N.C. Business Court Opinions, April 26, 2023 – May 9, 2023
Davis v. HCA Healthcare, Inc., 2023 NCBC 32 (N.C. Super. Ct. April 27, 2023) (Davis, J.)
Key Terms: restraint of trade; monopoly maintenance; monopoly leverage; monopoly acquisition; attempted monopoly; healthcare; outpatient services; inpatient services
Plaintiffs initially filed suit alleging various monopoly and restraint of trade claims against Defendants, who operate a hospital system in and around Asheville. In a previous order, discussed here, the Court dismissed the monopoly claims without prejudice. Plaintiffs then filed an amended complaint reasserting their monopoly claims and alleging that Defendants used their market power to coerce commercial health insurers to include provisions in their health insurance contracts which allowed Defendants to not only maintain their existing monopoly regarding inpatient services in the Asheville region, but also extend it to additional markets in western North Carolina. Defendants moved to dismiss all of the monopolization and attempted monopolization claims.
A monopolization claim must allege 1) the possession of monopoly power in the relevant market, and 2) willful acquisition or maintenance of that power separate from growth or development due to superior product, business acumen, or historic accident.
Monopoly Maintenance. The Court determined that Plaintiffs’ new allegations that Defendants had used the restraints in the insurance contracts to maintain their existing monopoly over inpatient services in the Asheville region were sufficient and thus denied dismissal.
Monopoly Leveraging. Plaintiffs alleged that Defendants had used their existing monopoly in the Asheville region inpatient services market to gain monopolies in the inpatient services market in the outlying regions and the outpatient services markets in both the Asheville region and the outlying regions. Regarding the outlying regions inpatient services market, the Court concluded that Plaintiffs’ new allegations regarding Defendants’ market share for this market were sufficient and thus denied dismissal as to the claim for this market. However, the Court granted dismissal as to the outpatient services market in both the Asheville region and the outlying regions because Plaintiffs had failed to sufficiently allege Defendants’ market share or that Defendants had the ability to control prices in those markets.
Attempted Monopolization. The Court’s conclusions mirrored those of the actual monopolization claims—the motion was denied as to the inpatient services market in the outlying regions, but granted as to the outpatient services markets in the Asheville region and the outlying regions.
N.C. Dep’t of Revenue v. Philip Morris USA, Inc., 2023 NCBC 33 (N.C. Super. Ct. May 3, 2023) (Earp, J.)
Key Terms: N.C.G.S. § 105-122; franchise tax; capital base; constitutional challenge; dormant commerce clause; subject matter jurisdiction; Office of Administrative Hearings
Under N.C.G.S. § 105-122, Defendant was required to pay an annual franchise tax for the privilege of doing business in North Carolina. For tax years 2012 through 2014, Defendant used its “Capital Base” to calculate its tax due. Capital Base is determined by totaling the company’s issued and outstanding capital stock, surplus, and undivided profits and then applying various adjustments. Upon conducting an audit of Defendant’s franchise tax liability for these years, NCDOR determined that Defendant had improperly adjusted its Capital Base resulting in an underreporting of its tax liability, and, consequently, owed over $300,000. Defendant challenged this determination with the Office of Administrative Hearings, arguing that section 105-122(b)’s differing treatment of affiliate receivables violated the dormant commerce clause of the U.S. Constitution and was therefore unconstitutional as applied to Defendant. After determining that the OAH had jurisdiction over as-applied challenges, the administrative law judge agreed with Defendant, granted summary judgment in its favor, and reversed and rescinded NCDOR’s determination. NCDOR petitioned for judicial review, challenging both the OAH’s jurisdiction and the merits of the decision.
NCDOR argued that the statute requires the OAH to dismiss any case in which the sole issue is the constitutionality of a statute, regardless of whether the challenge is facial or as-applied. The Court agreed. Constitutional challenges to tax statutes must be heard by the Business Court, but only after the statutory requirements are met, including the requirement that the OAH dismiss the case for lack of jurisdiction. Moreover, a contrary interpretation of the statute would not only violate the basic tenets of statutory construction and legislative intent, but also create fundamental uncertainty since there is no clear-cut test to distinguish facial challenges from as-applied challenges. The Court found the two cases cited by Defendant unpersuasive because they involved both constitutional and misapplication issues and reached the Court on appeals from summary judgment rulings that involved misapplication.
The Court also held that even if the OAH has jurisdiction to determine as-applied constitutional challenges, it could not have decided this case because the challenge here was a facial one as reflected by the remedy ordered by the ALJ. A party’s characterization of the issue as an as-applied challenge is not conclusive of the court’s jurisdiction.
Accordingly, the Court reversed the ALJ’s decision and remanded the matter with instructions to dismiss the case for lack of subject matter jurisdiction.
Wright v. LoRusso, 2023 NCBC 34 (N.C. Super. Ct. May 4, 2023) (Conrad, J.)
Key Terms: offensive summary judgment; premature; pending discovery; BCR 7.7
Plaintiffs, the minority members of an LLC, brought suit against Defendant Krista LoRusso, alleging that she had abused her position as the LLC’s majority member. While discovery was ongoing, Plaintiffs moved for partial summary judgment on their direct claim for declaratory judgment regarding whether a buy-sell event had been triggered under the LLC’s operating agreement by Defendant’s alleged misconduct.
The Court denied the motion. Not only was the motion premature due to pending discovery, but Plaintiffs had also failed to meet the higher burden required for offensive summary judgment. Specifically, their key evidence—a letter from their expert—was unsworn and thus inadmissible, and the Plaintiffs’ affidavits, although admissible, were vague and contradicted by Defendant’s affidavit. Finally, Plaintiffs’ reply brief contained new arguments and new evidence, which the Court declined to consider under Business Court Rule 7.7.
Columbus Life Ins. Co. v. Wells Fargo Bank, N.A., 2023 NCBC 35 (N.C. Super. Ct. May 4, 2023) (Davis, J.)
Key Terms: life insurance policy; wagering contract; STOLI policy; public policy
At issue in this case is whether a life insurance policy taken out by the named insured on his own life solely for the purpose of later selling it to investors is void as an unlawful wagering contract under North Carolina law. In 2005, Dr. Trevathan, with the assistance of an insurance producer named Chesson, was issued a life insurance policy by Plaintiff. Dr. Trevathan’s stated intention was to sell the policy to make additional money. To fund the initial premiums, Dr. Trevathan obtained a non-recourse premium finance loan from a third-party, with the options, upon the loan’s maturity in two years, to 1) surrender the policy to the lender in satisfaction of the loan; 2) pay off the loan and retain the policy; or 3) sell the policy and use the proceeds to pay off the loan. Dr. Trevathan sold the policy and paid off the loan in 2007. Five years later, the policy was sold to Defendant, with the beneficiary designation being changed to Defendant as well. However, Plaintiff did not disclose to Defendant that it suspected that the policy was a “stranger-oriented life insurance” (“STOLI”) policy. In 2021, Plaintiff initiated this action seeking declarations that the policy is unenforceable as an illegal wagering contract or due to the lack of an insurable interest. Defendant answered, asserting that the policy is valid, or in the alternative, asserting a counterclaim for return of premiums. Both parties moved for summary judgment.
The Court began by noting that, although numerous courts across the country have addressed the validity of STOLI policies in the last two decades, North Carolina’s appellate courts have not had occasion to address such issues in recent years. However, in the late 19th/early 20th century, North Carolina’s Supreme Court decided a line of cases involving whether a life insurance policy was void as an unlawful wagering contract. Based on its review of these cases, the Court articulated the following rule: a life insurance policy is “void as a wagering contract only where there is evidence of an agreement—prior to the policy’s issuance—that the policy would be assigned to a third party and that the third party participated in that agreement.” Here, there was no evidence that any of the ultimate assignees had any involvement relating to the policy until well after the policy’s issuance. Thus, the Court held that the policy was valid and enforceable and granted summary judgment in favor of Defendant.
Auto Club Grp. v. Frosch Int’l Travel, LLC, 2023 NCBC Order 27 (N.C. Super. Ct. May 3, 2023) (Robinson, J.)
Key Terms: attorneys’ fees; Rule 11; sanctions; N.C.G.S. § 6-21.5; justiciable issue; N.C.G.S. § 66-156; trade secrets; bad faith; N.C.G.S. § 75-1.1; UDTPA; frivolous; malicious; Rule 41(d); costs
Plaintiffs filed suit alleging claims for conversion, violations of the Trade Secrets Protection Act, and violations of the Unfair and Deceptive Trade Practices Act, based on contentions that Defendants had orchestrated the hiring of Plaintiffs’ travel agents and caused those agents to provide Defendants with Plaintiffs’ trade secrets and other confidential information. The action was voluntarily dismissed without prejudice and then re-filed without the TSPA claim. Defendants moved for an award of costs, attorneys’ fees, and sanctions against Plaintiffs pursuant to various rules and statutes.
Rule 11. Defendants sought sanctions under both the factual sufficiency and improper purpose prongs of Rule 11. Regarding factual sufficiency, the Court determined that the complaint was facially plausible because it showed that Plaintiffs had undertaken a reasonable inquiry into the facts and reasonably believed their position was well-grounded in fact. Regarding improper purpose, the Court found that an objective analysis of the complaint demonstrated that its purpose was to vindicate Plaintiffs’ rights. Defendants also contended that the affidavits it provided from the travel agents were sufficient to disprove Plaintiffs’ claims and thus maintaining the suit thereafter was improper. However, later testimony from one of the agents which contradicted her affidavit demonstrated otherwise. Thus, sanctions under Rule 11 were denied.
N.C.G.S. § 66-154. This section allows attorneys’ fees if a claim for misappropriation of trade secrets is made in bad faith. Defendants argued that the TSPA claim was made in bad faith because Plaintiffs 1) continued the action after receiving the agents’ affidavits; 2) could not show that Defendant received any trade secrets; 3) did not seek a TRO or preliminary injunction; and 4) did not re-file the TSPA claim. The Court did not find this sufficient to show bad faith, especially since the agents’ affidavits were contradicted by later testimony. Thus, attorneys’ fees pursuant to N.C.G.S. § 66-154 were denied.
N.C.G.S. § 75-16.1. This section allows attorneys’ fees for a UDTPA claim if the plaintiff knew the action was frivolous and malicious. For the reasons already stated, the Court could not conclude that the claim was frivolous. Moreover, Defendants’ assertion that Plaintiffs acted maliciously by bringing claims against a competitor with a “rapidly growing business” was insufficient to show that Plaintiffs brought the claim without just cause or as a result of ill will. The Court denied attorneys’ fees pursuant to N.C.G.S. § 75-16.1.
N.C.G.S. § 6-21.5. This section allows attorneys’ fees for the prevailing party if there was a complete absence of a justiciable issue of law or fact raised by the losing party in any pleading. However, as already discussed, the evidence showed that justiciable issues existed when the suit was filed and continued to exist throughout the litigation. Thus, attorneys’ fees pursuant to N.C.G.S. § 6-21.5 were denied.
Rule 41(d). The Court granted the motion under this Rule, which provides for the award of certain costs when an action is dismissed under Rule 41(a). Plaintiffs had previously tendered a check for the applicable costs to Defendants which was rejected. Accordingly, the Court ordered that Plaintiffs deposit the amount with the Clerk of Court for the benefit of Defendants.
Wright v. LoRusso, 2023 NCBC Order 28 (N.C. Super. Ct. May 4, 2023) (Conrad, J.)
Key Terms: BCR 7.5; BCR 7.8; word limit; pinpoint citations; summary judgment
Before the end of discovery in this case, the Individual Plaintiffs filed a partial motion for summary judgment. They then filed two more summary judgment motions, each with an accompanying brief, as well as a separate document entitled Statement of Undisputed Material Facts. The Court determined that these actions violated Business Court Rule 7.8, which prohibits parties from attempting to circumvent applicable word limits by filing multiple motions and incorporating one document into another. Moreover, the briefs also violated Rule 7.5 because they did not include pinpoint citations to the record. Noting that the Individual Plaintiffs had failed to comply with procedural rules throughout the case, the Court struck the second and third motions and the accompanying documents without leave to re-file them.
McManus v. Dry, 2023 NCBC Order 29 (N.C. Super. Ct. May 5, 2023) (Bledsoe, C.J.)
Key Terms: attorneys’ fees; Rule 1.5 factors; hourly rate; class action settlement
As discussed here, the parties had previously reached a class action settlement agreement which the Court approved, reserving, however, the request for attorneys’ fees and expenses pending supplemental briefing. The Court now addressed that request.
The reasonableness of a fee award is governed by Rule 1.5 of the Rules of Professional Conduct, which provides eight factors for consideration. The Court addressed each in turn.
The first factor weighed in favor of the award as the time expended by counsel was reasonable and the case involved complex and novel questions regarding digital privacy which required high legal skill to resolve. The second factor weighed against as there was no evidence that Plaintiffs’ counsels’ work on this case precluded other work.
In considering the third factor—the fee customarily charged in the locality—the Court first determined that the relevant locality was North Carolina, not the national plaintiffs’ data breach bar at large. The Court then surveyed recently approved hourly rates, which ranged from $250 to $600, but also acknowledged that hourly rates have been on the rise. In light of that, and the complex and novel area of the law at issue in the case, the Court concluded that hourly rates ranging from $575 to $700 for the partners and of $350 for the associates were reasonable.
The fourth factor also weighed in favor because Plaintiffs’ counsel had achieved a favorable settlement for the class. There was no evidence before the Court regarding the fifth (time limitations), sixth (nature of professional relationship with the client), or eighth (nature of the attorneys’ fee arrangement) factors, thus these weighed neither for nor against the award. The seventh factor also weighed in favor as Plaintiffs’ counsel all had extensive experience in data breach class actions. Lastly, the Court noted that the settlement class had received notice of the request but no member had objected.
Accordingly, the Court determined that, overall, the Rule 1.5 factors weighed in favor of the award and therefore approved the payment of attorneys’ fees and expenses with the stated adjustments to the hourly rates.
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