N.C. Business Court Opinions, November 1, 2023 – November 14, 2023
Cone v. Blue Gem, Inc., 2023 NCBC 74 (N.C. Super. Ct. Nov. 7, 2023) (Earp, J.)
Key Terms: derivative claim; improper purpose; N.C.G.S. § 55-7-46(2) and (3); attorneys’ fees
As summarized here, the Court previously entered an opinion dismissing Plaintiffs’ derivative claim for breach of fiduciary duty with prejudice, dismissing their judicial dissolution claim without prejudice, and taxing costs of the action against Plaintiffs. Thereafter, the individual Defendants moved for attorneys’ fees pursuant to N.C.G.S. § 55-7-46(2) and (3) (which permit the Court to award a defendant its reasonable expenses if a derivative proceeding was “commenced or maintained without reasonable cause or for an improper purpose”) or, alternatively, for court ordered indemnification pursuant to N.C. Gen. Stat. § 55-8-54. Defendant Blue Gem also sought its expenses pursuant to N.C.G.S. § 55-7-46(2) and (3), and an order taxing Plaintiffs with any amount it is required to indemnify the individual Defendants. Defendants argued that the derivative suit was filed for the improper purpose of coercing the individual Defendants into a buyout of Plaintiffs’ shares in Blue Gem at an unwarranted premium.
After assessing Plaintiffs’ objective behavior in view of the totality of the circumstances, the Court concluded that Plaintiffs’ derivative claim was not well-grounded in fact or warranted by law, and was pursued for the improper purpose of pressuring Defendants into voting for a proposal that would allow Plaintiffs to exit the company and maximize their interests. The Court granted the individual Defendants’ motion as to their attorneys’ fees but denied Defendant Blue Gem’s motion, as Blue Gem was not itself a defendant of the derivative claim, and as such, lacked a basis to seek recovery of expenses under the statute.
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7 Mile Advisors, LLC v. Zaelab, LLC, 2023 NCBC 75 (N.C. Super. Ct. Nov. 8, 2023) (Bledsoe, C.J.)
Key Terms: summary judgment; motion to deny or continue; Rule 56(f); completion of discovery
Plaintiff and Defendant entered into a letter agreement, whereby Plaintiff agreed to act as Defendant’s exclusive financial advisor in connection with the sale or transfer of Defendant’s equity or assets in exchange for retainer fees and transaction-based compensation. After a transaction occurred, a dispute between the parties arose as to Plaintiff’s right to receive a fee from the transfer, and Plaintiffs filed suit. After Plaintiffs moved for summary judgment in September 2023, Defendants moved, pursuant to Rule 56(f), for the denial or continuance of the summary judgment motion until discovery was completed. The Court’s case management order provided a discovery deadline of January 19, 2024.
At the motion’s hearing, Defendants presented factual evidence suggesting that certain defenses may be available to it upon further exploration in discovery. The Court agreed at the hearing that Defendant should be permitted to continue to explore these fact-based defenses through discovery before it should be required to respond to Plaintiff’s motion for summary judgment. Prior to entry of the Court’s written order conveying the same, Plaintiff withdrew its motion for summary judgment. As a result, the Court denied Defendant’s motion as moot.
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Vitaform, Inc. v. Aeroflow, Inc., 2023 NCBC 76 (N.C. Super. Ct. Nov. 9, 2023) (Bledsoe, C.J.)
Key Terms: attorneys’ fees; inextricably intertwined; N.C. Trade Secret Protection Act; N.C.G.S. § 66-154(d); bad faith; Lanham Act; 15 U.S.C. § 1117(a); UDTPA; N.C.G.S. § 75-16.1; frivolous and malicious; nonjusticiable issue; N.C.G.S. § 6-21.5
As summarized here, Plaintiff, a designer and manufacturer of post-partum compression garments, brought a variety of claims against Defendants arising from Defendants’ alleged misuse of Plaintiff’s confidential information to design a competing product. The majority of the claims were resolved either through voluntary dismissal or at summary judgment. Trial was set for April 2023; however, shortly before trial, the parties voluntarily dismissed without prejudice the remaining claims. Thereafter, Defendants sought attorneys’ fees and costs under several statutes.
Beginning with North Carolina’s Trade Secrets Protection Act, which permits an award of attorneys’ fees to the prevailing party where a claim is made in bad faith, the Court disagreed with Defendants’ argument that Plaintiff had pursued its trade secret misappropriation claim in bad faith by changing its legal theory and its supporting facts to avoid dismissal and by continuing to prosecute the claim long after it knew it was meritless. Plaintiff’s modification of its purported trade secret was more likely due to a reconsideration of the best way to identify its trade secret for pleading purposes, and Plaintiff’s new or revised factual allegations could just as likely have been due to imprecise recollections of events which happened years prior. Moreover, while Plaintiff’s legal and factual arguments ultimately failed, they were sufficient to preclude a finding of bad faith. Thus, the Court denied Defendants’ motion for fees under the TSPA.
Turning to the Lanham Act, which allows the prevailing party to recover attorneys’ fees in “exceptional cases,” the Court agreed with Defendants that attorneys’ fees were warranted because Plaintiff failed to dismiss its Lanham Act claim, thereby forcing Defendants to seek summary judgment, even after Plaintiff knew at the close of discovery that there was no evidence to support its allegation that Defendant Motif had copied Plaintiff’s products and passed them off as its own. The Court also concluded that Plaintiff should be required to pay all of Defendants’ attorneys’ fees incurred in connection with the summary judgment motion, rather than apportioning them between the Lanham Act claim and other claims, since the claims were inextricably interwoven and arose from a common nucleus of operative fact.
The Court next addressed North Carolina’s Unfair and Deceptive Trade Practices Act, which permits an award of attorneys’ fees incurred in defending a UDTPA claim if the party bringing the action knew, or should have known, the action was frivolous and malicious. Plaintiff’s UDTPA claim was based on its TSPA and Lanham Act claims, as well as its unsuccessful fraud claim. Defendants argued they were entitled to fees based on each of these claims. The Court declined to award fees under the UDTPA based on either the TSPA or fraud claims but agreed that Defendants were entitled to attorneys’ fees under the UDTPA based on the Lanham Act claim for the reasons previously stated. However, Defendants could only have a single recovery of their attorneys’ fees under the two statutes.
Finally, the Court granted in part, and denied in part, Defendants’ motion for attorneys’ fees pursuant to N.C.G.S. § 6-21.5, which allows the Court to award attorneys’ fees if there was a complete absence of a justiciable issue in any pleading. Defendants first argued that they should receive attorneys’ fees under N.C.G.S. § 6-21.5 based on Plaintiff’s TSPA, Lanham Act, and UDTPA claims. The Court denied the motion to the extent it was based on the TSPA claim, but granted it for the other two claims. Defendants also requested attorneys’ fees based on Plaintiff’s efforts to present damages evidence and theories disallowed by the Court. The Court denied this request because the statute only prohibits taking nonjusticiable positions in pleadings, not in motions practice. Lastly, Defendants sought attorneys’ fees for successfully defeating Plaintiff’s counterclaims for defamation, tortious interference, and violation of the UDTPA. The Court agreed that these claims were nonjusticiable since they were procedurally improper, barred by the judicial proceeding privilege, and fatally deficient on the merits. Thus, the Court awarded Defendants their attorneys’ fees in defending against Plaintiff’s counterclaims.
Pursuant to N.C.G.S. § 6-20, the Court also awarded Defendants their costs incurred in connection with Defendants’ motion for summary judgment and Plaintiff’s counterclaims.
Defendants were directed to submit supplemental briefing and supporting documentation detailing their fees and costs incurred in prosecuting their summary judgment motion and defending against Plaintiff’s counterclaims.
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BIOMILQ, Inc. v. Guiliano, 2023 NCBC 77 (N.C. Super. Ct. Nov. 13, 2023) (Robinson, J.)
Key Terms: Rule 12(b)(6); untimely; Rule 12(c)
Following a partial dismissal of its claims, Plaintiff sought leave to file a second amended complaint. The Court granted the motion, and Plaintiff filed its second amended complaint on April 21, 2023. Thirty-two days later, Defendants filed a partial answer, followed three minutes later by their Rule 12(b)(6) motion to dismiss.
The Court, sua sponte, denied the motion as untimely. The Court has consistently interpreted Rule 12(b) to require that a motion to dismiss for failure to state a claim must be filed prior to the filing of an answer, not contemporaneously or minutes after. Since Defendants had filed their partial answer—which constituted an answer for Rule 12(b) purposes even though it did not fully respond to the complaint—prior to the motion to dismiss, the motion to dismiss was untimely. Furthermore, the Court could not treat Defendants’ motion as a Rule 12(c) motion for judgment on the pleadings, as the pleadings were not closed in light of Plaintiff’s right to reply to Defendants’ counterclaim.
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James H. Q. Davis Tr. v. JHD Props., LLC, 2023 NCBC 78 (N.C. Super. Ct. Nov. 14, 2023) (Bledsoe, C.J.)
Key Terms: judicial dissolution; N.C.G.S. § 57D-6-02(2)(i); deadlock
As summarized here, this action arose from disagreements over estate planning vehicles established by Dr. Davis for the benefit of his four sons, namely a trust for each son, as well as two LLCs, which each of the trusts hold an equal interest in and which two of the sons—Charles and Jim—are managers of. The LLCs own four undeveloped tracts of land. After Charles and Jim were unable to reach an agreement on use of the property, two of the trusts filed this action seeking judicial dissolution of the LLCs under N.C.G.S. § 57D-6-02(2)(i). Charles, through his trust, intervened to oppose the dissolution. Both sides moved for summary judgment.
The evidence showed that, although Charles and Jim have been cordial and cooperative in their communications, they have been unable to reach agreement for at least three years, resulting in the failure of the LLCs to conduct any economically useful activity as contemplated by their operating agreements. Moreover, the operating agreements did not provide any mechanism to break the deadlock. As such, the Court concluded that it was not practicable to conduct the LLCs business and therefore, judicial dissolution was warranted.
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Innovare, Ltd. v. Sciteck Diagnostics, Inc., 2023 NCBC Order 55 (N.C. Super. Ct. Nov. 1, 2023) (Davis, J.)
Key Terms: motion to withdraw as counsel; Rules 1.16(b)(6) and (7) of the N.C. Rules of Professional Conduct; unreasonable financial burden
This order addresses Kilpatrick Townsend & Stockton LLP’s motion to withdraw as counsel for Plaintiff. Previously, Kilpatrick had sought and received extensions of time to complete briefing on the parties’ cross-motions for partial summary judgment, due to an issue that had arisen between Plaintiff and Kilpatrick potentially implicating Rules 1.16(b)(6) and (7) of the N.C. Rules of Professional Conduct.
Thereafter, Kilpatrick filed the motion to withdraw, in which Kilpatrick represented that Plaintiff had a substantially unfulfilled obligation to Kilpatrick regarding legal services and that further representation of Plaintiff would result in an unreasonable financial burden on Kilpatrick. Kilpatrick also represented that it had sought Plaintiff’s consent, but Plaintiff had declined to indicate whether it consents to the requested relief.
The Court granted Kilpatrick’s motion, ordering that Kilpatrick would be released from further representation of Plaintiff in the present matter upon the filing of a notice of appearance by Plaintiff’s new counsel, which must occur within 30 days of the order. If Plaintiff failed to obtain new counsel, the Court may dismiss Plaintiff’s complaint and enter summary judgment in favor of Defendant on its counterclaims.
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Husqvarna Pro. Prods., Inc. v. Robin Autopilot Holdings, LLC, 2023 NCBC Order 56 (N.C. Super. Ct. Nov. 1, 2023) (Bledsoe, C.J.)
Key Terms: consent protective order; attorneys’ eyes only
This matter was before the Court sua sponte to address a dispute between the parties relating to certain provision in the parties’ proposed consent protective order. The parties’ dispute centered around materials provided by Defendants in discovery which are labelled “Attorneys’ Eyes Only” or “Confidential – Source Code.” Defendants argued that they had a legitimate interest in avoiding potential competitive harm that could result from the disclosure of these materials. Plaintiffs argued that they would be severely prejudiced if their outside counsel could not share and discuss this highly-technical material with their in-house counsel and experts.
The Court agreed with both sides but concluded that the risk of misuse of the material could be ameliorated by 1) limiting the disclosure to a small number of Plaintiffs’ in-house attorneys who were not engaged in competitive decisionmaking in the areas of Plaintiffs’ business that compete with Defendants; and 2) requiring that any retained experts with access to the materials (i) sign a non-disclosure agreement; (ii) execute an affidavit under penalty of perjury that they are not competing against the party who produced the confidential information nor will they use the confidential material for improper purposes; (iii) provide answers to a series of questions listed by the Court regarding the expert’s background and employment; and (iv) provide the retaining party the expert’s curriculum vitae. The Court ordered that these documents be submitted for in camera review promptly upon retention of the expert.
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BIOMILQ, Inc. v. Guiliano, 2023 NCBC Order 57 (N.C. Super Ct. Nov. 3, 2023) (Robinson, J.)
Key Terms: motion for entry of default; motion to dismiss; answer
Plaintiff BIOMILQ moved to dismiss all but three of the counterclaims asserted by Defendants but did not file any answer. Defendants then moved for entry of default against BIOMILQ for its failure to answer the three counterclaims that were not addressed in BIOMILQ’s motion to dismiss.
The Court denied the motion for entry of default without a hearing and without awaiting the filing of a response by BIOMILQ. Defendants did not cite any caselaw in support of their motion and Rule 12 is clear: the time to answer a pleading is tolled until the Court rules on the pending 12(b)(6) motion.
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Howard v. IOMAXIS, LLC, 2023 NCBC Order 58 (N.C. Super. Ct. Nov. 3, 2023) (Earp, J.)
Key Terms: motion to compel; attorney-client privilege; work product doctrine; common interest agreement; joint defense rule; waiver
This matter came before the Court upon the IOMAXIS Defendants’ (“IOMAXIS”) motion to compel the production of communications and agreements between Plaintiff and Defendant Nicholas Hurysh, Jr. The communications at issue were withheld from discovery on the basis of attorney-client privilege or work product doctrine. Plaintiffs argued that a common interest agreement between them and Hurysh prevented the waiver of any applicable privilege to documents shared between them. IOMAXIS argued that a common interest could not exist between Plaintiffs and Hurysh because: (i) Plaintiffs and Hurysch are on opposite sides of the lawsuit; and (ii) no common interest has been identified in the case.
The Court disagreed with both contentions. The common interest doctrine does not require allied parties to be completely aligned on all matters in the litigation. Moreover, while mere conclusory allegations that a common interest exists are insufficient, after conducting an in camera review of the documents withheld, the Court determined that Plaintiffs and Hurysh had multiple interests in common with respect to the litigation. Nevertheless, the documents here revealed that the common interest agreement was not finalized until November 20, 2020. Thus, the Court granted IOMAXIS’ motion to the extent that it compelled the production of documents and communications between Plaintiff and Hurysh prior to that date, as well as purely administrative communications. The Court denied the motion as to all remaining communications and documents exchanged relating to the parties’ strategies with respect to the claims in the case.
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Mauck v. Cherry Oil Co., 2023 NCBC Order 59 (N.C. Super. Ct. Nov. 14, 2023) (Davis, J.)
Key Terms: supervision of call of shares; share valuation; appraiser; motion to supplement complaint; N.C.G.S. § 55-16-04; corporate record inspection
This suit arose from a dispute among family members over the management of their business, Cherry Oil. As summarized here, the Court previously granted summary judgment to Defendants on Plaintiffs’ remaining claims. In this Order, the Court addressed several motions relating to 1) the steps remaining to effectuate the purchase of Plaintiffs’ shares in Cherry Oil, a process that began with Defendants’ prior vote to exercise the “call” provision in the Shareholders’ Agreement; and 2) Cherry Oil’s alleged refusal to grant Plaintiffs the opportunity to inspect certain records of the company.
Having failed to reach an agreement with Plaintiffs on the process for valuing their shares under the terms of the Shareholders’ Agreement, Defendants filed a motion proposing alternative methods for proceeding with the valuation, to which Plaintiffs responded with their own proposal. The Court refused Defendants’ proposal of having the Court, rather than appraisers, decide the value of shares. Instead, the Court facilitated an agreement at the hearing on the motions, under which each side would designate an appraiser of their choice, and the two selected appraisers would subsequently select a third appraiser.
The Court next addressed whether Plaintiffs were entitled to obtain additional documents from Cherry Oil. Since Plaintiffs remain shareholders until they are actually bought out, they retained the statutory right to inspect certain corporate records as provided in N.C.G.S. § 55-16-02. Thus, in the interest of judicial economy, the Court ordered that Plaintiffs were permitted to file a supplemental complaint to seek an order, pursuant to N.C.G.S. § 55-16-04, allowing them to inspect and copy Cherry Oil’s records.
By: Natalie E. Kutcher and Ashley Oldfield
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The information in this article is not, nor is it intended to be, legal advice. You should consult an attorney for advice regarding your individual situation.