Big Changes At The Fourth Circuit

Our colleague Bill Watkins reports today on his South Carolina Appellate Law Blog that Chief Judge Wilkins is taking senior status, setting up Judge Karen Williams (also of S.C.) to become the next Chief Judge of the Fourth Circuit, and altering the composition of the Court by removing a conservative vote.

(Still) No Expert Testimony Requirement Re. Indemnity Involving Professionals

In Schenkel & Schultz, Inc. v. Hermon F. F. & Associates, the COA in a split decision filed Tuesday held, among other things, that the trial court erred in granting summary judgment against plaintiff's indemnity claim and in favor of defendant's breach of contract claim in a suit where defendant engineering firm allegedly provided plaintiff construction contractor with a faulty school design. Notably, the indemnity provision that arguably applied required indemnity in the event of negligence or breach of contract. In his dissent, Judge Tyson indicated that expert testimony would be required for plaintiff to prevail on its indemnity claim. Yet the case law the dissent cited to support this expert testimony requirement, by its own language, applied to professional negligence suits and even then did not apply where the applicable standard of care fell within common knowledge / experience (the common knowledge / experience exception is not mentioned in the dissent). If the dissent were adopted by the Supreme Court, could it mean ejection of even contract-based claims where there's no expert testimony in support of a professional's alleged breach / failure to perform?

NC SC: Discovery Rule Applies To Deceipt, Broad Personal Injury

With Misenheimer v. Burris, a majority of the NC Supreme Court on Friday overruled a split COA decision, the majority author of which was the then Judge Timmons-Goodson, and said that the 'discovery rule' codified in N.C. Gen. Stat. § 1-52(16) applied to criminal conversation (sleeping with another's spouse). Misenheimer may indicate a broad application of the discovery rule, especially in cases involving deceipt or concealment, and a broad notion of personal injury.

In Misenheimer, plaintiff's wife had an affair that ended around 1995. Plaintiff apparently 'discovered' the affair in July 1997 and filed his criminal conversation action in April 2000. Criminal conversation actions have limitations of 3 years (1-52(5)), and at issue in the case was whether that period started to run only after plaintiff's discovery of the alleged criminal conversation. The NC SC majority (Chief Justice Parker dissenting) answered with a yes.

One of the interesting issues in Misenheimer was what "personal injury" in 1-52(16)'s discovery rule means. 1-52(16) states in full:

Unless otherwise provided by statute, for personal injury or physical damage to claimant's property, the cause of action, except in causes of actions referred to in G.S. 1-15(c), shall not accrue until bodily harm to the claimant or physical damage to his property becomes apparent or ought reasonably to have become apparent to the claimant, whichever event first occurs. Provided that no cause of action shall accrue more than 10 years from the last act or omission of the defendant giving rise to the cause of action.

The NC SC majority stated that "personal injury has a wide range of meanings" and noted that criminal conversation could be personal injury as "an invasion of an individual's personal rights." The NC SC majority also indicated that criminal conversation could perhaps even be considered personal injury of the bodily harm variety, quoting a, 1890 case stating "the mind is no less a part of the person that the body . . . ."

The NC SC majority also underpinned its application of § 1-52(16) with "notions of fundamental fairness" and the "unacceptable consequence of rewarding a defendant . . . for deceptive and clandestine behavior that successfully prevents discovery . . . ."

Chief Justice Parker dissented, on the bases that criminal conversation actions are subject to a statutory 3 year limitation and that the limitations exception of § 1-52(16) did not apply because § 1-52(16), by its own clear language, applies only to actions for personal injury involving "bodily harm" and to actions for physical damage to property. Chief Justice Parker would hold criminal conversation fits neither bill.

The NC SC majority's rejection of the reasoning in Chief Justice Parker's dissent, focus on the fundamental fairness of applying the discovery rule to "deceptive and clandestine behavior," and broad view of "personal injury" may indicate impending wider application of the discovery rule.

A Victory For The Administrative State

On Nov. 17 the SCT ruled that the Board of Pharmacy did not exceed its statutory authority by adopting a rule regulating the working hours of pharmacists. The case is N.C. Board of Pharmacy v. Rules Review Comm'n, on which I wrote an earlier post (see Oct. 15 post below). The SCT reversed the COA and adopted the dissenting opinion by Judge Steelman.

The Board is the agency responsible for licensing pharmacists and enforcing the State's Pharmacy Practice Act. The rule in question regulates the number of hours a pharmacist may work in a day, on the theory that a tired or over-worked pharmacist is more prone to make filling errors (similar to the rule adopted by DOT with respect to commercial truck drivers).

In enacting the rule, the Board relied on its authorization to enforce the Pharmacy Practice Act, the purpose of which is to protect public health and safety in connection with the distribution of drugs, and on its authorization to adopt safety-based rules governing the filling of prescriptions. The COA, in a 2-1 decision, invalidated the rule on the ground that the General Assembly didn't specifically authorize the Board to regulate working hours. The COA majority concluded, for example, that the Board's rule limiting working hours "clearly does not concern the filling ... of prescriptions" (the statute authorizes the Board to regulate filling), even though the undisputed purpose of the rule is to reduce filling errors, and even though the majority didn't question the Board's empirical judgment that a limit on working hours would reduce filling errors.

The COA majority opinion could be read to suggest that an agency lacks authority to regulate an activity absent specific, spot-on authorization in an enabling statute regarding that activity (e.g., a statute specifically authorizing the Board to regulate working hours). Thus, the case raised important questions about the level of specificity required in enabling legislation before an agency lawfully may regulate. Had the SCT affirmed, it might've called into question the legality of a number of agency rules enacted on the basis of more general statutory authority.

But the SCT reversed. The SCT unanimously (6-0) adopted the dissenting opinion below, which concluded that the more general authorization in the enabling statute was sufficient to vest the Board with authority to regulate working hours.

The SCT also determined that it had improvidently granted discretionary review on the Board's constitutional challenge to the Rules Review Commission, which reviews proposed agency rules and blocks those rules it deems unauthorized by statute. (For the constitutional issues raised by that challenge, see my Oct. 15 post below.) Thus, the Rules Review Commission survives, at least for now.

Fourth Circuit: SPAM, Anyone?

On Nov. 17, the Fourth Circuit issued its first decision interpreting the Controlling the Assault of Non-Solicited Pornography and Marketing Act of 2003 ("CAN-SPAM Act"), 15 U.S.C. 7701 et seq. In fact, the CAN-SPAM Act has been interpreted by only one other Circuit (the Fifth). Significantly, the Fourth Circuit interpeted the CAN-SPAM Act's express preemption clause. The gist of the Fourth Circuit's ruling: Mere inaccuracies in commercial spam, such as non-material mispresentations or falsities that are not tortious in the common-law sense, are not actionable under the CAN-SPAM Act and cannot be made actionable in any State.

The case, Omega World Travel, Inc. v. Mummagraphics, Inc., involved commercial spam e-mail messages sent by Cruise.com. and alleged to contain inaccuracies. First, each message stated that the recipient had signed up for the Cruise.com mailing list, when claimant did not sign up. Second, the headers were inaccurate: while each message listed Cruise.com as the sending organization, each also included the address "FL-Broadcast.net" in its header information, even though "FL-Broadcast.net" is not an Internet domain name linked to Cruise.com; and the messages contained the "from" address cruisedeals@cruise.com, even though Cruise.com had apparently stopped using that address.

In short, the messages contained errors. They were, in a loose sense, false.

The Court confirmed that the sender didn't violate the CAN-SPAM Act, because there were no "material" inaccuracies and there was no "pattern or practice" of failures to conform to the Act's opt-out requirements. "The CAN-SPAM Act addresses 'spam' as a serious and pervasive problem," the Court observed, "but it does not impose liability at the mere drop of a hat."

The more interesting ruling concerned preemption. The claimant alleged violations of Oklahoma law, specifically Oklahoma's anti-spam statute, which makes it "unlawful for a person to initiate an electronic mail message that the sender knows, or has reason to know: 1. Misrepresents any information in identifying the point of origin or the transmission path of the electronic mail message; 2. Does not contain information identifying the point of origin or the transmission path of the electronic mail message; or 3. Contains false, malicious, or misleading information which purposely or negligently injures a person."

The CAN-SPAM Act has an express preemption clause. It provides, "This chapter supersedes any statute, regulation, or rule of a State or political subdivision of a State that expressly regulates the use of electronic mail to send commercial messages, except to the extent that any such statute, regulation, or rule prohibits falsity or deception in any portion of a commercial electronic mail message or information attached thereto." 15 U.S.C. 7707(b)(1). The preemption clause thus has an exception which allows states to prohibit "falsity or deception" in commercial e-mail messages, but nothing else.

The Fourth Circuit held that this preemption exception doesn't reach beyond common law fraud and deceit--laws that reach immaterial misrepresentations or falsities sounding in tort. The Court held that Congress didn't intend to allow the States to prohibit or regulate bare errors in spam messages. To allow such a claim to proceed, the Court concluded, would make all errors in commercial e-mails actionable, a result the Court was convinced Congress did not desire, since Congress rejected a strict liability, non-material mistake standard in the CAN-SPAM Act itself. "Rather than banning all commercial e-mails or imposing strict liability for insignificant inaccuracies," the Fourth Circuit said, "Congress targeted only e-mails containing something more than an isolated error." The Court reasoned that allowing States to impose liability for non-material inaccuracies in commercial spam would disturb this balance struck by Congress "and turn an exception to a preemption provision into a loophole so broad that it would virtually swallow the preemption clause itself."

The Court also believed that its interpretation of the preemption clause avoided a "difficult" constitutional question: whether Oklahoma's anti-spam law unduly burdened interstate commerce in violation of the so-called dormant commerce clause. And the Court indicated that Oklahoma's law (as a regulation of commercial speech) might pose First Amendment problems.

N.C. has an anti-spam statute, codified at G.S. 14-453 et seq. The statute allows a private right of action against one who sends unsolicited bulk commercial e-mail into or within the State, if the e-mails "falsely identify" with an "intent to deceive or defraud the recipient," or if they contain "forged" routing or transmission information. G.S. 14-458 & 1-539.2A. This law may be preempted by the CAN-SPAM Act, insofar as the N.C. law may impose liability for non-material misrepresentations that would not rise to the level of tortious fraud. If it's not preempted, the question arises whether it passes muster under the dormant commerce clause and First Amendment. See Michael B. Edwards, Call to Arms: Marching Orders for the North Carolina Anti-Spam Statute, 4 N.C. J. L. & Tech. 93 (2002) (analyzing constitutionality of the statute).

Assignments Of Error From Summary Judgment

This week, in Litvak v. Smith, the COA held that assignments of error are not required from summary judgment orders.

This is another issue on which the COA has zig-zagged over the years.

We begin with Ellis v. Williams, 355 S.E.2d 479 (N.C. 1987). There the SCT held that assignments of error are not necessary when appealing a summary judgment order. The SCT based its ruling on the text of Rule 10 then in effect.

But a decade later, the COA held that "Ellis is no longer good law." See Shook v. County of Buncombe, 480 S.E2d 706 (N.C.App. 1997). The plaintiff in Shook appealed a summary judgment order but failed to assign error. The COA dismissed. Mindful of Ellis's holding that assignments of error are unnecessary in an appeal from summary judgment, the COA held that "Ellis is no longer good law." Why? Ellis was based on an interpretation of the 1987 version of Rule 10, but that version was superseded when the SCT amended the rules in 1988. Shook demonstrated why the 1988 amendment to Rule 10 changed things and no longer permitted an exception for summary judgment appeals.

Shook was decided in 1997. The very next year, however, the COA reversed course, ignoring Shook and reverting back to the Ellis rule without explaining the flip. The COA stayed on this track in 1998, 2001, and 2004, citing Ellis and ignoring Shook. None of these decisions reckoned with the fact that Ellis was decided under an old, superseded version of Rule 10.

Then, earlier this year, in May 2006, the COA issued Hubert Jet Air, LLC v. Triad Aviation, Inc., 628 S.E.2d 806 (N.C.App. 2006). Hubert Air held that an assignment of error to a summary judgment order was deficient in violation of Rule 10, and the COA dismissed the appeal.

But the following month, in June 2006, the COA reversed course again in Nelson v. Hartford Underwriters Ins. Co., 630 S.E.2d 221 (N.C.App. 2006). Criticizing the Hubert Air panel for not following Ellis, the Nelson panel held that Ellis was binding. The panel thus denied a motion to dismiss the appeal. The panel never cited Shook. The panel never confronted the fact the Ellis was decided under a different version of Rule 10.

Which brings us back to Litvak v. Smith, decided this week. It follows Nelson, and thus follows Ellis, and thus ignores Shook and the fact that Ellis was based on a superseded version of Rule 10.

Is it possible that a future panel will flip back and hold (again) that Ellis is no longer good law? Only time will tell.

Loan Broker Claims: Businesses, Not Just Persons, May Bring Them, At Least For Now

In Printing Services of Greensboro, Inc. v. American Capital Group, Inc., filed Tuesday, a divided panel held that businesses, not just people, may bring claims under the Loan Broker Act.

"Loan broker" was defined in N.C. Gen. Stat. § 66-106(a)(1) as any person, firm, or corporation who, in return for any consideration from any person, promises to (i) procure for such person, or assist such person in procuring, a loan from any third party; or (ii) consider whether or not it will make a loan to such person. And a loan broker is required to, e.g., provide disclosure statements and file various materials with the Secretary of State.

The Printing Servs. majority held while the definition of "loan broker" includes "any person, firm, or corporation" who engages in certain conduct with respect to "any person," the defendant was not precluded from being considered a loan broker because the party for whom the loan is intended, here Printing Services of Greensboro, is a corporation and not a person.

Judge Geer dissented. She noted that the General Assembly defined the entity engaging in loan brokerage as encompassing persons, firms, or corporations, but, eight words later, when discussing potential borrowers, mentioned only persons, and stated that the court may not add additional words to the clear statute.

We'll see whether this gets appealed up and whether businesses will maintain the right to bring loan broker claims.

COA To Appellate Counsel: Get Out Your Prayer Books

In Stann v. Levine, filed today, a majority panel of the COA deemed that improper line spacing, among other things, constitutes a "substantial" violation of the Appellate Rules and therefore dismissed the appellant's appeal.

In Stann, the plaintiff's action was dismissed for lack of personal jurisdiction over the defendant, and plaintiff appealed. The COA dismissed that appeal for "substantial" violations of the Appellate Rules. The very first example that the Stann majority gives of such a substantial violation: the "line spacing" in the plaintiff-appellant's brief. The line spacing in the 18-page brief was 1 1/3, not double. Another substantial violation: The statement of facts contained only "sporadic" record cites and no cites in the last two paragraphs. A quick count indicated about 44 record cites in the statement of facts, which begs the question: What is sufficient to not be considered sporadic and warranting dismissal?

A third substantial error: Plaintiff's one assignment of error did not appear "at the conclusion of the record on appeal," but is instead located at page 111 of the 117-page record (a fact pointed out by Judge Geer's dissent, addressed in more detail below). What is the conclusion? Is it the very last page of the record? If so, wouldn't that then violate Appendix C to the Rules of Appellate Procedure, which indicates that the identification of counsel page should be the concluding page, and thus potentially expose folks to dismissal? What is appellate counsel to do?

The Stann majority also indicates that the lone assignment of error was "broad, vague, and unspecific." Yet, the assignment assigns error to the trial court's "dismissing the action of the plaintiff for lack of jurisdiction." As Judge Geer's dissent points out, Rule 10 itself requires that error be assigned "without argumentation." Did the majority want an argument about why the trial court had jurisdiction? Or should plaintiff have duplicitously assigned error to the trial court's "dismissing the action of the plaintiff for lack of jurisdiction because the court had jurisdiction"?

The Stann majority also notes as grounds for dismissal the absence of statements re. grounds for appellate review and standard(s) of review, undeniable rules violations.

In the end, the Stann majority holds that "the nature and number of rules violations" warrant dismissal and notes that to err once is human yet to forgive is "divine." Appellate counsel across this State had better be saying their prayers.

Judge Geer contributes a lengthy dissent, commencing with her observation that "this Court increasingly elevates form over substance in its attempt to apply our Supreme Court's decision in Viar v. N.C. Dep't of Transp." Judge Geer goes on to note that "Many, if not most, appeals involve some violation of the appellate rules, such as arranging the record on appeal in the wrong order, using the wrong font size in footnotes.... A line must be drawn between those violations that warrant dismissal and those that do not." Judge Geer proposes that "only those appeals that substantively affect the ability of the appellee to respond and this Court to address the appeal."

Judge Geer recognizes the unintended negative effects that a bright-line dismissal regime could have, including on legal malpractice exposure (imagine a legal malpractice claim based on footnote font size) and on the collegiality of the appellate bar in this State if zealous advocacy necessarily included a motion to dismiss for rules violations.

Another of Judge Geer's points: The appellee brief in Stann was also ridden with procedural errors (no statement of standard(s) of review, incorrect page numbering, improper form for record citations, improper font, to name a few), and yet the appellee violated with impunity while appellant received the ultimate sanction.

Judge Geer would sanction both parties under Appellate Rules 25 and 34 for their rules violations and not dismiss. Her invoking Rule 25 begs the question: Why does 25(b) allow, for example, sanctions such as monetary penalties where a party or attorney substantially fails to comply with the Appellate Rules if even "substantial compliance," which the Stann majority indicates is passe, rather than undeniable compliance essentially mandates dismissal?

Judge Geer then engages in an analysis of the merits of the case and finds that the trial court should be reversed. In concluding, Judge Geer states:
"I would not side-step resolution of those questions solely because the appellant's counsel - like the appellee's counsel - has been somewhat casual in compliance with the Appellate Rules. Our job is to correct errors by the trial court. We are not doing that job when we dismiss appeals for non-substantive rules violations."

US Supreme Court Hears Argument In Punitive Damages Case

The U.S. Supreme Court heard argument yesterday in Philip Morris v. Williams. The Supreme Court had granted certiorari on two issues, one of which was "Whether due process permits a jury to punish a defendant for the effects of its conduct on non-parties?" Several Justices (Roberts, Breyer, Souter) seemed in agreement that, under the Supreme Court's punitive damages precedents, the due process clause doesn't permit a jury to punish a defendant for harm caused to non-parties. Even Justice Scalia (who opposes due process limits on the size of punitive damage awards) seemed to agree.

In this case an Oregon trial court denied Philip Morris's proposed jury instruction which would've instructed the jury that it couldn't punish Philip Morris for harm caused to other (non-party) smokers. The jury returned a massive punitive damage award ($79.5 million, on $821,485 in compensatory damages), and the Oregon Supreme Court upheld it.

Yesterday's oral argument was consumed by confusion over the proposed jury instruction itself (it was not a model of clarity) and whether the Oregon SCT really believed that a defendant may be punished for harm to non-parties (the Oregon SCT's opinion was ambiguous).

My prediction: the U.S. Supreme Court will make clear that, although conduct toward non-parties may be considered by a jury in determining the reprehensibility of the defendant's conduct, punitive damages may not be used to punish harm to non-parties; and the Court will remand the matter to the Oregon SCT to reconsider the matter in light of that holding.

Of course, a due process decision restricting punitive damages will govern in NC. If you have a client on trial for punitive damages, you'd be wise to request a cautionary instruction, one that that instructs the jury that it can't punish the defendant for harm caused to non-parties.