The dog in the case was a Jack Russell Terrier named Laci.  She had been owned and loved by the Sheras for 12 years, since she was a puppy.  They shepherded her through cancer treatment in 2003, and had gone to N.C. State University's veterinary hospital for further treatment for her in 2007.  Unfortunately, the vets inserted a feeding tube improperly. That caused Laci's death.

The Sheras, who had a close relationship with their dog, sued the hospital and its veterinarians for the "intrinsic value" of Laci and also for "emotional distress and loss of enjoyment of life."  They emphasized the "human-animal bond" between them and their dog.

The Industrial Commission (which had jurisdiction over the claim because of the involvement of NCSU) ruled that it could not allow intrinsic value damages for the loss of a pet.  It granted an award of $3,105.72, which covered reimbursement for the cost of the treatment that led to Laci's death plus $350 for the replacement cost of a new Jack Russell Terrier puppy.

There were amicus briefs filed for each side in the appeal to the Court of Appeals.  Lining up with the Defendant were the American Kennel Club and the Cat Fanciers' Association.  You might expect the AKC, a dog loving organization, to be supporting the Sheras in trying to recover damages based on their emotional valuation of their dog, but the AKC says that allowing large awards to pet owners based  on their emotional attachment would result in an increase to the price of pet services and products to cover the cost of the awards.  Many pet owners then could not afford the more expensive services and care and would forgo them argued the AKC, so pets "would suffer."  AKC Brf. at 14.  I don't know whether the Cat Fanciers have a different perspective on the value of a dead cat, but anyone who has a cat as a pet knows that it's only fair that veterinarians should have to pay more for the unintended death of a cat.  The established superiority of cats to dogs has even been observed by the highly reputable newspaper, The Onion.

The amicus filing for the Sheras was by the Animal Legal Defense Fund.  The ALDF says on its website that it fights "to protect the lives and advance the interests of animals through the legal system."

The best argument made by the Sheras in support of their position was probably the one based on North Carolina's Pattern Jury Instruction 810.66.  That jury instruction says that intrinsic value should be used as a measure of damage "where damages measured by market value would not adequately compensate the plaintiff and repair or replacement would be impossible."  One of the factors to be taken into consideration if the instruction applies is "the opinion  of the plaintiff as to . . . value."

The Court dwelt for a while on the Sheras' argument that Laci was irreplaceable and that market value therefore wouldn't be adequate damages.  It said, based on the Sheras' testimony, that Laci performed no unique task or function that could not be performed by another dog.  It agreed that the "emotional bond" was irreplaceable, but not the dog herself.  It said that its conclusion was supported by the consistency of "our case law denying recovery for sentimental value of negligently lost or destroyed personal property."  Op. at 15.

Another basis for enhanced damages offered by the Sheras was also rejected by the Court.  They said that their damages should include what they had paid for Laci's medical care throughout her lifetime, including her cancer treatment.  The Court rejected that argument, saying "North Carolina law has not yet recognized a lost investment valuation method in wrongful death cases, whether human child or pet animal." Op. at 16.

Don't mistake my position on cats vs. dogs as making light of the Shera's understandable distress over the unexpected death of Laci.  The Court of Appeals certainly did not do that.  Judge McCullough ended the unanimous opinion by saying "[w]e sincerely empathize with plaintiffs' loss of their beloved pet Laci."  Op. at 19.  He said that the Court of Appeals was "an error-correcting court, not a law-making court" (id.) and that an expansion of the law to allow pet owners to recover sentimental damages for the loss of a pet was within the province of the NC Supreme Court, or preferably the Legislature.

That would be an unprecedented step for the state supreme court or the General Assembly.  I do not think there is a single state in the country that allows recovery for emotional damages for losing a pet.

And speaking of lost pets, one of my two cats got outside about a month ago and hasn't come back. Her picture is below.  Snickers is part Maine Coon cat and she is a real beauty.  If you have seen her running free in Greensboro, I am offering a reward of $500 for her return.  That's her intrinsic value to me based on what I have paid approximately over time to fill her Xanax prescription (don't ask me why she takes Xanax, it has nothing to do with me.)  But who knows, even though the Shera court rejected the cost of past medical treatment as a measure of damages, that's only dog law and perhaps cats will blaze a new trail in our appellate courts.

And just yesterday came yet another Rule 12 dismissal of an inadequately pleaded trade secrets claim. Judge Jolly of the Business Court shot down the claim because of the insufficiency of the pleading in AECOM Tech Corp. v. Keating, 2012 NCBC 10.

AECOM has the familiar fact pattern of an employee leaving employment with the plaintiff for a position at the defendant, a competitor, with accompanying claims of unfair and deceptive trade practices, tortious interference with contract, and misappropriation of  trade secrets (which was dismissed).

The allegedly stolen "trade secrets" in AECOM were "customer lists, customer contract information, pricing information, and product information,  These descriptions of the trade secrets were deemed to be too "sweeping and conclusory" to put the defendant on notice of what had been stolen and were dismissed.

Most of the claims survived dismissal because the departing employee (Keating) had been an officer of AECOM.  That meant he owed AECOM a fiduciary duty.  Op. ¶16.  The unfair and deceptive practices claim also stuck because the alleged conspiracy between the new employer and Keating to violate his fiduciary duty could constitute constructive fraud, which makes out a UDTPA claim.

Given that getting trade secrets claims dismissed  in the Business Court now (if the trade secrets are not described with sufficient particularity) is as easy as shooting fish in a barrel, I am declaring a boycott on writing about those types of dismissals.

Two of the Defendants, Moyer and Hutaff, were trustees of a trust established by Dan L. Moser.  They resigned as trustees by filing a written "Notice of Resignation" with the Union County Superior Court on December 3, 2007.  The Moser Trust hadn't funded when they "resigned."  It was a "pour over" trust from Moser's estate, which had not yet been settled.

The Plaintiffs, potential beneficiaries of the Moser Trust when it was funded, claimed that the trustees had breached their fiduciary duties after their resignation.  The nature of the alleged breach isn't that relevant, but it involved allowing an LLC interest in a golf course, an asset of the Estate, to be sold at foreclosure at substantially less than its fair market value, eliminating an equitable interest in the LLC which should have poured into the Moser Trust.

The trustees said they had no fiduciary duty after their resignation.  The resignation to the clerk of court, however, wasn't a resignation in compliance with G.S. §36C-7-705.  Judge Murphy said that the terms of the statute were "exclusive" as to the procedure for resignation.  The statute says that a trustee can resign “(1) [u]pon at least 30 days’ notice in writing to the qualified beneficiaries, the settler, if living, and all co-trustees; or (2) [w]ith the approval of the court.”  Moyer and Hutaff had followed neither path to resign.

In addition, G.S. §36C-7-707(a)  says that a trustee's duties don't pass "until the trust property is delivered to a successor trustee."  The successor trustee wasn't appointed for nearly three years.  It was during that gap of trusteeship that the claimed breach of fiduciary duty occurred.

Judge Murphy refused to carve out an exception from the strictures of the statute regarding trustee resignation.  He also didn't buy the argument that resignation procedures ought to be different because the Trust hadn't yet been funded.  So the defendant trustees of the Moser Trust who thought they had terminated their responsibilities are still on the hook for what may be a substantial claim.

Judge Benjamin Cardozo said in a famous (at least from law school) quote in Meinhard v. Salmon that "[a] trustee is held to something stricter than the morals of the market place. Not honesty alone, but the punctilio of an honor the most sensitive, is then the standard of behavior. . . ."  And you know what Johnny Paycheck said.  I guess that Judge Murphy is more of a Cardozo fan.
 

The only thing sweeter than winning a civil case against the federal government is to win the case and then be awarded your attorneys' fees.  But the winning defendant in EEOC v. Great Steaks, Inc., decided last week by the Fourth Circuit, will have to resign itself to eating cake without icing, notwithstanding three colorable fee arguments which were shot down by the Court.

The EEOC sued Great Steaks on behalf of several employees who claimed they had been sexually harassed in their work at Great Steaks' restaurant in Greensboro.  Great Steaks won the case after a three day jury trial and moved for its fees under Title VII's fee-shifting provision, under the Equal Access to Justice Act (the "EAJA") and under 28 U.S.C. § 1927.  Judge Beaty of the Middle District of North Carolina denied the fee request and was affirmed by the Fourth Circuit. 

Title VII's Fee-Shifting Provision

Title VII contains a provision allowing the Court in its discretion to award reasonable attorneys’ fees to prevailing parties in actions brought under it. 42 U.S.C. § 2000e-5(k).  The statute makes no distinction between the standard for prevailing plaintiffs versus prevailing defendants, but in Christiansburg Garment Co. v. EEOC, 434 U.S. 412 (1978), the Supreme Court established a more stringent standard governing when prevailing defendants may recover as compared to prevailing plaintiffs.  The Supreme Court said in Christianburg Garment  that a prevailing defendant is entitled to fees only if the trial court:

finds that [the plaintiff’s] claim was frivolous, unreasonable, or groundless, or that the plaintiff continued to litigate after it clearly became so.

Id. at 422.  A Title VII plaintiff who prevails, on the other hand, "is ordinarily entitled to attorneys' fees unless special circumstances militate against such an award."

The reasons for the difference are discussed by the Court on pages 9-10 of the opinion.

A highly significant factor to the Fourth Circuit in its determination that no fees were warranted was that Great Steaks had made a motion for judgment as a matter of law at the close of the EEOC's evidence at trial, which had been denied.  So the case was strong enough to go to the jury.  Judge Floyd said that the denial of a Rule 50 motion was a ""particularly strong indicator that the plaintiff’s case is not frivolous,unreasonable, or groundless."  He said that "we are hard-pressed to imagine circumstances where the district court could make this determination and nevertheless deem the plaintiff’s case frivolous, unreasonable, or groundless."  Op. at 12.

The review was for abuse of discretion, and the appellate court said that Judge Beaty was "in the best position"  to make the fee assessment" since he had "managed the litigation and conducted the trial."  Op. at 14.

All Great Steaks had to offer in support of its motion was that the EEOC's case had steadily eroded over time from being a class action on behalf of numerous Great Steaks' employees to a case involving only one employee who turned out not to be very credible and whose testimony had been deemed "troubling" by the Magistrate Judge who recommended that a summary judgment motion made by Great Steaks be denied.  One potential class member had refused to appear for her deposition, and another announced that she was quitting the case at her deposition.  This wasn't enough to establish frivolity or groundlessness, according to the Court

Great Steaks took two more shots at a fee award.

Fees Under The Equal Access To Justice Act

The EAJA makes an award of fees mandatory for a prevailing party against the government unless the trial court finds that the government's position was "substantially justified." 28 U.S.C. §2412(d). The government bears the burden of proving substantial justification.

This is a lower standard than the standard used in applying Title VII's fee-shifting provision. The Fourth Circuit ruled in what was a case of first impression for it that the EAJA's mandatory fee provision is unavailable to prevailing Title VII defendants.  It rejected the argument that the EAJA should apply because the Title VII standard was "narrower and more difficult." That seems pretty clear, since Section 2412 says that it does not "alter[ ], modif[y], repeal[ ], invalidate[ ], or supersede[ ] any other provision of Federal law which authorizes an award of such fees and other expenses to any party other than the United States."

The  first line of the statute moreover says it applies "[e]xcept as otherwise specifically provided by statute."  So when another provision of federal law provides for the recovery of attorneys' fees (like Title VII), the EAJA does not apply.

It's worth noting that fees are obtainable under the EAJA against the EEOC when it loses a case brought under the Age Discrimination in Employment Act, which has no provision regarding attorneys' fees.  The Fourth Circuit ruled on that point in EEOC v. Clay Printing Co., 13 F.3d 813 (4th Cir. 1994)

Fees Under 28 U.S.C. §1927

Capping off its "three and out" ruling against Great Steaks, the Fourth Circuit also affirmed the denial of attorneys' fees under 28 U.S.C. §1927 , which provides for fees to be awarded against ""[a]ny attorney . . . who so multiplies the proceedings in any case unreasonably and vexatiously...."

The inquiry under §1927 is not on the merits of the litigation, but instead how it is conducted. So Great Steaks' arguments about the lack of merits of the litigation didn't count at all in this part of the analysis. The statute also requires a showing of bad faith on the part of the attorney whose conduct provides the basis for the award.

Great Steaks said that the vexatiousness and bad faith flowed from two motions filed by the EEOC. One was a motion to strike Great Steaks' summary judgment motion on the basis that it used a font size in the supporting brief that was larger than that allowed by the Court's Local Rule. The EEOC failed to pursue its motion after Great Steaks responded to it.

The other actions pointed to by Great Steaks as vexatiously multiplying the case were twelve motions in limine which the EEOC filed the week before trial. Great Steaks didn't respond to any of the motions, and the Court granted four of the motions before the trial began and deferred ruling on the other eight.

Apparently motions about font size are not vexatious, and motions in limine (even twelve) don't meet the Section 1927 standard. So file away, with some discretion. But don't use too small a font.  That's really annoying and potentially vexing.

________________________________________________

The Fourth Circuit's opinion doesn't mention the amount of fees sought by Great Steaks, but the Motion in the trial court sought almost $150,000 in fees.

 The short answer is that bartenders are held to a higher standard than bankers.  A claim against a lending bank for anything other than a violation of the terms of the loan documents -- say such as a claim for breach of fiduciary duty -- is almost always doomed to dismissal  Judge Gale of the Business Court last week did exactly that to the borrower's claim in Wells Fargo Bank, N.A. v. Vandorn, 2012 NCBC 6, saying that “[I]n an ordinary lender-borrower relationship, the lender does not owe any duty to its borrower beyond the terms of the loan agreement[,]” Op. ¶__. (quoting Branch Banking & Trust Co. v. Thompson, 107 N.C. App. 53, 418 S.E.2d 694, 699 (1992)).

Wells Fargo had sued Vandorn, Cook and an LLC formed by the two individuals to collect on a defaulted loan made for the LLC  to buy a lot in a high-end resort development called Laurelmor.  Laurelmor was billed as a 6,000 acre golf resort, with the course designed by PGA great Tom Kite, to be developed in the North Carolina mountains.  The Winston-Salem Journal says that Laurelmor "collapsed under the bad economy and a massive loan."

The three defendants counterclaimed, seeking to avoid liability on their loan.  They alleged that Wells Fargo (then Wachovia) had breached its fiduciary duty to them because it failed to obtain an accurate appraisal on the lot and it also failed to determine that the LLC borrowing the funds was insufficiently capitalized to repay the loan.

The Vandorn Defendants said that Wells Fargo owed them a fiduciary duty to vet the deal because one of the Defendants, Cook, was a client in the Bank's Wealth Management Division.  That's the part of the Bank which handles its wealthiest clients, offering them a "holistic approach" and the advice of a "team of highly experienced specialists." Cook said he relied on the Division  for most of "his banking, investment, and insurance needs, and . . . for advice and counseling regarding a broad spectrum of financial matters." p. Par. 9.  Cook said he had relied upon the Bank to obtain a valid and reliable appraisal on the Laurelmor property and that the Defendants would not have purchased the lot if the Bank had appropriately protected them.

Judge Gale said that the "conclusory allegations" of the Counterclaim didn't have enough heft to establish a fiduciary relationship and he granted Wells Fargo's Motion to Dismiss. He summed up what was lacking this way:

Defendants do not allege Plaintiff or its employees located, identified, or recommended the lot, or that the lot purchase was part of a broader financial plan that Plaintiff had developed for [] Cook or the Defendants. Defendants do not allege that B. Cook or any other Defendant sought investment advice regarding the lot transaction. To the contrary, Defendants’ allegations indicate that Plaintiff became involved in the lot transaction only after Defendants had located the lot, formed the intent to purchase the lot, formed [the LLC] to facilitate the purchase, and approached Plaintiff about financing the transaction.

Op. ¶17

So if the Wealth Management Division had recommended the development to the Defendants, might that have established a fiduciary relationship?  Maybe, but the Vandorn decision is the latest in a series of Business Court decisions where investors in resort  development projects sought unsuccessfully to transfer the burden of their loss to their lenders, See Allran v. Branch Banking & Trust Corp., 2011 NCBC 21 (N.C. Super. Ct. Jul.6, 2011), and  Beadnell v. Coastal Communities,  (N.C. Super. Ct. June 3, 2011).

On a totally different subject, yesterday I checked out http://www.supremecourthaiku.com/, which summarizes US Supreme Court decisions in haiku.  The video explaining it is absolutely hilarious.  If I could write in three line haikus, my blog posts would be much shorter.  But I'm probably better at limericks, but not by much.

LegalZoom bills itself as “transform[ing] the way people think about and fulfill common legal needs.” It says that it has made its mission “to simplify the process and to set new standards for convenience and service in an industry not typically known for great customer care.” The company basically sells legal forms to non-lawyers (and helps its customers to fill them out by computer) which enable them to form their own corporations, write their own wills, and get their own divorces, while at the same time avoiding what LegalZoom condemns as the high cost of attorneys’ fees.

It’s said pretty often that “you get what you pay for,” so it’s not surprising that LegalZoom has taken some heat (like from Consumer Reports) for the quality of its services, even though it advertises that 94% of its customers "recommend LegalZoom to friends and family." The lawyers who provide the same services as those offered by LegalZoom, such as estate planning lawyers, and lawyers filing trademark applications, aren’t keen on the service. 

Not much has happened in the Business Court so far, except for LegalZoom’s strident efforts to stay out of the Business Court. Those began with the filing of the case by LegalZoom against the State Bar. LegalZoom immediately asked the Chief Justice of the NC Supreme Court for an exceptional case designation to Superior Court Judge Paul Gessner. That was granted back in October, apparently without notice to the NC Bar.  The Bar then designated the case to the Business Court as a mandatory complex business case, which LegalZoom opposed, saying its case was not a " complex business case" within the mandatory jurisdiction of the Business Court.

LegalZoom has lost Round 1.  Judge Jolly (who decides all designation motions as the Chief Judge of the Business Court) ruled that the claims made by LegalZoom in its Complaint are squarely within the jurisdiction of the Business Court. Count 1 of the Complaint is for a violation of the Monopoly Clause of the North Carolina Constitution, saying that the State Bar has interfered with LegalZoom’s constitutional right to freely do business in North Carolina. Count 2 says that the State Bar has also violated the state Constitution by excluding LegalZoom from “register[ing] its legally compliant prepaid legal services plan.” (That's a whole different LegalZoom service).  The third count is for “commercial disparagement,” alleging that the State Bar has made false statements to the public which caused the public “to regard [LegalZoom’s] product as legally unauthorized, and imputing illegal conduct to [LegalZoom].”

 In opposing the Bar’s designation as a mandatory business case, LegalZoom argued that its case was “exceptional,” but not a “complex business case.”  Judge Jolly didn’t spill much ink in denying the Opposition in an Order on January 9th. He said:

Plaintiff's Complaint specifically alleges that "this case includes claims that involve a material issue relating to . . . [a] anti-monopoly, anti-competition, and antitrust law claims that are not based solely on N.C. Gen. Stat. § 75-1.1; [b] unfair competition law claims that are not based solely on N.C. Gen. Stat. § 75-1.1; and [c] the Internet and electronic commerce." These allegations are substantially identical with three separate statutory grounds for designation of a civil action as a mandatory complex business case under the Removal Statute.

Order ¶3.  So that's that.  The case has been assigned to Judge Gale and will be resolved in the Business Court.

Where was the vitriol?

LegalZoom’s Reply Brief called out the State Bar, saying it “presumptively mischaracterizes LegalZoom’s motivation in opposing this case’s designation as a mandatory complex business case.” Reply at 8. It turned up that volume, saying that the State Bar’s assertions that LegalZoom did not want to be in the Business Court were “incorrect, and made with reckless disregard to the truth of the matter asserted.” Those are fighting words, and so are the remaining statements in this diatribe, that the Bar’s position was “grossly negligent, if not intentionally wrong,” which were unnecessarily harsh. Reply at 9.

The Brief in Support of its Opposition was also salted by LegalZoom with pejorative terms stating that the Bar had “incorrectly interpret[ed]” the statute governing the process of opposing a Business Court designation (Opp. Brf. at 1), that its interpretation was a “fallacy,” (Opp. Brf. at 2), and that the Bar had “made a series of unfounded, presumptive and incorrect characterizations and assertions against LegalZoom,” Opp. Brf. at 5.

I don't care much about the ultimate resolution of this case.  I don't feel threatened by LegalZoom.  But I'm not real keen on people using LegalZoom to replace the advice they would get from a lawyer. LegalZoom in fact warns against that repeatedly on its website. Its disclaimer says that "[t]he information provided in this site is not legal advice, but general information on legal issues commonly encountered. LegalZoom is not a law firm and is not a substitute for an attorney or law firm."

Would I refer a client to LegalZoom? Possibly, if I was sure that all that the client needed was a basic form which LegalZoom would assist him in filling out on line. But I would have to have some assurance of the quality of the form and the assistance provided before I did that.  A North Carolina Power of Attorney is probably a good example.  The statute (G.S. §32A-1) has an approved form which is pretty easy to complete.

But it's hard to feel much sympathy for LegalZoom. It has been markedly successful so far.  It is reported to have raised $100 million in funding, and is said to be looking ahead to a public offering.

The case will turn on whether LegalZoom's service is the unauthorized practice of law, which is illegal in North Carolina and many other states. The definition of "practice of law" varies from state to state, so LegalZoom's activity without much objection in 49 other states doesn't mean it will be permitted in North Carolina. Actually, North Carolina isn't alone in its concerns. The Bars of Connecticut and Pennsylvania also have raised questions whether Legalzoom is engaged in the unauthorized practice of law.

The controlling statute in North Carolina is N.C. Gen. Stat. §84-2.1 which says in part that the "practice of law" includes:

performing any legal service for any other person, firm or corporation, with or without compensation, specifically including the preparation or aiding in the preparation of deeds, mortgages, wills, trust instruments, inventories, accounts or reports of guardians, trustees, administrators or executors, or preparing or aiding in the preparation of any petitions or orders in any probate or court proceeding; abstracting or passing upon titles, the preparation and filing of petitions for use in any court, including administrative tribunals and other judicial or quasi-judicial bodies, or assisting by advice, counsel, or otherwise in any legal work;

That definition seems to cover whatever LegalZoom is selling like a blanket. I would be antsy if I were them.

Do any of you have strong feelings about LegalZoom?

Rivers sued Wachovia and its top officers and directors for misrepresenting the Bank's  financial condition in the months leading up to its failure in 2008.  He said that he would have sold his shares but for the positive statements made by  the Bank about its soundness and stability, which he said amounted to fraud.

Judge Wilkinson said that although Rivers sought to cast his claims as belonging personally to him (i.e. "individual"), they were in fact derivative claims (which belonged to the corporation). 

It is almost impossible in North Carolina for a shareholder to sue an officer or director for the loss in value of stock.  The Fourth Circuit said that in North Carolina and in South Carolina as well, "[t]he well-established general rule is that shareholders cannot pursue individual causes of action against third parties for wrongs or injuries to the corporation that result in the diminution or destruction of the value of their stock."

The reasons that such individual actions are precluded include that they prevent "self selected
advocate[s] pursuing individual gain rather than the interests of the corporation or the shareholders as a group,[from] bringing costly and potentially meritless strike suits."  All Wachovia shareholders were equally injured by the misrepresentations of which Rivers complained.

So, " [a] derivative lawsuit is . . . the vehicle for a shareholder to litigate injuries that result in the diminution in value of the corporation’s stock." The North Carolina Supreme Court has recognized two exceptions to its solidly established rule: "(1) where there is a special duty, such as a contractual duty, between the wrongdoer and the shareholder, and (2) where the shareholder suffered an injury separate and distinct from that suffered by other shareholders."

No Fiduciary Duty Was Owed By Wachovia's Officers To Rivers As A Shareholder

Rivers argued that the defendants owed him a "special duty," which Rivers said was met by the fiduciary duty owed to him by the officers and directors of Wachovia.

Judge Wilkinson quashed that argument, stating  that "[u]nder North Carolina law, officers and directors of a corporation owe a fiduciary duty to the corporation which does not create an individual cause of action."  In other words, the fiduciary duty of an officer/director is owed to the corporate entity, not to the shareholders individually.  Note that the answer can be different with a closely held corporation. 

There Is No Valid Claim For A "Lost Profit Opportunity"

Rivers' argument that he had a "special injury" met with the same result.  He argued that he "meant to sell his shares in Wachovia before the decline in share price but forwent the opportunity to sell based on the false statements of defendants."  Rivers characterized this as a "lost profit opportunity," but the Court said this argument was "indistinguishable" from the argument that every Wachovia shareholder might make.  Judge Wilkinson said the "effort to disguise a classic derivative claim for the decline in stock value as a 'lost profit opportunity' " was "too clever by half."

Judge Wlkinson also pointed out what he termed a "troublesome paradox" in Rivers' claim.  Rivers was saying that the fraudulent scheme caused his injury, but the same scheme had inflated the value of the stock in the first place.  He said that "[t]he failure to sufficiently capitalize on the effects of an alleged fraudulent scheme is not an injury we are prepared to credit." 

There is also a hypothetical aspect to a shareholder saying he would have sold his shares.  When? How many shares?  At what price?  Judge Wilkinson said that "[u]nlike a typical securities claim involving a precise date, number of shares, price, and profit or loss," such claims "involve only a hypothetical transaction."

So that's Rivers' lump of coal.  And if the Rivers case seems like "deja vu all over again," it is.  The North Carolina Business Court dismissed identical claims (brought by the same Plaintiff's counsel) early in 2011 in Harris v. Wachovia Corp., 2011 NCBC 3. In fact, that last quote from the Rivers case is straight  from Judge Jolly's opinion in Harris. But be aware that Mr. Harris suffered more pain than Mr. Rivers.  He owned 900,000 shares of Wachovia stock.  And he didn't even get a lump of coal for Christmas. 

And for the rest of us, we did better than a lump of coal because it's not all that often that the Fourth Circuit decides a derivative action case.  There's now a clearly articulated opinion on the issues decided in Rivers.  It's a must cite if you are moving in federal court to dismiss a derivative claim masquerading as an individual claim.

Shamoon is the inventor of the Ubiquitous device.  He sold a 1/2 percent interest of some type in it to the Turkows.  Whether ownership was conveyed was a principal issue in the case.  The assignment document said:

We, Charles and Deborah Shamoon, hereby grant Allen & Lucy Turkow one-half percent ownership in the Ubiquitous Connectivity & Control System for Remote Locations for the sum of $60000.00.

This grant of ownership entitles Allen & Lucy Turkow to one half percent of all the proceeds from the sale of the Ubiquitous Connectivity & Control System for Remote
Locations.

The Turkows made their investment based on Shamoon' s representations that he was about to license the invention to General Electric and that he was expecting money from GE in "sixty, ninety, worst case scenario, one hundred and twenty days."  He said he was "at the finish line" of the deal. 

The Turkows learned of Shamoon through their church, of which Shamoon was also a member.   He had sold an interest in the invention to a number of other members of the Living Word Family Church in Raleigh.  No doubt there was great expectation of a quick profit on the investment in the patents.  Parishioners at the church subscribe to a theology:

that believers who have strong faith and employ wise and moral business practices will be rewarded with spiritual abundance and financial prosperity.

Brf in support of Turkows' Motion for Summary Judgment at 3.  So it looked like a sure thing, with a quick return, but you can guess already that the transaction with GE failed to materialize, and the fallout was a  lawsuit.

Ownership of the Patents

Shamoon sued the Turkows because the Turkows were threatening to "assign or grant licenses[s] under the Patents to others" without sharing the proceeds with him. Complaint  Par. 11.  Shamoon said that he had not sold an ownership interest in the Patents to the Turkows and that the Turkows should be enjoined from their activity.

Could the Turkows have done what Shamoon feared with their teeny half a percent, if they had obtained an assignment of ownership?  Yes, because 35 U.S.C. §262 says that a joint owner of a patent  "may make, use, offer to sell, or sell the patented invention within the United States, or import the patented invention into the United States, without the consent of and without accounting to the other owners." 

Judge Jolly found the agreement to be ambiguous as to the nature of the interest acquired by the Turkows, and denied Shamoon's motion for summary judgment.  Shamoon was seeking a declaratory judgment that the Turkows were not owners of the Patents, but he now faces a trial if he wants that kind of relief.

Counterclaims

The Turkows made counterclaims against Shamoon based on the statements he had made regarding the imminent closing of his deal with GE.  Those were styled as claims for fraud and negligent misrepresentation.  Summary judgment was denied as to both of those claims, in part because Judge Jolly found a question of fact whether the Turkows could prove reasonable reliance based on the alleged statements about the finality of a deal with GE.  The Turkows had argued that their reliance on Turkow was reasonable because they were members of the same church.

Judge Jolly also found a question of fact about whether Shamoon's statements could be the basis for an unfair and deceptive practices claim.  As he put it, the issue was "whether Charles Shamoon’s solicitation of Defendants’ investment was primarily a "capital raising device" or a transaction to produce personal income for Charles Shamoon."  Op. ¶57.  "Capital raising" can't be an unfair and deceptive practice, but "personal income raising" can be.  So Shamoon is facing a trial on that issue too.

No fruitcakes were eaten during the preparation of this post. 

The Motion to Dismiss was based on Penguin's argument that litigation against it had to be brought in Michigan and that North Carolina was therefore an improper venue.  This was premised on a forum selection clause in the LLC's operating agreement which said that:

Any dispute or other legal action concerning this Agreement, including any arbitration or litigation proceedings shall be conducted in Wayne County, Michigan.

I don't know why even a penguin would choose to litigate in Wayne County, which boasts of being the home of the City of Detroit, over the North Carolina Business Court, but Wayne County is where Penguin has its headquarters, so that provides some explanation.

Roth was the former President of Penguin.  He had sued Penguin after his termination, claiming violations of the terms of his Employment Agreement.  He was also a member of the LLC.  Penguin said that venue was improper in North Carolina because of the forum selection clause in the Operating Agreement, although there was no forum selection language in the Employment Agreement.  Judge Murphy held that the terms of the Operating Agreement had not been incorporated by reference into the Employment Agreement and that the lawsuit was about the obligations owed to Roth under his Employment Agreement, not his rights as an LLC member.

Judge Murphy ruled that the clause would not be enforceable even if had been properly incorporated into the Employment Agreement.  North Carolina will only dismiss a case based on a forum selection clause if the clause is mandatory as to where the case must be filed.  That has been the ruling of the NC Court of Appeals before, in Mark Group Int'l, Inc. v. Still, 151 N.C. App. 565, 566 S.E.2d 160 (2002).  Although the Penguin clause specified that "any arbitration or litigation proceedings shall be conducted in Wayne County, Michigan," that language wasn't "mandatory" enough. 

You might think that the word "shall" is equivalent to "must," and therefore mandatory, but the word "shall" is falling into disfavor as a command.  The Committee drafting the Restyled Rules of Federal Evidence, which became effective yesterday, dropped the use of that word in a number of the Restyled Rules. The Committee on Rules of Practice and Procedure said:

'shall' is no longer generally used in spoken or clearly written English. The restyled rules replace "shall" with 'must,' 'may,' or 'should,' depending on which one the context and established interpretation make correct in each rule.

See here. at 29.  Words like "exclusive," "sole," or "only" are the magic words that will carry the ball across the line for an enforceable forum selection clause, as the NC Court of Appeals noted in the Mark Group case.

So what's this Penguin to do?  Leave some of that Michigan winter gear at home and resign itself to litigating in North Carolina.  Keep selling the Penguin toilets with overflow protection it offers from its headquarters in Michigan.  And work on revising that forum selection clause so it will stick the next time.  There's pretty clear guidance now about the words that it takes. 

Oh, and don't forget about N.C. Gen. Stat. §22B-3,  which makes a forum selection clause unenforceable if it requires litigation outside of North Carolina and it's "in a contract entered into in North Carolina."  That type of forum selection clause is against North Carolina's public policy, per the statute.  Roth presumably didn't enter into the Employment Agreement in North Carolina so that statute wasn't an issue in the case.

Last week, in Nelson v. Alliance Hospitality Management, LLC, 2011 NCBC 42, Judge Gale tangled with a word undefined in an LLC's Operating Agreement: "insolvency".  The word was tucked away  in what is probably familiar rote language to you, setting out the conditions under which an LLC member would lose his or her rights as a member.  It said "[a] member shall cease to have any power as a Member or Manager, any voting rights or rights of approval hereunder upon death, bankruptcy, insolvency, dissolution, assignment for the benefit of creditors, or legal incapacity. . . ."

The Defendant, Alliance, said that Nelson didn't have standing to sue it because he was insolvent, and he therefore had lost all rights of a member.  Alliance presented evidence to Judge Gale that Nelson had several judgments and other court activity which had not gone at all in his favor.  The net amount against him totaled almost $8 million. Op.¶28.

Judge Gale was unwilling to rule on a Motion to Dismiss that Nelson was insolvent even in light of the $8 million that he owed.  He said that there was no evidence before the Court establishing the asset side of Nelson's balance sheet, and nothing to demonstrate "his conclusive inability to pay his debts as they come due."  Op. ¶29. 

You don't want to leave this post without knowing what Words and Phrases says about "insolvent," do you?  It collects four North Carolina cases defining the term.  Three of them approve a balance sheet test, which appears to be what Judge Gale used, asking whether the obligor can meet liabilities by converting all of the property owned by that person into money  (e.g. Silver Valley Mining Co. v. North Carolina Smelting Co., 119 N.C. 417 (1896)).

It's nice to have a Court assume that you might have a net worth of more than $8 million and that you therefore wouldn't be rendered insolvent by scrambling to pay off multi-million dollar judgments.  I only know a couple of people who really warrant that generous a presumption, but I'm not one of them

It’s hard to call a client and have to tell her that the case you filed for her was dismissed. But it must be even harder to tell a client that she now has to pay the defendant for his legal fees in winning the dismissal. And think how much worse that would be if the defendant were her ex-husband.  And it's even worse if it's Thanksgiving!

That hasn’t happened to me (at least not yet), and I hope it hasn’t happened to you, but it is the phone call that the lawyers representing Jane Sutton in Sutton v. Sutton, 2011 NCBC 43 probably had to make after Judge Jolly’s ruling in her case on the Tuesday before Thanksgiving.

Jane Sutton became a shareholder in her husband’s business, Sutton’s Tree Service, Inc. during their marriage. She filed a derivative action against her ex-husband on behalf of the corporation for conversion, breach of fiduciary duty and the “improper filing of income tax returns.” Op. ¶1.

There were two fatal flaws in this turkey of a lawsuit which led to its dismissal. The first was that there had been no demand on the corporation to take the action against Mr. Sutton. Section 55-7-42 makes a demand a precondition to the filing of a derivative action. It says:

No shareholder may commence a derivative proceeding until:

(1)        A written demand has been made upon the corporation to take suitable action; and

2)        90 days have expired from the date the demand was made unless, prior to the expiration of the 90 days, the shareholder was notified that the corporation rejected the demand, or unless irreparable injury to the corporation would result by waiting for the expiration of the 90‑day period.

There’s also a statutory requirement that the person filing the derivative action must have been “a shareholder of the corporation at the time of the act or omission complained of….” N.C. Gen Stat. §55-7-41(1). He or she must also be able to “[f]airly and adequately represent[] the interests of the corporation in enforcing the right of the corporation.” Id. At 55-7-41(2).

The second fatal flaw was that in addition to not making a demand, Mrs. Sutton hadn’t been a shareholder of the corporation since her divorce from Mr. Sutton, which was undoubtedly before the alleged misconduct had taken place. There had been a Consent Judgment by which Mrs. Sutton had “surrendered to Defendant any and all interest she had in the Corporation.” Op. ¶11.

Judge Jolly said that her lack of ownership was established as a matter of res judicata and collateral estoppel, since the “Consent Judgment constitutes a valid, final judgment determining the respective rights of Plaintiff and Defendant regarding ownership of the Corporation.” She therefore had no standing to maintain the suit, and Judge Jolly ordered that it be dismissed,

So what about the fees, you are wondering. The statute on fees in derivative actions says that “On termination of the derivative proceeding, the court may:. . .  Order the plaintiff to pay any defendant's reasonable expenses, including attorneys' fees, incurred in defending the proceeding if it finds that the proceeding was commenced or maintained without reasonable cause or for an improper purpose.” N.C. Gen. Stat. 55-7-46(2).

Judge Jolly didn’t base the fees on the claimed “improper purpose” of Mrs. Sutton, even though her ex-husband’s lawyers said that she had filed the lawsuit as a part of a "personal vendetta against her ex-husband.”

He rested his discretionary award of $22, 751.08 in fees on his conclusion that the action had been “commenced and maintained . . .  without reasonable cause,” (Op. ¶18), because the Plaintiff “clearly lacked standing.” Adding a little bit of salt to the wound, Judge Jolly said that the “Complaint, on its face, [was] seriously deficient and subject to dismissal on several grounds “ Id.

Unfortunately, the file for this case isn’t on the Business Court’s website so I can’t make any observations of how “seriously deficient”  the Complaint was. It would also have been interesting to see the basis on which Mrs. Sutton opposed the Motion to Dismiss since there doesn’t appear from the Order for there to have been any.  She didn't oppose the Motion for the award of fees.

I hope you all have a great Thanksgiving. I’m shutting down for the holiday, and am looking forward to having my youngest child, my son Dash, here with me for Thanksgiving. So don’t look for anything from this blog until next week.

Have you ever filed a reply to a counterclaim where your reply was 89 pages long and to which you attached more than 200 pages of exhibits? I think you probably haven’t, but the Plaintiff in the Business Court case Fountain v. Fountain Powerboats, Inc. did. When the Defendant made a Motion to Strike the Reply, Judge Gale granted it in an Order filed last Friday,  saying that dissecting all the irrelevant allegations of the Reply "would burden this opinion with a tediousness serving no useful purpose.”” Op. ¶21.

            The legal issue decided in the opinion was whether a responsive pleading like a reply to a counterclaim or an answer to a complaint gives the responding party the latitude to provide the Court with “notice of the transactions, occurrences, or series of transactions or occurrences, intended to be proved,” which is what the Plaintiff said his rambling Reply had provided. The problem with that argument was that the quoted language, from Rule 8(a) of the North Carolina Rules of Civil Procedure, applies only to complaints. The part of Rule 8 that governs answers to complaints and replies to counterclaims doesn’t contain that language and doesn’t permit “a new cause of action or other matter beyond the scope of the new matter raised in the answer.”

 In other words, complaints and counterclaims, which set forth causes of action, allow for a “richness of detail” which isn’t warranted in a response to those allegations.

 
The court ruled that the expansive reply included statements that were “immaterial, impertinent, and redundant,” which included allegations which were

• “self-promotional,”
• Self-serving and irrelevant metaphors and analogies,”
• “Statements that appear to serve no purpose but to frustrate Fountain Powerboats current operations and promote RF Powerboats,” and
• “Unnecessary name calling”

Those types of things are frowned upon, although necessary name calling is often tempting.

And as for the hundreds of pages of exhibits, Judge Gale said that “none of these exhibits are germane to any legitimate defenses that can be asserted by Reggie Fountain.”Op. ¶22.   In fact, he said that the only reason for the exhibits to be attached to the Reply was “so as to become part of a centralized public record Reggie Fountain can use to further his personal ends, easily accessible via the Business Court’s website.”Op. ¶22.

The Judge let the Plaintiff dictate what would be stricken from the Defendant's Reply, ordering that the Plaintiff's version of the Reply would be the version considered as the case went forward.  Plaintiff submitted with its Motion filed on September 9, 2011 as Exhibit A a redlined copy of the Reply proposed by the Defendant.  It's not very often (like never) that an opposing party gets to control what the other side's pleading will say.

The Committee leading this effort (and there was a herd of committees) tried to be clear that its changes were not substantive. The Committee Note to virtually every changed Rule says that “these changes are intended to be stylistic only. There is no intent to change any result in any ruling on evidence admissibility.” The Committee avoided making changes to what it called “sacred phrases” in the Rules, which it felt would have been substantive.  “Sacred phrases” are those phrases that had become “so familiar in practice that [their] alteration would be disruptive..” In other words,  that means "phrases that have become so familiar as to be fixed in cement."

Do you know any of those? The only one that has stuck in my mind like cement over the years has been an out of court statement “offered to prove the truth of the matter asserted.” That definition of hearsay was indeed deemed “sacred,” but there have been other rewritings of the hearsay rules that make them more digestible.

The new Rules aren’t on the level of as good a read as, let’s say, John Grisham’s new book, The Litigators. But they certainly are easier to read than they were before. There’s a side by side comparison of the original Rule against the restyled Rule available to look at if you have an affection for a particular Rule or Rules. Oh, and the new Rules won a Burton Award.  Those awards are "designed to reward major achievements in the law ranging from literary awards to the greatest reform in law." The restyled Rules won the Reform in Law Award.

These changes have been in the works since 2006, so freshly graduated lawyers ought to be familiar with them. The luminaries working on this five year restyling effort included Professor Ken Broun of UNC Law School, who was a consultant to the Advisory Committee. Another professor involved, Joseph Kimble of the Thomas Cooley Law School, was the “style consultant” for the project. He wrote a series of four articles explaining improvements in specific Rules. You can read those here, here, here,  and here.

Professor Broun, incidentally, is not taking a break from the Rules of Evidence after this multi-year effort.. He is leading a project to create a resource that” would describe the federal common law on evidentiary privileges.” A very detailed draft on attorney client privilege and the marital communications privilege as presented to the Advisory Committee on Evidence Rules is available (at Tab IV).

I wonder if we could get restyling going on the North Carolina Rules of Appellate Procedure. They are sludge.
 

The Defendants moved for judgment on the pleadings.  There wasn't one overriding issue, but a host of issues decided by Judge Gale, which ended with a partilal grant of the motion and a denial of the motion as to some of the claims. Here's a summary:

Choice of Law Issue.  The covenants called for Delaware law to apply.  That was significant because Delaware law allows the Court to "blue pencil" an overly broad covenant, while North Carolina does not provide the Court with that power.  Defendants said that the Court should not enforce the choice of law provision because it would violate an entrenched public policy of North Carolina law (that "blue pencilling" is not allowed). The Court side-stepped this issue, ruling that the choice of law provision had been bargained for and was therefore valid.  That decision was no doubt prompted by Plaintiff's status as a Delaware corporation, and its payment of $9.5 million to Defendant Rogers for his stock in the acquired company.

Covenants Given In Connection with the Sale of a Business.  Judge Gale followed the general rule that "[N]on-compete covenants which accompany the sale of a business generally are afforded more latitude than covenants ancillary to employment contracts." Op.¶45.  He mentioned that point several times in his opinion while ruling on some aspects of the dismissal motion.  E.g. Op. ¶¶ 55, 60, & 67.

Standard for Non-Solicitation Agreements.  It has been an open question in my mind whether an agreement by an employee that she won't solicit employees of her old employer at a new employer is governed by the same requirements as a covenant not to compete.  There are distinctions to me between a non-solicitation agreement and a non-compete.  Judge Gale had no doubts about that, ruling "[t]he elements are the same for non-competition and non-solicitation clauses, but the latter are more easily enforced, as their restraints on employees are generally more tailored and less onerous on employees’ ability to earn a living." Op. ¶46.

The Language "Directly or Indirectly".  Covenants not to compete typically prohibit the employee from competing with his employer "either directly or indirectly."  Judge Gale said that "North Carolina courts have refused to enforce non-competition clauses using" that term.  He held back on the enforceability of that term pending "a more fully developed record."  Op. ¶61.  And he threw out this nugget: that the covenant wasn't necessarily unenforceable under NC law because Rogers had the right under the agreement containing the covenant to "invest in competing firms under terms that are more narrowly drawn to protect Akzo Nobel’s interests." Op. ¶62.

Breadth of Covenants.  Judge Gale reserved ruling on the reasonableness of a four year covenant restricting Rogers from competing on an international basis with Akzo.  He noted Rogers' extensive job responsibilities with Akzo and his broad knowledge of Akzo's business practices.He struck down the restrictions on three other employees of the acquired entity.  One swept too broadly, purporting to prohibit an employee named Schoning from "working for a competitor [of Akzo's] in a position wholly outside the scope of his employment with Chemcraft and from indirect ownership of a competing firm." That provision went "farther than is necessary to protect a legitimate business interest."Op. ¶ 74.  The other two employees escaped enforcement of a five year restriction, which Judge Gale said was "incurable and unreasonable as a matter of law" due to the time length of the restriction. Op. ¶86.

Tort Claims.  Judge Gale dismissed almost all of the tort based claims (tortious interference with contract and tortious interference with prospective advantage) because the claims were based on breaches of contract.  There was no duty "separate and apart" from those contained in the contracts and therefore no basis for tort claims. Most of the unfair and deceptive practices claims were dismissed as well, along with the claim for punitive damages.  Judge Gale hesitated a bit on dismissing a UDPA claim that Rogers had misrepresented the nature of his involvement with an Akzo competitor, which he found to be the basis for an unfair practices claim,  but found the Complaint lacking any allegation of actual injury to Akzo as a proximate result of the misrepresentation.  Akzo's argument that it had refrained from taking legal action against Rogers due to his alleged untruths was "not sufficient to establish the actual injury requirement of Chapter 75." Op. ¶117

Trade Secrets Claims.  Akzo's trade secrets claims were severely winnowed down because they hadn't been described with sufficient particularity to enable the Defendants to identify what had been alleged to be misappropriated.  The description of trade secrets as the Plaintiff's "proprietary formulas, methodologies, customer and pricing data and other confidential information . . . deriv[ing] independent actual or potential commercial value from not being generally known or readily ascertainable" was too "broad and vague" to meet the standard of particularity. Op. ¶127

Whew.  This opinion is stuffed with law about non-compete claims against former employees.  It's a definite read if you've got that type of claim before Judge Gale.  He's way up to speed on this subject.  Don't lag behind.

The case was Bell v. Mozley.  Mr. Bell, a resident of South Carolina, sued Mozley, another South Carolina resident, for alienating the affections of Bell's wife, and engaging in criminal conversation with her.  Mozley conceded having had sex with Mrs. Bell in a number of states, but denied having done so in North Carolina.  in fact, there was little evidence of any contact between them in North Carolina.

The trial judge denied the motion to dismiss for lack of jurisdiction, ruling that North Carolina had an "especially great" interest in providing a forum for a cause of action that had been abolished in South Carolina.  Judge McCullough, writing for the COA, took a distinctly different view.  He said, in reversing the trial judge and ordering dismissal of the case for lack of jurisdiction, that the decision of Bell to sue in North Carolina "smacks of forum-shopping."

i doubt there are many readers of this blog who concentrate their practice in alienation of affection cases  So beyond that small group, what's in this case for the you business litigators?    Not much, really.  But there's a good covenant not to compete case coming tomorrow, so stay tuned.

You all are probably  familiar with these amendments already, as I’m behind the curve on this subject.. There’s lots out there on the web, way earlier than this post, from other law firms. Like here, here and here.  There are at least 39 states which have addressed the issue of e-discovery.  Here's the most current listing I've seen.

On the subject of other North Carolina changes, the North Carolina Bar Association has put together a comprehensive bulletin which is a “summary of new laws affecting North Carolina lawyers.”  One of the new laws you should look at, beyond the ESI-specific changes, is North Carolina's adoption of the Uniform Interstate Discovery and Depositions Act as N..C. Gen Stat. §§1F-1 to 7.  The Act defines clear procedures for an out of state litigant to get a subpoena to depose a witness (or to obtain documents) in North Carolina.  It also elucidates the procedure for a  litigant to in a North Carolina case to send a subpoena outside of North Carolina.  These procedures kick into effect on December 1, and apply to actions filed on or after that date.

 Definition of ESI Includes Metadata 

Rule 26 now contains a definition of ESI, though it is limited to the subcategory of metadata and whether that should be included in production It says that only limited metadata must be produced, absent an agreement between counsel:

For the purposes of these rules regarding discovery, the phrase 'electronically stored information' includes reasonably accessible metadata that will enable the discovering party to have the ability to access such information as the date sent, date received, author, and recipients. The phrase does not include other metadata unless the parties agree otherwise or the court orders otherwise upon motion of a party and a showing of good cause for the production of certain metadata

Recovery of Costs Of Production Of ESI

In a change which is destined to become the source of a good bit of pretrial wrangling given the high cost often involved in the gathering and production of ESI, Revised Rule 26(b)(3) now empowers the Court to “specify conditions for the discovery,” specifically “including allocation of discovery costs.”

Protective Orders

If a protective order is sought on the basis that the ESI is not “reasonably accessible,” Revised Rule 26(c) says that the Court can still order production if the requesting party shows “good cause” and the Court takes into account the considerations of Rule 26(b)(2(iii)), which allows the Court to limit discovery if “the discovery is unduly burdensome or expensive, taking into account the needs of the case, the amount in controversy, limitations on the parties' resources, and the importance of the issues at stake in the litigation.”

Privilege Issues

The revised rules amp up the obligations of an attorney withholding information on the basis of privilege. Revised Rule 26(b)(7)(ii) requires that the withholding party must “describe the nature of the documents, communications, or tangible things not produced or disclosed, and do so in a manner that, without revealing information itself privileged or protected, will enable other parties to assess the claim.” That contemplates a privilege log.

Revised Rule 26(b)(7)(b) covers inadvertent production, and like Federal Rule 26(b)(5)(B), requires the party receiving the inadvertent production to promptly return or destroy  the material or to disclose it to the Court under seal so that the Court can rule on the claim of privilege,

New Discovery Conference Procedure

Another change in the NC Rules is that the attorney for a party may require a discovery conference to be held on a specified timetable (as soon as 61 days after the filing of the Complaint), and that the discovery plan should include a laundry list of items, including in the appropriate case “a reference to the preservation of [ESI], the media form, format, or procedures by which such information will be produced, the allocation of the costs of preservation, production, and, if necessary, restoration, of such information,. . . .”

Safe Harbor For Routinely Destroyed ESI

Revised Rule 37(c) provides a “safe harbor” from sanctions if ESI is destroyed as a result of “routine, good faith operation of an electronic information system.” The new Rule says that a court may not impose sanctions for a failure to provide what was routinely deleted, “[a]bsent exceptional circumstances.”
 

Lake House provides a residential therapeutic program to "troubled" girls aged 10 to 14.  It is one of only two programs in the United States directed at that target age group.  Lake House's boarding school is in Flat Rock, NC.  The other program is located in Bend, Oregon.  Op. ¶.5.  (Where do the mothers of 10-14 year old girls go for therapy?  My wife was fond of saying that she wanted to check into Charter Hills, a private psychiatric hospital in Greensboro, when our daughters were in that age bracket.  As things turned out, I should have listened and dropped her off there.)

Ms. Jennings was a member manager of the Lake House LLC.  Her breaches of fiduciary duty arose from her activities to set up a competing school in the same area as Lake House, to be called Glen Willow Academy. Judge Gale included in his opinion a laundry list of fiduciary duty violating conduct by Ms. Jennings.  Op. ¶¶39a-j.  This included soliciting Lake House employees to join the competitive entity, disparaging Lake House to the parents of daughters boarding there, leasing the space for Glen Willow's operations, and deleting documents from a Lake House computer.

Ms. Jennings defended the case on the basis that once she resigned as a manager of the LLC, she had no fiduciary duty to the LLC.  And, as she frequently pointed out in her brief, she had not signed a non-compete.  On that defense, she was part right.  Members do not owe fiduciary duties to each other or to the entity.  Op. ¶34.  But managers do, and much of Ms. Jennings actions took place before she resigned as a manager.  There was also an issue about whether her resignation as a manager was effective, because the Lake House Operating Agreement said that each member was a manager.  Ms. Jennings had sought to retain her status as a member when she resigned. 

The evidence at the preliminary injunction stage was enough to show a likelihood of success that Jennings had subverted Lake House's operations while she was a manager of the facility.  She was pretty candid and threatening about her plans.  According to a Lake House employee, Jennings said that she was "going to start up another school and that [she and others]  would make sure that no one would ever enroll another student at Lake House Academy and that she would make sure the school shut down and that [its employees] would all lose [their] jobs Op.  ¶14.

She also said “there would not be an educational consultant in the country who would make a referral to [Lake House]; I will make sure of that.” Op. ¶ 13

Irreparable injury was established by the impact of the opening of Glen Willow on a pending sale of Lake House.  Judge Gale said "[i]f Glen Willow Academy were to open its doors and compete with Lake House under these circumstances, such actions would unquestionably cause irreparable injury" to Lake House. Op. ¶46.  Ms. Jennings testified that the opening of the new school would affect the amount the buyer was willing to pay for Lake House.

On balancing the harms to the parties, the Court also ruled that Mrs. Jennings and Glen Willow Academy will suffer materially less damage or injury than Lake House if Jennings were permitted to open Glen Willow and compete with Lake House during the pendency of the litigation.  Judge Gale ordered Lake House to post a $100,000 bond as a condition of the injunction.

It was a big week in the courts last week for  breaches of fiduciary duty.  The Delaware Chancery Court entered judgment for $1.2 billion against corporate directors for their role in an acquisition of another company.  You can read about that case on the Delaware Corporate and Commercial Litigation Blog.

Richardson claimed that the company had improperly structured its sale so that non-employee shareholders like him were paid less for their stock than the shareholders who were employed by Frontier and that the company had failed to disclose material facts regarding the transaction.  The company defended by asserting that it had relied on the advice of its corporate counsel in how the sale was structured.

It is not unusual for counsel defending corporate directors to raise an "advice of counsel" defense because G.S. §55-8-30 says that directors may rely upon information provided by "[l]egal counsel, public accountants, or other persons as to matters the director reasonably believes are within their professional or expert competence" in discharging their duties as directors.

According to the Business Court, there is "ample authority" that the raising of such a defense results in a waiver of the attorney-client privilege.  Given that the scope of waiver is often a "thorny issue" (Op. Par. 9), a defense relying on Section 55-8-30 should be carefully worded.  The defense before Judge Jolly in the Richardson case stated that

if it is determined there was illegal disparate treatment of the "Outside Shareholder[s]" and the "Inside Shareholders" or insufficient material disclosure in the Stock Purchase Agreement and otherwise, which the Defendants specifically deny, then Defendants assert that in the discharge of any legal responsibilities with respect to these allegations, they relied on the advice of counsel.

In his ruling, the Judge said that the word "otherwise" was "so broad as to be elusive of clear and reasonable definition." Op. at Par. 8. He said also that "[s]uch broad language makes it extremely difficult for the court to define fairly and reasonably where any resulting waiver of the attorney-client privilege begins and ends." Op. ¶10.

He held that the waiver covered any communications between the defendants and their counsel that took place before the closing of the sale and which reasonably related to a broad range of matters involving the sale.

The waiver extended to the work-product of counsel, because the statutory defense applies only if the director reasonably relies on the legal advice.  Judge Jolly relied on cases outside of North Carolina for the proposition that:

fairness dictates the necessity for an examination of the underlying good faith and reasonableness of the advice itself, including the circumstances surrounding issuance of the legal opinion, and that relevant work product therefore loses its privilege protections.

That exposed the lawyers to having to produce all documents reflecting communications between the law firm's primary counsel to the company and other lawyers at the law firm.

Judge Jolly said that "it would not have been difficult" to limit the scope of the waiver by limiting the wording of the defense. Op. ¶10.  That might be easier said than done.  Waiver is a slippery slope once you start heading down it.  There's no telling where you might end up.

Standing to Object to Subpoenas to Non-Party Banks

In Deyton v. Estate of Kenneth C. Waters, Jr., 2011 NCBC 34, Judge Gale ruled that a party to a lawsuit lacked standing to object to a subpoena sent by the opposing party to a non-party bank.  The Judge observed that "as a general proposition, parties to a lawsuit typically lack standing to challenge a subpoena issued to a third party." 

Although there is an exception to that general rule if the objecting party has privilege in the documents requested,  the moving party attempted to invoke, Judge Gale held there is not a privilege created in bank records by the Federal Right  to Privacy Act of 1978 (12 U.S.C. §3402) or the North Carolina Financial Privacy Act (N.C. Gen. Stat. §53B-1, et seq.).

The rule might be different in federal court.  Judge Gale stated in a footnote that an Eastern District of North Carolina court has said in United States v. Gordon, 247 F.R.D. 509, 510 (E.D.N.C. 2007) that "[a] small number of courts have held that a party's claimed privilege with respect to his or her bank account records is sufficient to confer standing for purposes of challenging a subpoena."

In another case decided on the same day, Jones v. Sutherland, Judge Murphy, without the benefit of the Deyton discussion, considered an objection by a defendant to a subpoena to a non-party bank.  He denied the motion to limit the subpoena even though it covered a nine-year "extensive time period," saying it was not "designed to be a fishing expedition."

Preliminary Injunction for Breach of Fiduciary Duty

In GoRhinoGo, LLC v. Lewis, 2011 NCBC 38, Judge Jolly entered a preliminary injunction against a former LLC member and manager who conspired with the representatives of a landlord to terminate the lease of a Raleigh tavern, even though the tenant was not in default on the lease, and to open a competing tavern in the same space. The actions of the former member/manager were a breach of his fiduciary duty to the LLC.  The persons assisting the member/manager would be liable for conspiracy if the allegations were proven at trial, so they were also the subject of the injunction. 

Irreparable harm was established by the tavern showing that it stood to lose its business absent an injunction.  Judge Jolly cited United States v. Any and All Assets of Shane Co., 816F.Supp. 389, 400 (M.D.N.C. 1991) for the proposition that "[i]n the ordinary case, proof that a going concern will be forced out of business during the pendency of litigation raises a presumption of irreparable harm."

Order Dismissing Claims by Real Estate Broker

In Gunn v. Simpson, Schulman & Beard, 2011 NCBC 35, the plaintiff real estate broker alleged that he had been cheated out of a commission due him for arranging a lease agreement between  his longtime client LabCorp and a lessor, SN Commercial.

Gunn had an email from the owner of the property leased which said that SN Commercial would pay Gunn  a commission fee of 4% of the rent paid by his client.  The email came with a lease proposal which said it was "not contractually binding" until a formal lease was executed.  Judge Gale granted a motion to dismiss the case,holding that Gunn could not show the existence of an enforceable contract between him and the lessor.

Enforceability of Agreements to Indemnify  Attorneys' Fees

In GR&S Atlantic Beach, LLC v. Hull, 2011 NCBC 37, Judge Gale answered a couple of what I didn't even know were burning questions regarding the recovery of attorneys' fees from an opposing party.  He held that an agreement to indemnify an opposing party for its attorneys' fees has the  statutory authority required for the recovery of attorneys' fees  in G.S. §6-21.2.  He held that such an agreement is an "evidence of indebtedness"  which is therefore subject to the statute's cap of 15% of the amount recovered.  No appellate court in North Carolina has addressed that issue yet.  Judge Gale classified those types of attorneys' fees, incurred in litigation directly adverse to the party which has promised the indemnification, as "Direct Fees."

While he was mired in the deep body of law surrounding the recovery of attorneys' fees, Judge Gale also addressed an issue regarding what he called "Ancillary Fees."  In the GR&S case, those were fees incurred by GR&S in a proceeding brought against it by the NC Utilities Commission.  The ruling by the Judge on this point was not dispositive, but what he termed his "present inclination."  And that "inclination" was to rule that statutory authority is not needed for the recovery of "Ancillary Fees" and that such fees are not subject to the 15% cap of G.S.  §6-21.2

 Extensions of Time in the Business Court

Don't apply to the clerk of court in the county where your Business Court case was filed for an extension of time.  If you do that, the Business Court is likely to strike the order entered by the clerk as being null and void, as it's in violation of Business Court Rule 9.2.  Judge Murphy did that in Seraph Garrison, LLC v. Garrison.

Dismissal of Homeowners' Association Claim Against Developer Due To Lack of Standing

A lawsuit by a homeowners' association against the developers of the project was dismissed due to a lack of standing, in Queen's Gap Community Association, Inc. v. McNamee, 11 NCBC 36. The members of the  HOA were barred from maintaining the suit by the HOA's  own formative documents, which said that the homeowners could not elect a board of directors of the association (whose action would be required to initiate a suit)  until 90% of the lots were sold, or until March 31, 2015, whichever was first to occur.   Neither had happened.

The documents also required a 75% approval of the association's members before a lawsuit was filed.  Judge Murphy rejected the argument that the 75% requirement was invalid.  He said "that this type of requirement is 'common' and does not, in violation of law, 'eliminate the [Association's] right to file a legal action.'"  He said that the "litigation  approval requirement" was valid.  In the absence of a properly obtained 75% approval, the HOA members were booted from Court for lack of standing.

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It's good to be back.  But if you are a business litigator relying on my blog to keep you current, you shouldn't do that.  It makes me feel guilty when I am off on a frolic and detour.  You have a lot more than this blog you should be reading if you want to be on top of things.

Dellinger had sued her then current employer for a Fair Labor Standards Act violation, and applied to the Plaintiff, Science, during the lawsuit proceedings for a new position.  Science offered Dellinger a job, and requested that she inform it of any civil actions to which she was a party as a condition of her security clearance. Upon learning of the FLSA charges, Science withdrew its offer.  Dellinger sued, alleging that Science had taken its action in retaliation to her FLSA charge.

Her case was dismissed by the district court, and the Fourth Circuit affirmed.

The FLSA prohibits retaliation "against any employee" who has sued to enforce the Act.  The Act defines an "employee" as "any individual employed by an employer."  Judge Niemeyer, after wading through other provisions of the FLSA, held that "Dellinger could only sue Science Applications if she could show that she was an employee and that Science Applications was her employer."  According to the majority, no court has extended FLSA's anti-retaliation protections to prospective employees.

Dellinger argued that a ruling against her would give prospective employers the license to discriminate against prospective employees for having made FLSA claims in the past.  Judge Niemeyer said that he was "sympathetic" to this argument, but that:

The notion. . . that any person who once in the past sued an employer could then sue any prospective employer claiming that she was denied employment because of her past litigation would clearly broaden the scope of the FLSA beyond its explicit purpose of fixing minimum wages and maximum hours between employees and employers. We are, of course, not free to broaden the scope of a statute whose scope is defined in plain terms, even when "morally unacceptable retaliatory conduct" may be involved. Ball v. Memphis Bar-B-Q Co., 228 F.3d 360, 364 (4th Cir. 2000). 

Op. at p.9.

The holding was "that the FLSA gives an employee the right to sue only his or her current or former employer and that a prospective employee cannot sue a prospective employer for retaliation."

Judge King retorted that the Supreme Court had repeatedly acknowledged the "vital role" that anti-retaliation provisions play" in regulating a vast range of undesirable behaviors on the part of employers."  Op. at 18.  He said that the majority had disregarded the "definitive" principles of statutory construction outlined by the Supreme Court in Robinson v. Shell Oil Co., 519 U.S. 337 (1997).  The Supreme Court reversed the Fourth Circuit in that case, saying that a former employee could sue for retaliation under Title VII.

In the absence of the Supreme Court taking this case, employers in the Fourth Circuit are entitled to reject applicants who have a history of suing their employers for FLSA violations without fear of being sued for retaliation under the Act.