Current Developments and Firm News
Clients often ask me at the outset of case whether they will be able to recoup their attorneys’ fees should we prevail. A reasonable question. Unfortunately, under our American system of justice—as opposed to the legal systems in other countries—each side generally remains responsible for their own respective attorneys’ fees. Win or lose.
This remains the general standard in North Carolina as well. However, there are some notable exceptions. As I mentioned in another post, North Carolina reversed course under previous common law to allow for the enforcement of a reciprocal provision for the recovery of attorneys’ fees in business contracts. Before the enactment of this law, even a contract that allowed for a prevailing party to recover its attorneys’ fees was deemed unenforceable.
A recent decision from Judge Murphy in the North Carolina Business Court this past week highlights another exception. In Jacobson v. Walsh, 2014 NCBC 2, Judge Murphy awarded attorneys’ fees to the defending party based on the “Plaintiff’s failure to dismiss his breach of fiduciary duty claims against Walsh after Plaintiff stated in his deposition that the two never had a previous business relationship.” Opinion at ¶ 95. Judge Murphy rejected the plaintiff’s excuse that his allegation in the complaint of a previous relationship was “an oversight." Judge Murphy concluded that this “oversight” caused the defendant to unnecessarily incur the costs and inconvenience of defending against two claims that lacked a justiciable issue of law or fact.” Id.
Judge Murphy applied NC Gen. Stat. § 6-21.5. This section states that “[i]n any civil action, special proceeding, or estate or trust proceeding, the court, upon motion of the prevailing party, may award a reasonable attorney's fee to the prevailing party if the court finds that there was a complete absence of a justiciable issue of either law or fact raised by the losing party in any pleading.” Judge Murphy concluded that this fee shifting statute applied because the “losing party persisted in litigating the case after a point where he should reasonably become aware that the pleading he filed no longer contained a justiciable issue." Op. ¶ 94 (quoting Sunamerica Fin. Corp. v. Bonham, 328 N.C. 254, 258, 400 S.E.2d 435, 438 (1991))
This example provides a word to the wise to litigants and counsel that may be tempted to continue to press unmeritorious claims in a case long after the record obliterates a genuine legal or factual issue. It also provides some hope for a prevailing party to be compensated for the costs associated with defending against a frivolous claim or issue.
This week, the North Carolina Business Court provided yet another object lesson for companies seeking to protect their interests through non-competition agreements. In Outdoor Lighting Perspectives Franchising, Inc. v. Harders (2012 NCBC 26), the Business Court denied the Plaintiff’s motion for a preliminary injunction, and in doing so, invalidated the Plaintiff’s covenant not to compete on grounds that it was overbroad. This decision provides another example to businesses and their counsel to draft restrictive covenants with careful attention to their scope and reach, whether in the employment context, the sale of a business, or in this case, in connection with a franchise.
In Outdoor Lighting Perspectives, the Plaintiff Franchisor sought to enforce the following restrictive covenant in its franchise agreement with the Defendant Franchisee:
Upon termination or expiration . . . transfer, sale or assignment of this Agreement by the Franchisee, neither the Franchisee, the operating manager or the Franchisee’s owners will have any direct or indirect interest (i.e. through a relative) as a disclosed or beneficial owner, investor, partner, director, officer, employee, consultant, representative or agent, for two (2) years, in any Competitive Business within 100 miles of the Territory or any other franchisee’s Franchisor’s or Affiliates territory. (Op. at ¶ 5.) (emphasis added)
Key to the Business Court’s decision was the definition of “Competitive Business,” which the Business Court held was overbroad in relation to the activities that the Defendant Franchisee actually performed under the agreement. Although the agreement contained a “Definitions” section, the term “Competitive Business” was not defined there. “Competitive Business” is described elsewhere in the agreement as any activity “to be used or employed in any business operating in competition with an outdoor lighting business or any business similar to the Business. . .” As defined in the agreement’s “Definitions” section, at least when the term is capitalized, “Business” “means the business operations conducted or to be conducted by the Franchisee consisting of outdoor lighting design and automated lighting control equipment and installation services, using the Franchisor’s System and in association therewith the Marks.”
According to Judge Gale, had the plaintiff simply limited the scope of “Competitive Business” to capitalized “Business,” the Business Court indicated that it would have upheld the provision. (Op. at ¶¶ 35-37.) Judge Gale reasoned that the definition of “Business” with a capital “B” was narrowly tailored to the plaintiff’s actual business. However, what sealed the Plaintiff’s fate was its inclusion of “business” small “b” in the restriction it sought to enforce. Judge Gale determined that the provision as drafted “further restricts Defendants from any outdoor lighting business and any business which competes with a business “similar to” the Franchisee’s business. This expansive language extends well beyond activities that Defendants performed pursuant to the Agreement.” (Op. at ¶ 35.) (emphasis added)
Apart from extending beyond the Defendants’ activities, Judge Gale concluded that the restriction “likewise extends beyond the business [the Plaintiff] itself conducts. The language thus extends beyond [Plaintiff's] legitimate business interests." (Op. at ¶35.) Judge Gale thus held that the term "Competitive Business" was overly broad and “reached beyond the outer limits of North Carolina court decisions upholding restrictive covenants" and it therefore fell "within those cases which prohibit unreasonable restrictions on competition." (Op. at ¶6.)
The lesson here is to be very careful with the scope of any non-competition agreement. If a company or franchisor attempts to restrain competition beyond its business or the actual activates or services it performs, the risk is very great that such a provision could be struck down if later challenged. As the Plaintiff in Outdoor Lighting Perspectives learned, the difference between winning and losing can sometimes come down to a decision on a decision between capital and lower-case letters.
Yesterday, in Hest Technologies, Inc. v. North
Carolina the North Carolina Court of
Appeals invalidated the state’s prohibition on video sweepstakes machines (N.C.
Gen Stat § 14-306.4(a)(3)(i)).
A divided panel ruled that the law is an unconstitutionally overbroad regulation of free speech in violation of
the First Amendment.
The Plaintiffs in Hest Technologies developed sweepstakes management software to conduct promotional sweepstakes in consumer stores and convenience stores to market certain products. When the plaintiffs’ customers make a qualifying purchase of the plaintiffs’ products, they receive one or more sweepstakes entries. Alternatively, individuals may enter the sweepstakes without a purchase by completing entry forms that are available at each retail location.
A three-judge panel ruled 2-to-1 to uphold the decision of the trial court judge invalidating a portion of the 2010 law. The Court of Appeals even went one step further, striking down the law in its entirety. This piece of legislation was aimed at the video gambling industry and followed on the heels of a 2007 law that prohibits video poker machines. Specifically, the legislation amended the our state’s General Statutes to include a provision which prohibited conducting or promoting any sweepstakes which uses an “entertaining display.”
On appeal the State argued that the restrictions do not implicate First Amendment rights because they does not actually regulate speech, protected or otherwise. Instead, the State contends that the law only regulates conduct. The majority of the panel disagreed. It held that the statute attempts to regulate the use of an electronic machine or device in conjunction with a sweepstakes, however, does so in such a broad manner that results in a prohibition that is constitutionally problematic. The majority listed the examples of banned activities set forth in N.C. Gen. Stat. § 14-306(a)(3), and noted importantly that the restrictions do not limit the definition of entertaining display, and thus, the statute ultimately bans all “visual information . . . that takes the form of actual . . . or simulated game play.”
Writing for the majority, Judge Ann Marie Calabria cited a recent U.S. Supreme Court ruling that video games — like books and movies — are entitled to First Amendment protections: “The General Assembly cannot, under the guise of regulating sweepstakes, categorically forbid sweepstakes operators from conveying the results of otherwise legal sweepstakes in a constitutionally protected manner.”
Judge Robert C. Hunter dissented, writing that the law should be upheld because it regulates conduct, not speech. Under the law, he reasoned that the plaintiffs are still “free to allow anyone to play their video games so long as the video games are not used to conduct or promote sweepstakes.”
Because the decision was a split ruling, North Carolina’s Supreme Court is obligated to review the ruling. The State Attorney General’s Office announced it plans to appeal the Court of Appeals’ decision. Thus, the battle will continue.
If you or your client has been served with requests for admission, a recent decision from the North Carolina Court of Appeals highlights how important it is to respond before the deadline has expired. Inattention, laziness or carelessness can be fatal to your case. In the case of Nyguyen v. Taylor (COA11-369, Feb 21, 2012), a defendant’s failure to respond to requests for admission led to a $15,000,000 judgment.
For benefit of non-attorneys, requests for admission are a type of discovery device in which one party serves upon another a written set of proposed facts (i.e., “The light was green when Mr. Jones drove through the intersection.”). The receiving party must either admit or deny each fact in a separate written response. Rule 36 of the North Carolina Rules of Civil Procedure establishes strict deadlines for the responses.
On October 28, 2005, the plaintiffs, who were officers with the Greensboro Police Department, arrested Jayceon Taylor, a hip hot artist better known as “The Game” at the Four Seasons Mall in Greensboro and charged him with criminal trespass, communicating threats, and disorderly conduct. An individual in Mr. Taylor’s entourage recorded the arrest with a video camera. A heavily edited version of that video recording, which made it appear as though Mr. Taylor was wrongfully arrested, was included as a bonus feature on a documentary DVD released by Taylor and others, entitled “Stop Snitchin’ Stop Lyin.”
The plaintiffs filed a complaint against Mr. Taylor, and multiple other individuals and companies, including Black Wall Street Records, Grind Music, Jump Off Films, Universal Home Video, and YouTube. The officers’ claims included defamation, wrongful appropriation of a likeness, and unfair and deceptive practices.
Mr. Taylor prevailed in part on a Rule 12(b)(6) motion to dismiss, which the plaintiffs appealed. The trial court stayed the action while the appeal was pending. On October 20, 2009, the Court of Appeals dismissed the plaintiffs’ appeal on procedural grounds. The plaintiffs’ claims against Mr. Taylor for defamation, wrongful appropriation, and unfair and deceptive practices remained.
Afterwards, the plaintiffs served Mr. Taylor with requests for admission. He did not respond within the thirty-day time period. It does not appear from the record that Mr. Taylor ever responded to the requests for admission. At trial, the plaintiffs moved for summary judgment against Mr. Taylor on the basis of his failure to respond to the requests for admission. The trial court entered summary judgment against Mr. Taylor and proceeded to a bench trial on the issue of damages. It awarded the plaintiffs a total of $5M in compensatory damages, and $10M in punitive damages against the remaining defendants, including Mr. Taylor.
On appeal, Mr. Taylor challenged the trial court’s summary judgment award on the basis of the unanswered requests for admission. The Court of appeals rejected his argument. Instead, it held that the trial court properly relied upon Mr. Taylor’s admissions in granting summary judgment to plaintiffs.
The plaintiffs served requests for admission under Rule 36, which provides, among other things, “[t]he matter is admitted unless, within 30 days after service of the request, or within such shorter or longer time as the court may allow, the party to whom the request is directed serves upon the party requesting the admission a written answer or objection addressed to the matter, signed by the party or by his attorney.”
Mr. Taylor did not respond. The Court of Appeals concluded with no debate that the facts within the plaintiffs’ request were deemed admitted by Mr. Taylor, because he failed to answer or otherwise object to the requests. It noted that our Supreme Court has stated that “[f]acts that are admitted under Rule 36(b) are sufficient to support a grant of summary judgment.” Goins v. Puleo, 350 N.C. 277, 280, 512 S.E.2d 748, 750 (1999). The Court of Appeals went on to conclude that the admitted facts sufficiently established each element of defamation per se, wrongful appropriation, and unfair and deceptive practices.
The Court of Appeals affirmed the trial court’s decision to award the plaintiffs summary judgment against Mr. Taylor and that it properly considered the unanswered requests for admissions at the damages trial. The Court did vacate a portion of the punitive damages award for other reasons and remanded for consideration of whether evidence of certain
aggravating factors met required standards of proof.
The lesson here is to treat requests for admission with the utmost attention and careful consideration. Litigants must take additional steps with the court to seek relief for unanswered requests for production, interrogatories, or when a deponent does not show for his or her deposition. This is not the case with requests for admission. Under Rule 36, if a party does not object or respond with the required time period, they are automatically deemed admitted. Ignoring such requests could be a multi-million dollar mistake.
In some cases, a plaintiff will serve requests for admission upon a defendant with the complaint and summons, or very quickly afterwards – perhaps even before a lawyer is retained. In that case, it is very important to immediately consult legal counsel. Do not rely on casual agreements with the opposing side, or have the mistaken belief that a failure to respond can be easily remedied later. Inattention is a risk taken at your own peril, as evident in this example.
A nearly universal feature of most commercial contracts is a forum selection clause. If drafted correctly, this will allow one to preselect the jurisdiction for a future lawsuit that may occur. In some cases, a particular forum may be desired because of an advantageous legal standard. In most cases, the drafter wants any dispute to occur on its “home turf.” This saves on costs, and can obviate a need to obtain different counsel licensed or working elsewhere. A recent decision from the North Carolina Business Court, however, highlights the crucial importance of choosing particular language to better ensure enforceability later.
In North Carolina, a court will enforce a forum selection clause only if it is mandatory as to where the case must be filed. Roth v. Penguin Toilets, LLC involved a forum selection clause that indeed appears fairly mandatory on its face, and likely will to many readers. The defendant Penguin Toilets based its motion to dismiss on the following language in the company's LLC operating agreement:
Any dispute or other legal action concerning this Agreement, including any arbitration or litigation proceedings shall be conducted in Wayne County, Michigan.
Penguin Toilet apparently chose Wayne County, Michigan as its forum of choice because its company headquarters was situated there. Penguin Toilet likely assumed that using “shall” would be sufficient enough to render the clause enforceable, and mandatory. Judge Murphy of the North Carolina Business Court did not agree, and denied Penguin Toilet’s motion to dismiss.
Penguin Toilet’s former President, who claimed the terms of his employment agreement were breached upon his termination from the company, filed the lawsuit. Although there was no forum selection clause in the employment agreement, Penguin Toilet argued that the LLC’s operating agreement was incorporated into the employment agreement, thereby triggering the forum selection clause.
Judge Murphy did not agree. He found that the former president’s suit concerned his rights under the employment agreement, not his rights as a member of the LLC. Therefore, Judge Murphy held that the forum selection clause did not become incorporated into the employment agreement at issue in the case.
Judge Murphy also ruled that the forum selection clause within the LLC operating agreement was unenforceable, so that even if it was incorporated into the employment agreement, it would not require a dismissal of the case. A North Carolina court will dismiss a case based on a forum selection clause only if the clause is mandatory on its face as to where the case must be filed. Mark Group Int’l, Inc. v. Still, 151 N.C. App. 565, 566 S.E.2d 160 (2002). According to Judge Murphy, Penguin Toilet’s forum selection clause stating, “any arbitration or litigation proceedings shall be conducted in Wayne County, Michigan,” was not “mandatory.”
Citing Mark Group, Judge Murphy noted that the North Carolina Court of Appeals has made clear that to be mandatory, a clause must use terms such as “exclusive,” “sole,” or “only.” The word “shall” is not enough. Moreover, the Committee on Rules of Practice and Procedure drafting revised Rules of Federal Evidence recently explained, “‘shall’ is no longer generally used in spoken or clearly written English. The restyled rules replace ‘shall’ with ‘must,’ ‘may,’ or ‘should,’ depending on which one the context and established interpretation make correct in each rule.”
This decision should signal a warning for the use of "shall" in other contexts. I have certainly seen it used in many other clauses in which the intent was to make some performance or obligation mandatory. Although this case concerned a forum selection clause, we should be careful with the use of "shall." We may find that it will not have as strong of a meaning as we once thought.
On a final note, for contracts entered into in North Carolina, Judge Murphy’s decision and lesson may be academic for clauses seeking litigation outside of the state. For a contract entered into in North Carolina, N.C. Gen. Stat. §22B-3 applies. Under this provision of the law, a forum selection clause is against public policy—and unenforceable—if it requires litigation outside of North Carolina and it’s “in a contract entered into in North Carolina.”