N.C. Business Court Opinions, July 17, 2024 – July 30, 2024
Langley v. Autocraft, 2024 NCBC 45 (N.C. Super. Ct. July 23, 2024) (Earp, J.)
Key Terms: breach of contract; summary judgment; illusory consideration
Prior to beginning his employment with Autocraft, Plaintiff and Autocraft’s principal executed an agreement regarding the terms of Plaintiff’s employment. The agreement provided, among other terms, that after five years of employment, Plaintiff would receive 10% ownership in Autocraft. After Plaintiff’s employment was terminated over five years later, he brought suit for breach of contract seeking the value of the 10% interest. Defendants moved for summary judgment.
The Court granted the motion, concluding that the agreement was not an enforceable contract because it provided that Plaintiff had complete discretion to alter the terms of the agreement, thereby rendering his consideration illusory. The Court distinguished the N.C. Supreme Court’s recent opinion in Canteen v. Charlotte Metro Credit Union, in which the Supreme Court held that a change-of-terms provision permitting unilateral amendments to the credit union’s membership agreement was enforceable so long as the changes reasonably related back to the universe of terms discussed and anticipated in the original agreement. In contrast to the standardized consumer contract at issue in Canteen, the agreement here was individually negotiated and contained no restrictions on Plaintiff’s ability to change the agreement’s terms.
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Rel. Ins., Inc. v. Pilot Risk Mgmt. Consulting, LLC, 2024 NCBC 46 (N.C. Super. Ct. July 12, 2024) (Davis, J.)
Key Terms: adverse interest; summary judgment; misappropriation of trade secrets; non-solicitation clause; blue-pencil rule; confidentiality agreement; computer trespass; UDTPA; Wage and Hour Act; unjust enrichment
Plaintiff Relation Insurance sued a group of its Former Employees and their new employer, Pilot Risk, contending that they unlawfully used Relation’s confidential information and trade secrets to solicit employees and clients for Pilot Risk’s benefit. The Former Employees counterclaimed for Relation’s alleged failure to pay them correct wages. Both sides moved for partial summary judgment. Plaintiffs also moved for an adverse inference based on spoliation of evidence.
Motion for Adverse Inference. Plaintiffs argued that the individual Defendants spoliated evidence and therefore, an adverse inference should be drawn against Defendant on summary judgment and at trial. Upon review of the evidence, the Court agreed. Various of the Former Employees had, after notice of the lawsuit, reset or switched out the SIM cards in their cell phones and/or wiped or deleted files from their computers. The Court found that the Defendants had, at a minimum, failed to preserve potentially relevant evidence to which the Plaintiffs did not have equal access; thus, Plaintiffs were entitled to an adverse inference against Defendants at the summary judgment stage and an adverse inference jury instruction at trial.
Defendant’s Motion for Partial Summary Judgment on Plaintiff’s Claims
Misappropriation of Trade Secrets. Relation contended that each Defendant misappropriated its trade secrets in violation of both federal and state law. Of the eight documents identified as trade secrets by Relation, the Court concluded that three of them—the FS-1 List (containing FS-1 codes for insurance companies) and the Customer List and Client Renewal List (containing basic compilations of client information)—were not protectable as trade secrets. The trade secret status of the remaining five documents required determination by a jury. The reasonableness of Relation’s safety measures, which included things like a confidentiality provision in the employee handbook, employee-specific credentials, multifactor authentication, and role-based permissions, also required jury determination. Lastly, there was sufficient evidence of misappropriation by three of the Former Employees to allow the claim against them to go to the jury.
Breach of Non-Solicitation Clauses of Employment Agreements. The Court had already thoroughly analyzed the non-solicitation clauses at issue at the preliminary injunction stage and determined that they were likely unenforceable because they were too broad to protect the legitimate business interests of Relation. No new information obtained during discovery changed that analysis. Accordingly, the Court concluded that the non-solicitation clauses were unenforceable as a matter of law. The Court also rejected Relation’s request to apply the blue pencil doctrine because Relation did not specify how the doctrine should be applied here.
Breach of Confidentiality Provisions of Employment Agreements. In contrast, the Court was satisfied that the confidentiality provisions in the employment agreements were intended to protect Relation’s confidential business information as opposed to being restrictive covenants in disguise. Further, Relation had put forth evidence that the Former Employees violated the confidentiality provisions. The Court, therefore, denied Defendants summary judgment on this claim.
Unjust Enrichment. Relation’s unjust enrichment claim was based on Defendants’ alleged use of Relation’s confidential information for the benefit of Pilot Risk. The Court granted summary judgment in favor of Defendants on this claim because 1) Relation did not voluntarily confer a benefit on Pilot Risk since the Former Employees were alleged to have wrongfully taken the information; and 2) the Former Employees’ alleged misuse was encompassed by Relation’s claims for breach of the confidentiality provisions.
Computer Trespass. The Former Employees sought summary judgment on Relation’s federal and state law computer trespass claims against them. Regarding the federal claim, the Court determined that there was no violation of the Computer Fraud and Abuse Act because the Former Employees were authorized to access the computers and had permission to obtain the information at issue; thus, there was no unauthorized access or access in excess of authorization as required for a claim under the CFFA. However, the claim survived under North Carolina law because a genuine issue of material fact existed as to whether the Former Employees used Relation’s computers in a manner exceeding their permission by, inter alia, making unauthorized copies, deleting files, and taking screenshots of information.
Tortious Interference with Existing or Prospective Contract. The Court granted summary judgment in Defendants’ favor on the tortious interference claims to the extent that the claims were based on contractual relationships with vendors because there was no evidence in the record that Defendants had tortiously interfered with such relationships. However, summary judgment was denied as to tortious interference with client relationships because a jury question existed regarding whether Defendants tortiously used Relation’s confidential information, misappropriated its trade secrets, and engaged in computer trespass and thereby acted “without justification.”
UDTPA Violation. Since the Court determined that Relation’s claims for tortious interference and misappropriation of trade secrets survived summary judgment, the UDTPA claim based on those claims survived as well.
Plaintiff’s Motion for Summary Judgment on Defendants’ Counterclaims
N.C. Wage and Hour Act. Each of the Former Employees asserted NCWHA claims based on Relation’s failure to pay them commissions or bonuses they claim they were owed. Two of the Former Employees contended that they were entitled to receive a 27% commission rate for certain years if their book of business met a $500,000 threshold but were only paid a 25% commission rate. Relation argued that it was entitled to summary judgment on those claims because it changed its commission rates prior to the years when the employees met the threshold; however, because Relation had not provided notice of the change to the Former Employees, regardless of whether they met the threshold, the Court denied summary judgment. Summary judgment was granted in part and denied in part on the remaining Former Employees’ NCWHA claims.
Breach of Contract. The Former Employees also asserted breach of contract claims for unpaid compensation based on the same arguments as their NCWHA claims. The Court’s rulings on these claims mirrored those on the NCWHA claims, except that one claim that had been barred by the NCWHA’s two-year statute of limitations survived under the three-year statute of limitations for breach of contract claims.
Breach of the Implied Covenant of Good Faith and Fair Dealing. As these claims went hand in hand with the breach of contract claims, the Court’s rulings on them were the same as for the breach of contract claims.
UDTPA Violation. Pilot Risk contended that Relation engaged in unfair and deceptive trade practices by telling third-parties that the Former Employees were bound by non-competition agreements and telling insurance carriers that it preferred they not use Pilot Risk as an insurance agency. The Court concluded that these statements were insufficient to support a UDTPA claim, and, therefore, granted summary judgment in Relation’s favor.
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rFactr, Inc. v. McDowell, 2024 NCBC Order 47 (N.C. Super. Ct. July 18, 2024) (Bledsoe, C.J.)
Key Terms: motion to supplement and/or amend counterclaims; Rule 15(a), (d); Rule 13(h); Rule 20(a)
After six years of discovery delays, motions practice, trial continuations, and a year-long stay, this case was set for trial for November 2024. However, on May 9, 2024, the Defendants moved to supplement or amend their counterclaims to add Megan Brasser, wife of rFactr CEO Richard Brasser, as a party plaintiff and to add a counterclaim for defamation based on the Brassers’ alleged creation of a website containing defamatory statements about the Defendants.
The Court granted the motion. The Defendants had not unduly delayed in filing the motion because the supplemental counterclaim was premised on conduct which occurred within the past year, well after the genesis of the action in 2018 and during the period the case was stayed. Further, Plaintiffs had not shown that the additional claim would result in substantial injustice as it did not appear that the new claim would require extensive additional discovery or excessively delay the trial, especially in comparison to the two trial continuations already caused by Plaintiffs themselves. Further, as Plaintiffs conceded, their existing defamation claim and the supplemental counterclaim overlapped in certain respects, thereby establishing that the claims arose out of the same transaction or occurrence.
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Trail Creek Invs. LLC v. Warren Oil Co. LLC, 2024 NCBC Order 48 (N.C. Super. Ct. July 11, 2024) (Davis, J.)
Key Terms: petition for writ of mandamus, N.C. LLC Act, N.C.G.S. § 57D-3-04, document inspection request, operating agreement rights, discovery procedures
As summarized here, this suit concerns allegations by Plaintiffs that Defendants fraudulently failed to disclose substantial existing environmental liabilities in connection with the sale of Warren Oil Co. to Trail Creek Investments. Larry Sanderson is a defendant in the action, but also occupies a seat on the board of directors of Warren Oil as a minority member board representative. On January 5 and February 7, 2024, Sanderson made two document inspection requests to Warren Oil, which were refused. Petitioners subsequently filed two Petitions for Writs of Mandamus compelling Warren Oil to produce the requested documents. Warren Oil opposed the petitions.
The Court began by noting that North Carolina courts have not previously addressed the intersection of an LLC member’s document inspection rights and North Carolina’s rules of discovery. Relying on decisions from Delaware’s courts that determined that document inspection rights, whether statutory or contractual, are rights independent of litigation, the Court determined that Sanderson’s statutory and contractual inspection rights were not diminished by the availability of the discovery process.
The Court next turned to the interplay between the default provisions of the LLC Act and the provisions of Warren Oil’s operating agreement. The Court agreed with Sanderson that the operating agreement authorized inspection rights far broader than those conferred by the LLC Act; however, since the operating agreement did not provide any safeguards to protect the company from a member’s inspection of confidential information that could adversely affect the company, the Court found that the LLC Act’s safeguards in that regard were incorporated into the operating agreement. Nevertheless, Sanderson’s requests were not precluded by these safeguards because the fact that the requested documents may be used to assert counterclaims against the company was not the type of adverse effect contemplated by the LLC Act.
Lastly, the Court considered Warren Oil’s argument that Sanderson’s requests would require the exercise of too much discretion in determining which documents to produce, and therefore they were not sufficiently ministerial for a writ of mandamus to be proper. However, since Warren Oil did not separately address each of Sanderson’s requests for production, the Court deferred ruling and directed the parties to meet and confer on the issue in order to preserve judicial efficiency. If the parties could not come to an agreement, the Court authorized supplemental briefing by the parties.
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Eco Fiber, Inc. v. Yukon Packaging, LLC, 2024 NCBC Order 49 (N.C. Super. Ct. July 23, 2024) (Conrad, J.)
Key Terms: motion for preliminary injunction; breach of fiduciary duty; preparing to compete; tortious interference with prospective economic advantage; UDTPA; N.C.G.S. § 75-1.1; cold-chain packaging; patent infringement
Defendants Heeralall, Poore, and Vance are former Eco Fiber employees, who formed Defendant Yukon Packaging, and, according to Eco Fiber, poached its most substantial customer, Veritiv. Eco Fiber brought suit asserting claims for breach of fiduciary duty against Heeralall, its former president, and for tortious interference and unfair or deceptive trade practices against all Defendants. After the Court initially denied Eco Fiber’s motion for a temporary restraining order, Defendants removed the case to federal court. The case was remanded and presently before the Court is Eco Fiber’s motion for a preliminary injunction enjoining Defendants from selling certain products to Veritiv.
Breach of Fiduciary Duty. Although it was undisputed that Heeralall owed a fiduciary duty to Eco Fiber and had made plans to compete against Eco Fiber before his employment terminated, Plaintiffs failed to present any evidence that Heeralall’s conduct had crossed the line into a breach of fiduciary duty. Further, Eco Fiber did not present any convincing evidence that Heeralall had used Eco Fiber’s resources for Yukon Packaging’s benefit. Finally, Eco Fiber appeared to have released Heeralall from any claims related to Heeralall’s employment, whether known or unknown, which encompassed the breach of fiduciary duty claim. Accordingly, Eco Fiber failed to show a likelihood of success on the merits of its breach of fiduciary duty claim.
Tortious Interference with Prospective Economic Advantage. Eco Fiber also failed to show that it was likely to succeed on its tortious interference claim. Its brief failed to mention, let alone present evidence on, the essential element of the claim–that its business with Veritiv would have continued but for Defendants’ interference. Moreover, Defendants provided plausible evidence that Eco Fiber’s own conduct caused the loss of its business with Veritiv.
UDTP. The Court found some support for Eco Fiber’s UDTP claim based on its allegations that Vance allegedly threatened to sue Veritiv for patent infringement related to its purchases from Eco Fiber and by Poore hiding his involvement with Yukon Packaging and allegedly inducing Eco Fiber to raise its prices to push Veritiv away. However, even if Eco Fiber’s allegations were true, they did not warrant the requested injunctive relief. The alleged misconduct was all in the past and was unlikely to recur; thus, prospective injunctive relief was unnecessary.
For the foregoing reasons, the Court denied the motion for preliminary injunction.
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