Legalzoom may be a step closer to overcoming the NC State Bar’s assertion that its online legal document service constitutes the unauthorized practice of law (UPL), following yesterday’s ruling in LegalZoom, Inc. v. North Carolina State Bar, 2014 NCBC 9.  Or it may be only a few questions away from a ruling that would impact its ability to conduct business in North Carolina, depending on how you read the decision.

If you need some background on LegalZoom, you probably don’t own a television or you haven’t read my two previous posts on this long simmering dispute, from January 2012 and August 2012.  The company is constantly advertising its legal document generation service which it says on its website "strive(s) to be the best legal document service on the web."  It prepares incorporation papers, wills, trademark applications, and divorce documents and other things for its customers, who want a "do it yourself" approach to law.   LegalZoom has been battling with the NC State Bar in the Business Court since 2010 over whether its service constitutes the UPL.

Yesterday, Judge Gale denied the State Bar’s motion for judgment on the pleadings, ruling that he needed a "more developed record" to make a decision, in 2014 NCBC 9.  Op. 50.

Exceptions To The Unauthorized Practice Of Law and Judge Gale’s Questions

The definition of the "practice of law" is contained in G.S. §84-2.1.  LegalZoom argues that it falls within recognized exceptions to states’ prohibitions on the UPL.  One is known as the “self-help” or the “self-representation” exception, which means "that one can legally undertake activities in his own interests that would be UPL if undertaken for another, or to “practice law” to represent oneself." Op. 58.

The NC Supreme Court weighed in on the "self-help" exception fifty years ago, in State v. Pledger, 257 N.C. 634, 127 S.E.2d 337 (1962), in which it held that a non-lawyer employee of a company in the business of constructing and selling of homes did not engage in the UPL by preparing deeds of trust for homes that his employer sold.  The Court said that:

[a] person, firm or corporation having a primary interest, not merely an incidental interest, in a transaction, may prepare legal documents necessary to the furtherance and completion of the transaction without violating [the law].” Id. at 637, 127 S.E.2d at 339.

Op. ¶61.  Since LegalZoom doesn’t have a "primary interest" in its customers’ business, it wasn’t able to successfully avail itself of the "self-help" exception.

The second exception, relied on more heavily by LegalZoom has been referred to as a “scrivener’s exception,” which essentially means "that unlicensed individuals may record information that another provides without engaging in UPL as long as they do not also provide advice or express legal judgments." Id.

Judge Gale had a number of questions whether the operation of LegalZoom’s online software fit within the scrivener’s exception.  Those questions could not be answered on the existing record.  He posed the following:

if a customer makes one choice presented to him by the [LegalZoom] software, are there portions of the template that are then never shown to the customer? If so, what is the reasoning behind and the legal significance of the software’s determination not to present that portion of the form?  [Does the premise of the Pledger decision] require that only the unlicensed individual make choices in drafting a legal document, and that the choice or risk of an incorrect choice about which portions of a form to include must belong exclusively to the individual? Is there then a legally significant difference between how one engaging in self-representation uses a form book versus LegalZoom’s interactive . . . software? A form book presents the customer with the entire form, often accompanied by opinions or directions on how to use the form, but any choice and its implications are solely the customer’s. Does the LegalZoom software effectively make choices for its customer? Do responses depend in any part on the effects of statements embodied in the software, either those that promote the program or those that disclaim legal advice being given?

Op. ¶66.  Although the Judge was careful to say that these were not the "controlling or only relevant questions,"  Op.¶67, they certainly provide a road map for future resolution of the case via a motion for summary judgment.  

LegalZoom’s Prepaid Legal Services Plan

There’s another aspect to the case, which involves Legaloom’s prepaid legal services plans. The State Bar, which is responsible for registering such plans, refused to register LegalZoom’s plans.  The online vendor said this refusal violated the equal protection clauses of the U.S. and North Carolina Constitutions.

Judge Gale dismissed that claim, because LegalZoom had not exhausted its remedies by failing to request a hearing before the State Bar.  The Administrative Procedure Act, to which the State Bar is subject, requires a final agency decision before judicial review is allowed. 

LegalZoom had taken the position that requesting a hearing was only optional, and that a hearing would have been futile.  Judge Gale observed that both arguments were foreclosed by NC appellate decisions.  Op.  46, 47.
 

LegalZoom’s Claim that it has been Defamed by the NC State Bar was Dismissed

LegalZoom had made a claim against the State Bar that the Bar’s statements that it was engaging in the UPL were "false and untrue" and that those statements disparaged its product.

Judge Gale found those statements to be barred by the doctrine of sovereign immunity.

 

 

I’ve never thought much about the consequences of the violation of a Protective Order.  In fact, before last week’s Business Court ruling in Out of the Box Developers, LLC v. Logicbit Corp., 2014 NCBC 7, no North Carolina case had "squarely addressed whether Rule 37 permits sanctions for violations of Rule 26(c) protective orders." Op. 5.

But now we know that a North Carolina court can issue sanctions for a violation of a protective order because Judge Gale ruled so in the Out of the Box decision.  If you are surprised that this was uncharted territory for a North Carolina court, you probably should be.  Judge Gale cited nearly a dozen federal district court decisions, dating back more than ten years,  reaching the same conclusion.  Op. 5 & n.2.  Though he cited none from a North Carolina federal court.  Perhaps there weren’t any.

So what had the Defendants done that warranted sanctions?  One of the Defendants had posted on the internet a document subject to the protective order that had been produced to it.  The document hadn’t been designated as "confidential," but "it bore a Bates stamp and was clearly a document produced in discovery covered by the Protective Order’s restriction that it not be used for business or competitive purpose or any other purpose unrelated to the litigation of [the] case."  Op. 19.

The sanctions imposed were the striking of the Defendants’ counterclaims as well as their affirmative defenses.

The discovery process in the Out of the Box case has not been smooth.  The Defendants were previously sanctioned for $38,000 for failing to comply with production orders from the Court; and the Court also issued an interesting ruling last year about subpoenas directed to non-parties.

Can a law passed by a Legislature be called "immutable?"  (that means it’s ageless, not ever subject to change).

The Court of Appeals used that word this week in Heaton-Sides v. State Employees Credit Union to describe a statute dealing with foreclosures. 

The case dealt with the rights of a person to her personal property after a foreclosure.  A homeowner has ten days following a foreclosure to retrieve personal property left in her home, based on a combined reading of G.S. §45-21.29(1) and §42-25.9(g).

The Court of Appeals rejected the Defendant’s argument that Heaton-Sides had waived the ten day period by not taking it up on its invitation that she notify it of her intention to reclaim her property.

Chief Judge Martin ruled that the ten day period could not be waived, holding that:

In contract law there are generally two types of rules: default rules and immutable rules. Default rules are rules that “parties can contract around by prior agreement.” Ian Ayres & Robert Gertner, Filling Gaps in Incomplete Contracts: An Economic Theory of Default Rules, 99 Yale L.J. 87, 87 (1989).  Immutable rules, by comparison, are those rules that “parties cannot change by contractual agreement.”  Id. While these terms usually refer to the Uniform Commercial Code, they demonstrate the principle that some rules may be avoided by contract while others may not.

Op. 7.

When a law is subject to revocation or amendment by the Legislature, can it really be said to be immutable?  That’s a pretty strong word.  That the sun rises in the east and sets in the west is immutable.  Nobody can change that.  Unless you live on Venus.

 

 

 

 

A lawyer has limited remedies to collect on a judgment from a defendant who is unwilling to pay.  If the defendant holds stock in a corporation, you can execute on the shares, take possession of them, and sell them. N.C. Gen. Stat. §1-324.3.  But if that ownership interest is in an LLC, a "charging order" is your only recourse (per G.S. §57D-5-03(d)).

If you don’t know what a charging order is, it is a court order against an owner of an LLC interest which gives a creditor the right to receive any distributions that the owner of the interest would have received until the judgment is paid.

The Old LLC Act

Former Section 57C-5-03 of the General Statutes (which was repealed and replaced in January 2014 by the new North Carolina Limited Liability Act in Chapter 57D) said that:

On application to a court of competent jurisdiction by any judgment creditor of a member, the court may charge the membership interest of the member with payment of the unsatisfied amount of the judgment with interest.

But what exactly did the holder of the charging order receive under the Old LLC Act, and what did the LLC owner lose upon the issuance of a charging order?  Last week, the NC Court of Appeals wrestled with the question whether a charging order operates as an assignment of an LLC interest, in First Bank v. S&R Grandview, LLC.

First Bank had obtained a charging order against Donald Rhine, a member of S&R Grandview, an LLC.  The charging order said that the Plaintiff "shall hereafter have the rights of an assignee" of Mr. Rhine’s interest of the LLC, and that Mr. Rhine then had no remaining membership interest in the LLC.  The charging order said that his membership right would "lie fallow" until the judgment against him was satisfied.

Mr. Rhine appealed, arguing that the charging order did not operate to assign his LLC interest.  First Bank rejoined that the effect of  the charging order under Section 57C-5-03 was that Mr. Rhine was no longer a member of the LLC to which the order applied.

There was some plausibility to First Bank’s argument.  Section 57C-5-03 said that "[t]o the extent so charged, the judgment creditor has . . . the rights of an assignee of the membership interest." And Section 57C-5-02 said that "a member ceases to be a member upon assignment of all of his membership interest."

A Charging Order Does Not Work An Assignment Of An LLC Interest

The Court of Appeals disagreed with First Bank’s position, holding that "[n]owhere in these provisions does the General Assembly mandate an assignment of membership interests from a debtor to a judgment creditor through a charging order." Op. 8.  It added that "[h]ad the General Assembly intended a charging order to assign all membership interests and terminate a debtor’s membership in an LLC, as plaintiff contends, it could have easily included language to that effect." Op. 8-9.

The changes in the LLC Act through Chapter 57D bolstered the Court’s conclusion.  The new provision dealing with charging orders states that "this Chapter does not deprive any interest owner of a right."  N.C. Gen. Stat. §57D-5-03(c).  I’m not sure whether statutory interpretation lets a court look at the subsequent actions of a Legislature to determine what the Legislature meant the first time around.

But anyway, why did this Defendant care whether his LLC interest was assigned and whether he had lost his membership rights?  Remember that an LLC member has an ownership interest that includes both an economic interest and a right to participate in the management of the LLC.  N.C. Gen. Stat. §57D-1-03(25).

A charging order can affect only the economic interest.  The charging order in First Bank went too far.  It took away Mr. Rhine’s management rights.

What happens if those with management rights in the LLC decide to defer distributions from the LLC because of a dislike for the judgment creditor?  That’s undoubtedly a risk, and it will probably be the subject of a yet to be decided court decision.

Why Should You Care About The Old LLC Act?

The NC General Assembly repealed the Old LLC Act, in Chapter 57C and replaced it with the New LLC Act through Chapter 57D.  That change became effective three months ago, on January 1, 2014.

Do you need to worry about the repealed Act?

Maybe.  In the "Savings Provisions" in the New Act, the General Assembly said that "[a]ny proceeding commenced before January 1, 2014, may be completed in accordance with the law then in effect."  N.C. Gen. Stat.  §57D-11-03(d)

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I’ve resolved this year to blog about every numbered decision of the Business Court, as opposed to past years, where my lack of enthusiasm about the more boring decisions has left me writing about less than 100% of the Court’s decisions.

My resolve was tested with Judge Murphy’s decision last week in Speedway Motorsports Int’l , Ltd. v. Bronwen Energy Trading, Ltd., 2014 NCBC 5, but I have bitten the bullet and I have laboriously produced this post.

What’s the new Speedway decision about?  A complicated international dispute over oil contracts, letters of credit, a guarantee of letters of credit, and claims for fraud, conversion, negligent misrepresentation, and unfair and deceptive practices.

You might remember the Bronwen case.  It’s been pending in the Business Court since 2008 and has been up and back from the Court of Appeals over that 5+ years.  I wrote about the Court of Appeals decision affirming  the Business Court in 2011 (and reversing it in another decision issued at the same time).  In the affirming decision, the COA held that the "one bright star" in letter of credit transactions was that "every letter of credit involves separate and distinct contracts."

The effect of that ruling was that the COA affirmed the dismissal of claims against Defendant BNP-Suisse, which had issued a demand guarantee to BNP-France on a letter of credit issued by France.  The Suisse guarantee was secured by $12 million which Plaintiff had on deposit with Suisse.  When Plaintiff sued over the draw on its letter of credit with Suisse, France argued that the case was governed by a choice of forum provision in the Suisse guarantee calling for resolution in Switzerland.

The COA held that Plaintiff, which was not a party to the guarantee given by Suisse in connection with the letter of credit transaction,  was barred by the "independence rule"  from availing itself of the choice of forum provision because the contracts surrounding a letter of credit transaction must be "separate and distinct."

So in last week’s ruling, France sought to push the COA ruling in support of a new motion for judgment on the pleadings.  France argued that Plaintiff couldn’t make any claims at all against it based on its draw on the guarantee because the guarantee was "separate and distinct" from the obligations between Suisse and the Plaintiff.

That seems to fit with the independence principle, doesn’t it?  Not the way Judge Murphy saw it. France might have prevailed if the claims against it were based in contract.  But they were tort-based claims, for fraud, negligent misrepresentation, conversion, unfair and deceptive practices, and for an accounting.

Judge Murphy therefore denied the Rule 12(c) claim, holding that:

The Court of Appeals’ description of the “independence principle” was grounded in principles of contract. See Speedway I, 209 N.C. App. at 564, 706 S.E.2d at 263; see also Speedway II, 209 N.C. App. at 485, 707 S.E.2d at 392. Specifically, the Court of Appeals was concerned with maintaining the separateness of the multiple contracts that are characteristic of letter of credit transactions. See id. However, nothing in the Speedway opinions shields a defendant from purely tort-based claims like those alleged by Plaintiff. See id. Furthermore, France cites no authority that forecloses non-contract, purely tort-based claims by application of the independence principle. The import of the independence principle is that France is not bound by and cannot seek the benefits of the contracts that Plaintiff made with others.

Op. 28 (emphasis added).

 

Be careful with covenants not to compete when you buy or sell a business.  That’s the lesson from Amerigas Propane, LP v. Coffey, 2014 NCBC 4, decided this week by Judge Jolly.

The Plaintiff had Defendant Coffey, an employee of the company which it was acquiring, sign a "Confidentiality and Post-Employment Agreement" after the acquisition.  The Agreement contained a non-solicitation provision and a section protecting the buyer’s "confidential information." 

The Plaintiff fired Coffey a year later, and he went to work for a competing propane company.

Plaintiff moved for a preliminary injunction enforcing the restrictive covenants, which was denied by the Court.

You all know that there must be consideration for a covenant not to compete.  Those types of agreements ordinarily are entered into at the start of an employment relationship, and the new employment itself constitutes the consideration.  In North Carolina, continued employment can’t satisfy the consideration requirement.

So did the acquisition work a termination of Coffey’s employment with the selling company so that he had a new employment with the buyer?

Here’s where it gets interesting.  The type of acquisition makes a difference. If it had been an asset purchase it might have been a new employment which could have served as consideration. Judge Jolly observed that:

an employment contract signed at the time of a business acquisition may only use employment with the acquiring company as consideration if the old employment relationship is deemed terminated as a result of the transaction. In this regard, North Carolina courts previously have stated that acquisition of another company by asset purchase will act as a termination of existing employment relationships, and existing employees of the acquired business do not necessarily become employees of the acquiring entity.

Op. 5 (relying on Calhoun v. WHA Med. Clinic, PLLC, 178 N.C. App. 585, 597 (2006) (citing
QSP v. Hair, 152 N.C. App. 174 (2002)); and Better Bus. Forms & Prods., Inc. v. Craver, 2007 NCBC 34 (2007) ("[W]hen an employer sells its assets . . . the employment relationship has been terminated." Id. ¶38.).

But an acquisition via a stock purchase (or by purchasing membership interests, as happened in this case) doesn’t have the same effect.  It does not automatically terminate existing employment relationships "and therefore ordinarily will not constitute new employment for purposes of consideration."  Op. 6.

So the Plaintiff was left to argue that there was other consideration for the restrictive covenants, like "new benefits" made available to Coffey, and a raise in salary shortly after the acquisition.  Judge Jolly didn’t buy that.  He found the "new" benefits to be essentially the same as Coffey would have received with the selling employer.

 

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

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

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

Judge Gale dismissed the claim, holding that:

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

Op. Par. 17.

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

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

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

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


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

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

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

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

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

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

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

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

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

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

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

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

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

Op. ¶22 (emphasis added).

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

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

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

Op. ¶19 (emphasis added).

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

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

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

 

There’s enough of interest in the North Carolina Court of Appeals’ decision this week in GE Betz, Inc. v. Conrad for five posts. It’s got a couple of good rulings on covenants not to compete, a few points about trade secrets issues, and an interesting matter of a violation of a protective order.  The opinion, a unanimous sixty-four pager written by Judge Robert C. Hunter, is worth reading.

The attorneys’ fee aspect of the case was the most interesting part of the opinion to me.  The trial court awarded $5.77 million in fees to GE Betz, a General Electric subsidiary.  GE Betz had been successful, after trial, on its claims that the Defendants violated G.S. §75-1.1 and misappropriated trade secrets.

Over $3 million of the fees were billed by GE Betz’s prestigious New York-based law firm — Paul Hastings.  The hourly rate of Paul Hasting’s lead counsel ranged from $633.25 to $675.75 during the course of the litigation.  The North Carolina firm that tried the case — Ward & Smith — charged significantly less, at rates between $270 and $390 an hour.  The trial court said that Ward & Smith was "a highly capable and qualified law firm."  Op. 51.

A trial court must make findings regarding the reasonableness of the fees in making an award.  A key factor to be considered is the "customary fees for like work."

The COA recognized that the question whether local rates should be a benchmark for reasonableness was one of first impression.  Judge Hunter said:

our appellate courts have not had occasion to decide whether fees must be awarded in light of the rates typically charged in the geographic region where the litigation takes place.

Op. 48.  He looked to a Fourth Circuit decision which "held that the community where the court sits is “the appropriate starting point for selecting the proper rate.” Nat’l Wildlife Fed’n v. Hanson, 859 F.2d 313, 317 (4th Cir.1988).

Judge Hunter refused to weigh in on whether it was reasonable for GE to hire its out-of-state counsel.  He held:

we decline to adopt a test that forces courts to assess the reasonableness of a litigant’s decision to hire counsel generally.  Parties, including GE, are free to hire as counsel whomever they wish at whatever rates they are willing to pay. The issue is whether the fees awarded against an adverse party are reasonable, not whether it was reasonable for those fees to be incurred by the prevailing party.

Op. 50.

On the issue of the reasonableness of the fees, Judge Hunter observed that "[i]t appears that much of the work performed by Paul Hastings’ attorneys could have just as effectively been performed by local counsel at local rates.  The trial court did not attempt to make this distinction."  Op. 52.  He gave this example:

in April 2007, associate attorneys at Paul Hastings charged $500.00 per hour – double the $250.00 fee charged by attorneys at Ward and Smith – for “factual investigation and development; obtaining and analyzing [c]lient documents; [and] interview[ing] witnesses”. These duties clearly did not require a prior relationship or intimate knowledge of GE’s employment contracts [which was part of GE’s argument as to the reasonableness of the fees], because GE paid the attorneys at Ward and Smith to perform almost identical work during the same time period.

Op. 52-53.

In the end, the COA ruled that it was unreasonable to force the unsuccessful Defendants to pay a fee "that includes rates double those billed in the community where the litigation took place for work that seemingly did not require such a premium."  Op. 53. 

It gently chided GE for its excess, saying that " [u]ltimately, GE’s willingness to pay significantly higher rates for work that they could have procured for much less does not necessitate a finding that those fees are reasonable when awarded against" the Defendants.  Id. 

The case was remanded to the trial court for further findings.