared by a lawyer.  I have looked at the Trial Brief.  It might have been prepared by a lawyer, but if it was, it’s not a very impressive piece of work.
What difference does it make who prepared it?  The answer is that if it was “ghostwritten” by Mr. Georgia Lawyer, that would be the unauthorized practice of law.
Ghostwriting
Ghostwriting is worth a few words.  First, an attorney licensed in North Carolina can draft documents on behalf of a pro se party without appearing in the case.  Op. ¶22.  But an out-of-state lawyer can’t do that unless she complies with pro hac admission procedures.  Id.
If Mr. Georgia Lawyer drafted documents for his client to sign off on, he was engaging in the unauthorized practice of law.  So?  Well that is a Class 1 misdemeanor in North Carolina.  Op. ¶24.  How serious is a Class 1 misdemeanor in North Carolina?  I wondered, and finding the answer took a took a little bit of searching.  North Carolina has four classes of misdemeanors: Class 1A, 1, 2, and 3.  N.C. Gen. Stat. §15A-1340.23.  If Mr. Georgia Lawyer has no prior misdemeanors on his record, he faces 45 days of community service plus a fine in an amount to be determined in the discretion of the Court.  That penalty, if it is ever imposed, will be handed out by a state District Court Judge, not a Business Court Judge.