Four North Carolina counties sued hotels.com, alleging that the online aggregator purchased blocks of hotel rooms from hotel owners and only paid occupancy tax based on the price paid, even though they sold those rooms to lodgers for more than they had paid and even though the lodgers paid occupancy tax based upon the higher price. (The Court referenced a series of cases filed across the country on the same issue).

The plaintiff counties had various ordinances and various administrative procedures regarding the enforcement of those ordinanances, and the Court observed that the case raised "thorny issues of statutory interpretation." It denied the motion to dismiss as to the principal claims because the defendant was collecting the tax and failing to remit it, and also failing to file the returns required by law.

The Court granted the motion as to an unfair and deceptive practices claim, however, holding that the act does not apply when the alleged wrong is already the subject of extensive governmental regulation and oversight, as there is for a failure to remit taxes. Otherwise, the Court observed, every tax dispute could become an unfair and deceptive practices claim, entitling the taxing authority to treble damages. The Court also noted that there was no commercial activity involved which implicated the deceptive practices statute.

The Court also dismissed the claims of one of the plaintiff counties, because it had failed to exhaust its own administrative remedies before filing suit. Having chosen to create such procedures, the county was not entitled to arbitrarily decide to ignore them.

Full Opinion

Defendant had entered into a covenant not to compete with his employer, BBF. The assets of BBF, including its contract rights, were acquired by GDX. GDX then terminated defendant’s employment per the agreement, and hired him directly. There was no new non-compete agreement entered into directly between GDX and defendant. Years later, GDX filed for bankruptcy, and its assets were purchased by the plaintiff.

The Court held that a covenant not to compete can be assigned as the part of the sale of a business. Therefore, GDX would have been entitled to enforce the covenant against defendant if defendant had left GDX at the time of the sale and begun to compete. The Court further held, however, that GDX was obligated to negotiate a new non-compete if it wished to continue the covenant in place. (The Court held that the answer would have been different if GDX had acquired the stock of BBF, as opposed to its assets). It stated "when an employer sells its assets, including its right to enforce a restrictive covenant in an employment contract, the period of the restrictive covenant begins to run because the employment relationship has been terminated. The former employee and the new employer have the choice of either not entering into a new agreement and having the old covenant enforceable or entering into a new agreement with a new restrictive covenant."

On the issue of the entitlement of a purchaser of assets at a bankrupty sale to enforce a covenant not to compete, the Court held "this Court is doubtful that the appellate courts of this state will sanction the purchase and enforcement of restrictive covenants by bidders for assets of the bankrupt employer."

Full Opinion

Defendant, a veterinarian, had signed a covenant not to compete with his former employer. He was, at the time, the sole shareholder, sole officer, and sole director of his employer, although the management of the company was controlled by an affiliated entity (VetCor). Defendant left the business and sold its stock, but before doing so he formally cancelled his own non-compete and that of his wife, another veterinarian.

His former employer sued for breach of contract, breach of fiduciary duty, aiding and abetting breach of fiduciary duty, unfair and deceptive practices, and violation of the North Carolina Trade Secrets Protection Act. The Court granted summary judgment on the breach of contract claim as to the former employer. It held that "a sole shareholder of a corporation is generally free to dispose of corporate assets as he sees fit, except where such actions harm or defraud the corporation’s creditors, or otherwise violate public policy." Vetcor, however, was entitled to proceed on its breach of contract claim, because the contract had been intended for its benefit.

The Court held that summary judgment was inappropriate on the argument that the covenants were unenforceable becasue they had been signed after the commencement of employment. The date on the contracts was contemporaneous with the start of employment of defendant and his wife, and the Court held that the dates in the contract were prima facie evidence of the date of execution. The Court said that it would consider parol evidence on the actual date that the contracts were signed.

The Court also found that the covenants were ambiguous about whether they applied in the event of a resignation, as opposed to a termination, and that this was an issue for trial.

The Court granted summary judgment on the fiduciary duty claims. Defendant had no fiduciary duty to Vetcor, which was merely a creditor of a corporation that was not in a winding up mode, and he had not breached any duty to his former employer because he was the sole shareholder at the time of his alleged misconduct in setting up a competing business. The Court held that "to hold that [defendant] breached a fiduciary duty would mean only that he breached a duty to himself. Because this conclusion is a non sequitur, the Court declines to adopt it."

On the trade secrets claim, the Court ruled that customer lists are not protected if they contain information that is easily accessible or which can be retrieved by reviewing public information, and that plaintiff had no claim.

The Court let stand the unfair and deceptive practices claim, finding questions of fact on whether defendant was entitled to invoke the learned profession exemption from the statute.

Full Opinion

The Court interpreted an earnout provision in an asset purchase agreement, which called for the application of Delaware law. The Court granted relief to the plaintiff, which resulted in an award to the plaintiff of nearly $4 million in stock based upon defendant’s failure to comply with its contractual obligation to provide "outside financial information" regarding its post-purchase performance. This was more than the defendant would have had to pay if the earnout target had been met, and it appeared both parties agreed that it had not been met.

The Court discussed the defendant’s argument that this was both an unenforceable penalty and a windfall, but concluded that "the fundamental maxim [of contract construction is] that the parties are bound by the terms of their own agreement."

Full Opinion

This case addresses a minor, but significant point involving discovery. Rule 33(a) of the North Carolina Rules of Civil Procedure provides that "[i]nterrogatory parts and subparts shall be counted as separate interrogatories" for purposes of counting the number of interrogatories. The Court ruled that a subpart is counted separately only if it is requesting information about a discrete subject. If the subparts are "sufficiently related to the primary question," they will count together as a single interrogatory.

The Court further held that "[i]nterrogatories are designed to elicit facts in a cost-efficient manner" and that they do not need to be "one-event, one-fact questions."

In a sidelight, the Court held that once a case is removed to the Business Court, requests for extensions of time must be addressed to the Business Court, and may not be entered by the Clerk of Court in the County where the case is pending.

Full Opinion

Plaintiff, who held a default judgment against a North Carolina corporation, sued its directors to collect from them personally. The claims included breach of fiduciary duty, fraudulent conveyance, failure to give notice of dissolution, and piercing the corporate veil.

The directors served discovery aimed at the validity of the amount of the judgment, which potentially reached privileged material. The plaintiffs objected, and before the Court was plaintiff’s Motion to Compel. The Court discussed the scope of discovery, the historic strength of the attorney client privilege, and denied the motion. It held that defendants were not entitled to information regarding plaintiffs’ analysis of the value of their claims and their discussions with counsel.

In reaching this conclusion, the Court noted that a director of a company in dissolution mode has fiduciary duties to creditors, and an obligation to treat all creditors of the same class equally.

Furthermore, the plaintiffs’ communications on the value of their claim were not relevant, as the issue of the damages to be recovered had already been adjudicated.

Also, if the plaintiff managed to pierce the veil of the corporation, they would have established that the directors thoroughly dominated the affairs of the corporation. The directors would then be collaterally estopped from contesting the amount of the judgment. A default judgment is entitled to preclusive effect if the party against whom judgment is entered had a full and fair opportunity to contest it.

Full Opinion

The Court held that the plaintiffs could not state a claim for fraud because neither of them took advantage of their opportunity to investigate the facts presented to them or to seek clarification, and there was no allegation that they had been denied the opportunity to investigate.

Plaintiffs also had no claim for unfair and deceptive practices, because their claims were not "in or affecting commerce." Their claims were essentially a dispute over compensation due to them as employees under the terms of various documents that governed their relationship with their employer." Employee-related claims are generally not within the scope of the deceptive trade practices statute, with minor exceptions that were discussed and distinguished by the Court.

The Court held that the unfair and deceptive practices statute is not meant to apply to the internal affairs of business associations.

Full Opinion

The Court enforced a forum selection cause calling for the matters in dispute between the parties to be litigated in New York. The parties agreed that the determination of the validity of the clause would be governed by New York law. The plaintiff argued that the defendant should be estopped from claiming the benefit of the clause due to its failure to state, when it sought removal to the Business Court, that it would contend that the Court was an improper forum. The Court seemed to agree that this should have been disclosed, but held that this did not amount to grounds for estoppel or waiver.

The plaintiff then argued that the agreement containing the forum selection clause was unenforceable, as it was simply an agreement to agree. The Court rejected this argument as well, holding that none of the terms of the agreement remained to be negotiated, and that the parties had stated their intent to be bound by it. Plaintiff was bound by the agreement even though it had not signed it, because it was a subsidiary of a company signing the agreement, and the agreement stated that subsidiaries would be bound.

Full Opinion

The North Carolina Insurance Commissioner sued the defendants, shareholders of insurance carriers in liquidation, for breach of fiduciary duty. Defendants moved to dismiss, claiming that the claims were barred by the statute of limitations at the time of the filing of the petition for liquidation. The Court found the statute of limitations for breach of fiduciary duty to be the three year statute contained in N.C.G.S. §1-52(2).

The Court held that "[a]n ambiguous, ill-defined limitations period for breach of the standards of conduct for directors and officers would have a chilling effect on the willingness of individuals to serve in those capacities, and as such would be an unsound public policy." Thus, all breaches of fiduciary duty occuring more than three years before the filing of the petition for liquidation were barred by the statute of limitations.

The plaintiff argued that the statute should be tolled pursuant to the "adverse domination," doctrine, a theory the Court found was not recognized in North Carolina. The Court stated that it would not apply the doctrine in any event, because it tolled only claims based on a breach of the duty of loyalty like decisions made on the basis of self-interest, and that the claims before it were limited to claims for negligent management. There is no cause of action in North Carolina for negligent management.

As the Court put it, "[n]o rational business person would sit on the board of an insurance company if they were personally liable if the company’s decision with respect to underwriting or investment proved faulty." Some of the decisions challenged here — to enter a particular market and to write a particular kind of policy — were "quintessential decisions subject to the business judgment rule."

Plaintiff was entitled to go forward on its claim that the defendants had submitted false or misleading financial statements to the Department of Insurance, as such conduct would violate the defendants’ fiduciary duties to their policyholders.

Unfair trade practice claims based on the false financials, and the defendants’ alleged increased underwriting activity for their own personal gain, also survived the motion to dismiss.

Full Opinion