A Primer on the North Carolina
Business Court
Association of Corporate Counsel – Charlotte Chapter
March 26, 2013
Presented by:
Fred M. Wood, Jr., Jonathan Heyl and Heather C. White
Smith Moore Leatherwood LLP
525 N. Tryon St., Suite 1400
Charlotte, NC 28202
(704) 384-2600
I.
Introduction
The North Carolina Business Court is on the front line of business law issues in North
Carolina. For business litigators and corporate counsel, it is important to follow the Court in
order to stay up to date on corporate matters in North Carolina. Further, the Business Court is a
preferred forum for litigating complex business disputes in North Carolina, as explained below.
The following outline provides a brief overview of the North Carolina Business Court. This
outline covers the following information: (a) the history and philosophy of the Court, (b) why
you want your cases heard in the Court, (c) which cases qualify to be heard in the Court, (d) how
to bring cases in the Court, and (e) recent Court decisions to note. The treatment of the topics
below is not comprehensive.
II.
History and Philosophy of the North Carolina Business Court
A.
Why Establish a Business Court?
In April 1994, Governor Hunt established the North Carolina Commission on Business
Laws and Economy (the “Commission”). This Commission was charged with recommending
“any needed changes in existing statutes and regulations which affect the operation of businesses
in North Carolina.” See General Rules of Practice for Superior and District Courts Rule 2.2 cmt.
1. Among other things, the Commission focused on proposing amendments to Chapter 55 of the
North Carolina General Statutes – the statute governing corporations. Id. The Commission
looked at recommending amendments to statutes and other regulations to assure that North
Carolina would offer a legal environment that would allow business to operate successfully in
this state and to attract foreign business to relocate and incorporate here. Id.
In January 1995, the Commission issued a report, recommending among other things,
that North Carolina establish a business court. In doing so, the Commission looked to Delaware
and its nationally-renowned Chancery Court. Rule 2.2 contains commentary on the influence of
the Delaware Chancery Court on the Commission’s decision to recommend a business court:
Many national corporations incorporate in the State of Delaware
because that state’s Chancery Court which provides a high level of
judicial expertise on corporate law issues.
It also observed the
desirability of a state having a substantial body of corporate law that
provides predictability for business decision making. Also, it is
essential that corporations litigating complex business issues receive
timely and well reasoned written decisions from an expert judge.
Rule 2.2 cmt 1. The Commission reasoned that amending North Carolina’s laws to be more
consistent with the Model Corporation Act was only half the solution. In addition, the
Commission determined that it was also important to change North Carolina’s court system to be
as responsive and predictable as the Delaware Chancery Court in dealing with complex business
disputes. In sum, state officials believed the Business Court would spur business development
by attracting out-of-state businesses to North Carolina by developing their understanding of
North Carolina corporate law. Jacqueline Bueno, North Carolina to Establish Business Court,
WALL ST. J. (Souteast ed.), Oct. 25, 1995, at S1, 1995 WL-WSJ 9905195.
B.
Formation
In response to the Commission’s recommendation, in the fall of 1995, the North Carolina
General Assembly appropriated funds for the formation of the North Carolina Business Court.
The North Carolina Supreme Court amended Rules 2.1 and 2.2 of the General Rules of Practice
for the Superior and District Courts to allow for certain cases to be designated as “complex
business cases” and assigned to a certain Special Superior Court Judge to hear exclusively hear
those cases.
In January 1996, Governor Hunt appointed Ben F. Tennille as a Special Superior Court
Judge and Chief Justice Mitchell designated him as North Carolina’s first Special Superior Court
Judge for Complex Business Cases. Judge Tennille is largely responsible for the early growth
and direction of the North Carolina Business Court.
C.
Early Years
In the early years of the Business Court’s existence, the North Carolina General
Assembly did not provide any funding beyond Judge Tennille’s salary. Carrie O’Brien, The
North Carolina Business Court: North Carolina’s Special Superior Court for Complex Business
Cases, 6 N.C. BANKING INST. 367, 377 (2002). Consequently, Judge Tennille worked from a
home office without any assistance. Id. When he needed a courtroom, he called around different
courthouses until he found available space. Id.
In 1999, the Business Court found a permanent home in Greensboro, where is leased a
space that had previously functioned as a courtroom. Id. The General Assembly also
appropriated additional funds for the Business Court to create an electronic filing system. Id. at
378-82. The electronic filing system set the Business Court apart from other North Carolina
state courts, which still rely on paper filing today. The Business Court created a website for
electronic filing, where litigants and members of the public can access an online database of the
court’s opinions and dockets.
D.
Expansion
In 2005, the North Carolina General Assembly appropriated additional funds to expand
the North Carolina Business Court. Specifically, additional courts were added in Charlotte and
Raleigh. Judge John R. Jolly, Jr. was appointed to be the Raleigh judge and Albert Diaz was
appointed to be the Charlotte judge. In 2011, Judge Tennille retired and was replaced by Judge
James L. Gale in Greensboro. Also in 2011, Judge Diaz left the Business Court for the Fourth
Circuit, and he was replaced by Judge Calvin E. Murphy in Charlotte. Currently, Judge Jolly in
Raleigh is the Chief Judge of the Business Court, as he is the most senior judge.
Over the last fifteen years, the North Carolina General Assembly has continued to
increase the Business Court’s budget as it continues to grow in popularity and case load.
Originally, Judge Tennille operated without a law clerk or judicial assistant. In the mid-2000s,
the Business Court was appropriated funds to hire a law clerk and assistant for each judge. In
early 2012, additional funds were appropriated for each judge to hire a second law clerk.
E.
Building a Body of Law
One of the largest reasons for establishing the Business Court was to build a body of case
law to serve as guidance on business issues to the business community. See O’Brien, supra at
376. To that end, the Business Court judges are required to write an opinion explaining the final
disposition of each case. See Rule 2.1. Although not required under Rule 2.1, the Business
Court generally writes an opinion on any dispositive motion (even when the motion is denied) or
other novel non-dispositive issues. The purposes of the written opinion is to create persuasive
legal authority that will assist businesses operating in North Carolina predict how their cases
might turn out if designated as a complex business case. Although Business Court opinions are
not binding precedent, they are persuasive. Indeed, the Business Court often cites its prior
decisions when analyzing legal issues. In 2012, the Business Court listed 62 opinions on its
website. In 2011, the Court issued 46 opinions, and 22 in 2010. These statistics show how the
Business Court continues grow every year and build a body of case law.
III.
Why You Want Your Cases Heard in the North Carolina Business Court
A.
B.
C.
Experienced judges with expertise in complex business litigation.
1.
Private practice experience in commercial litigation prior to joining the
bench (i.e., Judge Gale – Smith Moore Leatherwood; Judge Jolly – Poyner
Spruill).
2.
Expertise in business law because these judges only hear “complex
business cases.” To the contrary, other superior court judges ordinarily
hear criminal cases and a wide variety of civil cases.
Well-reasoned and thoughtful decisions.
1.
The judges are required to write opinions on dispositive motions pursuant
to Rule 2.1 of the General Rules of Rules of Practice for Superior and
District Courts. The judges often elect to write opinions on nondispositive matters of first impression or novel issues. The opinions are
neither published, nor binding, but they are posted on the Business Court’s
website. Further, the opinions are reported on Westlaw and LexisNexis.
2.
Each judge has two law clerks (similar to federal district court judges).
The law clerks assist in legal research and writing, drafting of opinions
and orders, and other case management duties.
Same judge throughout the life of the case.
1.
Cases are better managed as each judge controls his or her docket and
handles all pretrial procedures and scheduling.
2.
Eliminates or reduces the risk of conflicting decisions on substantive and
evidentiary matters.
3.
D.
E.
IV.
Avoids inefficiency of explaining the facts and complex issues to multiple
different judges at different stages of the case.
Electronic filing and case management system.
1.
Cost savings – eliminates need to print and serve multiple copies of
pleadings and other court papers. Litigants are only required to file one
paper copy with the Clerk of Court in the county of origin. Local Rule 8.1.
2.
Electronic filing is analogous to the federal court system. The electronic
docket is accessible online and documents can be searched by keywords,
which promote efficiencies for litigants. See www.ncbusinesscourt.net.
The Local Rules are modeled after the federal rules.
1.
Practice and procedure in the Business Court is more analogous to federal
court than North Carolina state court. This is desirable and advantageous
to counsel accustomed to litigating in federal court or for out-of-state
counsel unfamiliar with North Carolina state court procedures.
2.
Local Rule 17 sets forth the protocol for case management conferences in
the Business Court. This Rule is modeled after the Federal Rule of Civil
Procedure 26(f). Early case management conferences allow litigants to
agree on a case scheduling plan and set forth a discovery plan, including
electronic discovery protocols. The benefits of effective case management
results in a more efficient and less costly disposition of cases.
The Types of Cases That Qualify for the North Carolina Business Court
A.
N.C. Gen. Stat. § 7A-45.4 sets forth a list of the types of cases that qualify to be
designated as “complex business cases” and assigned to the Business Court. A
“mandatory complex business case” involves a “material issue” related to:
1.
“The law governing corporations, except charitable and religious
organizations qualified under G.S. 55A-1-40(4) on the grounds of
religious purpose, partnerships, limited liability companies, and limited
liability partnerships, including issues concerning governance, involuntary
dissolution of a corporation, mergers and acquisitions, breach of duty of
directors, election or removal of directors, enforcement or interpretation of
shareholder agreements, and derivative actions.”
a.
Examples: shareholder derivative suits, minority shareholder
oppression claims, breach of fiduciary claims against officers and
directors, class action merger litigation, dissolution and
receivership cases, claims arising under Chapter 55 (Business
Corporation Act), Chapter 55B (Professional Corporation Act),
Chapter 57C (LLC Act), Chapter 59 (Partnership Act).
2.
“Securities law, including proxy disputes and tender offer disputes.”
a.
3.
“Antitrust law, except claims based solely on unfair competition under
G.S. 75-1.1.”
a.
4.
Examples: violations of the North Carolina Securities Act
(Chapter 78A), Tender Offer Disclosure Act (Chapter 78B), and
the Investment Advisers Act (Chapter 78C); securities lending
litigation. See N.C. Dep’t of State Treasurer v. Bank of New York
Mellon, 2012 NCBC 54 (N.C. Super. Ct. Oct. 31, 2012).
Examples: anti-monopoly, anti-competition, and common law
antitrust claims arising under Chapter 75 (not N.C. Gen. Stat. § 751.1 exclusively); federal antitrust claims; claims under the
Monopoly Clause of the North Carolina Constitution. See
Legalzoom.com, Inc. v. North Carolina State Bar, 2012 NCBC 47
(N.C. Super. Ct. Aug. 27, 2012).
“State trademark or unfair competition law, except claims based solely on
unfair competition under G.S. 75-1.1.”
a.
Cases involving only a breach of a non-competition agreement are
not within the mandatory “unfair competition” jurisdiction of the
Business Court. See Workplace Benefits, LLC v. Lifecare, Inc.,
Wake County No. 08 CVS 8528, slip op. (July 14, 2008) (Tennille,
J.).
b.
However, additional allegations surrounding the breach of a noncompete might give rise to mandatory jurisdiction. “For example,
allegations of the theft of trade secrets which provide a competitive
advantage to one party could give rise to a mandatory case. See
e.g., Analog Devices v. Michalski, 157 N.C. App. 462, 579 S.E.2d
449 (2003). Also, actions designed to unfairly damage another’s
business would give rise to an unfair competition claim. See, e.g.,
Sunbelt Rentals, Inc. v. Head & Engquist Equip., LLC, 174 N.C.
App. 49, 620 S.E.2d 222 (2005).” Workplace Benefits, Order at 2;
see also New Breed, Inc. v. Golden, Guilford County No. 12 CVS
7847, slip op. (Sept. 21, 2012) (Jolly, J.) (recognizing that
allegations of employee raiding and misappropriation of trade
secrets and confidential information to harm a business rival will
give rise to mandatory jurisdiction).
5.
“Intellectual property law, including software licensing disputes.”
6.
“The Internet, electronic commerce, and biotechnology.”
7.
V.
“Tax law, when the dispute has been the subject of a contested tax case for
which judicial review is requested under G.S. 105-241.16 or the dispute is
a civil action under G.S. 105-241.17.”
a.
This subsection gives the Business Court jurisdiction over parties
seeking judicial review of a contested tax case decided in the
Office of Administrative Hearings by an Administrative Law
Judge.
b.
Examples: state and local taxation disputes with the North
Carolina Department of Revenue or other municipal entities. See
Kimberly Rice Kaestner 1992 Trust v. N.C. Dep’t of Rev., 2013
NCBC 9 (N.C. Super. Ct. Feb. 11, 2013); Wake County et al. v.
Hotels.com, L.P. et al., 2012 NCBC 61 (N.C. Super. Ct. Dec. 19,
2012).
How to Get a Case in to the North Carolina Business Court
A.
Removal Procedure for “Mandatory Complex Business Cases”
1.
The party seeking to “remove” a case to the Business Court must file a
notice of designation, which must state the basis that the civil action meets
the criteria for designation as a mandatory complex business case under
N.C. Gen. Stat. § 7A-45.4. This statute is sometimes referred to as the
“removal statute” or “mandatory statute.”
2.
Timing:
a.
Plaintiff/third-party plaintiff – notice of designation must be filed
contemporaneously with the filing of the complaint or third-party
complaint.
b.
Defendant/other party – notice of designation must be filed within
thirty (30) days of receipt of service of the pleading seeking relief
from defendant or other party.
c.
Intervenor – notice of designation must be filed
contemporaneously with the filing of a motion to intervene.
3.
Fee – $1,000 filing fee must be paid upon assignment of the case to a
Business Court Judge. This one-time fee is in addition to general state
court filing fees.
4.
Service – the notice of designation must be filed in the county of venue,
served on parties, and e-mailed to Chief Justice Sarah Parker via David F.
Hoke (david.f.hoke@nccourts.org) and Chief Judge of the Business Court
John R. Jolly, Jr. via Christy Rutan (Christy.rutan@ncbusinesscourt.net).
The complaint or other pleading giving rise to Business Court jurisdiction
should be attached to the notice of designation.
5.
B.
Procedure – After the notice of designation is filed and served, the Chief
Justice of the Supreme Court will enter a “designation order,” which will
provisionally designate the case a “mandatory complex business case.”
Then, the case is referred to the Chief Judge of the Business Court. The
Chief Judge will review the notice of designation and determine whether
the case meets the criteria for designation under N.C. Gen. Stat. 7A-45.4.
If the Chief Judge determines that the case does not satisfy the
requirements of N.C. Gen. Stat. 7A-45.4, then he will remand the case to
the superior court in the county of venue. If the Chief Judge determines
that the case falls within the statute, then he will assign the case to one of
the three Business Court judges.
Rule 2.1 Designation of “Complex Business” Cases
1.
If a case does not meet the substantive requirements for mandatory
complex business designation under N.C. Gen. Stat. § 7A-45.4, then a
party may still designate the case to the Business Court under Rule 2.1 of
the General Rules of Practice for Superior and District Courts. For
example, there are times when a party fails to designate within the
requisite period of time or the nature of the case does not fall within the
substantive criteria of the statute. The designation process under Rule 2.1
is discretionary, not “mandatory.”
2.
To have a case considered for discretionary complex business designation,
a party must request a recommendation from the Senior Resident Superior
Court Judge or presiding Superior Court Judge in the county of venue by
letter or motion. Conventions and practices regarding Rule 2.1
designation vary by county. If a Superior Court Judge recommends the
case for Rule 2.1 designation, then the recommendation is submitted to the
Chief Justice of the Supreme Court and he/she has the discretion to
designate the case as a “complex business” case. Discretionary “complex
business” cases are assigned to a Business Court Judge by the Chief
Justice.
3.
As a practical matter, very few cases are designated to the Business Court
under Rule 2.1. Prior to the enactment of N.C. Gen. Stat. § 7A-45.4 in
2008, all cases were designated to the Business Court under Rule 2.1. As
North Carolina commercial litigators have become more familiar with
N.C. Gen. Stat. § 7A-45.4, they have learned to designate cases under the
statute, instead of Rule 2.1. The procedure under the statute is
“mandatory” and fairly straightforward, as compared to the
“discretionary” nature of Rule 2.1. Accordingly, Rule 2.1 is now a rarely
utilized mechanism for designating cases to the Business Court.
C.
VI.
Assignment of Cases. The Chief Judge determines which Business Court judge
will be assigned to preside over the case. Several factors are considered when
determining where to assign the case. Those factors include geography, current
case load of each judge, area of law, and conflicts of interest. Geography
arguably plays the greatest role in the decision. For example, eastern North
Carolina cases are typically assigned to Judge Jolly in Raleigh, and western North
Carolina cases are typically assigned to Judge Murphy in Charlotte. With that
said, geography is not the only factor, and there are occasions when cases will not
be assigned to the closest sitting judge.
Recent Notable Decisions From the North Carolina Business Court
A.
B.
Blythe v. Bell, 2012 NCBC 42 (N.C. Super. Ct. July 26, 2012)
Attorney-Client Privilege and Electronic Discovery
1.
The Court held that the attorney-client privileged was waived with respect
with electronically produced documents.
2.
In response to a motion to compel, Defendants retained an IT vendor to
collect electronically-stored data. The vendor collected over 286
gigabytes of information, which Defendants did not review for
responsiveness or privilege. Defendants produced this data (over 3.5
million documents) to opposing counsel. Defendants later discovered over
1700 privileged documents that had been produced. Defendants sought
return of the privileged documents and argued that the production was
inadvertent, and therefore, it had not waived the privilege.
3.
Judge Gale utilized federal case law to determine whether inadvertent
disclosure of electronic discovery will result in the waiver of the attorneyclient privilege. Ultimately, the Court determined that the
“reasonableness” of the precautions taken by Defendant to prevent
inadvertent disclosure was lacking. Thus, Defendants had waived the
privilege.
Elliott v. KB Home North Carolina, Inc., 2012 NCBC 55 (N.C. Super. Ct. Nov. 2, 2012)
Waiver of Arbitration Clause
1.
The Court held that the Defendant waived its right to compel arbitration
after class certification.
2.
Plaintiffs filed putative class action in 2008 arising out of alleged
HardiePlank siding defects. The parties litigated the dispute for almost
four years and incurred hundreds of thousands of dollars in legal fees. The
class was certified in February 2012. Shortly thereafter, Defendant KB
Home filed its motion to compel arbitration against unnamed class
members.
3.
B.
Judge Jolly ruled that KB Home had waived its right to compel arbitration
by litigating the case for almost four years without asserting its arbitration
rights. KB argued that it could not assert its arbitration rights against
unnamed class members until the class was certified. Judge Jolly rejected
this argument, noting that it would not condone “gamesmanship in the
class certification process” by allowing KB Home to “wait in the weeds
and delay asserting its arbitration rights.” The Court acknowledged that
allowing KB Home’s attempt to compel arbitration as to unnamed class
members (after class certification) would effectively undo the Court’s
order on class certification.
Outdoor Lighting Prospectives Franchising, Inc. v. Harders, 2012 NCBC 26
(N.C. Super. Ct. May 14, 2012)
Restrictive Covenants in Franchise Agreements
1.
The Court declined to enforce restrictive covenant in franchise agreement.
2.
Plaintiff sought a preliminary injunction to enforce restrictive covenants in
a franchise agreement that would prohibit the Defendant franchisee from
competing in “any Competitive Business.” The term “Competitive
Business” was defined in the agreement to include any business in
competition with an outdoor lighting business. Judge Gale ruled that this
restriction was overly broad because it attempted to restrict the Defendant
from engaging in activities beyond the business that Plaintiff itself
conducts. Consequently, the restriction extended beyond Plaintiff’s
legitimate business interests, and beyond the outer limits of North
Carolina law upholding restrictive covenants.
3.
Judge Gale also noted that the treatment of a restrictive covenant in a
franchise agreement is neither analogous to the treatment of restrictive
covenants in employment agreements, nor the sale of a business. With
that said, Judge Gale declined to adopt a standard of general application to
franchise agreements.
C.
Associated Packaging, Inc. v. Jackson Paper Mfg. Co., 2012 NCBC 13 (N.C.
Super. Ct. Mar. 1, 2012)
D.
NNN Durham Office Portfolio 1, LLC v. Highwoods Realty Limited P’shp, 2013
NCBC 12 (N.C. Super. Ct. Feb. 19, 2013) (addressing pleading, scienter and
justifiable reliance requirements under Section 56(a)(1) and 56(a)(2) of the North
Carolina Securities Act).
E.
Tong v. Dunn, 2012 NCBC 16 (N.C. Super. Ct. Mar. 19, 2012) (dismissing aiding
and abetting breach of fiduciary claim against corporation because a corporation
cannot conspire with its own officers, employees or agents)
F.
WNC Holdings, LLC v. Alliance Bank & Trust Co., 2012 NCBC 50 (N.C. Super.
Ct. October 2, 2012) (denying motion to dismiss breach of fiduciary duty claim
against a bank).
G.
Lecann v. Cobham, 2012 NCBC 56 (N.C. Super. Ct. Nov. 07, 2012) (awarding
over $2 million in compensatory and punitive damage on plaintiff’s claims for
breach of fiduciary duty, constructive fraud and self-dealing in closely-held
corporation).