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.

The attorney for the Plaintiff in Preiss v. Wine and Design Franchise, LLC, 2018 NCBC 53, apparently didn’t bother to read the Business Court’s Rules on what must be done in order to file a document under seal.  That lawyer failed on three separate occasions to comply with the Court’s procedures for sealing a document.

So Judge McGuire took the Plaintiff’s lawyer to school, though pretty gently.  He said:

On the charitable assumption that Plaintiffs counsel’s continued failure to comply with the applicable BCR regarding filing under seal is a result of ignorance of the procedures, rather than a flagrant disregard for this Court’s authority, the Court will outline the applicable rules and procedures below.

Op. at 3.

Those procedures?  It’s best to read the Business Court Rules, mostly Rule 5.2, but if you want a document to stay under seal, you have to file it “provisionally” under seal along with a Motion for leave for it to be filed under seal.  BCR 5.2(b).  Your Motion has to be accompanied by a brief.  BCR 7.2.

The motion and brief must contain enough information to persuade the Court that sealing is warranted. The Rule lists seven categories of necessary information:

(1) a non-confidential description of the material sought to be sealed;

(2) the circumstances that warrant sealed filing;

(3) the reason(s) why no reasonable alternative to a sealed filing exists;

(4) if applicable, a statement that the party is filing the material under seal because another party (the “designating party”) has designated the material under the terms of a protective order in a manner that triggered an obligation to file the material under seal and that the filing party has unsuccessfully sought the consent of the designating party to file the materials without being sealed;

(5) if applicable, a statement that any designating party that is not a party to the action is being served with a copy of the motion for leave;

(6) a statement that specifies whether the party is requesting that the document be accessible only to counsel of record rather than to the parties; and

(7) a statement that specifies how long the party seeks to have the material maintained under seal and how the material is to be handled upon unsealing.

BCR 5.2(b).

Most of those items are pretty easy to assemble.  But it is clear that the most critical ingredient is 5.2(b)(2), “the circumstances that warrant the sealed filing.”  What is it that you are asking the Court to take out of the public eye?  I’m not aware of a published Business Court Opinion discussing what will justify a sealed filing, but Judge Bledsoe said this in a 2016 unpublished Order granting a Motion to Seal: “sealing documents from the public record may be appropriate where the documents contain business information, including pricing and cost information, that could harm a litigant’s competitive standing.”  Order at 2.

Remember that you start on a Motion to seal by running uphill. The Business Court will begin its consideration of a Motion to Seal:

with the ‘presumption that the civil court proceedings and records at issue.  .  . must be open to the public.’ The party seeking to have a filing sealed bears the burden of overcoming this presumption ‘by demonstrating that the public’s right to open proceedings [is] outweighed by a countervailing public interest.’

Op. at 6 (quoting France v. France, 209 N.C. App. 406, 414, 705 S.E.2d 405, 406 (2011).

So what could be such a “countervailing public interest”?  The Business Court Rules give no guidance, but Plaintiff didn’t have whatever it takes.  The document filed under seal (a brief) was immediately unsealed by the Court.

What do you have to do while your Motion to Seal is pending?  BCR 5.2(d) says that you must:

Within five business days of the filing or provisional filing file a public version of the document. The public version may bear redactions or omit material, but the redactions or  omissions should be as limited as practicable.

If you are attempting to file an entire document under seal (as this Plaintiff was):

the filing party must file a notice that the entire document has been filed under seal. The notice must contain a non-confidential description of the document that has been filed under seal.

BRC 5.2(d).

This Plaintiff”s counsel repeatedly ignored the Business Court Rules about sealing.  Judge McGuire lectured that “[t]hese rules and procedures for making sealed filings are not frivolous ‘make-work’ for attorneys, nor are they intended to be optional exercises”  Op. at 5 (emphasis added).

So did Judge McGuire sanction the Plaintiff?  Not now, but he reserved the right to do so.  He said:

because Plaintiffs have now failed for the third time to make efforts to comply with the applicable BCR or this Court’s past Orders, the Court takes under advisement such further relief as may be just and appropriate, including whether the complained-of conduct of Plaintiffs’ counsel merits imposition of sanctions under Rule 11 or other authority.

In Plaintiff’s counsel’s defense, he may have thought he was entitled to file documents under seal because the parties had agreed to a Consent Protective Order which said that “documents designated by any Party as Confidential ‘shall be filed under seal.'”

But the agreement of the parties had no bearing on whether the described documents could be filed under seal.  BCR 5.2(a) says explicitly that a Protective Order dealing with sealing of documents “should include procedures similar to those described in subsections (b) through (d) of this rule.”

Statements made in the course of settlement negotiations are inadmissible at trial, per Rule 408 of the NC Rules of Evidence.  But does that dead end to admissibility protect against the production of such items during discovery?

No, said Judge Bledsoe, in his Opinion late last month in Duke Energy Carolinas, LLC v. AG Insurance SA/NV, 2018 NCBC 38.  He could have rejected Defendant Duke’s claim that communications regarding settlement of ther cases weren’t subject to production on this principle:

Our courts have long recognized that ‘[t]he relevancy test for discovery is not the same as the relevancy test for admissibility into evidence.  To be relevant for purposes of discovery, the information [sought] need only be ‘reasonably calculated’ to lead to the discovery of admissible evidence.’  Shellhorn v. Brad Ragan, Inc., 38 N.C. App. 310, 314, 248 S.E.2d 103, 106 (1978); see also N.C. R. Civ. P. 26(b)(1); Lowd v. Reynolds, 205 N.C. App. 208, 214, 695 S.E.2d 479, 483 (2010).  If this test is met, a party may not object to a discovery request merely because ‘the information sought will be inadmissible at the trial.’  N.C. R. Civ. P. 26(b)(1).

Op. ¶15.

But Defendant Duke argued for a "settlement privilege," which has been recognized by some courts.  Well, Duke didn’t push for a full-blown privilege but something short of that, urging the Court to "require that a “heightened standard of relevance” be met before documents prepared for and communications made during settlement negotiations can be discovered."  Op. ¶19.

The danger of not adopting its position, said Duke, was that "“[p]arties are unlikely to propose the types of compromises that most effectively lead to settlement unless they are confident that their proposed solutions” will not be used for some purpose in later litigation“ by some future third party.”  Op. ¶20.

Judge Bledsoe disagreed, and said that Duke’s argument that settlement negotiations should get special protection in discovery "has been widely criticized and rejected by the majority of federal courts that have considered the issue." Op. ¶22.

Although Judge Bledsoe refused to give accord a blanket privilege to the previous settlement negotiations, he did an in camera review of the documents which Duke sought to protect from discovery.  He denied Duke’s Motion for a Protective Order to the extent that the documents involved concerned "coal combustion residuals" (i.e. coal ash) or the power plants at issue in the case.  He granted the Motion as to documents he deemed "not reasonably calculated to the discovery of admissible evidence.  These documents concerned asbestos litigation or power plants not involved in the lawsuit before him.                

The Business Court has previously held that settlement agreements are discoverable.

I guess that every North Carolina lawyer doesn’t know that since October 2014, appeals of final decisions by the NC Business Court go directly to the NC Supreme Court instead of to the NC Court of Appeals.

You didn’t know that?  Well you are not alone.  The Notice of Appeal of Judge Gale’s Opinion in Zloop, Inc. v. Parker Poe Adams & Bernstein, 2018 NCBC 16 dismissing all of Plaintiff’s claims was addressed to the COA, not the Supreme Court. Judge Gale dismissed the appeal yesterday, in Zloop, Inc. v. Parker Poe Adams & Bernstein, 2018 NCBC 39.

In all other respects, the appeal was totally compliant with the Rules of Appellate Procedure.  It was timely, and the Notice of Appeal was properly filed in Mecklenburg County.

There are a bunch of minefields along the path of a Business Court appeal.  I’ve written about the ones that have exploded on an appealing party, like: not filing the Notice of Appeal in the county where the case originated, not including the Notice of Designation to the Business Court in the Record on Appeal, and like the Zloop Notice of Appeal, sending the Notice of Appeal to the wrong appellate Court.

The attorneys for the Defendant in the Zloop case, picking up immediately on the misdirection of the Notice of Appeal, moved to dismiss the appeal.

Plaintiff moved, in response, to be allowed to amend its Notice of Appeal to properly address it to the NC Supreme Court.  By then, the thirty day period to file a Notice of Appeal had run out.

Judge Gale’s ruling was that he did not have jurisdiction to allow the amended Notice of Appeal and he granted the Motion to Dismiss the appeal.

Why was the trial court judge ruling on matters concerning an appeal?  You might be thinking that the motion to amend the Notice of Appeal should have been decided by the appellate court.  Rule 25(a) of the North Carolina Rules of Appellate Procedure seems to provide that.  But the Rules also provide that a case is not fully before an appellate court until the Record on Appeal is filed, and that the trial court has jurisdiction over the case until then.

Couldn’t Judge Gale have shown some mercy for this minor error? Maybe you think that Judge Gale is too cold-hearted and that he could have given the Plaintiff a pass on this mistaken Notice of Appeal.  Well, no, because as Judge Gale noted in his first decision on exactly the same issue (an unpublished decision, Christenbury Eye Center, P.A. v. Medflow, Inc., he had "no discretion to allow Plaintiff to amend [its] appeal."

Can the NC Supreme Court still accept the appeal?  Yes, as the NC Supreme Court has the power to allow a deviation from its own Rules.  Appellate Rule 2, captioned "Suspension of Rules" specifically allows that.  Maybe the High Court will show some empathy for this Plaintiff as the case involves issues of first impression: whether claims for professional malpractice can be barred by the doctrine of in pari delicto, and whether North Carolina recognizes a tort claim for aiding and abetting breach of fiduciary duty (the Business Court seems pretty sure that it doesn’t).

[Note: This is the first time in a long while that I have blogged about a case the day after the Opinion was handed down as opposed to a week later.  That doesn’t mean that I have recovered my zip.  It means that Judge Gale’s Zloop Opinion was only five pages long.  I encourage more short Opinions.  Those are easier for me to write about.]

It’s been a while since the Business Court devoted a full opinion to a shareholder’s rights to inspect corporate records.  But last week, Judge Bledsoe filled that gap with his Order and Final Judgment in Sharman v. Fortran Corp., 2018 NCBC 27. 

Fortran?  If you are thinking that Fortran Corp. must control the rights to the Fortran computer coding language, like I was, you are wrong. This Fortran Corporation is a "telecommunications system integrator dedicated to designing, sourcing, implementing and maintaining complex communications solutions."  That’s what its last Annual Report says.

The Sharman Opinion deals with the request of multiple Fortran shareholders to inspect a wide swath of Fortran’s corporate records.  I can’t think of another area of the law where you get a statutory right to discovery before filing a lawsuit (though it’s limited to what the statute says you can get).  And you are entitled to a response in five business days!  No thirty or sixty days waiting for a response.  Plus you might be entitled to recover your attorneys’ fees.  I wonder why every claim by a shareholder against a director or officer for, say, a breach of fiduciary duty, isn’t preceded by the use of this powerful tool.

There are two "separate and distinct categories" of inspection requests.  Op. 16 (quoting Russell M. Robinson, II, Robinson on North Carolina Corporation Law § 10.0 1(7th ed.2017)).  These are generally referred to as "absolute rights of inspection" (per. G.S.§55-16-02(a), and "qualified rights of inspection (per. G.S. §55-16-02(b)).

Absolute Right Of Inspection

Section 55-16-01(e) of the General Statutes lists certain records which a corporation is required to keep.  A shareholder is "entitled" to inspect these records:

(1)  Its articles or restated articles of incorporation and all amendments to them currently in effect;

(2) Its bylaws or restated bylaws and all amendments to them currently in effect;

(3) Resolutions adopted by its board of directors creating one or more classes or series of shares, and fixing their relative rights, preferences, and limitations, if shares issued pursuant to those resolutions are outstanding;

(4) The minutes of all shareholders’ meetings, and records of all action taken by shareholders without a meeting, for the past three years;

(5) All written communications to shareholders generally within the past three years and the financial statements required to be made available to the shareholders for the past three years under G.S. 55-16-20;

(6) A list of the names and business addresses of its current directors and officers; and

(7) Its most recent annual report delivered as required by G.S. 55-16-22.

"Absolute" Doesn’t Mean Automatic

Not every shareholder has these "absolute" inspection rights. Only "qualified shareholders" can exercise them.  Only those who have held their shares for more than six months before making their demand for inspection, or who hold at least five percent of any class of the corporation’s shares are "qualified."  N.C. Gen. Stat. §55-16-02(g). 

"Qualified" Rights Are Tougher To Obtain

Those shareholders trying to exercise the "qualified rights" of Section 55-16-02(b) have to satisfy a more difficult standard.  The requesting shareholder must show that his:

Continue Reading NC Business Court On Shareholder Inspection Rights

What choice of law rule applies to trade secrets claims?  No North Carolina appellate court has answered that question, but Judge Robinson of the NC Business Court stepped into that breach in his Opinion in SciGrip v. Osae, 2018 NCBC 10.

The Plaintiff certainly didn’t like the answer, as it resulted in the dismissal of its claim for the misappropriation of its trade secrets.

Defendant Osae had worked for the Plaintiff SciGrip for years developing its adhesive products.  He then left to join a competitor, Scott Bader, Inc. (SBI).  SciGrip sued both Osae and SBI in 2008 (in another lawsuit) for Osae’s violation of confidentiality restrictions which he had signed while working for SciGrip.  That first lawsuit was settled via a Consent Order, which specified that Osae could not disclose SciGrip’s confidential information, and that SBI could not use it.

SciGrip sued Osae again in 2013, after he had joined another company, EBS, which is also in the adhesives industry.  This is the case in the Business Court.  EBS had filed a provisional patent application regarding its adhesives in Europe.  SciGrip alleged that the patent application contained its trade secret information and that Osae was in violation of the Consent Order.

SciGrip also sued Osae for misappropriation of trade secrets.  It sued SBI as well.  SBI, based in the UK, moved for summary judgment on the basis that all of  the alleged misappropriation of trade secrets had occurred outside of the State of North Carolina, and that NC’s Trade Secrets Protection Act does not apply to misappropriation that occurred outside of the State.  Osae had done all of his work for SBBI and EBS outside of the State of North Carolina.

The case turned on whether North Carolina’s  law ought to apply to the trade secrets claim.  Plaintiff argued for the "most significant relationship" test, saying the North Carolina had the most significant relationship to the events leading to the misappropriation.

Judge Robinson went with SBI’s argument, that the proper test was lex loci delicti.  "Under this test, the situs of the claim is the state where the injury or harm was sustained or suffered — the state ‘where the last act occurred giving rise to [the] injury.’  Op. Par. 34.

So what was the last act causing harm to the Plaintiff?  Judge Robinson said that "[m]isappropriation occurs when defendant acquires, discloses, or uses another’s trade secret without the owner’s consent or authority."  Op. Par. 35.

Osae had worked for the Plaintiff in North Carolina when he acquired its trade secrets, so that would seem to be the end of the choice of law inquiry.  But Judge Robinson looked to a North Carolina federal court ruling, and decisions from other federal jurisdictions holding

that the lex loci delicti ‘is  not the place where the information was learned, but where the tortious act of misappropriation and use of the trade secret occurred.’  Domtar AI Inc. v. J.D. Irving, Ltd., 43 F. Supp. 3d 635, 641 (E.D.N.C. 2014)(concluding that plaintiffs could not bring a claim under North Carolina’s TSPA because defendants’ alleged misappropriation occurred in Canada); 3A Composites USA, Inc. v. United Indus., Inc., No. 5:14-CV-5147, 2015 U.S. Dist. LEXIS 122745, at *10 (W.D. Ark. Sept. 15, 2015) (applying North Carolina conflict of laws rules and following the approach taken in Domtar); Chattery Int’l, Inc. v. JoLida, Inc., No. WDQ-10-2236, 2012 U.S. Dist. LEXIS 57512, at *12−13 (D. Md. Apr. 24, 2012) (applying the lex loci delicti rule and stating that “[m]isappropriation occurs where the misappropriated information is received and used, not necessarily where it was taken or where the economic harm is felt”). 

Op. Par. 35.

Under this standard, Osae’s alleged misappropriation occurred either in the United Kingdom, where he had worked at SBI’s facilities, or in Florida, where Osae had worked for EBS.

Judge Robinson ruled that Plaintiff could not bring a claim under North Carolina’s Trade Secrets Protection Act, and granted summary judgment for the Defendants.

This means that claims for violations of NC’s TSPA cannot be pursued (at least in the NC Business Court) for misappropriation occurring outside of the State.  I’m already hearing gloom and doom about this decision, but Plaintiff almost immediately noticed an appeal, so we will be hearing from the NC Supreme Court on this choice of law issue.  Probably next year.

And if you are outraged at Judge Robinson’s blunting of the reach of the NC TSPA, remember that "state laws may not generally operate extraterritorially."  Carolina Trucks & Equip., Inc. v. Volvo Trucks of N.A., Inc., 492 F.3d 484, 489-90 (4th Cir. 2007).  So there is nothing unusual about Judge Robinson’s unwillingness to extend the TSPA’s reach to conduct taking place not only outside of North Carolina, but outside of this country.

 

 

It is hard to base your case on a breach of fiduciary duty when there is a contract in place between the parties.  Contracting parties owe no special duties to each other beyond the terms of the contract.  Branch Banking & Tr. Co. v. Thompson, 107 N.C. App. 53, 61, 418 S.E.2d 694, 699 (1992).

But the NC Business Court twice in January allowed fiduciary duty claims to survive when the relationship between the parties was based on a contract.  The cases are Austin v. Regal Investment Advisors, 2018 NCBC 3 and Can-Dev, ULC v. SSTI Centennial, LLC, 2018 NCBC 9.

Breach Of Fiduciary Duty Claim Against Investment Advisor Gets Past Motion To Dismiss

The Plaintiffs in the Austin case, who had invested funds with the Defendants acting as their investment advisors, sued when the individual Defendant (Barnes) persuaded them to invest in a sketchy venture.  A key claim against the investment advisors was for breach of fiduciary duty.

You probably think that an investment advisor stands in a fiduciary relationship to his client as a matter of law (a de jure relationship), but no NC appellate decision has so held.  Judge Robinson didn’t see any need to take that step, and instead ruled that the facts alleged in the Complaint were sufficient at the Motion to Dismiss stage to support a de facto fiduciary relationship.  Op. 43.  He said:

that the Complaint’s allegations regarding the relationship between the parties, the amount of discretion given to Mr. Barnes and Regal to manage Plaintiffs’ investments, and the circumstances of the Triton investment, together with the allegations that Plaintiffs, who were not sophisticated investors, relied on Mr. Barnes and Regal for their financial expertise to manage their investment accounts, are sufficient at the Rule 12(b)(6) stage to plead the existence of a de facto fiduciary relationship.

Op. 43.

Breach Of Fiduciary Duty Claim Survived Motion For Summary Judgment When Contracting Party "Held All The Cards"

So does it get tougher to get beyond the summary judgment stage when you are claiming a de facto fiduciary relationship?  It didn’t for the Plaintiff in the Can-Dev decision. That Plaintiff had entered into a joint venture deal with the Defendants to develop self-storage facilities in Canada.  The contractual relationship was carefully detailed, and Judge Robinson noted the well accepted principle that 

parties to a contract do not thereby become each others’ fiduciaries; they generally owe no special duty to one another beyond the terms of the contract[.]

Op. 40 (quoting Branch Banking & Tr. Co. v. Thompson, 107 N.C. App. 53, 61, 41, 8 S.E.2d 694, 699 (1992)).

He then observed that:

the existence of a contract does not foreclose the possibility that a contracting party may repose trust and confidence in the other party, beyond the terms of the contract, such that the other party, in equity and good conscience, becomes bound to act in good faith and with due regard to the interests of the one reposing confidence.

Op. 40.

The standard for proving a de facto fiduciary relationship "is a demanding one."  Op. 37.  The NC Court of Appeals has said that "[o]nly when one party figuratively holds all the cards — all the financial power or technical information, for example — have North Carolina courts found that the special circumstance of a fiduciary relationship has arisen.” Lockerman v. S. River Elec. Membership Corp., 794 S.E.2d 346, 352 (2016).

Plaintiff Can-Dev got over that hurdle  (and at the summary judgment stage, which is all the more impressive).  The Defendants had taken over control of the development projects which were the subject of the contracts, and had failed to provide financial information regarding the projects to the Plaintiff.  Plaintiffs argued, successfully quoting the Court of Appeals’ decision in Lockerman, that this "resulted in Defendants “literally ‘[holding] all the cards — all the financial power [and] technical information[.]’”

                                                                          * * *

This isn’t the end of the road for the Plaintiffs in either of these cases.  They still have to prove their claims at trial, because whether a de facto fiduciary relationship exists it is "is generally a question of fact for the jury.”  Can-Dev at 40.

I should note that the Plaintiffs in the Austin case (the investment advisor case) are represented by Brooks Pierce lawyers Clint Morse and Jessica Thaller-Moran.