What’s the difference between a patent holder who suffers harm from third-party infringement and a patent holder who suffers harm from his own attorney’s malpractice?  The latter can pursue his claim in state court, according to a March 9 Business Court decision.

In Revolutionary Concepts, Inc. v. Clements Walker PLLC, the inventor of an "automated audio video messaging and answering system" and the current holder of the patent sued a patent agent, three patent attorneys, and a law firm for malpractice in failing to take certain actions before the United States Patent & Trademark Office ("USPTO").  Specifically, Plaintiffs alleged that Defendants failed to file certain paperwork that cost Plaintiffs their ability to patent their invention in foreign jurisdictions, including Japan and the European Union.  Defendants moved to dismiss for lack of subject matter jurisdiction, arguing that the claims lay within the exclusive jurisdiction of the federal courts. 

Further complicating matters, shortly after filing the Business Court lawsuit, Plaintiffs filed a separate lawsuit in the Western District of North Carolina, Carter v. Ozoeneh (W.D.N.C. No. 3:09-CV-614), to determine the ownership of the patent at issue.  The defendant in the federal lawsuit is an individual who was listed as a co-inventor on a prior patent application for the technology at issue.  Plaintiffs sought to amend the federal complaint to add one of the attorney defendants from the Business Court lawsuit along with Lawyers Mutual for claims of racketeering, maintenance, unfair competition, and tortious interference.  On September 16, 2009, Magistrate Judge David Cayer denied the motion to amend and recommended that the District Judge dismiss other claims against John Doe defendants, but the ownership claims remain in the federal lawsuit.

As for the jurisdictional issue in the Business Court lawsuit, Judge Tennille held that Plaintiffs’ malpractice claim was not within the exclusive jurisdiction of the federal courts.  The Court examined cases from several jurisdictions, some of which permitted malpractice claims to proceed in state court and others of which held them to be exclusively federal claims.  The distinction depended on whether federal patent law was an essential element of the Plaintiffs’ claims.  In Revolutionary Concepts, it was not:

In this Court’s view, the case sub judice is different.  The Complaint in this case does not raise an issue which requires the determination of the validity, scope or infringement of a United States patent.  Furthermore, the Complaint does not raise an issue requiring determination of what the USPTO would do under certain circumstances, nor does it involve regulation of the conduct of counsel appearing before the patent office.  The Complaint clearly raises issues of what the validity and scope of potential foreign patents would have been and perhaps issues of infringement of potential foreign patents that were allegedly lost.

The loss of the foreign patent rights is based upon a breach of the standard of care, quintessentially a state law claim.  Every malpractice action will require determination of a standard of care.  It is unlikely that any standard of care can be assessed without some reference to compliance with the proper procedures in the USPTO.  This Court does not read the Federal Circuit decisions to hold that any case by a patent owner against its patent counsel will fall within the exclusive jurisdiction of the federal courts.  Where federal jurisdiction will promote uniformity of claim construction, consistency in validity, scope and infringement of U.S. patents, or promote uniform regulation of patent counsel conduct before the USPTO, federal jurisdiction is mandated.  Where the issues involve foreign patent rights and issues of whether a lawyer complied with a standard of care, federal jurisdiction is not mandated.

The Court also noted that Plaintiffs voluntarily dismissed a claim for breach of contract in the prosecution of the patent before the USPTO.  In contrast to the foreign registrability issues of the malpractice claim, the breach of contract claim would have implicated federal law enough to confer exclusive federal jurisdiction over the lawsuit.  After the dismissal of that claim, however, whatever exclusivity may have existed previously no longer did.

 

[Ed. note:  The following article was written by Mack Sperling before his unplanned leave.  Although releasing it today is less timely than is Mack’s custom, the issues involved in the case are still of interest to businesses and business lawyers.  Any errors or shortcomings in the article are attributable to your substitute bloggers.]

 

On February 16, in Lynn v. Lynn, the Court of Appeals interpreted provisions of a Shareholders Agreement requiring the corporation to repurchase a shareholder’s "restricted shares" upon his death, with the purchase to be funded by the proceeds of a life insurance policy on the shareholder.

The trial court had found the Agreement to be ambiguous, and had considered a variety of extrinsic evidence in determining the ownership of the shares in question.  The Court of Appeals found no ambiguity, ruled that it had been error to consider the extrinsic evidence, but it nevertheless reached the same result as to ownership.

Background

A father (James) and his two sons (Greg and Kenneth) formed a corporation, James Lynn & Sons, Inc. Eventually, the father owned 51% and the sons each owned 24.5% of the company’s stock.

In 1993, the shareholders and their wives entered into a shareholders’ agreement requiring that upon death, each shareholder would sell his "restricted" shares back to the corporation for an amount equivalent to the face amount of a life insurance policy on his life, with the face amount to be adjusted annually. The corporation was to own the policies.

The sons kept life insurance in place, paid for by the company, which increased over time from $75,000 to $375,000. The corporation paid the premiums, though the brothers had the policies issued in their names as opposed to them being owned by the corporation.  They named their wives as beneficiaries of the policies. The father didn’t maintain insurance, due to expense, but upon his death in 1997 his executor sold his shares to the sons in a transaction referencing the Shareholders Agreement.

Later, the sons adjusted their ownership interests with Kenneth becoming the 55% majority owner and Greg holding a 45% interest.

Then it got interesting. Greg and his wife got divorced, and were involved in heated litigation over the equitable distribution of their property. Greg’s wife sued Kenneth, as majority shareholder, to establish that the shares of the company were subject to equitable distribution.

Kenneth then died unexpectedly.  His shares went to his estate.  The insurance proceeds went to his wife.  Greg’s ex-wife said that 100% of the shares were now subject to her equitable distribution claim.  Greg pretty much agreed with his ex-wife, and said that upon the payment of the life insurance proceeds to Kenneth’s wife, he held 100% of the shares.

Kenneth’s widow had a different point of view.  She said that the Shareholders Agreement only applied to "restricted shares," and that the shares held by her late husband did not fit that definition. She also said that the corporation hadn’t complied with the life insurance provision given that it did not own the policies. She said she was entitled to both the insurance proceeds and the shares.

 

 

Continue Reading NC Court of Appeals Interprets the “Purchase on Death” Provisions of a Shareholders Agreement

Mack Sperling, founder and author of this blog, is away on medical leave. 

Like the cotton gin or the steam engine, Mack by himself can do the work of several people, and this blog is no exception.  Jennifer Van Zant, Julia Ambrose, and John Buford, Mack’s colleagues at Brooks, Pierce, McLendon, Humphrey & Leonard, L.L.P., have agreed to share the load during Mack’s absence.  We cannot promise you that any of us will have Mack’s singular insight, wit, or charm.  We can promise that we will continue to monitor and report judicial developments of interest to North Carolina businesses and business lawyers. 

We are all avid readers of this blog and know firsthand what a valuable resource it is.  We do not intend to be your permanent hosts.  We are guests, house-sitting while Mack is away.  Nothing will please us more than the day when Mack is back and we can return to our previous status as fans of the blog.

Those who wish to send greetings to Mack may address them to msperling@brookspierce.com.  Thank you for your past and continued readership and for the kind messages that many of you have had for Mack over the past weeks.

 

[We will strive to continue Mack’s apt illustrative use of photography and clip art.  The photo of the cotton gin above is from billums‘s photostream on Flickr, some rights reserved.]
 

North Carolina law says that "one judge may not modify, overrule, or change the judgment of another Superior Court judge previously made in the same action."  In a Business Court decision last week, Phillips and Jordan, Inc. v. Bostic, the Court granted a motion for Rule 11 sanctions on a fraud claim that another Superior Court Judge had refused to dismiss on a 12(b)(6) motion. It did so over the objection of the Plaintiff that the grant of the sanctions motion would be an overruling of the first Judge’s Order on the motion to dismiss.

The procedural facts are quirky. A group of defendants (the "Bostic Defendants") had made and lost a motion to dismiss a fraud claim before the case was designated to the Business Court. After the designation, another defendant moved to dismiss the same fraud claim made in an amended complaint. That dismissal motion was granted by the Business Court on Rule 9(b) grounds.

Judge Diaz referenced in his Order facts showing the Plaintiff had not relied on the statements it claimed were misrepresentations. He said, however, that he wouldn’t consider these facts as to the fraud claim against the Bostic Defendants because that would be "a backdoor attempt . . . to re-litigate the legal sufficiency of the fraud . . . claims in the face of a prior court order denying their Rule 12(b)(6) motion to dismiss."

He nevertheless admonished Plaintiff and its counsel to "consider carefully their obligations under Rule 11 of the North Carolina Rules of Civil Procedure before . . . pursuing the fraud claim against the remaining Defendants."  Plaintiff didn’t take that advice, and in August 2009 the Bostic Defendants filed their motion for sanctions. Judge Diaz "again suggested to Plaintiff’s counsel that they consider the merits of the claim alleging fraud" after the motion was fully briefed. This time, the Plaintiff took the Court’s advice and dismissed its fraud claim.

Judge Diaz went ahead and granted the motion for sanctions. He applied a standard of objective reasonableness, and said that "a legal position violates Rule 11 if it "has absolutely no chance of success under the existing precedent." He found that total lack of potential success to be present because the basis of the fraud claim was that the Plaintiff had been deprived of information necessary to make a lien claim against a construction project, but Plaintiff had in fact been able to make this very claim. The Court ruled that the claimed misrepresentation "did not deceive Plaintiff."

The Order doesn’t address why this wasn’t an end run around the principle that one Superior Court Judge can’t overrule another. The Bostic Defendants addressed this in their opening Brief.  Their position was:

Continue Reading One Superior Court Judge Can’t Overrule Another, Right?

The Court had warned Plaintiff and his counsel in an Order granting a Motion to Dismiss to "consider carefully their obligations under Rule 11 of the North Carolina Rules of Civil Procedure before continuing to pursue a common law fraud claim" against the "Bostic Defendants".

The Court’s Order had dismissed the fraud claim against one Defendant, but it didn’t dismiss the claim against the Bostic Defendants because those defendants had already made a Motion to Dismiss and had it denied before the case was transferred to Business Court.

After that, the Bostic Defendants filed a Motion for Rule 11 Sanctions. The Court then in an in chambers conference "suggested to Plaintiff’s counsel that they consider the merits of the claim alleging fraud." Shortly after that, the Plaintiff voluntarily dismissed its fraud claim.

The Court nevertheless granted the Motion for Sanctions. It held that "a legal position violates Rule 11 if it ‘has absolutely no chance of success under the existing precedent.’"  It found that to be the case because the fraud claim was founded on the theory that the Defendants had misrepresented the true owner of property in order to deprive the Plaintiff of its Chapter 44A lien rights. But Plaintiff had determined the true owner of the property and had in fact filed a claim of lien, and it had not therefore been deceived.

The Court held "in other words, Plaintiff either knew or should have known that its claim alleging common law fraud had absolutely no chance of success because Plaintiff was not deceived by this particular misrepresentation."

Full Opinion

Brief in Support of Motion for Sanctions

Brief in Opposition to Motion for Sanctions

Reply Brief in Support of Motion for Sanctions

 

 

If you are a lawyer headed to federal court in one of the three federal districts in North Carolina, can you take a laptop computer into the courthouse? What about a cellphone, either with or without a camera? 

The answers are different in the Eastern, Middle, and Western Districts. That’s also true throughout the country, because the Administrative Office of the Courts has left the decision about how to handle these devices to the discretion of each Court.

The Middle District

The Middle District of North Carolina is the most restrictive of North Carolina’s three districts. That Court last year implemented a strict policy banning laptops entirely without advance court approval. That policy has now been relaxed, and you can apply for a Laptop Authorization Card to bring a laptop to Court.

But you can forget about a camera with a cellphone in the Middle District The Court’s website says that "[p]hotographic, recording or transmitting devices are prohibited in all courthouses. Prohibited devices include, but are not limited to . . . wireless microphones, recorders, cameras, 2-way radios, push to talk cellphones and cellphones with cameras."  

Cellphone without a camera?  That’s fine in the Middle District.

The Eastern District

In the Eastern District, there is a Standing Order dated August 15, 2005 titled In re Prohibition of Wireless Communication Devices In Courtroom Facilities. The Order covers laptops, cellphones, and cellphones with cameras, and says they can’t be brought into the courthouses.

But the Order exempts "attorneys on court business provided that their possession and use of wireless communication devices in courtroom facilities is relating to their official duties." The exemption allows attorneys to bring cellphones with cameras into the courthouses in the Eastern District.

But even though you might think that laptops fall within the exemption, they don’t. If you want to bring a laptop into an Eastern District court, you need to contact the Case Manager for the Judge you are appearing before and ask for advance permission.  If permission is granted, the Court Security Officers will be informed and will you’ll be able to get the computer through security.

The Western District

The Western District is the most technology friendly district in North Carolina.  Lawyers headed for the courthouses in Charlotte and Asheville can bring in both laptops and cellphones with cameras.

The Standing Order there applies to "lap top computers, cell phones, pagers, personal digital assistants or other electronic devices." It says that members of the bar can bring such devices into the courthouses so long as they are screened by the Marshals and turned off while the court is in session. The permitted devices include cameras with cellphones.

Not only that, but there is wireless internet access in the attorney conference rooms in the Western District.

___________________

Thanks very much to John Brubaker, Dennis Iavarone, and Frank Johns, the Clerks in the Middle, Eastern, and Western Districts, who were very helpful in answering questions about these policies.

The Plaintiff in Stratton v. Royal Bank of Canada, 2010 NCBC 2 (N.C. Super. Ct. February 5, 2010) thought she had struck it rich. She had found a 1927 stock certificate in the name of her late mother for five shares of stock in the Bank of Manteo. Plaintiff’s calculation was that her mother’s shares of stock, following various mergers, were the equivalent of 14,486 shares of RBC common stock. That’s about $765,000.

The problem for the Plaintiff — and the reason that summary judgment was entered against her — was that she had known about the stock certificate since 1982 and that her mother had known that the Bank hadn’t recognized her as a shareholder since well before that. The Plaintiff furthermore had over the years asked bank employees, stockbrokers, and lawyers about the stock, but she hadn’t done anything to begin a lawsuit.

The dismissal was based on laches, "an equitable doctrine ‘designed to promote justice by preventing surprises through the revival of claims that have been allowed to slumber until evidence has been lost, memories have faded, and witnesses have disappeared.’" Op. ¶33. A party defending on the basis of laches is required to show "that (a) the plaintiff negligently failed to assert an enforceable right within a reasonable time and (b) the defendant was prejudiced by the delay in bringing the action." Op. ¶36.

Judge Jolly ruled that Plaintiff and her mother had known about the first merger of the Bank of Manteo, with Planters National Bank, and had known that the Bank didn’t consider Plaintiff’s mother to have been a shareholder after that merger took place in 1962.  He said:

Given the small size of the town and Inge’s extended residence there over several decades, the court determines there is no genuine question that Inge knew of the merger. There is no evidence that Inge received dividends or any other incidents of share ownership during that time, and the court concludes that it is undisputed that Inge knew or should have known the Bank of Manteo and its successors no longer considered her to be a shareholder.

The long delay in pursuing the claim had prejudiced the Bank. Judge Jolly held that "the passage of time has (a) made appropriate written records unavailable and (b) precluded RBC or its predecessors from talking effectively with witnesses or Inge, who either now are deceased or whose memory about such a transaction that took place many years ago most likely would have deteriorated materially, to the prejudice of the Defendant."

The Court also ruled that claims for constructive trust, conversion, and unjust enrichment were barred by the applicable statutes of limitation.

If you’ve tried cases, you’ve probably lived through this nightmare. It’s a few weeks before trial. You call your out of state client to make arrangements for your witnesses to be in the courtroom at the appointed time. But your contact tells you that the company has just fired your key witness.

What, you say?  What were you thinking? How could you do that? I can’t try this case without Pete. After the initial shock has faded, you start to hope that Pete will show up voluntarily. You ask your client about that. Well, they say, it wasn’t a pretty parting. And sure enough, Pete laughs and hangs up on you when you ask him if he will come to North Carolina to testify.

Now you are in crisis mode, scrambling for a way to get this key testimony. There’s a video deposition of Pete, but all the questioning was done by opposing counsel. You probably prepped Pete before the deposition with that common advice that he shouldn’t volunteer information, so there are a lot of one word answers, terse responses, and not much presentation of the warm side of Pete. You didn’t ask a single question, counting on Pete striding confidently to the witness stand to carry your client’s banner during your direct examination. The video just isn’t going to play well.

What now? You scour the Business Court Rules. Rule 18.10 provides some hope. It says:

18.10 – Trial Preparation After the Close of Discovery. For good cause appearing
therefor, the physical or mental examination of a party may be ordered at any time prior to or during trial. Ordinarily, the deposition of a material witness not subject to subpoena should be taken during discovery. However, the deposition of a material witness who agrees to appear for trial, but later becomes unavailable or refuses to attend, may be ordered at any time prior to or during trial.

Surely the unexpected firing of Pete is good cause, and you you make a motion to take a trial deposition of Pete per Rule 18.10. Will it be granted? Every case is different, but maybe not. A motion on similar facts was denied last week in the case of Hilb Rogal & Hobbs Company v. Sellars, in which Judge Diaz prohibited the taking of a deposition two weeks before trial.

The facts in Hilb Rogal need a little development. . . .

Continue Reading Problems At Trial: The Suddenly Unavailable Key Witness

The lawyers who represented a class of Wachovia shareholders in the lawsuit over Wachovia’s merger last year with Wells Fargo have gotten a ruling on their application for $1,975,000 in fees. Judge Diaz knocked that application down by over a million dollars — or more than half of the fees sought — to $932,621.98.

The Order today in Ehrenhaus v. Baker ruled that "the time spent by counsel on the case appears to be somewhat excessive," and that "the hourly rates of Plaintiff’s New York counsel [of $750 per hour] are far in excess of those normally charged by attorneys in North Carolina."

I cannot tell you how the Court got to the $932,621.98 number because, as Judge Diaz observed, Plaintiff’s counsel "did not submit detailed time records of the work done." But the fee application claimed 2,333 hours of work, which breaks down to an award of $399.75 per hour.

On a more serious note, there are two parts to the Order that may have more of a future precedential value.  One is that Judge Diaz’ ruling certified a non-opt-out class. In other words, class members didn’t have the traditional right to opt out of the settlement and pursue their individual claims. The Court said that this type of certification was appropriate given that this was a lawsuit over a merger seeking primarily equitable relief. There are no appellate cases in North Carolina approving such a non-opt-out certification, although the Business Court has certified such classes before.

The other is the Court’s consideration of the reaction of the class itself in determining that the settlement was adequate. Judge Diaz said that "the reaction of the class to the settlement is perhaps the most significant factor to be weighed in considering its adequacy." He noted that over a million class members had received notice of the settlement, but that only 51 had objected. He held that "the overwhelming majority of the Class has been virtually silent as to the Proposed Settlement," and that "the muted reaction of the Class . . . supports a finding that the Proposed Settlement is fair and reasonable."

I don’t think this was the tacit approval that Judge Diaz thought it was. It’s more likely to me that Wachovia’s shareholders were just tired of the whole darn thing.

If you are removing a case to federal court where there are multiple defendants, it can be a tricky business. If the defendants are served at different times, when does the thirty days for a removal under 28 U.S.C. § 1446(b) begin and end running?

There is a split in the Circuit Courts on this issue. In the Fifth Circuit, the rule is the "first-served defendant rule." The thirty days starts to run as soon as the first defendant is served. If the first served defendant doesn’t remove thirty days after it is served, defendants served later can’t remove.

The rule is exactly the opposite in the Sixth, Eighth and Eleventh Circuits, which follow the "last-served defendant rule." Each defendant, no matter when it is served, has thirty days from the date of service on it to remove.

The Fourth Circuit’s position wasn’t clear. A footnote in McKinney v. Board. of Trustees of Maryland Community College, 955 F.2d 924 (4th Cir. 1992), suggested that the Circuit might be a "first-served" jurisdiction.  But in today’s decision in Barbour v. International Union, the Fourth Circuit dismissed that footnote as "classic judicial dictum" and joined the "last-served" camp.

The majority in Barbour held "that in cases involving multiple defendants, each defendant, once served with formal process, has thirty days to file a notice of removal pursuant to 28 U.S.C. § 1446(b) in which earlier-served defendants may join regardless of whether they have previously filed a notice of removal."