The Court denied a motion for preliminary injunction in this litigation involving the merger of Wachovia and Wells Fargo.

The principal holdings of the decision were  that (1) the Wachovia Board of Directors, in approving the merger deal, satisfied its obligations under the Business Judgment Rule in light of the dire economic circumstances and lack of alternatives faced by the Board, (2) the Board complied with North Carolina law in the issuance of new shares of stock to Wells Fargo which gave it 39.9% of the voting control over Wachovia, and (3) the grant of this voting bloc was not coercive to Wachovia’s shareholders. 

The Court also found, however, that the continuation of Wells Fargo’s right to vote these shares for an 18 month period if the Wachovia shareholders were to reject the merger was invalid. 

There’s a more complete summary of the Court’s opinion here.

Full Opinion

 

Brief in Support of Motion for Preliminary Injunction

Wachovia Brief in Opposition to Motion for Preliminary Injunction

Wells Fargo Brief in Opposition to Motion for Preliminary Injunction

Reply Brief in Support of Motion for Preliminary Injunction

Wachovia Sur-Reply in Opposition fo Motion for Preliminary Injunction

The Court entered a Temporary Restraining Order in a dispute between jewelers with similar trademarks.  Plaintiff holds a North Carolina state trademark registration for Windsor Jewelers, Inc., and was seeking to enjoin Defendant from using the name Windsor Fine Jewelers.

The TRO says that:

Defendants’ intent to confuse the consuming public is clear, as (notwithstanding that they have used the name Windsor Jewelers in Georgia and South Carolina) they were aware of Plaintiff’s trademark registration in North Carolina when they selected Windsor Fine Jewelers as the name for their NC based stores, and indeed, attempted to purchase the Plaintiff’s business and mark before announcing that they intended to change the name of their NC-based stores to Windsor Fine Jewelers.

Op. ¶3.  The TRO enjoined Defendants from use of the Windsor name in North Carolina, and also calls for all advertising materials which use the Windsor name in association with Defendants’ Charlotte stores to be destroyed.

The Order itself is very short, so you’ll have to look at the Briefs (linked below), to get the full flavor of the issues in the case.

Temporary Restraining Order

Brief in Support of Motion for TRO

Brief in Opposition to Motion for TRO

 

This case enforced an arbitration provision, even though the Plaintiff had never signed the agreements which contained the arbitration provision. 

A Motion to Compel Arbitration was granted, because the Plaintiff had done the work described in the agreements and was seeking payment pursuant to those agreements, it had submitted applications for payment pursuant to the terms of the agreements and accepted some payment, and it had signed an addendum to one of the agreements which referenced the agreement containing the arbitration provision.

Among other things, the Court noted that "much like the case of Real Color Displays, Inc. v. Universal Applied Techs., 950 F. Supp. 714 (E.D.N.C. 1997), Plaintiff’s conduct demonstrates that it intended to be bound by the Subcontracts, including the Arbitration Clause."

Full Opinion

 

Brief in Support of Motion to Compel Arbitration

This case interpreted South Carolina law — different than North Carolina law — on the enforceability of a confidentiality agreement that the Defendant argued was overly broad.

The South Carolina precedent is Carolina Chemical Equipment Co. v. Muckenfuss, 471 S.E.2d 721 (S.C. 1996), where the South Carolina Supreme Court  held that a broad confidentiality agreement, which would have the effect of a covenant not to compete, will be subject “to the same scrutiny as a covenant not to compete.” The confidentiality agreement at issue in Muckenfuss prohibited the use of virtually all of the knowledge which Muckenfuss had gained during his employment with the plaintiff. The South Carolina Supreme Court held that this broad provision was tantamount to a covenant not to compete, and that it was invalid because it contained no restrictions as to time or territory.

The following year, however, the South Carolina Legislature overruled Muckenfuss, at least in part, by enacting the South Carolina Trade Secrets Act. A provision of that statute provides that “a contractual duty not to disclose or divulge a trade secret, to maintain the secrecy of a trade secret, or to limit the use of a trade secret must not be considered void or unenforceable or against public policy for lack of a durational or geographical limitation.” S.C. Code Ann. §39-1-30(D) (2007). (There is no counterpart to this provision in the North Carolina Trade Secrets Protection Act). 

In this case, the North Carolina Business Court interpreted South Carolina law to be as follows:

South Carolina law, as it applies to this case, prohibits an employer (or business purchaser) from enforcing a restriction on the use of information that would amount to an unlawfully broad restrictive covenant preventing a person from using the general skills and knowledge acquired as an owner or employee of a business. On the other hand, expiration of a restrictive covenant does not permit a former employee or business owner to use proprietary and confidential information or trade secrets of a business that are otherwise protectible.

Thus, Judge Tennille observed, South Carolina law would permit the Plaintiff to restrict Caldwell from using “specific customer or supplier pricing information” he had learned before leaving the company. But South Carolina law would not permit the Plaintiff to restrict Caldwell “from using his general knowledge of how prices are set in the forklift repair business to compete.”

The Court denied the motion to dismiss, interpreting the confidentiality provision to be permissibly  limited to prohibiting Caldwell’s use of non-public, proprietary information to which he had access at the business he had sold, and which had been part of the assets purchased by the Plaintiff. 

The North Carolina appellate case on the issue of enforceability of confidentiality agreements is Chemimetals Processing, Inc. v. McEneny, 124 N.C.App. 194, 476 S.E.2d 374 (1996), where the Court held:

An agreement is not in restraint of trade, however, if it does not seek to prevent a party from engaging in a similar business in competition with the promisee, but instead seeks to prevent the disclosure or use of confidential information. Such agreements may, therefore, be upheld even though the agreement is unlimited as to time and area, upon a showing that it protects a legitimate business interest of the promisee.

Full Opinion

Brief in Support of Motion to Dismiss

Brief in Opposition to Motion to Dismiss

Reply Brief in Support of Motion to Dismiss

The Business Court’s plate is pretty full as we move into the new year of 2009.  This post summarizes the dispositive motions pending before the Court that are fully briefed and ready for a ruling.

These cases cover a broad range of issues, summarized by general categories below, including: class actions, construction law, derivative actions, breach of fiduciary duty/unfair competition, jurisdiction, partnership, securities fraud, shareholder/member disputes, trademark law, trusts, and uniform commercial code. 

As you read on, a few disclaimers.  First, this only covers dispositive motions.  There are certainly other, non-dispositive motion pending.  Second, I may have missed some.  And third, these summaries are deliberately short.  I’m not trying to cover all of the issues that might be included in a dispositive motion filing, just trying to give you a general idea of rulings that may be coming down in the next several months.  That’s involved a quick look at the briefs.  And on that note, a number of the cases involves multiple issues and don’t fall exclusively into one category.

Each summary includes a link to the Business Court electronic file.

Class Actions

Clark v. Alan Vesture Auto Group, Inc.: This is a putative class action against an automobile dealer for allegedly misleading financing practices.  Pending are a motion to dismiss two defendants because of insufficiency of service of process, and a motion for summary judgment.  One issue is whether the Court should consider the dispositive motion before discovery and at the same time as its ruling on the class certification motion. 

Construction Law

Miller & Long Co., Inc. v. Intracoastal Living, LLC: The issues in this construction law case involve collection on a payment bond and enforcement of a claim of lien.

Wachovia Bank N.A. v. Superior Construction Corp.: The issue in this construction law case is the priority of Wachovia’s deed of trust versus a previously filed mechanics lien, where the lienholder had accepted some payment on its lien and executed a partial waiver of lien.

RJM Plumbing, inc. v. Superior Construction Corp: Motion for summary judgment by subcontractor on claim for breach of contract

Derivative Actions

Esquire Trade & Finance, Inc. v. Diversified Senior Services, Inc.: This case raises derivative action issues, including whether the allegations of the complaint were improperly broader than the demand which had been made, the effect of findings by a special litigation committee, whether plaintiff was owed a “special duty” as a preferred shareholder which entitled him to make direct claims against the corporation, and whether fiduciary duty claims were barred by the two year statute of repose of GS §55-7-48.

Garrett v. Parton: Motions to dismiss a derivative claim made by taxpayer on behalf of the City of Roanoke to recover money invested in a music theater, on the basis of standing.

Lancaster v. Harold K. Jordan and Co.: This is another derivative action case, involving whether the plaintiffs, members of the limited liability company plaintiff, had standing to bring claims on behalf of the LLC. The case raises the usual issues of whether the Defendant owed a “special duty” to the Plaintiffs, and whether Plaintiffs had injury “separate and distinct” from that of the LLC.

Mitchell, Brewer, et al v. Brewer: This dispute involves the breakup of a law firm that was a limited liability company, including whether plaintiffs were entitled to maintain the action as a derivative action, in part because they had withdrawn as members of the limited liability company, and whether they were entitled to pursue an action against the individual members of the LLC.

Revolutionary Concepts, Inc. v. Clements Walker PLLC: This isn’t a derivative action in the true sense of the term, but it does raise the issue of when a shareholder has standing to maintain an action for an injury to the corporation.  The more interesting issue in this case is whether the Business Court lacks subject matter jurisdiction over a malpractice claim involving a patent because federal courts have exclusive jurisdiction over patent matters.

Webb v. Royal American Company: Motion to dismiss derivative claim against lender to limited liability company, issues include whether an adequate demand was made or whether plaintiff had established demand futility, and whether claims were barred by exculpatory provisions in loan agreement.

Continue Reading The Year Ahead In The North Carolina Business Court

Business Court Rule 15.12, which is titled "Determination Of Discovery Motions Through Oral Argument Without Briefs" states that "with the consent of both parties and as allowed by the Court, the parties may present motions and the Court may resolve disputes regarding discovery matters through the use of an expedited oral argument procedure. Such motions will routinely be limited to matters which can be argued and determined in one hour or less."

The Court will not consider the use of this expedited procedure without the consent of the non-moving party, as required by the language of the Rule.

In Hilb, the Court struck the Motion to Compel filed by the Plaintiff because consent had not been obtained.

Full Opinion

Can a confidentiality agreement be too broad to be enforced?  The North Carolina Business Court said it can be, under some circumstances, in Covenant Equipment Corp. v. Forklift Pro, Inc.

Before you keep reading, know that the case involved South Carolina, not North Carolina, law. North Carolina law on this point looks to be pretty different, as discussed at the very end of this post, but the case is still worth a look.

The facts are typical for a lawsuit against a former employee: Caldwell had sold his forklift business to the Plaintiff and became Plaintiff’s employee. As a part of the sale, Caldwell agreed that he “w[ould] not, directly or indirectly, disclose or furnish any non-public, proprietary or confidential information obtained from or relating to the Business.” 

Caldwell left the Plaintiff and started a new competitive business. The Plaintiff sued, arguing that Caldwell had breached his confidentiality obligations. Caldwell moved to dismiss this claim, arguing that under South Carolina law the confidentiality provision was overly broad and unenforceable.

The motion to dismiss was based on the South Carolina Supreme Court’s 1996 decision in Carolina Chemical Equipment Co. v. Muckenfuss, 471 S.E.2d 721 (S.C. 1996), where it held that a broad confidentiality agreement, which would have the effect of a covenant not to compete, will be subject “to the same scrutiny as a covenant not to compete.” The confidentiality agreement at issue in Muckenfuss prohibited the use of virtually all of the knowledge which Muckenfuss had gained during his employment with the plaintiff. The South Carolina Supreme Court held that this broad provision was tantamount to a covenant not to compete, and that it was invalid because it contained no restrictions as to time or territory.

The following year, however, the South Carolina Legislature overruled Muckenfuss, at least in part, by enacting the South Carolina Trade Secrets Act. A provision of that statute provides that “a contractual duty not to disclose or divulge a trade secret, to maintain the secrecy of a trade secret, or to limit the use of a trade secret must not be considered void or unenforceable or against public policy for lack of a durational or geographical limitation.” S.C. Code Ann. §39-1-30(D) (2007). (There is no counterpart to this provision in the North Carolina Trade Secrets Protection Act). 

Judge Tennille, finding no definitive guidance from South Carolina’s courts on the interplay between the court decision and the statute, interpreted South Carolina law to be as follows:

South Carolina law, as it applies to this case, prohibits an employer (or business purchaser) from enforcing a restriction on the use of information that would amount to an unlawfully broad restrictive covenant preventing a person from using the general skills and knowledge acquired as an owner or employee of a business. On the other hand, expiration of a restrictive covenant does not permit a former employee or business owner to use proprietary and confidential information or trade secrets of a business that are otherwise protectible.

Thus, Judge Tennille observed, South Carolina law would permit the Plaintiff to restrict Caldwell from using “specific customer or supplier pricing information” he had learned before leaving the company. But South Carolina law would not permit the Plaintiff to restrict Caldwell “from using his general knowledge of how prices are set in the forklift repair business to compete.”

The Court then denied the motion to dismiss, interpreting the confidentiality provision to be permissibly  limited to prohibiting Caldwell’s use of non-public, proprietary information to which he had access at the business he had sold, and which had been part of the assets purchased by the Plaintiff. 

There is no North Carolina appellate decision I’m aware of which analyzes a confidentiality agreement under the same factors applicable to non-compete agreements.  That approach was rejected by the Court of Appeals In Chemimetals Processing, Inc. v. McEneny, 124 N.C.App. 194, 476 S.E.2d 374 (1996), where the Court held:

An agreement is not in restraint of trade, however, if it does not seek to prevent a party from engaging in a similar business in competition with the promisee, but instead seeks to prevent the disclosure or use of confidential information. Such agreements may, therefore, be upheld even though the agreement is unlimited as to time and area, upon a showing that it protects a legitimate business interest of the promisee.

Chemimetals might leave room for a North Carolina court to say that a confidentiality agreement seeking to protect all information of a former employer is invalid because the breadth of such a restriction doesn’t protect "a legitimate business interest" of the former employer.  The Covenant decision might be of some help in an argument like that.

The photo at the top came from Tom Arthur’s Photostream on Flickr.

When a Plaintiff files a Rule 41 dismissal, and then refiles his action, Rule 41(d) of the North Carolina Rules of Civil Procedure requires that he must pay the costs of the first action as a prerequisite to pursuing the new action.  "[T}his section establishes a mechanical condition precedent that must be satisfied before that plaintiff may commence a new action based upon the same claims against the same defendant."

Full Opinion

Wachovia and Wells Fargo have probably reached a settlement with the Plaintiff in the class action lawsuit over the merger between the two banks.  The settlement, announced in Wachovia’s Form 8-K filed with the Securities and Exchange Commission yesterday evening, will if finalized require approval by the North Carolina Business Court.

The 8-K filing references a Memorandum of Understanding setting out the anticipated terms of the settlement.  The Memorandum wasn’t a part of the SEC filing, but the filing says that Wachovia and Wells Fargo will agree not to appeal the (pretty insignificant) win by Plaintiff on the invalidity of the 18 month "tail" in the Merger Agreement, and Wachovia will agree to make additional disclosures in its proxy statement.

The filing says the following:

Wachovia and Wells Fargo agreed not to appeal from the portion of the Court’s Order dated December 5, 2008 that enjoins the 18 Month Tail Provision. Wells Fargo for its part also agreed to waive the enforceability by Wells Fargo of the 18 Month Tail Provision to the extent enjoined by the Court’s Order. Wachovia and Wells Fargo also agreed to make certain additional disclosures related to the proposed merger, which are contained in this Form 8-K. The memorandum of understanding contemplates that the parties will enter into a stipulation of settlement.

The stipulation of settlement will be subject to customary conditions, including court approval following notice to Wachovia’s shareholders. In the event that the parties enter into a stipulation of settlement, a hearing will be scheduled at which the Court will consider the fairness, reasonableness, and adequacy of the settlement. There can be no assurance that the parties will ultimately enter into a stipulation of settlement or that the Court will approve the settlement even if the parties were to enter into such stipulation. In such event, the proposed settlement as contemplated by the memorandum of understanding may be terminated.

The Form 8-K also contains the additional disclosures which Wachovia agreed to make in its proxy statement. There’s nothing particularly new or revealing in those.

The picture of the Wachovia sign at the top is from CounterBreak, on Flickr.  

In this case, the Court rejected the unopposed motion of the plaintiff to place the entire contents of a case which had been settled under seal.  

The Court’s rationale ran like this:

  • It is inconsistent with the North Carolina Public Records Act, N.C. Gen. Stat. §§ 132-1 to 132-10 (2007), to put everything in a case file under seal.
  • The Public Records law provides that there should be "liberal access to public records," and that public records "must be made available for public inspection" in the absence of a “clear statutory exemption or exception."
  • Civil and criminal case filings are public records.  The public has a statutory right of inspection of court filings pursuant to N.C. Gen. Stat. § 7A-109(a) (2007).
  • The public’s right of access to court filings can be limited 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,” per the North Carolina Supreme Court’s decision in Virmani v. Presbyterian Health Servs., 350 N.C. 449, 476, 515 S.E.2d 675, 693 (1999).

Judge Diaz indicated that he would consider the arguments of the parties as to the need for sealing particular documents in "due course."

This isn’t the first time that the parties to this case tried to keep their dispute out of the public eye.  Back in September 2008, Judge Diaz entered an Order denying their request for a blanket protective order permitting them to file all exhibits to their briefs and pleadings under seal.  The rationale of that Order was pretty much the same as the order entered in December.

Full Opinion