For anyone who has agonized over a decision between moving to dismiss or moving to compel arbitration, your strategic torment may be over.  A short but important order from the Business Court yesterday ruled that the two options are not mutually exclusive.

In Triad Group, Inc. v. Wachovia Bank, N.A., a bond swap lawsuit filed in April 2009, Wachovia moved to dismiss the claims of the various nursing center plaintiffs.  This April, Judge Tennille dismissed the punitive damages and Chapter 75 claims, but denied the motion as to all remaining claims.  Soon thereafter, Wachovia moved to stay the case and compel arbitration based on a comprehensive arbitration clause contained in one of the written agreements between the parties, and the Court agreed that the clause was enforceable.

The Plaintiffs’ most interesting argument was that Wachovia waived the right to arbitrate by moving to dismiss, which caused the Plaintiffs to incur substantial litigation expense during the year that the lawsuit was pending before the Court.  Judge Tennille rejected that argument:

Although the Court is always concerned about the ever-increasing costs of litigation, the fact that one party may file a motion to dismiss prior to invoking an existing arbitration clause is in and of itself insufficient to warrant denial of enforcement of an otherwise valid arbitration agreement.  It would be bad public policy to discourage parties from filing early motions to test the legal sufficiency of claims.

The Court also noted that the Plaintiffs could have avoided their own litigation expense by moving to compel arbitration themselves before Wachovia moved to dismiss.

Although the Order does not address this point, it is consistent with the growing sentiment of many commentators in the profession that arbitration often is no less expensive than litigation.  If that sentiment is accurate, then the expense of some judicial proceeding before compelling arbitration is less likely to constitute the prejudice that must be shown for a waiver of the right to arbitration.

(The image is the only one I could find from Miller Lite’s excellent "Let’s Watch Both!" series of commercials circa 1993, featuring amalgamated sports like the Full Contact Golf depicted above).

Full Order

 

The insolvency of prominent contractor Bostic Construction, Inc. has been a fertile source of Business Court litigation over the last couple of years in three cases against the company’s officers and directors.  A recent Bankruptcy Court decision from the Middle District permits the Business Court cases to proceed, holding that they are not barred by a settlement between the bankruptcy trustee and those officers and directors.

The procedural history is complicated (as you would expect with three cases in Business Court and one in Bankruptcy Court) but the underlying facts are not.  Bostic Construction was formed by one of the "Hogs," former Redskins guard Jeff Bostic, and his brother, former St. Louis Cardinals guard Joe Bostic, both Greensboro natives.  In its heyday, Bostic was the nation’s second-largest apartment builder, with over $200 million in revenue.  Bostic Construction’s operating model focused on construction management, delegating most or all of the labor, materials, and equipment to subcontractors.

During the 1990s, Bostic Construction performed most of its work for unrelated third parties, but at the turn of the millenium, the company transitioned to projects for LLCs owned or controlled by company insiders.  Those insiders also formed other LLCs to provide labor and materials to Bostic Construction at a profit for the LLCs.  Bostic Construction’s financial condition deteriorated in 2003 and 2004, and the company’s creditors allege that the insiders began acting to ensure the profitability of the LLCs rather than Bostic Construction itself.

Bostic Construction’s creditors filed an involuntary Chapter 7 petition in January 2005.  The trustee settled the company’s claims against the insiders in 2007.  Three cases then were filed in Superior Court against the insiders:  the Phillips & Jordan case in January 2008, and the American Mechanical and Yates Construction cases in October 2009. 

The insiders moved for Judge Diaz to dismiss the American and Yates cases and moved the Bankruptcy Court for an interpretation that its order approving the 2007 settlement barred the creditors’ claims against the insiders.  (By that time, Judge Diaz had already ruled that the plaintiffs in the Phillips & Jordan case had direct claims against the insiders which were not impacted by the trustee’s settlement).  Judge Diaz stayed the American and Yates cases pending the Bankruptcy Court’s ruling.

The Bankruptcy Court held that the settlement did not bar the Business Court claims.  The key question was whether the creditors’ claims were personal, direct claims against the insiders or whether they were derivative claims that could be asserted only by the trustee.  That question is determined by state law. 

Judge Waldrep cited North Carolina cases for a familiar series of propositions:  

Although the general rule is that directors of North Carolina corporations do not owe a fiduciary duty to the creditors of the corporation, an exception exists when there are circumstances amounting to a winding up or dissolution of the corporation. . . .  If the directors and officers continue to operate an insolvent corporation only to recover the amounts owed to them, to the detriment of the corporation’s other creditors, North Carolina courts equate that to a winding up or dissolution and find that the directors and officers owe a fiduciary duty to creditors. . . . However, no duty is owed to creditors, even if the corporation is balance sheet insolvent, when the directors and officers are acting in good faith in running the business.

The claims of constructive fraud, aiding and abetting constructive fraud, and violations of the NC RICO statutes were personal to the creditors, not derivative.  The circumstances of Bostic Construction amounted to a winding up or dissolution of the business, creating a fiduciary duty from the directors to each creditor to support the constructive fraud and aiding and abetting claims.  (The Court noted the ongoing doubt over whether any aiding and abetting claims exist under North Carolina law anymore, but ruled that if they existed at all, they were direct claims).  Similarly, the Court examined the text of Chapter 75D, which includes the element that RICO defendants personally benefit from the illegal conduct.  Based on that element, the Court concluded that the RICO claims were direct, not derivative, and were not barred by the settlement.

Bankruptcy Court Opinion

 

The City of Richmond was kind to the City of Greensboro last week.  After nearly a decade of litigation and arbitration, the Fourth Circuit affirmed the district court’s rejection of a challenge to a nearly $15 million arbitration award against the general contractor of a wastewater treatment facility.

The published opinion in MCI Constructors, LLC v. City of Greensboro is the latest round in a dispute arising from a 1996 contract.  That contract delegated to the city manager the role of referee and arbitrator for disputes.  The City terminated MCI for cause, and MCI sought relief from the city manager.  After a hearing in 2002, the city manager ruled that the termination for cause was proper.  At a subsequent hearing in 2003 on the issue of damages, the city manager awarded the City over $13 million.

In 2004, on a challenge by MCI to the arbitration award, the Middle District of North Carolina entered summary judgment in favor of the City.  The Fourth Circuit reversed in 2005, 125 Fed. Appx. 471, holding that the District Court’s application of a highly deferential "fraud, bad faith, or gross mistake" standard was inappropriate because applying that standard to the city manager, who "in essence was adjudicating his own performance, rights, and liabilities under the contract," would result in an illusory contract.  Instead, the Fourth Circuit required review under "a standard of objective reasonableness ‘based upon good faith and fair play.’"

After the Fourth Circuit’s original decision, the parties agreed to re-arbitrate the matter, this time before a panel of three arbitrators.  In 2007, the panel ruled that MCI’s termination was for cause.  At the damages hearing in 2008, the panel awarded the City $14,939,004.  In 2009, the Middle District rejected MCI’s challenges and confirmed the award.

The Fourth Circuit rejected the three main arguments raised by MCI on appeal.  First, the Fourth Circuit held that the Middle District did not err in certifying the matter as final under Rule 54(b).  MCI’s claims against the project engineer, who was not party to the arbitration proceedings, did not affect the arbitration in such a way as to require their adjudication before the arbitration award was confirmed.

Second, the Fourth Circuit held that there were no grounds, either under the FAA or at common law, to justify vacating the award.  The award was not procured by "undue means" despite MCI’s arguments about allegedly objectionable conduct by opposing counsel.  "[N]o court has ever suggested that the term ‘undue means’ should be interpreted to apply to actions of counsel that are merely legally objectionable."  The Court also held that MCI failed to show that the alleged undue means led to the procurement of the award.  Although MCI argued that meeting this standard was impossible because the panel did not issue a reasoned award, the Fourth Circuit was unwilling to waive the causal element out of fear that parties would intentionally reject reasoned awards so as to ease their burden of proof later in judicial challenges to those awards.

The Court also rejected MCI’s argument that the panel exceeded the scope of its authority.  "[N]either misinterpretation of a contract nor an error of law constitutes a ground on which an award can be vacated. . . .  As long as the arbitrator[s] [are] even arguably construing or applying the contract, as they were here, their awards will not be disturbed."

The Court likewise dismissed MCI’s common-law argument that the award "failed to draw its essence" from the contract — essentially that the award was "impossible to square" with certain contractual provisions.  In doing so, the Court avoided confronting the issue of whether there even exist any common law grounds to vacate arbitration awards after the Supreme Court’s decision in Hall Street Associates, L.L.C. v. Mattel, Inc., 552 U.S. 576 (2008).

Finally, the Fourth Circuit rejected MCI’s claim that the award was invalid because it was not reasoned.  MCI claimed that the arbitration was governed by JAMS Rule 24(h), which requires reasoned awards.  The arbitration agreement, however, allowed the panel to proceed pursuant to JAMS Rules or AAA Complex Commercial Arbitration Rules.  The panel having elected the latter, which do not require a reasoned award unless requested before appointment of the panel, the award remained valid.

The Brooks Pierce attorneys comprising the City’s team before the Fourth Circuit included Bill Cary, George House, Mike Meeker, and Joey Ponzi.  A number of others at the firm have contributed to the case over its lengthy lifetime.

Full Opinion

For almost 30 years, minority shareholders in North Carolina have sought relief from corporate oppression via so-called Meiselman actions.  An important Business Court opinion released Tuesday discusses the limits of Meiselman claims, which will be less appropriate the larger the number of shareholders and the greater the corporate governance in operation.

In the Meiselman case itself, the Supreme Court permitted minority shareholders in closely-held corporations to seek judicial relief to enforce those shareholders’ reasonable expectations, such as employment or participation in management.  Meiselman characterized closely-held corporations as "little more than ‘incorporated partnerships,’" often formed due to family or friend relationships, in which the minority shareholders are not practically able to bargain for protection (or to recognize the need for protection) when the corporation is formed.  Meiselman involved seven such corporations — all part of a family business formed by the father of the two brothers who found themselves on opposite sides of the lawsuit.

The Business Court decision confronted a different situation, and those differences determined a different outcome.  In High Point Bank & Trust Co. v. Sapona Mfg. Co., at issue were the plaintiff’s rights as minority shareholder of three corporations.  Although the corporations originated as family businesses — the youngest of which was over 75 years old — the shareholder and employee base had expanded significantly over time.  Acme-McCrary, a hosiery manufacturer, now has 81 shareholders and 892 employees; Sapona, a yarn processor, now has 51 shareholders and 200 employees; Randolph Oil, a petroleum wholesaler and convenience store owner, now has 25 shareholders and 49 employees.  The shares of these corporations were unmarketable and functionally locked the shareholders into ownership absent some company action.  Two of the three corporations had issued tender offers to their shareholders on one or two occasions in the last 20 years.

Following the death of the individual plaintiff, the daughter and granddaughter of the companies’ founders, her executor asked the three companies to redeem her shares at a market value established by an appraisal that the executor commissioned.  Each company’s board of directors met and considered the request, but declined.  The executor sued under a Meiselman theory, arguing that the companies’ refusal to repurchase the shares was coercive and oppressive conduct leaving a minority shareholder without rights.  The question for the Court was whether the right to have stock repurchased was an enforceable right or interest under Meiselman.  If so, the corporations’ refusal to repurchase rendered that right in need of protection.

Judge Tennille began his analysis by discussing the broad Meiselman remedies and the limitations on those remedies from more recent statutory amendments.  Under the old N.C.G.S. § 55-125, a court had equitable discretion to fashion a number of remedies besides dissolution of the corporation — remedies such as repurchase at fair value, altering corporate bylaws provisions, or prohibiting certain corporate actions.  Section 55-14-30, the modern replacement, eliminates those alternative remedies.  With liquidation as the only remedy, judicial dissolution required a "strong showing" because such a remedy conflicted with the business judgment rule and other traditional judicial deference to corporate governance. 

The Court viewed this case as significantly different from Meiselman and the Court’s own 1999 decision in Royals v. Piedmont Elec. Repair Co. (which found a right of redemption for a minority shareholder) for several reasons.  First, there was no loss of ownership benefits here.  Plaintiff was not denied an opportunity to work; the trust now holding her shares continued to receive the same benefits that she enjoyed while living; no assets were diverted; no excessive salaries were paid, but regular dividends were paid to all shareholders.  The Court held that there was no mandatory right of redemption of stock in closely-held corporations.  Such a right "would place the other shareholders in close corporations at financial risk upon the death of any shareholder."

Second, there was no personal or familial antagonism of the sort experienced in Meiselman.  The plaintiff was never an employee or involved in management, and thus was not being deprived of such opportunities.  The majority of shares in the three companies were owned by non-employees.

Third, there was no controlling shareholder and the shares were diffused to a much greater extent than in Meiselman.  Each corporation observed corporate formalities.  The majority of the companies’ officers were not related to the founders.  In short, these corporations were not the same as a corporation with three shareholders being run like a partnership.

The Court was not willing to create a bright-line number of shareholders that would remove a corporation from Meiselman analysis.  Nevertheless, the more diffuse the ownership of a company, the more important "the number, composition, and rights and interests of the non-complaining shareholders" become.  "Where, as here, there is no impediment to the majority of shareholders exercising their voting rights, the courts should not intervene on behalf of a minority shareholder."

Judge Tennille also held that the plaintiff had no reasonable expectation of a right of redemption.  There was no written agreement establishing such a right.  The limited activities of the corporations with a one-time tender offer and a one-time repurchase of the shares of a deceased shareholder were not sufficient to create a future right of redemption.  Most importantly, there was no evidence that any shareholder other than the plaintiff or any officer or director had any notice of or expected that plaintiff would have such a right of redemption.

The expectation also was unrealistic on two grounds:  first, that the redemption of plaintiff’s minority interest would be at fair market value with no minority discount, and second, that the redemption would be personal to plaintiff.  The latter, in particular, would have created "stiff fiduciary challenges" from the other shareholders.  Although the plaintiff had some minimal evidence of oppression, "oppression is not the standard for determining rights and interests.  It is applicable only when determining the need for protection."

Meiselman likewise requires consideration of the impact of the plaintiff’s claim on other shareholders.  Here, dissolution would impose stock value and tax losses on all of the other shareholders and displace hundreds of employees.

After High Point Bank & Trust, it would be an overstatement to declare Meiselman dead for corporations with more than a handful of shareholders.  Nevertheless, the larger the shareholder base and the more significant the formal corporate governance, the less likely it is that a corporation will have created unwritten "expectations" for shareholders or that the corporation will face dissolution in the name of shareholder protection.

Full Order & Opinion

 

A few points to keep in mind when the world of pro se plaintiffs meets the world of closely held entities in the Business Court, courtesy of Monday’s decision in Bodie Island Beach Club Ass’n, Inc. v. Wray:

  • A letter written by a physician who was served both individually and as registered agent for an LLC served as an answer for the physician only, not for the LLC.  The letter was written on the physician’s personal letterhead and did not purport to answer on behalf of the LLC.
  • Even if the physician’s answer were purportedly on behalf of the LLC, it would have been an invalid appearance by the LLC, which, like all corporations, may not appear pro se.
  • A physician in such circumstances was deemed to be a sophisticated investor capable of following court rules.
  • The Court may enter default on its own motion (i.e., the "or otherwise" clause of Rule 55(a)).
  • If an answer were filed, even if untimely, entry of default under Rule 55(a) would be inappropriate even when entered by the Court rather than the clerk.
  • When no answer was  filed, however, a proposed answer filed with a motion to amend does not bar entry of default.
  • Failure to respond to a summons for five months was dilatory, not mere technical error.
  • Although a plaintiff’s conduct may waive its right to entry of default, no such waiver occurred when the plaintiff moved for summary judgment against the LLC within two months of failure to answer and when the LLC waited another two and a half months to submit a proposed answer.

Full Order

The Business Court granted summary judgment last week to a company and dismissed claims brought by its former CEO for breach of a severance agreement, fraud, and unfair and deceptive trade practices.

In McKinnon v. CV Industries, Inc., the defendant (CVI) owned a number of subsidiaries which manufactured, among other things, high-end residential furniture (Century) and mid- to high-end jacquard fabric (Valdese Weavers).  Plaintiff was an employee of the defendant or its subsidiaries for over twenty years, including five years as CVI’s president and CEO.  In 2000, Plaintiff went to work for Mastercraft, a direct competitor of Valdese Weavers.

Plaintiff and Defendant entered into a severance agreement to modify certain incentive plans and benefit agreements.  Under that agreement, Plaintiff would not qualify for certain benefits (the "shadow equity plan") until he stopped directly competing with Valdese Weavers.  In addition, those benefits would not accrue if the company’s ESOP stock price on the December 31 immediately preceding Plaintiff’s cessation of competition was less than the ESOP stock price on December 31, 1999.

At some point in 2001 or 2002, Plaintiff stopped working for Mastercraft and started working for another company.  The stock price at that point was below the 1999 price, which would eliminate any benefits.  Plaintiff, however, contended that he continued to compete through 2007, at the end of which the stock price would have triggered benefits.

Judge Tennille granted summary judgment on each of Plaintiff’s claims.  First, on Plaintiff’s damages and specific performance claims for breach of contract, the Court held that Plaintiff’s post-2001 employer (Basofil) was not a competitor of CVI.  On resigning from Mastercraft, Plaintiff entered into another noncompete agreement, one that expressly permitted Plaintiff to work for a company in Basofil’s field — supporting the conclusion that Basofil was not a competitor of Mastercraft or Mastercraft’s competitors, i.e. CVI.  Plaintiff likewise admitted that his noncompete agreement with Basofil would not have prevented him from working for CVI.  Thus, competition with CVI was terminated on a date on which Plaintiff was ineligible for benefits under his CVI severance agreement.

Second, the Court dismissed Plaintiff’s fraud claim, holding that he showed at best an unfulfilled promise, but failed to produce evidence that CVI intended at the time it signed the severance agreement that it would never perform.  CVI’s intent to perform was demonstrated by its performance under other portions of the agreement and by the fact that it carried the disputed benefits as a liability on its books until 2002.

Third, the Court dismissed Plaintiff’s unfair and deceptive trade practices claim.  The Court, again enforcing the "in or affecting commerce" limitation of the reach of N.C.G.S. § 75-1.1, cited its decision in Schlieper v. Johnson that "“[m]ost disputes between employers and employees are internal to the business organization and simply do not have an effect on commerce in the way required by section 75-1.1."  In this case, "the payment (or lack thereof) of these employment benefits would not be a practice that impacts commerce or the marketplace, nor would it be part of the day-to-day activities for which CVI was organized."

Full Order and Opinion

 

The sealing of a complaint due to confidentiality concerns is more than an administrative exercise, according to a Business Court order last week.  Parties seeking to maintain a complaint under seal will face a heavy burden, and the Court signaled a willingness to revisit orders of other courts, both inside and outside North Carolina.

In Smith v. Raymond, a shareholder derivatively sued various directors and officers of a corporation.  Procedurally, the dispute began in the Delaware Chancery Court, in which the Plaintiff sued the corporation itself to obtain access to the company’s books and records.  Under the terms of a stipulation in that case, if the Plaintiff relied on information obtained in that case to file derivative claims later, he was required to obtain the Chancery Court’s permission and to file the complaint under seal.

The Plaintiff followed the Delaware court’s order and filed his complaint under seal in Mecklenburg County.  He obtained an order from a resident Superior Court judge approving the sealing of the complaint, then designated the case as a mandatory complex business case.  Like many Superior Court orders, the sealing order did not recite any findings of fact or conclusions of law.  It read in its entirety:  "Plaintiff having moved the Court for leave to file his Complaint under seal, and good cause appearing therefore [sic], IT IS HEREBY ORDERED that Plaintiff may file his Complaint in the instant action under seal."

Judge Diaz held that he was not bound by either the Delaware stipulation or the pre-designation Mecklenburg County order.  First, the Business Court has the inherent authority to modify orders entered by a pre-designation judge.  Second, although the parties contemplated that the lawsuit would be brought here, the stipulation itself was entered by the Delaware Chancery Court.  "Put bluntly, the Stipulation does not bind this Court."

The Court stated that sealing of court documents "is inconsistent with the North Carolina Public Records Act."  Under existing law, "Absent ‘clear statutory exemption or exception, documents falling within the definition of ‘public records’ in the Public Records Law must be made available for public inspection.’"  (See News & Observer Publ’g Co. v. Poole, 330 N.C. 465, 486, 412 S.E.2d 7, 19 (1992)).  Court records are public records, and their sealing is appropriate only “when there is a compelling countervailing public interest and closure of the court proceedings or sealing of documents is required to protect such countervailing public interest.”  (See Virmani v. Presbyterian Health Servs., 350 N.C. 449, 476, 515 S.E.2d 675, 693 (1999)). 

After examining the complaint, the Court concluded that it was "hard pressed" to find such a countervailing public interest to support sealing the entire complaint.  There were no documents attached to the complaint, so the express terms of the stipulation were not violated.  Although there were quotes from some documents in the complaint, most of those quotes were taken from letters between the CEO and other officers and directors of the corporation.

The Court gave the parties ten days to file supplemental briefs if they insisted that the entire complaint needed to remain under seal.

(The image is the 1981 cover from the single "Our Lips Are Sealed" by the superfluously-apostrophed band The Go-Go’s).

Full Order

We can’t say it better than Mack Sperling did about eight months ago:  "If you are thinking of designating a case to the Business Court because the Complaint raises allegations that the corporate veil should be pierced, stop.  Those types of allegations, without more, aren’t enough to invoke the mandatory jurisdiction of the Court. "

In case you’re wondering, the Business Court has not changed its mind since November.  Earlier today, in Bullard v. Liberty Healthcare Services of Mary Gran Nursing, LLC, Judge Tennille on his own motion denied the Defendants’ designation of the matter as a mandatory complex business case.  As the Court stated unequivocally, "Piercing the corporate veil alone is insufficient to establish mandatory jurisdiction."  It is not the first time, or even the second time, the Court has made that statement.

The Notice of Designation contained a number of allegations regarding the potential complexity of the matter.  By remanding the case, the Business Court has reiterated that, when it comes to mandatory jurisdiction, the question is whether the matter fits into one of the "business" categories of Section 7A-45.4 of the General Statutes, regardless of complexity.  Rule 2.1 designation remains available for cases in which complexity (plus some business relationship) makes up for a case not fitting within the statute.

An award of damages for breach of a noncompete agreement, like any other damages award, requires evidentiary support.  In a judgment issued yesterday after a bench trial, the Business Court awarded the plaintiffs nominal damages absent such evidence.

In HILB Rogal & Hobbs Co. v. Sellars, the Court faced a common factual scenario:  a former vice president of the plaintiffs resigned and went to work for a direct competitor.  The businesses in question were insurance companies targeting building materials suppliers.  The plaintiff and defendant executed an employment agreement that contained standard restrictions on post-employment competition and on the use of confidential business information.

Two days after interviewing for the competitor’s job, the defendant

copied the entire hard drive of his work computer, which contained, among other things, confidential and proprietary information about [plaintiffs’] Lumber Program accounts and business strategies, including account files and lists, policy expiration dates, policy terms, conditions and rates, internal and external pricing and profit margins, information relating to accounts’ risk characteristics, and carrier information.

He resigned two weeks later and went to work for the competitor, taking the confidential information with him.  (The Court ordered him to return the confidential information in 2008).

Plaintiffs asserted claims for breach of fiduciary duty, breach of contract, and unfair & deceptive trade practices, and defendant counterclaimed for breach of contract for unpaid salary.  Judge Diaz applied New York law to the claims.

During the lawsuit, the defendant took two Rule 30(b)(6) depositions of the plaintiffs concerning their claimed damages.  At those depositions, the witness, another vice president of plaintiffs, disclaimed lost profits, as did counsel for the plaintiffs.  The witness did not know of the origin or calculation of two summary exhibits that plaintiffs attempted to use at the bench trial — those exhibits were prepared by other employees, none of whom testified at trial.  Judge Diaz noted at least eleven unexplained discrepancies between the two exhibits.  Moreover, the Rule 30(b)(6) witness "could not rule out the possibility that the damages exhibits contained amounts for lost revenues for business that Plaintiffs could not underwrite, irrespective of [defendant’s] alleged breach of the Employment Agreement."

The damages witness suddenly became unavailable for trial due to the pre-trial but post-discovery termination of his employment — he declined to appear voluntarily, and he was outside the Court’s subpoena power.  The plaintiffs attempted to notice a de bene esse deposition less than one month before trial.  The Court quashed the notice of deposition based on a month-long delay between plaintiffs’ awareness of the witness’s unavailability and the issuance of the notice, as well as the fact that the Court already had continued the trial once to allow de bene esse depositions to occur.  Thus, plaintiffs had to rely upon his deposition testimony.

Although the plaintiffs proved that the defendant breached his fiduciary duty and breached the employment agreement by copying the contents of his hard drive before resigning, the Court held that there was insufficient evidence of damages.  Under New York law, breach of fiduciary duty damages "are limited to profits lost from the actual diversion of customers," a damages theory that the plaintiffs waived. The Court awarded $1 in damages for the breach of contract claim.

Although the plaintiffs attempted to rely on a liquidated damages formula in the employment agreement, the Court similarly held that they had not provided sufficient evidence of the components of that formula.  Specifically, the Court rejected the argument that the summary exhibits were admissible business records under Rule 803(6) because the Rule 30(b)(6) witness did not lay any foundation for admissibility or for the reliability of the figures contained in the exhibits.  The Court awarded $1 in damages for the breach of contract claim.

The Court rejected the unfair and deceptive trade practices claim, holding that North Carolina’s Chapter 75 was inapplicable under the "most significant relationship test" and that, even if it applied, the lack of actual damages was fatal to a UDTP claim.  Likewise, the Court found no basis to award punitive damages or attorneys’ fees.

As for the counterclaim, the employee asserted that he was entitled to over $94,000 in unpaid salary.  The plaintiffs responded that an interim $50,000 payment constituted an accord and satisfaction.  The Court rejected plaintiffs’ defense on the grounds that they failed to prove that the $50,000 was intended to settle all compensation claims or that the defendant was informed of that intention before he accepted the check.  Instead, the Court offset the $50,000 payment from the employee’s salary claim and awarded him the balance.

Although the claims on both sides arose under New York law, there is no apparent reason why the result would be different under North Carolina law.  In either event, enforcement of a noncompete provision can prove to be an expensive proposition (here, two and a half years of litigation), particularly where the former employee has counterclaims.

Full Order and Judgment

[UPDATE:  In an Order dated July 6, 2010, Judge Diaz denied the company’s motion to reconsider the ruling on the employee’s counterclaim].

The North Carolina Business Court was formed in 1995, largely inspired by Delaware’s Chancery Court.  Our state recently returned the favor:  Delaware now has created its own business court division of its Superior Court, sparked by the experiences of North Carolina and sixteen other states.  Delaware’s new Complex Commercial Litigation Division (“CCLD”) shares some common elements with our Business Court, but differs in other aspects.

For the core details of the CCLD, we recommend the summaries from two blogs that you should be reading anyway:  the Delaware Corporate and Commercial Litigation Blog and the Delaware Business Litigation Report.  In addition, if you’d like to see how business courts in other states are structured, you should check out the appendix to the report of the Delaware special committee that was appointed to survey such courts.

Like our Business Court, the CCLD features assignment of a case to a single judge from cradle to grave and more uniform, intense, and proactive case management than in the courts of general civil jurisdiction.  Here are a few interesting comparisons and contrasts between the CCLD and our Business Court:

Topical Definitions of Jurisdiction:  To qualify for mandatory complex business designation in North Carolina, a case must fit into at least one of seven defined categories:  corporate or other entity law, securities law, antitrust law, state trademark or unfair competition law, intellectual property law, Internet / e-commerce / biotechnology, and certain tax cases.  The CCLD, on the other hand, has a list of categories that will be excluded per se from its jurisdiction:   personal, physical, or mental injury cases; mortgage foreclosure cases; mechanics’ lien cases; condemnation proceedings; and any case involving an exclusive choice of court agreement where a party to the agreement is an individual acting primarily for personal, family, or household purposes or where the agreement relates to an individual or collective contract of employment.

Choice of Court Agreements:  Speaking of that last clause, the CCLD has jurisdiction over any case not otherwise excluded in which the parties have selected the CCLD through an exclusive choice of court agreement.  There is no corresponding provision in our statutes or rules that permits parties to contractually "select" the Business Court if a case does not qualify through mandatory jurisdiction or Rule 2.1 practice, although it would be interesting to see how many North Carolina businesses would utilize such clauses in their contracts if permitted.

Amount in Controversy:  As long as the subject matter is not excluded, the CCLD will have jurisdiction over any case with $1 million or more in controversy.  North Carolina does not have any such qualifying amount.  Nevertheless, a large amount in controversy may influence the decision of a Senior Resident Superior Court Judge to recommend complex business designation under Rule 2.1 (or exceptional case designation under Rule 2.1).

Judicial Assignments:  North Carolina has three Special Superior Court Judges who focus on cases assigned to the Business Court.  They occasionally are drafted to fill in for other Superior Court judges for regular civil or even criminal trial calendars, but that is an irregular occurrence.  The three judges of the CCLD, in contrast, apparently will continue to hold regular civil terms hearing both CCLD cases and cases that do not qualify for CCLD designation.  CCLD cases automatically will take priority over non-CCLD cases on a judge’s calendar.

Designation Procedure:  In North Carolina, a mandatory complex business case is designated by filing a Notice of Designation with the Clerk of Superior Court, with copies to the Chief Justice and the Chief Business Court Judge.  Cases outside mandatory complex business jurisdiction can be assigned to the Business Court upon motion to the Senior Resident Superior Court Judge, who makes a recommendation to the Chief Justice, who ultimately determines whether or not such a case will be assigned.  Delaware makes it easier:  a qualifying case can be designated by typing the appropriate four-letter code on Delaware’s equivalent of our AOC’s Civil Action Cover Sheet (AOC-CV-751, for those of you scoring at home).  In both states, a party opposing designation can challenge it by filing the analogue of a federal court motion to remand, and in both states, such a motion is resolved by the presiding judge of the specialized court.