You probably know that there is a fight afoot between the North Carolina State Bar and the do-it-yourself vendor of legal documents, LegalZoom. The simmering dispute has been covered in the Wall Street Journal, the ABA Journal, and the case is now in the Business Court over Legalzooom’s vitriolic objections.  The issue is whether LegalZoom’s offerings constitute the unauthorized practice of law.

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

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

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

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

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

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

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

Where was the vitriol?

Continue Reading We’re Gonna Zoom A Zoom A Zoom in North Carolina

The Fourth Circuit delivered a lump of coal right before Christmas to a Wachovia shareholder whose 100,000 shares of the Bank’s stock, once worth about $5.6 million, sank into near worthlessness when Wachovia failed.  The case, decided December 23rd, is Rivers v. Wachovia Corp., and it affirms the dismissal of all of Rivers’ claims.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The Business Court decision last week in Shamoon v. Turkow, 2011 NCBC 46  has a little bit of everything: a plaintiff who is a claimed huckster (maybe even a fraudster), parties who are members of a fundamentalist church, plus a Fortune 50 company.  When you mix patents for a high-tech device called the "Ubiquitous Connectivity & Control System for Remote Locations," into that cast of characters, you’ve got something like a holiday delicacy that is itself ubiquitous.

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

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

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

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

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

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

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

Ownership of the Patents

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

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

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

Counterclaims

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

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

No fruitcakes were eaten during the preparation of this post. 

 

Everybody loves a penguin, or at least I think that is so.  But Penguin Toilets, the Defendant in Roth v. Penguin Toilets, LLC, 2011 NCBC 45, can’t be loving the result it got on its Motion to Dismiss, which was denied in the Business Court by Judge Murphy on Wednesday.

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

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

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

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

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

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

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

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

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

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

 

 

 

My favorite multi-volume treatise is Words and Phrases.  If you don’t know it, it is a super-legal dictionary that collects cases from every jurisdiction defining … well, frequently used words and phrases.  Since business litigation often turns on the definition of a word or a term that the drafters left undefined, I have a thoroughly excellent time finding a definition in the cases that supports my interpretation.

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

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

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

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

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

 

 

 

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

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

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

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

No shareholder may commence a derivative proceeding until:

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

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

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

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

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

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

           

 

Continue Reading Expensive Lesson From The Business Court For Derivative Action Plaintiff Whose Case Was Dismissed

 

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

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

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

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

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

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

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

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

 

If you are trying a case in in federal court after December 1, 2011, you’d better bring a new copy of the Federal Rules of Evidence. Don’t lose any sleep, because the substance of the Rules hasn’t changed, they’ve only been “restyled.” This reworking of the FRE was aimed at making the Rules more consistent in their use of terminology, to stick to “plain language” and to make the language more “user-friendly.”

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

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

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

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

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

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

On Friday,  the Business Court issued an opinion on a number of covenant not to compete issues, in Akzo Nobel Coatings Inc. v. Rogers, 2011 NCBC 41.  The Defendants were former employees of the Plaintiff, which had acquired the company for which they had worked.  The Defendants had executed non-competition and confidentiality agreements in connection with the acquisition.  The Defendant claimed a violation of the agreements and asserted a number of tort based claims, a 75-1.1 claim, breach of contract claims, and a trade secrets claim.

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

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

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

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

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

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

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

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

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

 

 

 

The North Carolina Court of Appeals sent a pretty clear message last Tuesday  to out of state citizens filing claims for alienation of affection in North Carolina courts.  The message was don’t file your lawsuit here, even though North Carolina is one of the few states in the country that hasn’t abolished that tort.

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

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

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