Long time readers of this blog know that you can’t designate a case limited to a covenant not to compete to the Business Court.  That’s the Lifecare case, from 2008, in which Judge Tennille said "every suit based upon a breach of a restrictive covenant . . . [will not] give rise to a mandatory business case based upon ‘unfair competition.’"

Judge Tennille intimated in Lifecare that additional allegations surrounding the breach of the covenant might give rise to the Business Court’s mandatory jurisdiction.  He said:

For example, allegations of the theft of trade secrets which provide a competitive advantage to one party could give rise to a mandatory case. See e.g., Analog Devices v. Michalski, 157 N.C. App. 462, 579 S.E.2d 449 (2003). Also, actions designed to unfairly damage another’s business would give rise to an unfair competition claim. See, e.g., Sunbelt Rentals, Inc. v. Head & Engquist Equip., LLC, 174 N.C. App. 49, 620 S.E.2d 222 (2005).

Late last week, Judge Jolly refined the contours of the Business Court’s unfair competition jurisdiction, in an Order on Notice of Designation in New Breed, Inc. v. Golden.  The New Breed complaint alleges that the multiple defendants, all former IT professionals with New Breed, were lured away by a competitor in violation of covenants contained in their employment agreements.

So what pushed New Breed over the hurdle and into the jurisdiction of the Court?  Judge Jolly said that the Complaint alleged unfair competition, which is a basis for mandatory jurisdiction under G.S.§7A-45.4(a)(4).  He said that the styling of that particular cause of action as "unfair and deceptive practices," which are excluded from the Court’s unfair competition jurisdiction under Section 7A-45.4(a)(4), made no difference. 

He held:

Under North Carolina’s current scheme of notice pleading, in examining a claim alleged in a complaint, neither the court nor party litigants are limited to the technical label given to the claim by the pleader. Rather, the reader appropriately should examine the actual facts alleged.

Op. Par. 13.

Upon examining the "actual facts alleged," Judge Jolly concluded the Complaint stated a claim for common law unfair competition, which he said was "a wrongful act done in the context of competition between business rivals."   Order 11. He read the Complaint to make allegations that "Defendants were guilty of unfair competition in that they wrongfully intended to (a) raid Plaintiff of its IT employees, (b) harm Plaintiff’s business and (c) acquire Plaintiff’s trade secrets and confidential and proprietary information." Id.

Also noteworthy in the Order is Judge Jolly’s ruling that it isn’t necessary to sue the competing business to make out a claim for unfair competition.  He held that "[t]he court cannot find a requirement that a competing business be a party litigant as a condition precedent to alleging a common law claim for unfair competition." Order 12.  New Breed sued only its former employees, not their new employer.

 

You all know that there is no Chapter 75 claim for a breach of contract unless there are "substantial aggravating circumstances."  What if you have the substantial aggravating circumstances but you don’t have a breach of contract?  The Court of Appeals answered that question Tuesday in SunTrust Bank v. Bryant/Sutphin Properties, LLC.

The answer is you might not have anything.  That’s why the COA set aside the Defendants’ $2.1 million verdict against SunTrust. 

Here’s how Judge Stroud summed it up:

the jury found that although there was not a breach of contract there were “[s]ubstantial
aggravating circumstances” that took place. Mitchell, 148 N.C. App. at 75, 557 S.E.2d at 623-24. While this was a logical conclusion for the jury to make, as they could properly find that a breach of contract had not taken place and that plaintiff had committed the acts listed in [the verdict question covering the allegedly unfair and deceptive acts]. . . it was error for the trial court to determine as a matter of law that these acts constituted a Section 75-1.1(a) violation where the only acts alleged were “[s]ubstantial aggravating circumstances” to a breach of contract when there was no breach of contract. Id. Without an independent Section 75-1.1(a) claim based upon some conduct outside the scope of the contracts, an award for a Section 75-1.1(a) claim could be entered only if the jury found a breach of contract accompanied by “[s]ubstantial aggravating circumstances.” Id. As the jury did not find a breach of contract, the inquiry should have ended because there was no breach of contract. Id.

 Op. 15-16.

If you can’t understand that unusual result, and you don’t want to slog through Judge Stroud’s 23 page opinion to figure it out, here’s the story: 

The jury found that the Bank had frozen one of the Defendant’s money market accounts without any notice of a default or making any demand for repayment of a separate loan it had made, which action the Defendants said had destroyed their business.  The jury also found, somewhat inconsistently, that the Bank hadn’t breached the contract that governed the money market account by freezing the account.  The trial judge had determined those actions to be an unfair and deceptive practice and had trebled the $700,000 damages awarded by the jury for those actions, per G.S. §75-16.

The reversal was based on the lack of breach of contract to accompany the "substantial aggravating circumstances."

The moral of this story seems to be that if you are trying to morph a breach of contract claim into a treble damage claim under Chapter 75, you’d better be able to prove the breach of contract.

The SunTrust decision marks the second time this month that Judge Stroud has tangled with Chapter 75.  In the other opinion, Green v. Freeman, the Judge affirmed the dismissal of Chapter 75 claims made by investors in a business.  She ruled that this was "raising capital," which "is not a business activity contemplated within the Act."  Op. 37.  By the way, that case is headed to the Supreme Court of NC based on a dissent, though the majority and the dissent agreed on the Chapter 75 issue.  The issue for the appeal concerns the sufficiency of the evidence to support a breach of fiduciary duty claim on which the Plaintiffs prevailed.

The intersection of technology and the rules of ethics continues to develop.  The NC State Bar has proposed a new FEO (2012 Formal Ethics Opinion 5), which deals with the interesting question of the attorney-client privilege of an employee’s emails to her personal lawyer that are on her employer’s email system.

If Your Client Is The Employee

The Opinion contains a caution: If you are a lawyer representing an employee in any matter, whether related to her employment or not, you probably shouldn’t communicate with her at her office email address.  The opinion recommends that the lawyer "explore with the client alternative methods of communicating including use of the employee’s personal email system, telephone, and texting. "

If Your Client Is The Employer

If you are a lawyer representing the company, can you access the employee’s emails with her lawyer on the corporate system?  Only if you can conclude "confidently" and "in good faith" that any privilege has been waived.

How can you arrive at that "confident" determination?  It depends on whether the employee "had a reasonable expectation of privacy in the email communications."  That requires taking into account a hodgepodge of factors, including:

whether the employer has a clear, unambiguous policy regarding email usage and monitoring; whether that policy is effectively communicated to employees; whether the policy is adhered to by the employer; whether third parties have access to the employee’s email account on the employer’s system; when/where the communication occurred (at home or the office; during work or leisure hours); and whether the employee took affirmative steps to preserve the privacy of the communication.

Since the opinion recommends that the attorney seeking to view or use the emails "should err on the side of recognizing the privilege whenever an analysis of the facts and case law is inconclusive," it seems that the necessary "confidence" might not often be found. 

But let’s say that you are in the rare situation where the employee could not be said to have a "reasonable expectation of privacy" in the emails.  Do you have to notify the employee’s personal counsel that you are going to read them?  There is a bright line answer here: No.  The reason is that the fact that the employer has copies of the emails is confidential client information, which the employer’s attorney may not disclose without his client’s consent or unless an exception to confidentiality (like a need to disclose to comply with the law, a court order, or the rules governing discovery) applies.

Employee’s Personal Email Account

The opinion isn’t really different when it’s a personal email account involved (like a gmail account which the employee accesses at work).  The lawyer for the employer can’t advise his client to invade the account by changing the password.  I didn’t realize that was possible, but it would violate RPC 1.2(d), which prohibits a lawyer from counseling a client "to engage in criminal or fraudulent conduct,"  Nor can the lawyer reap the benefit of the client undertaking that action on its own.  That would be assisting the client in fraudulent conduct.

But what if you don’t need to change a password to access the account, or you can recover the emails from the employee’s hard drive?  No clear answer.  Given that the Opinion is fiercely protective of the privilege, I would say you can’t.  It says that the privilege "is fundamental to the client-lawyer relationship and the trust that underpins that relationship. As such, the bar must protect the privilege and seek to limit incursions upon the privilege that are not warranted by law."

This isn’t the only foray of the State Bar into the intersection of ethics and email.  2012 FEO 7, proposed at the same time, says that a lawyer sending an email to a lawyer representing an adverse party cannot copy the other lawyer’s client on the email.

The Opinion says that "[c]opying the opposing party on a communication—whether email or conventional mail—with opposing counsel is a communication under Rule 4.2(a) and prohibited unless there is consent. "  "Consent" means "express consent from opposing counsel."

The Opinion sets out the same rule even if the opposing client was copied on the email to which the response is being made.

Note that these Opinions are only proposed.  The Bar is inviting and accepting comments.

Thanks to my friend Molly Whitlatch for suggesting that I write about 2012 FEO 5.

 

Sometimes you have a hard time telling who won and who lost a motion ruling.  That’s true of Judge Gale’s ruling on Monday in Legalzoom, Inc. v. The North Carolina State Bar, 2012 NCBC 47.

You are all undoubtedly familiar with Legalzoom, an on-line purveyor of do it yourself legal documents. This isn’t the first time that I’ve written about Legalzoom. The NC State Bar has been making noise for several years that the vending of Legalzoom’s documents is the unauthorized practice of law, and therefore illegal. 

This irked Legalzoom, so it hauled off and sued the Bar for a declaratory judgment in September 2011 seeking a ruling that it isn’t engaged in the unauthorized practice of law.   It also made affirmative claims for "commercial disparagement" and for the Bar violating the Monopoly Clause of the state Constitution.  The State Bar made a motion to dismiss, arguing that all of Legalzoom’s claims depended on it not being involved in the unauthorized practice of law.

So who won?  No one.  Judge Gale denied the motion to dismiss Legalzoom’s claim for declaratory relief, and deferred ruling on the other claims.

The principal reason for the ruling was the Bar had not put the unauthorized practice issue in play by presenting a claim for unauthorized practice.  The Bar can do that by making a claim for injunctive relief to a Superior Court (per N.C. Gen Stat. §84-37), or a District Attorney can initiate misdemeanor proceedings against an unauthorized offender (per G.S. §§84-7, and 84-8).

Judge Gale said that "[a] declaratory judgment action is not generally envisioned as a proceeding to force a State agency or criminal authority to undertake an enforcement proceeding it has in its discretion to date elected not to take."  Op. 44.

Judge Gale said that a motion to dismiss "is seldom an appropriate pleading in actions for declaratory judgments."  Op. 28.

He invited the Bar to make a counterclaim raising the unauthorized practice of law issue.  I expect that will be coming soon, unless the Bar and Legalzoom patch up their differences.

I hope you don’t think I am harping on this recent change in the procedure for designating a case to the Business Court, but on Friday Judge Jolly withdrew his Order in the Kight v. Ganymede Holdings II, Inc. case, recognizing that it was "a change in the previous practice relative to certain time requirements for designating an action as a mandatory."  It’s just not fair to change the rules in the middle of the game.

[If you haven’t followed this important issue, up until recently a plaintiff had thirty days after filing his or her complaint to file a Notice of Designation to the Business Court.   Beginning August 10th, Judge Jolly said that the Notice of Designation had to be filed at the same time as the Complaint (or the Amended Complaint if the amended document raises Business Court issues)].

Judge Jolly’s New Order lets Kight slip into the Business Court despite filing his Notice of Designation twenty-seven days after filing his Amended Complaint.  Nevertheless, Judge Jolly sent up a clear signal that the rule has now changed.  He said in the New Order in the Kight case that:

Notwithstanding any previous rulings of this court or any procedural guidelines that may be found on the North Carolina Business Court website or elsewhere on the Internet, as of this date and pursuant to N.C. Gen. Stat. § 7A-45.4(d)(1), any Notice of Designation by a plaintiff, third-party plaintiff or petitioner for judicial review that is based upon a complaint, third-party complaint or petition for judicial review, respectively (collectively, "Complaint") that is not filed on the same day as the Complaint shall not be considered filed contemporaneously with the Complaint and will be deemed untimely.

New Order 2.

This should be the last word on that now vanished thirty days.

 

 

 

There was one thing I could have told you for sure about Business Court procedure before August 10th.  That was that a Plaintiff had 30 days from the filing of his Complaint to designate the case to the Business Court per N.C. Gen. Stat. §7A-45.4.

That certainty was based on a decision from Judge Tennille over four years ago, in Ross v. Autumn House, Inc. He reached that conclusion notwithstanding the language of the statute, which says that "[t]he Notice of Designation shall be filed: (1) By the plaintiff or third-party plaintiff contemporaneously with the filing of the complaint . . . in the action." N.C. Gen. Stat. § 7A-45.4(d)(1)(emphasis added). 

The Autumn House decision was based on Guidelines still available today on the Business Court’s website which say that the Plaintiff could file a Notice of Designation within 30 days of filing the Complaint.

So what’s changed?  Chief Judges of the Business Court for one thing.  Judge Jolly, who took over the chiefship after Judge Tennille’s retirement in early 2011, issued an Order on August 10th in Foster v. Bell Mini-Storage, Inc. in which he said the statute requires that:

a plaintiff must file a notice of designation at the same time the complaint is filed.

Order Par. 5

So now, after Foster v. Bell Mini-Storage, Inc., if you are a Plaintiff wanting to designate your new case to the Business Court, you’d better file that Notice of Designation at the same time you file your Complaint.

Note that Judge Jolly found the designation in Foster to be valid even though it was made more than thirty days after the complaint was filed.  He did that because the answer raised issues of corporate governance.  Section 7A-45.4(d)(3) says that any party has "30 days of receipt of service of the pleading seeking relief from the defendant or party" to file a Notice of Designation.  The Notice was filed six days after the Answer was filed, so it was timely in that regard.

But there’s no doubt now that the thirty day largesse granted by the Autumn House decision to Plaintiffsd has been laid to rest.  Judge Jolly referenced that decision yesterday in an Order in Kight v. Ganymede Holdings II, Inc., 2012 NCBC 46, and held that:

In Ross v. Autumn House, Inc., Caldwell County No. 07 CVS 2172 (N.C. Super. Ct. Order Feb. 26, 2008), this court interpreted "contemporaneously" in this context to mean within thirty days of the filing of the complaint, relying on certain "guidelines" published on the website for the North Carolina Business Court.

The court now reconsiders the requirement that a notice of designation be filed contemporaneously with the complaint. To comply with this requirement, a plaintiff must file a notice of designation at the same time the complaint — or amended complaint — is
filed.

Op. at 2.  This disagreement between Judge Tennille and Judge Jolly over the meaning of "contemporaneous" reminds me of Humpty Dumpty’s statement to Alice (in Through the Looking Glass) that "When I use a word, it means just what I choose it to mean — neither more nor less."

For now, the Business Court’s definition of "contemporaneous" means what Judge Jolly chooses it to mean: "at the same time."

 

 

Do me a favor.  Take five minutes and fill out an American Bar association form (link here) nominating this blog to be included on the ABA’s list of the 100 best legal blogs.

The blog fits pretty well the criteria set out by the ABA for a nomination.  The ABA says:

  • We’re primarily interested in blawgs in which the author is recognizable as someone working in a legal field or studying law in the vast majority of his or her posts.
  • The blawg should be written with an audience of legal professionals or law students—rather than potential clients or potential law students—in mind.
  • The majority of the blawg’s content should be unique to the blawg and not cross-posted elsewhere or cut and pasted from other publications.
  • We are not interested in blawgs that more or less exist to promote the author’s products and services.

There’s a box on the form where you have to explain your reasons for supporting the blog.  The question is "Why Are You A Fan Of This Blawg?’  If you are dry on reasons, here are a few suggestions:

  • This blog changed my life.  [fill in how and tell me about that too]  [Ex: In addition to feeling knowledgeable and up-to-date, I  am taller and better-looking when I go to Court as a result of reading the blog.]
  • It’s like a Cliffs Notes for the NC Business Court.  Mack reads the cases and summarizes them. and I don’t have read them.
  • Everybody I know reads this blog.  If that’s not true, tell everybody you know to read it. 

Please take the few minutes this will take.  After all, it is Friday.

Note that lawyers and personnel associated with Brooks Pierce are discouraged by the ABA from voting.  But I am specifically encouraged by the ABA to invite non-Brooks Pierce readers to send it  messages on behalf of this blog.

The deadline for nominations is September 7th.

Now, this is just the first step.  If I make the list I’ll ask you later in the year to vote for me.

Thanks in advance for your support of this blog.

 

The Plaintiff in Kreich, Inc. v. Tarheel Publishing Co. thought he had all of his ducks in a row for summary judgment and a preliminary injunction.  But he didn’t.

Defendant was in serious default under promissory notes given in connection with its acquisition of the Plaintiff’s interest in an LLC.   Payments were due on the first day of each month, with a ten-day cure period.  The payments were chronically between 25 and 70 days late for almost an entire year.

Plaintiff wanted to exercise his rights under a Membership Interest Pledge Agreement, which was his security for the promissory notes.  The Pledge Agreement gave the Plaintiff equal control of the LLC it had sold to Defendant Hayes in the event of a default.

Given the repeated acceptance of delinquent payments, Judge Gale saw questions of fact on whether the Plaintiff had waived his right to timely payments.  Well, you might be thinking, didn’t he have a provision in his agreement saying that acceptance of late payments wasn’t a waiver of a right to call a default?

No difference, said Judge Gale, holding that:

a party that has consistently accepted late payments can only enforce timely payment by first giving notice to the other party of his intention to enforce the terms of the agreement in the future. Meehan v. Cable, 135 N.C. App. 715, 719, 523 S.E.2d 419, 422 (1999). This rule can apply even when the contract contains a non-waiver provision, as a non-waiver provision can itself be waived or modified through the conduct of the parties. See 42 E., LLC v. D.R. Horton, Inc., ___ N.C. App. ___, ___, 722 S.E.2d 1, 6-7 (2012).

Op. ¶16 (emphasis added).

There was no evidence that the Defendant had been given notice that the Plaintiff intended to enforce its right to timely payments, so the Motion for a Preliminary Injunction enforcing the Pledge Agreement was denied.

 

 

The Order on the Motion to Compel last week in WNC Holdings, LLC v. Alliance Bank & Trust Co. will be of particular interest to lawyers in litigation with banks.

The case deals mainly with the discoverability of a bank’s "compliance review documents."  Those are defined by statute as "documents prepared for or created by a compliance review committee."  N.C. Gen. Stat. sec 53-99.1(a)(2).  A compliance review committee is a committee appointed by the board of directors of a bank and charged with determining compliance with:

1. Loan underwriting standards;

2. Asset quality;

3. Financial reporting to federal or State regulatory agencies;

4. Adherence to the bank’s investment, lending, accounting, ethical, and financial standards; or

5. Compliance with federal or State statutory requirements.

Id. at (a)(1)(b).  Probably good stuff to have if you are suing a bank for failing to follow its own underwriting guidelines with regard to an allegedly inflated proposal, as WNC is doing.

There’s a statute dealing with these types of documents.  It says that they "are not discoverable or admissible in evidence in a civil action against a bank, its directors, officers, or employees, unless the court finds that the interests of justice require that the documents be discoverable or admissible in evidence."  N.C. Gen. Stat. Sec. 53-99.1 (emphasis added).

Judge Murphy, after observing that "there is no case law in North Carolina dealing with the interpretation of" the statute, said that the term "in the interests of justice" meant "the fair allocation of common advantages and the sharing of common burdens between parties to a legal action."  Op. ¶11.

He ordered the bank Defendant to provide its compliance review documents for an in camera inspection.

But WNC wasn’t as successful in its attempt to obtain attorney-client privileged documents based on  its argument that they fell within the crime-fraud exception.  (If you’ve forgotten the crime-fraud exception to attorney-client privilege, it says that communications between a lawyer and a client will not be privileged where an attorney’s services are utilized in furtherance of a crime or fraud.).

Judge Murphy said that before he would conduct an in camera review of the documents in question, the Plaintiffs would need to "present ‘a factual basis adequate to support a good faith belief by a reasonable person,’ . . . that in camera review of the materials may reveal evidence to establish the claim that the crime-fraud exception applies.’"  Op. ¶14.

Plaintiff’s argument that the communications sought were made during the time that the bank defendant had allegedly converted hundreds of thousands of dollars from its account were insufficient to "support a good faith belief that an in camera review would reveal evidence that the crime-fraud exception applies."  Op. ¶15.

 

There haven’t been a lot of opinions from the Business Court on Motions to Compel, but yesterday there were two, both from Judge Murphy.  In the first, Blue Ridge Pediatric & Adolescent Medicine, Inc. v. First Colony Healthcare, LLC, 2012 NCBC 45, the Judge found a general objection insufficient to withstand the Motion to Compel and made other rulings of interest.

You’d Better Think About Moving for a Protective Order

The objections to the discovery in the case stated that the discovery was inappropriate and that the Defendant intended to move for a protective order against it.

But the Defendants who had objected to the discovery never followed on with their Motion for a Protective Order.  Judge Murphy held that this was fatal to their opposition to the Motion to Compel and granted the Motion:

The appropriate means for the [] Defendants to prevent or limit discovery that they contend is unreasonable, inappropriate, and excessive is to seek a protective order under Rule 26(c). Because no such motion has been made to this Court, the Court concludes that the [] Defendants have not properly contested Plaintiff Blue Ridge’s discovery requests.

Op. 29 (emphasis added).

So if you are trying to shut the other side down on discovery, you’d better file a Motion for a Protective Order soon, probably before they file a Motion to Compel.

And there’s more to the Blue Ridge case.

Service of Subpoena on a Corporation

When you send a subpoena to a corporation, do you have to address it to a particular human being?  Rule 45 says that a subpoena must contain "[a] command to each person to whom it is directed. . . ."

The subpoena at issue was addressed to a law firm (a P.A., and therefore a corporation), without naming an individual or agent responsible for compliance.  There’s no North Carolina appellate case law on the validity of this sort of subpoena.

The Judge found "substantial compliance" with Rule 45, particularly since a corporation is often held to be a "person" under the law.

Good to know, though there’s no reason not to put the name of the registered agent on a subpoena to a corporation.

Preserving Objections Based on Privilege

The law firm quarreling with the validity of the subpoena also objected to it on the basis that it sought privileged materials.  And it did, it asked for "all materials, whether considered privileged or not, that relate to the transactions and execution of instruments that give rise to this litigation."

Here, the non-compliance with the Rules of Civil Procedure was more extreme than with the subpoena.   Rule 45(d)(5) says that a person receiving a subpoena objecting on grounds of privilege must make the objection "with specificity" and support it with:

a description of the nature of the communications, records, books, papers, documents, electronically stored information, or other tangible things not produced, sufficient for the requesting party to contest the objection.

Judge Murphy held that as a result of a failure to obey Rule 45, the privilege issue was not properly before him.  Op. ¶49.  He didn’t find waiver of the privilege, however.  He ordered a privilege log to be produced in thirty days, and for the parties to meet to attempt to resolve the claims of privilege.

Deposing Opposing Litigation Counsel

 You’ve all wanted to depose opposing trial counsel at one time or another.  Admit it. 

There’s no North Carolina state court authority on whether you can do that, but Blue Ridge provides some guidance.  It adopts the standard set out by the Eighth Circuit in Shelton v. American Motors Corp., 805 F.2d 1323 (8th Cir. 1986), followed by the Middle District of North Carolina in N.F.A. Corp. v. Riverview Narrow Fabrics, Inc., 117 F.R.D. 83 (M.D.N.C. 1987); and Static Control Components, Inc. v. Darkprint Imaging, Inc., 201 F.R.D. 431 (M.D.N.C. 2001).

The Shelton case says that you can depose opposing counsel only if you have:

shown that (1) no other means exist to obtain the information than to depose opposing counsel; (2) the information sought is relevant and nonprivileged [sic]; and (3) the information is crucial to the preparation of the case.

Op. 58.

Applying that standard, Judge Murphy quashed the subpoena to the attorney who had signed the Complaint.He didn’t find attractive Defendants’ position that they wanted to ask the lawyer about “advice, communications, and receipt of documents [that are] the basis” of Plaintiffs’ suit.  He said that "[s]uch knowledge is precisely the type of information Shelton attempts to protect from disclosure by litigation counsel in a deposition."  Op. 62.

The opportunity for deposing opposing litigation counsel is pretty limited.  Better quench that desire.

 There’s Another One Coming

Yes, I did say there were two Motion to Compel opinions.  The Blue Ridge case was so chock full of stuff that I’m saving the other case for Monday.