The Court denied the entry of a mandatory injunction requiring the Defendant to deliver the title to a motor vehicle to a third party purchaser. 

The Court observed that “'[m]andatory injunctions are disfavored as an interlocutory remedy[]’ because, rather than maintaining the status quo (as is the case when a prohibitory injunction issues), a mandatory injunction effectively alters it."

The Court held that such an injunction is appropriate where a plaintiff provides proof of “serious irreparable injury to the [plaintiff] if the injunction is not granted, no substantial injury to the [defendant] if the injunction is granted, and predictably good chances of success on the [merits].”

The injunction requested by the Plaintiff was denied for several reasons, including because Plaintiff’s claimed injuries would be compensable by money damages and there was therefore no irreparable harm.

In a Uniform Commercial Code sidelight, the Court discussed the concepts of attachment, perfection, and priority, and held that Defendant might have a valid purchase money security interest under the UCC even though it had not perfected its claimed security interest.  The Court held "the Court has found no case (and Plaintiff cites none) holding that the failure to perfect a security interest deprives a secured creditor of its remedies against the debtor for default, including its right to demand possession of proceeds in the possession of the debtor following the unlawful sale of the creditor’s collateral."

Full Opinion

Brief in Support of Motion for Preliminary Injunction

Brief in Opposition to Motion for Preliminary Injunction

Reply Brief in Support of Motion for Preliminary Injunction

It’s black letter law in North Carolina that a liquidated damages provision is enforceable, so long as it is not a "penalty."  The need to make that distinction typically comes up when the Defendant believes the liquidated amount is excessive when compared to the actual damages incurred by the Plaintiff.

In Azalea Garden Board & Care, Inc. v. Vanhoy, 2000 NCBC 8 (N.C. Super. Ct. March 17, 2009), the Business Court confronted the exact opposite of the usual penalty argument.  The Plaintiff asserted that a provision in the contract severely limiting its recovery was a penalty because it would only allow damages it described as being "woefully inadequate." 

The provision at issue, contained in a $3.6 million contract to buy a nursing facility, said that "Buyer agrees that if he should fail or refuse to complete this transaction after timely acceptance by the seller, then any funds or deposit with the Broker will be forfeited and shall be split 50% to the broker and 50% to the seller." That provision yielded damages to the Plaintiff of only $12,500.

The Court determined this was a liquidated damages provision as a matter of law, and that it did not constitute a penalty. The Court held "Plaintiff’s argument that the liquidated damages provision is unreasonable because it is too small in light of the damages actually suffered is not persuasive."  Op. Par. 30.  The Opinion referenced cases from other jurisdictions reaching the same result in a situation the Court described as "rare."

The other issue resolved in the Opinion was whether Tuttle could be liable for a breach of the agreement to purchase the nursing facility even though he had not signed it.  Tuttle asserted the Statute of Frauds.  The Plaintiff responded that the Tuttle was part of a joint venture, that the contract had been signed by an authorized agent of the joint venture, and that it was therefore binding on Tuttle.  

Continue Reading A Liquidated Damages Provision Providing Inadequate Damages Isn’t A “Penalty”

The "reasonable expectations" of minority shareholders as to continued employment and continued stock ownership were the issue in Vernon v. Cuomo, 2009 NCBC 6 (N.C. Super. Ct. March 17, 2009), decided yesterday by the North Carolina Business Court.

Judge Tennille ruled after a one week trial that the Plaintiffs did not have a reasonable expectation of continued employment, given extreme animosity that had developed among the shareholders of the Company. 

On the dilution issue, however, the Court ruled that Plaintiffs had a reasonable expectation that their ownership interest in the Company would not be diluted, at least not through the means that the Defendants chose to accomplish that dilution. Plaintiffs were restored by the Court to their original ownership position and the Court ordered dissolution of the Company.

The Plaintiffs were two shareholders with a 40% ownership in TriboFilm, Inc., which was developing technology to eliminate silicone as a necessary lubricant in syringes.  They had a serious falling out with the Defendants, five other shareholders who controlled the remaining 60% of the Company.  The Court described the situation as "intolerable" and "dysfunctional."

The majority stripped the Plaintiffs of their status as employees, officers, and directors. Then, after each faction rejected an offer by the other to be bought out, the Defendants implemented a plan to virtually eliminate the Plaintiffs’ ownership interest.  Here’s what happened as the Court described it:

  • Defendants voted themselves "unrealistic" and "inflated" salaries (most of them had not had any salary at all before this) or salary increases.  The Company did not have the financial ability to pay these salaries.
  • The Defendants then agreed to defer a substantial portion of their new salaries.
  • None of this information regarding salaries and deferral was disclosed to Plaintiffs.
  • Next, the Directors voted to convert a portion of the deferred salary into Company stock at a penny per share, much less than they had been offered by Plaintiffs.
  • Defendants, in their capacities as Board members, then recommended to the shareholders that the number of outstanding shares be increased from 1 million shares to 15 million shares to permit the deferred salary conversion.
  • The Defendants informed the Plaintiffs that the reason for the new shares was to raise additional capital and pay certain obligations.  They did not disclose their plan to exchange their deferred salaries for some of the new stock.
  • The share issuance resolution was approved by the shareholders, over Plaintiffs’ objections.
  • The Defendants then each forgave $15,000 of deferred salary (an essentially worthless claim, given the financial state of the Company) in exchange for 1,500,000 shares of Company stock.
  • The effect of the transfer was to immediately reduce each Plaintiff’s ownership interest in the Company from 20.2% to 2.4%.

Plaintiffs sued, asserting that their "reasonable expectations" as shareholders to continued employment and continued ownership of their stock had been frustrated.  They lost on the first point, but won on the second.

Continue Reading Reasonable Expectations Of Minority Shareholders Frustrated By Dilution of Ownership, But Not By Termination Of Employment

A novel issue of work product privilege was decided today by the North Carolina Court of Appeals in Boyce & Isley, PLLC v. Cooper.  The Court held that an attorney’s verbatim copying of the text of selected documents at a document production was entitled to the protection of the privilege.

Here are the facts: during a document production, an attorney for the Defendant made notes on her laptop computer of the documents being reviewed. Her notes included "short snippets of verbatim text from certain documents" and her "thoughts regarding them and her theories of the case."

Plaintiff moved to compel production. The trial court ordered the production of the lawyer’s notes, but the Court of Appeals accepted an interlocutory appeal of the issue and reversed.

The precedent the Court found to be similar consisted of federal cases holding that an attorney’s highlighting of documents constituted protected work product.  The Court of Appeals held that "the act of defendants’ counsel of inputting text from [plaintiff’s] files into her laptop is analogous to an attorney highlighting select portions of copied documents." 

The Defendants also argued that the lawyer’s selection of a few items to record verbatim — out of thousands of pages of documents produced — warranted the protection of the work product privilege.  The Court agreed, and held moreover that this was opinion work product entitled to absolute protection:

Defendants contend that the disclosure of the notes would direct plaintiffs to the few documents and portions thereof that defendants’ counsel focused on and considered significant enough to emphasize from among a vast number of items. We agree. Consequently, we conclude that the verbatim text entered in the computer of defendants’ counsel qualifies as opinion work product and is not discoverable, especially where plaintiffs. . . already have the underlying, original documents in their possession. As such, the trial court abused its discretion by concluding otherwise. Furthermore, even assuming, arguendo, that the verbatim text here qualifies merely as ordinary work product as opposed to opinion work product, we agree with defendants that plaintiffs have neither argued nor shown that there is a “substantial need” or “undue hardship” to justify production, particularly given that [plaintiffs have] all of the underlying documents in [their] possession.

The Court also observed that "in cases that involve reams of documents and extensive document discovery, the selection and compilation of documents is more crucial than legal research."  (quoting Shelton v. American Motors Corp., 805 F.2d 1323 (8th Cir. 1986)).

I’ve used the term "privilege" in this post, the Court of Appeals said that work product is actually a "qualified immunity."

Jim Phillips and Charles Coble of Brooks Pierce represent the Defendant.

 

Whether the parties had agreed on the material terms necessary to create a binding contract was the issue resolved by the Business Court in two opinions issued simultaneously on Friday, March 13th.  The claims in one case survived a motion to dismiss, the claims in the other were cut down on summary judgment.

In the first case, JDH Capital, LLC v. Flowers, 2009 NCBC 4 (N.C. Super. Ct. Feb. 13, 2009), the Court ruled that a Letter of Intent executed by the parties was a "non-binding agreement to agree," and dismissed the case.  In the second case, Crockett Capital Corp. v. Inland American Winston Hotels, Inc., 2009 NCBC 5 (N.C. Super. Ct. Feb. 13, 2009), the Court ruled that the plaintiff could proceed in its case even though the Master Agreement at issue contemplated the need to negotiate the terms of future agreements.

These cases are must reads if you are litigating a contract formation issue in the Business Court.  They are equally important to look at if you are drafting Letters of Intent or other agreements involving commercial real estate ventures, which were the business deals involved in both Flowers and Crockett. (There are reportedly non-litigation lawyers who read this blog precisely to see how their deal documents might play out in Court).

Continue Reading Letters Of Intent And Agreements To Agree: Two Rulings From The North Carolina Business Court

The Business Court ruled today in Crowder Construction Co. v. City of Charlotte, a construction law case, that North Carolina does not recognize the "cardinal change doctrine."  It also dismissed a claim that a project consultant had tortiously interfered with the contract between the general contractor and the City by rejecting the general contractor’s claims for payment.

A "cardinal change" is a change to a government contract which "fundamentally alters the contractual undertaking of the contractor."  It is a change which "cannot be redressed within the contract by an equitable adjustment to the contract price."

Crowder was the general contractor for a parking garage for the City of Charlotte.  It claimed that "after it began work on the Project, it discovered that the soil conditions at the site differed greatly from those represented in the Bid Documents and that these changed conditions resulted in significant additional work and expense. . . ."  Crowder sued to recover these additional expenses, claiming that the unanticipated soil conditions were a cardinal change.

Judge Diaz dismissed the claim, stating that it was "not recognized in North Carolina."  He ruled that a claim for cardinal change was essentially a claim for breach of an implied contract, and that such a claim was barred by the doctrine of sovereign immunity.

Also dismissed was a claim by Crowder for tortious interference with contract against  STV, the City’s "Project Management Support Services Consultant."  Crowder claimed that STV had interfered with Crowder’s contract by failing to properly administer the contract and by refusing to negotiate proper payment for Crowder.

The Court held that the "interference" was justified, even though Crowder had specifically alleged that it was not.  Judge Diaz ruled that Crowder’s allegation as to the lack of justification was "a legal conclusion the Court need not accept," and that Crowder’s allegations on this point were self-defeating.  Crowder had referenced STV’s contract, which showed that it had been contractually authorized to review and approve change orders, and had asserted that STV was responsible for evaluating the validity of any claims made in connection with the Project. 

The Court determined that STV had a proper motive — the performance of its own duties under its own contract with the City — in how it had dealt with Crowder.  Thus, the Court concluded, STV’s actions were "reasonably related to the protection of a legitimate business interest," and it dismissed Crowder’s tortious interference claim.

Brief in Support of Motion to Dismiss (Cardinal Change Issue)

Brief in Support of Motion to Dismiss (Tortious Interference Issue)

Brief in Opposition to Motion to Dismiss (Tortious Interference Issue)

Reply Brief in Support of Motion to Dismiss (Cardinal Change Issue)

Most of the cases in the North Carolina Court of Appeals are decided without oral argument.   In 2008, for example, the Court calendared oral argument in 175 cases, but ruled that it would decide 824 others without oral argument.  These numbers, based on the Court’s calendars for 2008, mean that only about 17.5% of cases were called for oral argument.  That percentage is comparable to numbers from the Court for 2005. 

This no-hearing disposition is permitted by Rule 30(f)(2) of the Rules of Appellate Procedure, which provides that "[i]f all of the judges of the panel to which a pending appeal has been referred conclude that oral argument will not be of assistance to the Court, the case may be disposed of on record and briefs.  Counsel will be notified not to appear for oral argument." 

The Court issues 30(f) Notices in the substantial majority of the cases it decides.  Can you draw any conclusions upon getting that Notice?  Does it mean, for example, that the trial court was so obviously right that the Court of Appeals doesn’t need to hear the terrific argument you wanted to make?  Or could it mean that the trial judge got it so painfully wrong that the appeals court doesn’t need to do anything more than read your brief to be persuaded?

Every case is certainly different, but I can provide you with some statistics that will give you a little bit of guidance.  My wonderful and never complaining assistant Nancy and I ran the numbers for (1) every case in which a 30(f) Notice was issued during calendar year 2008 and (2) which was decided by the Court of Appeals by March 1, 2009. 

There were 703 cases total (civil and criminal) in the group.  Of that number, 499 were affirmed.  That’s an overall affirmance percentage of 70%  So, a broad generalization is that if you get a 30(f) notice, and you are the appellant, there’s only about a 30% chance of a reversal.  And some of the reversals in our count might not be much of a win, because we counted any "affirmed in part and reversed in part" as a reversal.  You’re certainly better off being the appellee, which is probably obvious anyway.  (Another note: we counted appeals that were dismissed as having been affirmed).

If you are appealing a criminal case, your chances as the appellant are worse.  We counted 309 criminal cases, of which 234 were affirmed.  That’s a success rate for prosecutors of 76% in cases where the Court declines argument.

There probably aren’t many prosecutors reading this blog, so what about the civil cases standing alone?  Overall, we counted 394 civil cases which were 30(f)’d.  Of those, 265 were affirmed.  That’s an affirmance rate of 67% overall.

What was the affirmance rate over the same time period for cases where the Court did hear oral argument?  Higher or lower than the rate by which 30(f) cases are decided?  I’ll follow up with that later this week.  Call this the first blog cliffhanger.

As you are thinking about this information, don’t forget, as is often attributed to Mark Twain, "there are three kinds of lies: lies, damned lies, and statistics."  That might be an apt thought to keep in mind with regard to this particular post.

The Court struck an Entry of Default which had been signed by an assistant clerk of court in the county where the case had been filed.  The entry of default was signed after the case was designated to the Business Court.  Judge Diaz cited Business Court Rule 15.1, stating:

Because the above-captioned cases are Business Court cases, the Clerk of Court had no authority to enter this Order and Entry of Default. See BCR 15.1 (“After a case has been assigned or designated to the Business Court, and for as long as the case is pending in [the Business] Court, parties shall seek rulings on all motions in the case from [the Business] Court, and not from Superior Court Judges or Clerks in the counties where the cases originate.”).

Full Opinion

You can’t use a compass to draw a circle without working from a fixed point in the center. That basic principle of geometry is what doomed Plaintiff’s effort to enforce a covenant not to compete in Asheboro Paper and Packaging, Inc. v. Dickinson, decided by Judge Schroeder in the Middle District of North Carolina on February 19th.

The Defendant, Dickinson, had signed a covenant not to compete saying that he wouldn’t work for a competitor within a 150 mile radius of the Asheboro Paper’s "branch office" in Virginia.

The problem for the Plaintiff was that although it had intended to open a Virginia office at the time the agreement was signed, it had never done so.  Dickinson therefore ended up working from his home, as did another Virginia-based employee of Asheboro Paper.  The Court therefore had no starting point to draw a circle with a radius of 150 miles.

Judge Schroeder rejected the argument that the covenant should be drawn from the locations of Dickinson and his fellow employee, saying that "such an interpretation would reduce the ‘branch office’ reference in the No-Compete Agreement to a concept rather than a place and fail to establish any reasonable basis from which to calculate a territorial restriction of 150 miles."

The case also serves as a reminder that a covenant not to compete may be too broad if it prevents the employee from working for a competitor "in any other relationship or capacity whatsoever," as this one was worded.  Judge Schroeder held that "[w]here a covenant requires an employee to have no association whatsoever with any business irrespective of whether he or she would be in a position to compete or divulge protected information, the covenant is overbroad."

In the 1930’s, North Carolina began an ad campaign describing the state as "Variety Vacationland."  UNC’s Wilson library says that the advertising resulted in a "growing number of visitors to places like Asheville, Pinehurst, and the Outer Banks" and that it "heightened their reputation as excellent vacation areas."

What do places like Pinehurst and the Outer Banks have to do with business litigation in North Carolina?  The answer is in the Fourth Circuit Court of Appeals’ opinion yesterday in OBX-Stock, Inc. v. Bicast, Inc.  The OBX case involves a trademark referencing the Outer Banks, and it discusses an earlier Fourth Circuit opinion addressing the "Pinehurst" trademark.

The Plaintiff had conceived of the OBX abbreviation to designate the Outer Banks of North Carolina, placing it on stickers, t-shirts, and other items. The Plaintiff was so successful that a broad variety of businesses began using the term as a shorthand designation for the Outer Banks.  The result, said Judge Niemeyer, was that "[t]he initials OBX are omnipresent in the Outer Banks and are universally understood as an abbreviation for ‘Outer Banks.’"

The Defendant came into Plaintiff’s crosshairs when it began selling stickers using the term OBXtreme "to denote the wide variety of extreme sports available at the Outer Banks."  The Plaintiff, which held four federally registered trademarks for OBX, sued for infringement.  It lost at summary judgment and the Court of Appeals affirmed.

The reason was that OBX wasn’t identified with any product.  Instead, it was merely descriptive of a geographical location.  The Court held that the term had become so widely and generally used that it had "entered the ‘linguistic commons’ as an often-used, everyday abbreviation of ‘Outer Banks.’"  Thus, In order to prevail, the Plaintiff needed to show that its descriptive mark had secondary meaning associated not with the Outer Banks, but with Plaintiff’s products.  The Court said that there was no such evidence.

In an interesting sidelight, the Fourth Circuit held that OBX couldn’t rely on its federal registrations because "the PTO only grudgingly issued the registrations after intervention by North Carolina’s congressional delegation."  The registrations had been rejected five times by the PTO based on its determination that OBX "had become nothing more than an alternative to Outer Banks and the terms were used ‘interchangeably.’"  The Court said that "quick process through the PTO," conversely, would "weigh[] in favor of validity."

In the earlier case involving the "Pinehurst" trademark, Resorts of Pinehurst, Inc. v. Pinehurst Nat’l Corp., 148 F.3d 417 (4th Cir. 1998), the Fourth Circuit held that Defendant had infringed by using "Pinehurst" in connection with its competing golf resort.  Pinehurst is a geographic location also, so what was the difference from the OBX case?  In Resorts of Pinehurst, the Court found the secondary meaning lacking in OBX, holding that the "Pinehurst" mark "had a clear secondary meaning in consumers’ minds, making it an enforceable trademark even if it might have been geographically descriptive.  Resorts of Pinehurst communicated its name to the consuming public effectively to associate the name with a private provider of golf courses and golf services, and not the geographical location in North Carolina."

My partners Reid Phillips and David Sar represented the prevailing Defendant.