I can think of only three reasons why you might want to know about the Business Court’s decision in Sykes v. Health Network Solutions, 2013 NCBC 53:

  • You are a chiropractor or you live with one.
  • You are fascinated by the subject of the management of health care costs.
  • You are interested in antitrust law.

If you don’t fit those qualifications but are still willing to continue reading, the case is about Plaintiff Sykes’ claim that Defendant HSN violated antitrust laws by fixing prices for chiropractic services through its operation of an "independent practice association" of chiropractors.

If you are already asleep, skip to near the end of this post, under the heading "Why The Injunction Was Denied."

Some Medical Terminology

To start, you’ll need to know some healthcare terminology.  HSN is an IPA (an independent practice association).  Independent chiropractors each enter into a PPA (practitioner participation agreement) with HNS.  HNS negotiates with Payors (insurance companies like Blue Cross/Blue Shield and other third party purchasers of chiropractic services) to establish reimbursement rates for its members.  The chiropractors who are members of the network agree to be reimbursed by the negotiated rates.

HNS follows a QMI (Quality Management and Improvement Plan) to ensure that the services provided by its members are delivered in "the most effective and cost-efficient manner."  Op. Par. 20.

HNS established a maximum allowable average cost per patient for its providers (the chiropractors) of 151% of the HNS network average.  A provider exceeding this benchmark following review per the QMI faces probation, then termination by the network. 

The Antitrust Issues

Sykes contended this practice of controlling chiropractic costs was anti-competitive and illegal.  The illegality argument rested on North Carolina’s insurance laws, which say that a review of a medical provider’s costs must be based solely upon "medical necessity" and performed by a licensed entity.

The Court observed that of the 1,667 chiropractors licensed in North Carolina, 1,006 were HSN members.  Op. ¶16.  Though the Plaintiff’s alleged that HSN had monopoly power, Judge Gale did not reach that issue.

He did rule, however, that the Plaintiffs did not present a case of per se violations, but that he would rule on a future motion to dismiss through a rule of reason analysis.   Op.  ¶57. 

If it has been thirty years since you took antitrust law in law school, here’s q quick refresher.  Some categories of anti-competitive behavior are conclusively presumed to be violations of the antitrust laws, and are known as per se violations. A rule of reason analysis looks at all the surrounding circumstances of the alleged violation to determine whether the practice promotes or represses competition.

Judge Gale held:

[t]he mere presence of price related agreements in the various contracts at issue or exclusion of Plaintiffs from the HNS network do not necessarily lead to anticompetitive findings or per se violations.  Certain price related agreements may be appropriate when necessary to achieve efficiencies that achieve procompetitive effects for consumers.  Others may be so egregious and unaccompanied by other provisions so as to lead to illegality.  But, in appropriate circumstances pricing related agreements may also be a necessary component of a more comprehensive set of undertakings that on the whole lead to beneficial and procompetitive efficiencies.

Op. ¶58.

Judge Gale did not need to plow new ground on whether to follow a rule of reason analysis for the matter before him.  The Federal Trade Commission has taken the position since 2009 that IPAs should be evaluated on a case by case basis, taking into account an array of factors, like:

a definition of the market to which the analysis will be applied, the competitive nature of and the allocation of power within that market, whether the network under attack is an exclusive provider, the degree of sharing of financial risk by network participants, the degree of practice integration to achieve efficiencies or that are instead barriers to efficiencies, and other evidence of other anticompetitive purpose.

Op. ¶61 (quoting U.S. Dep’t of Justice and Federal Trade Commission, Statements of Antitrust Enforcement Policy in Health Care, Statement 8: Enforcement Policy on Physician Network Joint Ventures §B(1)(known as "Policy Statement 8")

The Court ruled that the record before it was not fully developed enough for it to follow the four-step process recommended by Policy Statement 8 in determining the anti-competitive effect of the HSN procedures.  Those steps involve "defining the market; evaluating the competitive effects of the physician joint venture; evaluating the impact of procompetitive efficiencies; and examining collateral agreements.

 

Why The Injunction Was Denied

One of the Plaintiffs, another chiropractor, was facing termination of his membership in HSN and was seeking an injunction barring his termination.  Since the Complaint of Sykes’ co-Plaintiff, Dr. Lynn, requested money damages, you don’t need to understand antitrust law to see why Judge Gale denied the motion.  He held:

If Dr. Lynn is able to prove that he has suffered a compensable loss, he may be compensated with money damages; indeed, his requested relief is for money damages. (Am. Compl. ¶¶ 169, 174, 179.)While his damages might ultimately be difficult to calculate, the court does not conclude that they are of such a “peculiar nature that compensation in money cannot atone for it.” Hodge , 137 N.C. App. 247, 252, 528 S.E.2d 22, 26 (2000).

Op. ¶66.

Congratulations to my partner Jennifer Van Zant, a renowned antitrust lawyer, for her representation of the Defendants.  Also involved from Brooks Pierce were Ben Norman and Mike Dowling.

If you think like me, you were thinking that the $1,000 fee for designating a case to the Business Court would be recoverable as an item of costs if you were successful in the case.

But I’m wrong.  Last Thursday, in an Order in Prospect Marketing Group, Inc. v. Chasnan, Inc., Judge Jolly ruled that there is no statutory basis for the recovery of the designation fee as a cost.

In looking at the statute governing costs, that is absolutely correct.  Section 7A-305 of the General Statutes, which is titled "Costs in civil actions," says in subsection (d) that "[t]he following expenses, when incurred, are assessable or recoverable, as the case may be. The expenses set forth in this subsection are complete and exclusive and constitute a limit on the trial court’s discretion to tax costs pursuant to G.S. 6-20." 

The designation fee is not included in the items listed in Section 7A-305(d).  So that’s out as an item of recovery.

And what did the prevailing party in Prospect Marketing Group recover on its application for $2,248.19 in costs, which included the $1,000 designation fee?  A whopping $7.56, which represented the only recoverable amount: the cost incurred for service of process by certified mail, which is specifically allowed by G.S. §7A-305(d)(4).

I’m sure that the Prospect application for costs cost more than $7.56 to prepare, making it a losing exercise financially.  It seems like that is true for most applications for costs — that they generate so little that they are not worth pursuing.

You’ve no doubt heard about the University of Maryland’s withdrawal from the Atlantic Coast Conference and the University’s unwillingness to pay the $50 million withdrawal fee required by the Constitution of the ACC.

This week, in Atlantic Coast Conference v. University of Maryland, the NCCOA rejected the U of M’s contention that it was entitled to sovereign immunity from suit in North Carolina to collect the fee. The case will go forward on the issue of whether that sizeable fee is an appropriate measure of liquidated damages or an unconstitutional penalty.

The withdrawal fee is three times the ACC’s total annual operating budget.  It adds up precisely to $52,266,342.  We are unfortunately well away from the time when the courts will rule on whether the withdrawal fee is enforceable as a liquidated damages provision.

Under NC law:

A stipulated sum is for liquidated damages only (1) where the damages which the parties reasonably anticipate are difficult to ascertain because of their indefiniteness or uncertainty and (2) where the amount stipulated is either a reasonable estimate of the damages which would probably be caused by a breach or is reasonably proportionate to the damages which have actually been caused by the breach.

E. Carolina Internal Med. v. Faidas, 149 N.C. App. 940, 945-46, 564 S.E.2d 53, 56 (2002).

The $52 million fee is said to be the largest to be assessed upon a team leaving an athletic conference.  Syracuse, for example, was assessed $7.5 million upon leaving the Big East conference to join the ACC. 

But the opinion doesn’t assess at all the enforceability of the fee.  Instead, the opinion focuses on whether the trial court’s decision not to dismiss the case was immediately appealable and whether North Carolina should extend comity to its "sister state" on the University of Maryland’s sovereign immunity request.

The decision of the trial court that it would not allow the University of Maryland the defense of sovereign immunity was immediately appealable because it affected the University’s "substantial right" to be free from defending a case from which it might be immune.

But why shouldn’t the State of North Carolina accord the University of the State of Maryland the defense of sovereign immunity?  Apart from what might be a general dislike of the Terrapins, the reason was that the ACC’s claim is one for a breach of contract.  The Court said:

public policy is violated in North Carolina when the State is allowed to assert sovereign immunity as a defense to causes of action based on contract. It would seem plain, then, that because the ACC is seeking a declaration as to the parties’ rights and obligations under the terms of the ACC Constitution, it would violate public policy to extend comity to Defendants’ claim of sovereign immunity.

Op. 19-20.

In an earlier decision, the NC Supreme Court  had said that allowing a State to walk away from its contractual obligations and to claim sovereign immunity "would be judicial sanction of the highest type of governmental tyranny."  Smith v. State, 289 N.C. 303, 320, 222 S.E.2d 412, 423 (1976).

Maryland is a member of the ACC through the 2013-14 season and will play in the 2014 ACC basketball tournament here in Greensboro.  I only live a few miles from the Greensboro Coliseum.  The Terps can drop that $52 million on my front lawn if they would like.

The best lines in Green v. Freeman, decided last week by the NC Supreme Court, are that "[t]he doctrine of piercing the corporate veil is not a theory of liability.  Rather, it provides an avenue to pursue legal claims against corporate officers or directors who would otherwise be shielded by the corporate form."  Op. 17-18 (emphasis added).

That means it’s not enough to show merely that the shareholder has so "dominated the corporation" that its "corporate separatedness" should be disregarded.  As Justice Martin put it, "sufficient evidence of domination and control establishes only the first element for liability.  There must also be an underlying legal claim to which liability may attach."  Op. 17.

The Supreme Court reversed the jury’s verdict that one of the defendant corporation’s directors had breached a fiduciary duty to the Plaintiffs and that she was accordingly personally liable due to her domination and control of the corporation.  It also found that no fiduciary duty was owed to the Plaintiff by the defendant director.  It remanded the case to the Court of Appeals to consider another theory of liability.

Is there anything else of interest in the Green case?  It’s got some good language to cite in future cases for the well-accepted principle that directors of a North Carolina corporation don’t owe a fiduciary duty directly to shareholders:  "The General Assembly has expressly indicated its intent “to avoid an interpretation [of N.C.G.S. §55-8-30]. . .that would give shareholders a direct right of action on claims that should be asserted derivatively” and to avoid giving creditors a generalized fiduciary claim."  Op. 9.  Of course, there are numerous Business Court cases stating the same principle, but it’s always nice to have a Supreme Court case to rely on.

My basic comment about this case is that it represents the application of long established rules in the context of litigation against corporate officers and directors, and that it breaks no new ground.

It’s worth noting that piercing the corporate veil claims are mostly unsuccessful.  Five years ago, Justice Timmons-Goodson of the NC Supreme Court said  that "proceeding beyond the corporate form is a strong step: ‘Like lightning, it is rare [and] severe[.]’"  That’s the last time the State’s high Court spoke to the subject.

And don’t forget that piercing the corporate veil allegations are not a basis for mandatory jurisdiction in the Business Court.

You may remember the case of Out of the Box Developers, LLC v. Logicbit Corp.  It has spawned a couple of interesting discovery decisions.  One was on subpoenas to third parties, another involved nearly $40,000 in sanctions for attorneys’ fees against two of the Defendants for failing to comply with a discovery order.

Now there’s something new in that case.  Judge Gale followed that nearly $40,000 sanctions order  with an October 4th Order ruling that the Defendants had violated a Protective Order by posting on the internet  information which it had obtained during discovery.  He allowed the Plaintiff some limited discovery on the extent of the protective order violation, and deferred his ruling on sanctions "until a later date."

I blinked when the Defendants filed a notice of appeal  the same day that the Order was entered.  Can you even appeal a discovery ruling?  Isn’t it interlocutory?  The appealability of non-final judgments is not an issue I focus on, though it does seem like half of the output from the North Carolina Court of Appeals involves a discussion whether an appeal is interlocutory.  If you like reading about that issue or other appellate procedure quirks, the North Carolina Appellate Practice blog discusses them frequently.

Did the Defendants care if the October 4th Order was immediately appealable?  Maybe not.  Maybe they thought that even if they ended up having their appeal dismissed as interlocutory by the COA a year down the line, at least they would have delayed the discovery contemplated by the Order.

Their next step was to ask Judge Gale for a stay of all proceedings in the Business Court while their appeal proceeded. 

That motion was denied by Judge Gale, who ruled last week in a November 1st Order that his October 4th Order was not immediately appealable.  Now, wait, you are thinking.  The trial court can’t do that, can it?  Isn’t it an issue for the appellate court?

Well, the North Carolina Court of Appeals has held that a trial court can determine whether its own Order is immediately appealable:

The trial court has the authority. . .  to determine whether or not its order affects a substantial right of the parties or is otherwise immediately appealable. See Utilities Comm. v. Edmisten, Attorney General, 291 N.C. 361, 365, 230 S.E.2d 671, 674 (1976); Veazey, 231 N.C. at 364, 57 S.E.2d at 382-83; T & T Development Co., 125 N.C.App. at 603, 481 S.E.2d at 349; Benfield v. Benfield, 89 N.C.App. 415, 420, 366 S.E.2d 500, 503 (1988).

 RPR & Assocs., Inc. v. University of North Carolina, 153 N.C. App. 342, 348, 570 S.E.2d 510, 514 (2002).

So what’s next for the Defendants?  Apparently, a motion in the Court of Appeals.  The RPR & Associates case says that:

Pursuant to Appellate Rule 8, a party may apply to the appellate courts for a stay when the trial court chooses to proceed with the matter. See N.C.R.App. P. 8 (2002).

Id.  The Defendants stated in a November 4th filing that they intend to file a Petition for a Writ of Supersedeas.  [Update: That Petition was filed on November 6th.]

It might be that the parties will never get to the merits of this case, with all the wrangling over discovery issues.

If you are a partner in a limited liability partnership, or if you have clients who are, you’ll want to read Judge Gale’s opinion in Chesson v. Rives, 2013 NCBC 49, decided last week.  It provides guidance on the rights of partners withdrawing from LLPs.

Chesson, one of the Plaintiffs, was a partner in an accounting firm, Rives & Associates, an LLP.  Chesson and two other partners withdrew from the firm, and then sued two of their former partners on a variety of claims, including breach of fiduciary duty, constructive fraud, and "constructive expulsion."

The case is a good reminder that most of the relationship between partners is governed by the Uniform Partnership Act (Chapter 59 of the General Statutes), but can often be modified by a written Partnership Agreement.

Can a partner make claims against his partners after he has withdrawn from the partnership?  Judge Gale said that "[a]lthough Plaintiffs withdrew from the partnership, they retained personal rights for the value of their partnership interest at the time of their withdrawal."  Op. ¶22.  In other words, the withdrawing partners had standing to make their claims.

Didn’t the former partners’ withdrawal result in a dissolution of the partnership? Ordinarily it would have, because dissolution "occurs automatically by operation of law upon any partner’s unequivocal expression of an intent and desire to dissolve the partnership."  Op. ¶29 (quoting Sturm v. Goss, 90 N.C. App. 326, 332, 368 S.E.2d 399, 402-03 (1988)),  In this case, the partnership agreement provided that the non-withdrawing partners could continue the partnership.

Does a partner have to make a demand on the partnership, and have that demand refused,  before suing for an accounting?  Judge Gale said that a demand was not necessary.

Can Partners eliminate the fiduciary duties they owe to one another via a partnership agreement? No, "a partnership agreement cannot eliminate those enumerated fiduciary duties partners owe to one another as a matter of law."  Op. ¶26.  Those "duties include providing full information to the partnership, accounting for the use of partnership property, disclosing self-dealing transactions, and remitting profits obtained through transactions affiliated with the partnership’s business." Id.

Thus, the partners who had withdrawn had not lost claims that the remaining partners had diverted partnership assets to themselves personally and had used partnership assets to form a separate entity.

What is the measure of damages for partners who have withdrawn?  "Absent agreement to the contrary, upon dissolution which was not caused by contravention of the partnership, a partner’s right is his pro rata share of the net value of the partnership assets at the time of dissolution."  Op. ¶30.

What about a claim for "constructive expulsion," that the remaining partners had made working conditions so intolerable that they forced a resignation?  North Carolina "does not recognize a claim for wrongful expulsion from a partnership," held Judge Gale.  Op. ¶36.

At least accountants don’t commonly have contingent fee engagements.  Those can cause real headaches in valuation, as the Court’s opinion last year in Mitchell v. Brewer, 2013 NCBC 14, illustrates.  I wrote about that case last year.

I probably enjoy reading a ruling on a motion to compel a whole lot more than the judge does in writing it.  So of course I enjoyed reading Judge Murphy’s Order on a Motion to Compel yesterday in County of Catawba v. Frye Regional Medical Center.  It’s actually pretty interesting.  It’s got discovery issues, a 30(b)(6) issue, and an attorney-client privilege issue too.

Frye Regional moved to compel because the County hadn’t organized and labelled its document production to respond to the request to which the documents were responsive.  Frye Regional’s co-defendant re-served the same document requests to which the County had already responded, demanding labelling.  Rule 34 requires labelling, but it also allows a party in the alternative to produce documents as they are kept in the "ordinary course of business."  Judge Murphy accepted the County’s representation that it had produced its documents as they were kept in the ordinary course of business, and denied that aspect of the motion to compel. 

The County was more successful on its own Motion to Compel.  Frye Regional had refused to produce a witness on some of the topics listed in the County’s 30(b)(6) deposition notice.  The Defendant had argued that a number of the topics in the notice requested information not "known or reasonably available" to it.  Frye Regional said that the proposed topics — on its financial performance — would require its witness to make burdensome calculations and compilations that it did not ordinarily perform.

Judge Murphy said:

While the Court is cognizant of the fact that the Rule 30(b)(6) Notice, by its nature, imposes a heavy burden on Frye and its designee, this burden does not relieve Frye of its obligation to appoint a designee to provide deposition testimony on behalf of the company. Rule 30(b)(6) clearly states that, upon notice from the requesting party, the organization “shall designate” a representative to “testify as to matters known or reasonably available to the organization.” N.C. R. Civ. P. 30(b)(6). Having considered Plaintiff’s Motion and the arguments of counsel, the Court finds no basis to relieve Frye of its obligation under Rule 30(b)(6). Therefore, the Court concludes that Frye must respond to the Rule 30(b)(6) Notice [and] designate a witness to testify on the company’s behalf.

Order ¶20.

The County also sought documents from Frye Regional by its Motion to Compel.  These were "Quarterly Certifications" prepared by Frye Regional’s parent to prepare filings required by the federal government under the Sarbanes Oxley Act.

Frye Regional had withheld those documents on the basis of attorney-client privilege, but Judge Murphy said that any privilege belonged to Frye Regional’s parent company (Tenet), not to Frye Regional.  He held:

the documents in question reflect communications between a Tenet employee and Tenet executives and counsel.  Although Frye appears to be a subsidiary of Tenet, Frye remains a third party to any privileged communications between Tenet and its counsel, and therefore, has no standing to assert a claim of privilege over such communications. . . . Therefore, the Court concludes that only Tenet or an attorney on its behalf may raise a claim of privilege over the requested portions of the Quarterly Certifications and accompanying memos.

Op. ¶22.

If the issue of the invocation of the parent’s attorney-client privilege by a subsidiary is ringing a distant bell in your mind, you might be thinking of Judge Gale’s recent opinion in SCR-Tech v. Evonik Energy Services LLC, 2013 NCBC 42,which I wrote about in August.  Though the issue in SCR-Tech wasn’t precisely whether a subsidiary can claim its parent company’s privilege, that certainly seemed assumed in the opinion.  At the hearing in this case, Frye Regional’s counsel stated that the privilege belonged to Tenet, not Frye Regional. Op. ¶22.

But all is not lost for the privilege  — Judge Murphy ordered that Tenet should be given notice of his ruling and be allowed to intervene to protect its privilege.

The County is represented by Brooks Pierce lawyers Jimmy Adams, Forrest Campbell, and Justin Outling.

 

Last week’s Order in Gusinsky v. Flanders Corp., 2013 NCBC 46, should be required reading for lawyers thinking of suing the directors of a corporation in North Carolina over a merger transaction.  It provides guidance on the duties of directors in those transactions, whether the claims are derivative or direct, and lays down some heightened pleading requirements for some of those types of claims. 

You probably wouldn’t be surprised to have never heard of Flanders Corporation.  Flanders, based in Washington, NC, says it is the largest United States manufacturer of air filters.  It was publicly traded until its shareholders approved a sale of the company via a merger in May 2012.

That approval by the shareholders came nearly a year and a half ago, but it was only last week that the NC Business Court dismissed a shareholder class action challenging the merger.  In its Order, the Court dismissed the  claims by the Plaintiff (a trust) for breach of fiduciary duty and for aiding and abetting breach of fiduciary duty.

One claim of breach of fiduciary duty was an alleged failure to "maximize shareholder value" in the sale of the company, which Plaintiff claimed was a duty owed by the directors of Flanders to all shareholders.  The other was an alleged failure to disclose information material to the deal.

There Is Rarely A Fiduciary Duty Owed Directly From A Corporation’s Directors To Its Shareholders

In dismissing the claim, the Business Court underscored the principle that directors virtually never owe a fiduciary duty directly to shareholders.  The duty is owed to the corporation, not shareholders. Those claims therefore must be made derivatively, unless the circumstances of the "Barger rule" are met. (I’ve written about the Barger rule before).

It seems so obvious that this type of claim is derivative that you might be wondering how this class action plaintiff even argued its position.  All it made was a couple of pretty anemic arguments which Judge Jolly shot down.

One was that the General Statutes contemplate fiduciary duties owed directly to shareholders.  Plaintiff said that G.S. Section 55-8-30, which delineates the duties of directors, contains only one reference to a duty to the corporation and that the other duties prescribed therefore must be owed directly to shareholders.

That’s so wrong.  The North Carolina Court of Appeals held last year that:

The drafters [of the Business Corporation Act] recognized that directors have a duty to act for the benefit of all shareholders of the corporation, but they intended to avoid stating a duty owed directly by the directors to the shareholders that might be construed to give shareholders a direct right of action on claims that should be asserted derivatively.

Estate of Browne v. Thompson. __ N.C. App. __, 727 S.E.2d 573, 576 (2012)(quoting Russell M. Robinson, II, Robinson on North Carolina Corporation Law § 14.01[2] (7th ed.) (citing Official Commentary, N.C. Gen. Stat. § 55-8-30 (1989)).

The Plaintiff also failed in its argument that it met the requirements of the "Barger rule." Plaintiff struck out on that score because the Flanders directors owed no duty to the class Plaintiff that was personal to the Plaintiff.  The cases that the Plaintiff relied on were cases involving closely held corporations controlled by a majority shareholder.  Judge Jolly found them not to be apposite.

Judge Jolly also ruled that a claim alleging inadequate consideration in a merger transaction was a harm to the corporation itsself, not to shareholders individually.  He said that:

[t]his is so because a claim for inadequate consideration is, functionally, a claim for the diminution of the value of shares held by all Flanders shareholdrs.  Without more, the ‘lost value’ of all shares of Flanders’ stock does not describe an injury peculiar and personal to Plaintiffs.

Op. Par. 32.

You can probably guess the rest of this story.  If you can’t, remember that derivative claims require the prospective Plaintiff to make a demand on the corporation to pursue the claim before being allowed to file a complaint.  This Plaintiff made no demand.  As the Court observed, "A plaintiff’s failure to fulfill the statuory requirements for bringing a shareholder derivative action [is an] . . insurmountable bar [to recovery]." (quoting Allen v. Ferrera, 141 N.C. App. 284, 287, 546 S.E.2d 761, 764 (2000)).

So the first claim for breach of fiduciary duty for "failure to maxinize shareholder value" was dismissed.

 

 

Continue Reading Don’t Sue A North Carolina Board Of Directors Over A Merger Without Reading This Case

This week’s decision from the Business Court in Maurer v. Maurer, 2013 NCBC 44 is a continuation of the litigation between Jill Maurer and the company owned by her and her husband, which was the subject of three Business Court opinions in 2005 and 2006, in 2005 NCBC 1, 2005 NCBC 4, and 2006 NCBC 1.  And that case even went to trial, yielding a $1.6 million verdict for Mrs. Maurer against Slickedit’s then CEO.  A portion of that verdict was set aside by Judge Tennille in  2006 NCBC 1.

After all that previous litigation, what could be left to fight about?  Well, the Maurers had gotten divorced during the earlier litigation, and each departed the marriage with a 50% ownership interest in Slickedit.  Business lawyers know that a 50/50 split is a recipe for disagreement and disaster, and the situation in which the ex-spouses found themselves was no exception. 

Mrs. Maurer sued her ex-husband in March 2013, who had by then become the company’s CEO and only director.  She alleged that he had excluded her from any knowledge of or participation in corporate affairs, notwithstanding her 50% ownership.  There was a "consistent deadlock" between the Maurers, and Mrs. Maurer said that her ex-husband’s conduct was in violation of his fiduciary duty owed to her individually and that she therefore had a direct claim against him.

Mrs. Maurer needed to show a fiduciary duty owed to her because in the absence of such a "special" duty the general rule is that "shareholders lack standing to bring individual causes of action to enforce actions accruing to the corporation."  Op. 21.  Those types of claims must be pursued on a derivative basis, on behalf of the corporation.

Judge Gale dismissed the fiduciary duty claim, ruling that there is no fiduciary duty "in favor of one fifty percent owner against the other fifty percent owner who has effective control."  Op. 24.  In the absence of a direct claim against her ex, all Mrs. Maurer had was a derivative claim, on behalf of the corporation, against Mr. Maurer.

What was the reasoning behind this ruling?  Fifty percent shareholders have options that may not be available to shareholders with a smaller interest.  The Court said that a less than fifty percent shareholder might face

insurmountable hurdles because of the procedural requirements for derivative actions which can be manipulated by a controlling majority. A fifty percent owner, with the ability to impose an impasse, is not in the same precarious position. An equal owner, unlike a minority owner, can automatically create a deadlock on any matter requiring a shareholder vote, and the existence of such a deadlock may afford greater access to judicial dissolution and a limit on the control of the other shareholder. See N.C. Gen. Stat. § 55-14-30.

Op. 26.

Judge Gale recognized that the allegations of the derivative claim were "admittedly thin," but let the "liberal standards of Rule 12(b)(6)" dictate the outcome. Op. 37.  He said that "[d]erivative litigation should not be the forum for claims that are, in essence, really domestic disputes."  Op. 37.

Congratulations to my colleagues Walt Tippett, Jennifer Van Zant and Eric David, who represented the Defendant.

How much of an ownership interest does a parent have to have in a subsidiary for the attorney-client  privilege to extend to communications between the susidiary and the lawyer for the parent company?

Judge Gale pondered that question in SCR-Tech v. Evonik Energy Services LLC, 2013 NCBC 42, and wrote on a clean slate, given that he found no applicable North Carolina precedent.  Op. 8.

The Plaintiff, SCR-Tech, had been owned by a holding company in which Ebinger had a minority (37.5%) interest.  The communications withheld on the basis of privilege covered a three year period during which SCR-Tech, Ebinger, and counsel were negotiating the sale of SCR-Tech.

Defendants said that to be considered SCR-Tech’s "parent," Ebinger needed to be a majority owner with a greater than 50% interest.

That argument launched Judge Gale into distinguishing the "joint client" aspect of the attorney-client privilege from the "common interest" doctrine.  He said:

The “joint client” privilege focuses on client identity as defined by the extent of corporate relationship between two entities. The “common-interest” doctrine depends more on common legal interests between the separate entities, although the fact of corporate affiliation between them can factor into the analysis of that common legal interest.  The common-interest doctrine has arisen by expanding the joint-defense doctrine in criminal law, which was not controlled by any ownership relationship.

Op. 12.

The extent of Ebinger’s interest in SCT-Tech really didn’t make much difference to the analysis, given the two companies’ common legal interest in the matters discussed in the withheld communications.

The Court held that the documents in question were privileged and denied the Defendants’ motion to compel their production.

Judge Gale cautioned that "the court here does not intend to set rigid parameters for applying the common-interest doctrine, and this Order must be read in the context of the particular facts of this case."  Op. 12 & n.1.