Fourth Circuit Dismisses Federal Securities-Fraud Class Action

On Tuesday Feb. 20 the Fourth Circuit, in a split decision, affirmed the MDNC's Rule 12(b)(6) dismissal of a 168-page federal securities-fraud class action complaint brought against Cree, Inc., a technology business based in Durham. The case is Teachers' Retirement System of La. v. Schoenfeld. Judge Niemeyer wrote the majority opinion, joined by Judge Wilkinson. Judge Shedd dissented.

This is an important case concerning the application of the Private Securities Litigation Reform Act's heightened pleading requirements for 10b-5 cases alleging misrepresentations or omissions. See 15 U.S.C. 78u-4(b). The heightened pleading standard applies to two elements: (1) that the defendant made a false statement or omission of material fact (2) with scienter. The panel divided on whether the complaint satisfied the heightened pleading requirements.

The panel also divided on whether the complaint adequately pleaded a separate issue: loss causation. Loss causation requires a plaintiff to show a causal link between the defendant's misrepresentation and the decline in stock value. See generally Dura Pharm., Inc. v. Broudo, 544 U.S. 336 (2005) (discussing loss causation).

Interestingly, just last month the economic consulting firm NERA published a study which, in addition to documenting a dramatic decrease in federal securities class action filings, found that the Fourth Circuit has the highest rate of dismissal of federal securities class actions, dismissing 31 percent of cases within two years.

COA: Despite Signed Certified Mail Return Receipt, Service Validity Issues

In In the Matter of K.N., the COA yesterday vacated an order terminating a mother's parental rights. Importantly for a party bringing any type of suit, the COA did so despite a certified mail return receipt that had been signed, and seemingly without proof as to improper service.

Civil Procedure Rule 4 allows for a presumption of proper service where process was signed for by the named party's agent or a person who resides in his or her home. Here, the COA found the presumption of proper service rebutted by: 1) the discrepancy between an address the mother gave the trial court and the address to which the certified mail was directed; 2) the mother's failure to appear at the proceeding; and 3) the lack of information about who the person who signed for the certified mail was.

The COA essentially held that the mother's procedural due process rights to notice and a hearing (here the hearing was only 20 mins. and the mother had not been represented by counsel) had been violated. The COA therefore vacated the order terminating the mother's parental rights.

Notably, the Court suggested that "issues" as to valid service may suffice to invalidate an order. The COA did not indicate, for example, that evidence existed demonstrating that the person who had accepted service for the mother was unauthorized to do so. (Carpenter v. Agee suggests that that's the kind of evidence needed to overcome the presumption of proper service resulting from a return receipt and affidavit of service. 171 N.C.App. 98, 613 S.E.2d 735 (2005)). Nor did the COA indicate (or the appellant affirmatively state in her brief) that the address to which the summons had been sent was actually wrong.

Will future defendants for whom someone else signs when process is delivered be able to overturn adverse judgments by providing discrepant addresses, failing to appear, and leaving unanswered whether the person who signed for service was actually unauthorized? Plaintiffs and petitioners may want to think about these risks in determining whether their proof of service is sufficient.

COA: Dismissal Filed Under Settlement Reached Through Alleged Malpractice Not Last Act Giving Rise To Malpractice Claim

In Ramboot, Inc. v. Lucas, the COA held yesterday that the last act that may trigger a legal malpractice claim is not an act the lawyer undertakes as an officer of the court to comply with a settlement agreement. Rather, the last act was the settlement, which was allegedly reached based on the lawyer's malpractice.

In Ramboot, the plaintiffs retained the allegedly errant lawyer to represent them in their claim for insurance coverage loss related to a fire at their bowling alley. The plaintiffs' allegations focused on the lawyer's actions prior to and at a mediation at which the plaintiffs settled their case. With their malpractice claim, the plaintiffs contended that their attorney gave them misinformation and bad advice that led them to undervalue their claim in that settlement.

The limitations on malpractice claims begin to run at the time of defendants' last acts that gives rise to the malpractice claims. Here, the COA held that the last act triggering the plaintiffs' malpractice claim was either the mediation or, at the latest when the plaintiffs signed a release and took possession of their settlement check. The document dismissing the lawsuit that the allegedly errant lawyer filed pursuant to the settlement agreement did not trigger a malpractice claim. The COA held that was done as an officer of the court and was mandated by the terms of the agreement.

COA: Proof of Receipt of Arbitration Provision Key To Having Provision Enforced

In Evangelistic Outreach Ctr. v. General Steel Corp., filed yesterday, the COA reminded parties who insert arbitration provisions in their contracts that they had better have proof that the other party to the contract has received the arbitration provision.

General Steel Corp. and Evangelical Outreach had contracted about the purchase of a prefabricated steel building. An arbitration provision was included on the back side of the contract. General Steel said it faxed both the front and back sides of the contract. Evangelical Outreach, however, said it received only the front side of the contract, and not the back side containing the arbitration provision. Evangelical Outreach said it neither received nor agreed to the arbitration provision.

The court refused to enforce the agreement and sent a reminder to businesses with arbitration clauses they want to be able to enforce: Be able to produce evidence that the other parties to your contracts received the arbitration provisions. For example, require a signature or initialing of the conditions pages containing the arbitration provisions.

COA Rejects Chapter 75 Claim As Not "Affecting Commerce"

Today in Esposito v. Talbert & Bright, Inc. the COA held that the defendant was entitled to summary judgment on plaintiff's Chapter 75 (UTPA) claim because plaintiff couldn't satisfy the second element of a Chapter 75 claim: showing that the alleged unfair/deceptive act was "in or affecting commerce." See G.S. 75-1.1.

This "in or affecting commerce" element usually doesn't receive much attention. Most folks just assume it's satisfied whenever the defendant engages in commerce, i.e., in business. But in recent years, particularly in cases involving disputes by employees, the courts have inquired whether the challenged conduct had an impact beyond the parties to the case, an impact on commerce.

The key cases in this line are Dalton v. Camp, 353 N.C. 647, 548 S.E.2d 704 (2001), and Durling v. King, 146 N.C.App. 483, 554 S.E.2d 1 (2001). The latter was a dispute over the amount of commissions the defendant owed the plaintiff. The COA affirmed summary judgment because "no evidence was presented that the subject transactions had any impact beyond the parties' employment relationships."

The controversy in today's case arose from a contention that defendants, through statements and actions, interfered with plaintiff's employment relationship with his employer, resulting in disciplinary action and termination. The COA relied on Durling, emphasizing that whether an act affected commerce usually depends on the facts of each case and the impact in the marketplace. The COA held that even assuming defendant's acts were unfair or deceptive acts that injured the plaintiff, he "has forecast no evidence that defendant's statements and actions had any impact beyond his employment relationship" and therefore he "failed to show that defendants' statements and actions were 'in or affecting commerce'" as required to prevail on a Chapter 75 claim.

Judge Stroud's First Dissent

Judge Stroud, who joined the COA last month, issued her first dissenting opinion today in Dysart v. Cummings.

It's an appeal from a summary judgment award of a $10,500 earnest money deposit in favor of plaintiffs, who had backed out of a contract to buy a $1.2 million home in Raleigh. They backed out of the contract based on a "cost of repair contingency" (a standard clause in these types of contracts) which provided, "If a reasonable estimate of the total cost of repairs required . . . equals or exceeds $10,000.00, then Buyer shall have the option to terminate this Contract and all earnest monies shall be returned to the Buyer." Plaintiffs obtained two estimates that the cost of repair would exceed $10,000. When the defendants wouldn't return the earnest money deposit, plaintiffs sued and won summary judgment. Judge Stroud dissented on the ground that a jury should determine whether the plaintiffs' repair estimates were "reasonable."

US SCT Hands Down Big Punitive Damages Ruling

Today the U.S. Supreme Court issued its decision in Philip Morris v. Williams. (For my earlier post on the oral argument, see here.)

The ruling isn't terribly remarkable; the Supreme Court had signaled it in earlier cases. The upshot: The Due Process Clause forbids a State from using punitive damages to punish a defendant for injury it inflicts on nonparties.

Thus, a jury may not award punitive damages (or increase the amount of punitive damages) for the purpose of punishing a defendant for harming persons other than the plaintiffs though similar conduct.

Here's the rub: If you're up against a claim for punitive damages and the plaintiff puts on evidence concerning actual or potential harm to others, you'd be wise to request a jury instruction (citing Philip Morris v. Williams) that, in determining how much punitive damages, if any, to award for harm suffered by the plaintiff, the jury may not consider alleged harm to other persons or companies who are not parties to the action.

Rules Violations Yield No Sanctions

In an unpublished decision today (involving a juvenile's appeal of a finding that she violated her probation) the COA, in a divided opinion, chose not to dismiss an appeal despite several acknowledged rules violations.

The appellant violated the rules in these ways:

1. Her brief failed to include citation of the statute permitting appellate review (see Rule 28(b)(4)).

2. Her brief failed to include a statement of the standard of review for each question presented (see Rule 28(b)(6)).

3. Her Appeal Information Statement was untimely filed and incomplete (see Rule 41).

Judge Geer wrote the majority opinion, joined by Judge Levinson. Judge Geer's majority opinion reasoned that dismissal wasn't warranted because the violations had not "impeded [the court's] review since it is apparent from the nature of the case that it is a proper appeal and because the standard of review is well established." Judge Geer added, "Most importantly, however, dismissal would serve only to punish a child for the errors of her attorney."

Judge Jackson wrote a separate opinion disagreeing with the majority's standard. "The fact that the rules violations did not impede our review of the appeal is immaterial, based upon Viar," she wrote. "Therefore," Judge Jackson concluded, "based upon the violations of our appellate rules, including the omissions of the grounds for appellate review and the applicable standards of review for each question presented, I would impose sanctions pursuant to rule 25(b) of our appellate rules." She didn't state precisely which sanction she would choose (e.g., dismissal versus taxation of costs).

This split is a reprise on the split seen in several recent decisions, most notably Jones v. Harrelson & Smith Contractors, LLC (Dec. 19, 2006) and Stann v. Levine (Nov. 7, 2006), both of which had Judge Geer dissenting from opinions written by Judge Jackson. (Note: Jones is on appeal to the NC Supreme Court based on Judge Geer's dissent; the appeal notice was filed January 23rd.) The split concerns the standard that should guide the court's determination whether an appeal should be dismissed for rule violations. As Judge Geer's opinion today shows, her view (a view shared by others on the COA) is that rules violation should not result in dismissal unless they impede the court's or the opposing party's comprehension of the issues on appeal. Judge Jackson disagrees with that standard. (For more on this split, see the article I co-authored with former COA judge K. Edward Greene entitled, To Err Is Human, But To Forgive Is Divine, which was published the Feb. 2007 edition of NC Bar's The Litigator.)

As for the majority's statement today that "dismissal would serve only to punish a child for the errors of her attorney," it's difficult what to make of it. In any case in which an appeal is dismissed for rule violations, a party is, in a sense, being punished for the errors of the attorney. That's unsurprising. Historically the law has preferred imputing attorney negligence to clients. See generally Henderson v. Wachovia Bank of North Carolina, N.A., 551 S.E.2d 464 (N.C.App. 2001) (tracing to common law of England the principle that the law prefers to impute to clients the conduct of the lawyer). It's not evident why the client's status as a child should make a difference. It's not as if the average lay adult-client is in a better position to superintend a lawyer's compliance with the Rules of Appellate Procedure, and the court's precedents do not suggest that the dismissal-as-sanction analysis should weigh the sophistication of the client or the client's ability to control the attorney's compliance with the rules. That being said, a number of sui generis rules have been generated in cases involving children. Maybe this case should be added to the list.

COA Issues APA Decision On Agency Deference

The COA today held that when an agency fails to adopt an ALJ's decision in a contested case, the superior court may not defer to the agency's interpretation, in the case, of the statute at issue. The case is Rainey v. NC Dep't of Public Instruction. The agency declined to adopt the ALJ's decision, and the superior court affirmed, concluding it could "give appropriate weight to an Agency's demonstrated expertise and consistency in applying various statutes." The COA disagreed, invoking the APA, specifically the anti-deference mandate in G.S. 150B-51(c), which says that where an agency doesn't adopt the decision of the ALJ, "the court shall review the official record, de novo, and shall make findings of fact and conclusions of law," and in so doing, "the court shall not give deference to any prior decision made in the case and shall not be bound by the findings of fact or the conclusions of law contained in the agency's final decision." The COA held that, "Deference to the agency is inconsistent with this mandate" and therefore "the trial court erred in its application of the standard of review."

COA Reminder about Cross-Assignments

In a case decided today the COA declined to address arguments raised by an appellee because the appellee didn't cross-assign error under Appellate Rule 10(d). The case is D.A.N. Joint Venture, III, L.P. v. Fenner (unpublished).

In this contract case, the COA ruled for the plaintiff, holding the trial court abused its discretion in not granting plaintiff a new trial after the jury answered "none" for the amount of damages owed to the plaintiff on the contract.

The defendant argued that the judgment should be affirmed on the alternative ground that the contract claim was barred by the statute of limitations and by a lack of consideration. The COA held that it couldn't address those issues because the defendant had failed to cross-assign error: "The statute of limitations and lack of consideration arguments could certainly provide an alternate basis for upholding the trial court's judgment. However, defendant did not cross-assign error to the trial court's failure to render judgment on these grounds. Defendant has not properly preserved these grounds for appellate review."

It is sometimes difficult to determine whether an appellee who prevailed in the trial court should cross-assign error or file a cross-appeal when an alternative basis exists for affirming the judgment. Even if a cross-appeal isn't filed, an appellee should consider whether a cross-assignment of error is warranted. As the Supreme Court has said, "Rule 10(d) provides protection for appellees who have been deprived in the trial court of an alternative basis in law on which their favorable judgment could be supported, and who face the possibility that on appeal prejudicial error will be found in the ground on which their judgment was actually based." Crawan v. Tate, 304 N.C. 696, 286 S.E.2d 99 (1982).

Article "A Third of 4th Circuit Seats Could Be Vacant"

Click here for a law.com article on the increasing 4th Circuit vacancies.

COA Splits On Whether 12(b)(6) May Be Granted Based On Statute Of Frauds

In Burgin v. Owen, decided today, the COA split on whether a complaint may be dismissed under Rule 12(b)(6) if it doesn't plead facts indicating there was a signed writing satisfying the statute of frauds.

The majority affirmed the dismissal. Judge Tyson dissented. He reasoned that the statute of frauds is an affirmative defense which can be raised only by way of answer (or reply) and, as such, shouldn't be considered in the context of a Rule 12(b)(6) motion, which tests the adequacy of a complaint. For support he cited a 1989 case where the NC Supreme Court, in a per curiam reversal, adopted the dissenting opinion of then-Judge (now fellow Womble colleague) Jack Cozort. In that dissent, Judge Cozort made a number of points, one of which was this: "It is inappropriate to consider, for purposes of a motion under 12(b)(6), whether the contract fails to comport with the statute of frauds, because the defense that the statute of frauds bars enforcement of a contract is an affirmative defense that 'can only be raised by answer or reply.'"

More Re: Viar

In a decision today, the COA rejected a motion to dismiss an appeal for a purported rule violation while dropping this footnote: "We note again, however, the difficulty in applying our Supreme Court's ruling in Viar v. N.C. Department of Transportation to determine what might constitute 'creat[ing] an appeal for an appellate.'"

And as Sarah notes in her posts below, the COA declined to dismiss one appeal despite acknowledging a rule violation, and declined to dismiss another appeal over Judge McGee's dissent where she urged dismissal based on multiple rule violations.

Further Evidence Of Softening On Rules Violations At COA?

In State v. Bradley, a published opinion filed today, the NC COA noted that a (criminal) defendant's brief violated Rule 28(b)(6): The defendant failed to identify his assignments of errors "by the pages at which they appear in the printed record on appeal." The COA "[n]evertheless[] ... conclude[d] that defendant's violation [was] not so egregious as to warrant dismissal or sanctions." And in the unpublished Dept. of Transportation v Prince from a different panel, appellants were allowed to amend their one inadequate assignment of error (it failed to state a legal basis) and thereby save their appeal. The court, in allowing the amendment, noted that the appellee would not be prejudiced. In contrast, in the unpublished In The Matter of: K.D.R., an appeal was dismissed for several and "significant" violations. Most notably, the appellant failed to cite authority in her argument, and the COA held that violation would require the COA to construct the appellant's appeal, for which the COA was expressly admonished in Viar. Do these and other recent cases (especially Seay v. Wal-Mart Stores, Inc. (Dec. '06) and Caldwell v. Branch (Jan. '07)) evidence a softening trend toward appellate rules violations and a movement toward dismissal only in the event of multiple, significant, or prejudicial violations?

Split 9th Circuit Panel Affirms Certification Of Largest Class Action In History

Today the 9th Circuit, in a 2-1 decision, affirmed a district court order certifying a sweeping class action in a Title VII sex discrimination suit against Wal-Mart. The case is Dukes v. Wal-Mart. As the 9th Circuit acknowledged, it's "the largest certified class in history." The class consists of about 1.5 million women who work or used to work at in one of Wal-Mart's 3,400 stores across the country since 1998. Judge Kleinfeld dissented, concluding that the certification violates the requirements of Rule 23, threatens the rights of women injured by sex discrimination, and deprives Wal-Mart of due process. He concludes, "Since when were district courts converted into administrative agencies and empowered to ignore individual justice?" For those who litigate class actions, this is an important case.

COA Refuses To Dismiss Appeal Challenged For Inadequate Assignments

In Morris v. Gray, filed today, the NC COA refused to dismiss an appeal on the basis of allegedly inadequate assignments of error. The COA noted that, contrary to appellee's arguments, COA appellants: 1) are not required to cite to supporting authority in assignments of error; 2) are specifically precluded by Rule 10(c)(1) from including argument in assignments of error; and 3) have sufficient assignments where they "direct[] the attention of the appellate court to the particular error about which the question is made, with clear and specific record or transcript references." N.C. R. App. P. 10(c)(1).

Minimalist Arbitration Clause Passes Muster, J. McGee Would Hold Appellant's Appeal Does Not

In Goldstein v. American Steel Span, Inc., filed today, the NC COA, in a split decision, held that a minimalist arbitration provision was enforceable and that a chosen venue for such arbitration is enforceable under the Federal Arbitration Act, regardless of (preempted) NC policy.

In Goldstein, the plaintiff contracted to buy unassembled buildings from defendant. Included in the contract was a minimalist arbitration provision stating: "All claims, disputes, and other matters in question arising out of or relating to this Agreement of Sale, or breach hereof, shall be submitted to binding arbitration in the City of Fargo, North Dakota." The trial court found the clause too indefinite to be enforceable and the chosen venue of ND to be unreasonable and against NC policy. The COA disagreed.

While the COA noted that parties to an arbitration must specify the scope and terms of their agreement to arbitrate, the Uniform Arbitration Act governs and provides a number of "gap-fillers," including about selecting an arbitrator, that save an otherwise fatally vague arbitration agreement like the one in this case.

The COA also disagreed with the trial court's ruling that designating North Dakota as the locale for the arbitration was unreasonable and in contravention of NC policy. The COA held that the FAA applied, and that the FAA preempts NC law and policy. The parties agreed upon a locale for arbitration in their contract; that locale would be enforced.

Judge McGee dissented from the majority (comprised of Judges Elmore and Bryant) on the basis of appellate rules violations. Judge McGee held that the appellant had not preserved its FAA and preemption arguments in its assignments of error. Judge McGee therefore believed the majority was creating an appeal for the appellant and cited to Viar (where bases of the majority opinion were not simply not preserved by assignments but were not argued in the appellant's brief--which was not the case here). Judge McGee also noted that the appellant had failed to include a statement of the grounds for appellate review and applicable standard of review.

Take-away from Goldstein: Minimalist arbitration clauses may be enforced, and appellate counsel, heed those rules.