Revisions to the North Carolina Rules of Civil Procedure became effective to actions filed on or after October 1, 2011. A blacklined version showing the changes wrought by a law titled  an  "Act to clarify the procedure for discovery of electronically stored information and to make conforming changes to the North Carolina Rules of Civil Procedure" is here.  

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

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

 Definition of ESI Includes Metadata 

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

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

Recovery of Costs Of Production Of ESI

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

Protective Orders

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

Privilege Issues

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

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

New Discovery Conference Procedure

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

Safe Harbor For Routinely Destroyed ESI

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

For the second time in a space of two weeks,  the Business Court granted a motion for a preliminary injunction against  an LLC member/manager as a result of breaches of fiduciary duty.  The first case was GoRhinoGo, LLC v. Lewis,  which I blogged about last week, and the second case, decided last Thursday, was Lake House Academy for Girls LLC v. Jennings, 2011 NCBC 40.

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

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

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

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

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

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

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

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

A broadly worded defense in a case challenging the sale of a company resulted in a waiver of the attorney-client and work product privileges last week, in Richardson v. Frontier Spinning Mills, Inc.

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

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

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

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

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

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

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

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

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

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

 

i was gone (not fishin’) for the entire month of September.  I haven’t written on this blog since August and nobody has noticed.  Nobody has emailed me to ask where the heck I was or what I was doing or whether anything worth knowing had happened in the Business Court  The lack of any outcry about my absence hurt my feelings, but I am back even so with this September update on cases in the Business Court decided during the missing September.  They ran the gamut, from subpoenas to injunctions to how not to get an extension of time in the Business Court.

Standing to Object to Subpoenas to Non-Party Banks

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

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

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

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

Continue Reading I’m Back With An Update on Six Business Court Cases

in a significant employment law case, the Fourth Circuit ruled last Friday that an employer may decline employment to a prospective employees due to her having made FLSA charges against a previous employer. The case, decided 2-1 over a strong dissent from Judge King, is Dellinger v. Science Applications International Corp.

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

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

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

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

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

Op. at p.9.

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

 

 

 

Continue Reading Fourth Circuit Authorizes Retaliation By Prospective Employers Against FLSA Claimants

This week, Judge Jolly permitted a 50% shareholder to pursue derivative and individual claims against her co-shareholder. He found that the plaintiff had satisfied the demand requirement of G.S. sec. 55-7-42, and that she fit an exception to the general rule that a shareholder cannot pursue an individual cause of action for the diminution or destruction of the value of her stock.

The decision came in LeCann v. Cobham, a long running bitter dispute between dentists who operated a number of entities providing dental care.  LeCann said that Cobham had diverted funds from a practice in which they shared ownership to another dental practice operated solely by Cobham.

G.S. sec 55-7-42 says that a shareholder "may not commence a derivative proceeding" without having made a written demand "upon the corporation to take suitable action."  In discussing the adequacy of LeCann’s demand, Judge Jolly quoted Russell Robinson, who says that no specific form of demand is required by the statute:

except to require that it be in writing; but to serve its purpose it should set forth the facts of share ownership and  describe the redress demanded with enough particularity to allow the corporation either to correct the problem, if any, without a lawsuit or to bring its own direct action.

ROBINSON ON NORTH CAROLINA CORPORATION LAW, § 17.03[1] (7th ed. 2009).

There is no appellate North Carolina authority evaluating the sufficiency of a demand. The form of the LeCann written "demand" was several emails from LeCann to Cobham telling her to quit taking corporate funds for her own benefit  and to return what had been taken.  You can read one of the emails here. The Court said that these demands were "clear and particular enough to put Defendant Cobham reasonably on notice as to the substance of Plaintiff’s objections." 

Now, why did LeCann have the right to sue Cobham on an individual basis, especially in light of the NC Supreme Court’s opinion in Barger v. McCoy Hillard & Parks, 346 N.C. 650 (1997), where it held:

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.

Id. at 658.  Those types of claims affect all shareholders equally, and belong to the corporation.

LeCann said that she could pursue her claims on an individual because Cobham owed her a "special duty," a recognized exception to the Barger rule, as she was the only other shareholder in the companies.  Judge Jolly remarked that Cobham had asserted herself in her Answer that LeCann owed her a "duty of care, good faith, loyalty, fair dealing, full disclosure, [and] avoidance of self dealing."  He said given that each party claimed the other party owed her a fiduciary duty of care, that there was a genuine issue of material fact precluding a dismissal of LeCann’s claims.  He also equated the co-equal shareholders to partners, who certainly owe a fiduciary duty to one another.

 

 

 

 

Yesterday, Judge Gale entered summary judgment against a North Carolina lawyer who claimed he was entitled to a greater share of a $3 million fee award to a group of plaintiffs’ counsel in a series of settled class actions.  The opinion was in the case brought by the lawyer seeking an enhancement of his fee, Donald Dunn, against the lawyers who were his co-counsel, Henry Dart and Robert Zaytoun, in Dunn v. Dart.

The lawyers represented members of the communities living near an industrial plant in Apex, North Carolina at the time of an explosion there. Those families who were forced to evacuate their homes as a result of the explosion settled several class actions for payments of close to a total of $8 million.

A federal judge approving the settlement in the Eastern District also approved the $2.9 million fee award, which allocated $75,000 to Dunn.  Dunn then filed a separate action in North Carolina asserting that he had a side arrangement with his co-counsel to split one third of the fee 50/50 with them.  Dart walked from the fee award with $975,000 and Zaytoun with $670,000, aggrieving Dunn, who received only a paltry $75,000 for his work on the case.

Dunn presented emails speaking to the split, but Judge Gale ruled that the emails were insufficient to prove an agreement, and that they anticipated further negotiation over terms followed by a final written agreement.

The other basis for summary judgment against Dunn was North Carolina Rule of Professional Conduct 1.5, which says that lawyers from different firms may divide fees only if the client consents to the split, and the agreement is confirmed in writing.   Dunn had no evidence of such consent, and no written agreement (except for the found-to-be-inadequate emails).  Judge Gale said that the agreement was unenforceable without compliance with the Rule

 

Yesterday, the United States Supreme Court delivered two of its most significant opinions on  the subject of personal jurisdiction in nearly twenty-five years (since Asahi Metal Ind. Co. v. Superior Court of California, 480 U.S. 102(1987)).  The new cases are J. McIntyre Machinery, Ltd. v. Nicastro and Goodyear Dunlop Tires Operations, S.A. v. Brown. (linked below)

In Goodyear, Justice Ginsburg authored a unanimous opinion in which the Court reversed a decision by the North Carolina Court of Appeals which she said had "confused" or incorrectly "blended" jurisdictional principles.  The plaintiffs in Goodyear were the parents of two young soccer players who had been killed in a bus accident in France.  Tires manufactured by Goodyear’s Turkish subsidiary  were the alleged cause.

The foreign subsidiaries had lost a motion to dismiss made on jurisdictional grounds in the trial court, which had been affirmed by the North Carolina Court of Appeals.  The NC Supreme Court denied a petition for discretionary review, but the Supreme Court accepted certiorari. 

The Supreme Court reversed, disagreeing with Judge Ervin’s conclusion that the sale by the subsidiaries of thousands of tires to North Carolina customers supported a finding of general jurisdiction over them because they had "purposefully injected [their] product into the stream of commerce" without excluding North Carolina from that distribution.  To him, this meant that they had "purposefully availed themselves of the protection of the laws of this State."  681 S.E.2d at 68-69. 

He had concluded that stream of commerce analysis can support a finding of general jurisdiction, necessary because the injury to the soccer players hadn’t flowed from the NC sales.

Justice Ginsburg said that the "attenuated connections" to North Carolina fell "far short" of the "’continuous and systematic general business contacts’ necessary to empower North Carolina to entertain suit against them on claims unrelated to anything that connects them to the State."

That ruling seems pretty clear, but the companion decision in J. McIntyre clouded things.  It is a fragmented opinion, with Justice Ginsburg this time in the dissent, Justice Breyer concurring, and Justice Kennedy (joined by the Chief Justice and Justices Scalia and Thomas) delivering the plurality opinion.

J. McIntyre had been more deliberate about the sales of its metal recycling machinery in the United States than Goodyear had been for its tires.  J. McIntyre had an affiliated Ohio-based distributor which handled the U.S. sales it had deliberately sought, and it had attended numerous trade shows in the U.S., and it had sold at least one machine in New Jersey, to Nicastro’s employer.  The injury to Nicaastro, which involved the severing of four fingers on his right hand, had occurred in New Jersey.

 The New Jersey Supreme Court considered in its opinion the Supreme Court’s conflicting opinions in Asahi on how the stream of commerce analysis fits into the personal jurisdiction paradigm (the competing opinions in that case, one by Justice O’Connor and one by Justice Brennan, are discussed by Justice Kennedy in his plurality opinion), and held:

that a foreign manufacturer that places a defective product in the stream of commerce through a distribution scheme that targets a national market, which includes New Jersey, may be subject to the in personam jurisdiction of a New Jersey court in a product-liability action

Justice Kennedy, in the plurality opinion, disagreed, stating that "as a general rule, the exercise of judicial power is not lawful unless the defendant ‘purposefully avails itself of the privilege of conducting activities within the forum State, thus invoking the benefits and protections of its laws.’"  It was not enough to the plurality that J. McIntyre had targeted the entire United States as a market and that it perhaps should have foreseen sales in New Jersey.  Forseeability is not the test.  As Justice Kennedy held:

[t]his Court’s precedents make clear that it is the defendant’s actions, not his expectations, that empower a State’s courts to subject him to judgment.

Plurality Op. at 8.

It’s hard to assess where jurisdiction stands over foreign entities which  sell some product in various areas of the United States.  The availment of a state’s laws must certainly be "purposeful," which isn’t a new concept.  It was first articulated by the Supreme Court in Hanson v. Denckla, 357 U.S. 235 (1958).  Justice Ginsburg said that the majority:

turn[s] the clock back to the days before modern long-arm statutes when a manufacturer, to avoid being haled into court where a user is injured, need only Pilate-like wash its hands of a product by having independent distributors market it.

Dissenting Op. at 2.  She said that the majority took "a giant step away from the notions of fair play and substantial justice" imbedded in the notion of the "minimum contacts" necessary to support a finding of personal jurisdiction. 

You can find deeper analysis of these two important Supreme Court opinions at the Civil Procedure & Federal Courts Blog.  There’s a lot more to be said about their impact.   They will be confounding those teaching Civil Procedure in our law schools for the next twenty years.  Certainly as much as Asahi did

If you are making an Offer of Judgment per Rule 68 of the Federal Rules of Civil Procedure, be sure to think about whether to include costs and attorneys’ fees in the amount offered.  Yesterday, the Fourth Circuit underscored the need for "precise drafting" of such Offers,and required the offering party to pay triple the amount specified in its imprecise Offer to cover the attorneys’ fees and other costs not mentioned in the Offer.  The case is Bosley v. Mineral County Commission.

The Plaintiff had made an offer "in the amount of Thirty Thousand Dollars ($30,000.00) as full and complete satisfaction of [Plaintiff’s] claim against . . . Defendants."  The Offer was accepted by the Defendants, who then made a motion for an award of attorneys’ fees pursuant to a fee shifting statute, 42 U.S.C. §1988(b), as the prevailing party.

When the District Court awarded over $66,000 in attorneys’ fees (which are defined as "costs" per 42 U.S.C. §1988(b)) plus other recoverable costs on top of the $30,000 offer, the Plaintiff screamed that its Offer in "full and complete satisfaction" of the claims  had implicitly included all attorneys’ fees because attorneys’ fees had been requested in the ad damnum clause of the complaint.  Judge Davis, writing for the Court, said this contention was without merit."

Quoting a Supreme Court opinion on Rule 68, Marek v. Chesney, 473 U.S. 1 (1985), Judge Davis wrote:

if the offer does not state that costs are included and an amount for costs is not specified, the court will be obliged by the terms of the Rule to include in its judgment an additional amount which in its discretion. . . it determines to be sufficient to cover the costs.

Judge Davis declined to consider the negotiations between the parties leading to the Rule 68 Offer, which the Plaintiff said would show that the $30,000 Offer had been understood to include fees and other costs.  He said that considering such evidence would be "imprudent, impractical, and . . . wholly foreclosed by the reasoning of [the Supreme Court’s Marek decision."