Court of Appeals Argument In Incentives Challenge

Yesterday the NC Court of Appeals heard oral argument in Blinson v. State, a taxpayer challenge to the constitutionality of economic incentives. Former Justice (and current GOP gubernatorial candidate) Robert Orr argued for the plaintiffs. Former Chief Justice Burley Mitchell (our Womble partner) argued for Dell. The state and local governments also presented arguments. The panel: Judges Wynn, Elmore, and Geer. The argument focused on two issues: (1) whether plaintiffs had standing to advance discrimination-based claims, and (2) plaintiffs' Public Purpose Clause argument (under Article V of the N.C. Constitution). For the appellate brief Womble Carlyle filed in support of Dell, see here.

On Tuesday, the day before the oral argument, the NC Supreme Court issued an order denying the "bypass" petition for discretionary review the plaintiffs had filed six months ago.

Court of Appeals to Hear Incentives Challenge Tomorrow

Tomorrow the Court of Appeals will hear oral argument in Blinson v. State. This is a constitutional challenge to economic development incentives. The defendants are the State, Forsyth County, the City of Winston-Salem, and Dell Inc. (Womble Carlyle represents Dell). Plaintiffs, led by former Supreme Court Justice Robert Orr, are challenging tax legislation adopted by the General Assembly a couple of years ago to lure major computer manufacturing facilities to North Carolina. Plaintiffs are also challenging the local incentives issued to Dell by the City and County to lure Dell to their communities.

Judge Hobgood dismissed Plaintiffs' claims for lack of standing (Plaintiffs assert taxpayer standing) and on the merits. From that order Plaintiffs appealed. Their claims include challenges under the N.C. Constitution's public purpose clause, uniformity clause, and exclusive emoluments clause, as well as the dormant commerce clause of the U.S. Constitution.

More Dismissals For Rule Violations

In two cases today, the Court of Appeals dismissed appeals because in each case the Record on Appeal (ROA) omitted certificate of service for the notice of appeal. The cases are Blevins v. Town of West Jefferson -- in which Judge Geer filed a dissent over the dismissal of the Town's appeal -- and In re A.C. Last month another decision in this line registered a dissent by Judge Wynn. See In re C.T. These cases all follow a decision issued five months ago: Ribble v. Ribble.

These decisions are in tension with Hale v. Afro-Amerian Arts Int'l, Inc., 335 N.C. 231, 436 S.E.2d 588 (1993) (per curiam). In Hale the N.C. Supreme Court unanimously held that if the ROA omits the certificate of service that was attached to the notice of appeal, that is not grounds for dismissal of the appeal, at least so long as the appellee does not object. The Supreme Court in Hale reversed the Court of Appeals and expressly rejected the conclusion that there's a jurisdictional defect when the certificate of service for a notice of appeal is omitted from the ROA. (In 1997, four years after Hale, the Court of Appeals again dismissed an appeal for failure to include a certificate of service in the ROA, and the Supreme Court summarily reversed on the basis of Hale. See Edwards v. West, 492 S.E.2d 356 (N.C. 1997). And The following year, the Supreme Court again reversed the Court of Appeals, ordering, pursuant to Hale, that "the Court of Appeals is directed to hear and determine plaintiff's appeal." Hill v. Town of Cape Carteret, 500 S.E.2d 96 (N.C. 1998).)

The recent Court of Appeals cases rely on Appellate Rules 3 and 26. But these rules don't address the contents of the ROA (that issue is regulated by Rule 9). Rule 3 requires that a notice of appeal be timely filed and served. And Rule 26 simply requires that papers filed with a court be served and that proof of service (a certificate of service) be affixed to the paper.

The recent Court of Appeals cases also rely on the controversial Viar v. N.C. Dep't of Transp., 359 N.C. 400, 610 S.E.2d 360 (2005), which held that the Court of Appeals cannot use Rule 2 (i.e., cannot suspend the appellate rules) to create an appeal for an appellant who has violated the rules by not properly advancing an issue on appeal. But as Judge Geer explained in her Blevins dissent today: "Viar does not specifically address the issue at hand. Hale is directly on point. I am not comfortable broadly assuming that the Supreme Court has sub silentio overruled its own prior decisions--or in construing as controlling authority mere dicta suggesting such a possibility. It is inconsistent with the concept of precedent to dismiss an appeal that fully complies with a prior Supreme Court decision on the basis that a subsequent opinion of the Supreme Court--not specifically addressing the issue--silently overruled that prior opinion." She added, "It is particularly inappropriate to do so sua sponte without notice to the appellant and without any opportunity to correct the purported error by moving to amend the record on appeal."

Judge Wynn registered a similar complaint last month in his dissent in In re C.T., writing that Viar "did not overrule the well-settled holding of Hale" and that, accordingly, the Ribble panel "did not have the authority to overrule our Supreme Court's holding in Hale."

As today's Blevins decision shows, it doesn't matter if the appellee stipulates to the ROA, never raises an issue about service of the notice of appeal, and files an appellate brief addressing the merits of the appeal. Even so, the Court of Appeals may raise this issue itself and dismiss the appeal. And as Ribble shows, even if the appellant includes in the ROA a signed document stating that all papers in the ROA (including the notice of appeal) were timely filed and served, the Court of Appeals may still dismiss the appeal.

The bottom line: include in the ROA the certificate of service for the notice of appeal.

And also make sure you include in the ROA a file-stamped copy of the notice of appeal. Today's Blevins decision also ruled that the Town's appeal had to be dismissed because the copy of the notice of appeal in the ROA didn't show the date on which it was filed, as required by Rule 9(b)(3). Rule 9(b)(3) provides, "Every pleading, motion, affidavit, or other paper included in the record on appeal shall show the date on which it was filed and, if verified, the date of verification and the person who verified." The Court held the appeal had to be dismissed because the appellant "failed to provide a stamped copy of a notice of appeal filed with the Clerk of Superior Court" and the "notice of appeal does not show it was either filed with or stamped by the Clerk of Superior Court." Judge Geer dissented on this ruling as well because the stipulated ROA contained a statement identifying the date when the notice of appeal was filed. The majority's decision indicates that a stipulation won't satisfy Rule 9(b)(3).

COA Affirms Trial Court's Criminal Contempt And License Suspension Against Lawyer Who Abandoned Client

In a pair of companion appeals (see here and here), the Court of Appeals affirmed judgments by Wake County Judge Donald Stephens holding a lawyer in criminal contempt and suspending him from practicing in the courts of Wake County for one year.

When his client failed to pay an extra $200 fee, the lawyer, Key, abandoned his client outside the courtroom before a hearing on her alleged probation violation, and without telling her. When Key left the Wake County Courthouse, the judge instructed the courtroom clerk to call him and request his presence. Upon receiving the clerk's call, Key told the clerk, "I don't see where the Judge has the authority to tell me to be there whenever I haven't been paid or retained in this case." Key then asked the clerk what the judge would do if he didn't show up. The clerk advised that the judge would probably issue a show cause order or an arrest order, and Key responded, "Well, he doesn't have the authority, and I don't give a s---- what he does."

Unfortunately for Key, Judge Stephens concluded he had the authority. He found Key in criminal contempt, sentencing him to 30 days in jail, suspended pending an 18-month probation. Judge Stephens also invoked the court's inherent authority to issue a disciplinary sanction--suspending Key's right to practice law in Wake County courts for one year--based on a violation of Rule 1.16 of the Revised Rules of Professional Conduct, which regulates how and when a lawyer may withdraw from representing a client. In affirming the disciplinary sanction, the Court of Appeals cited, among other facts, the fact that Key "behaved rudely towards the courtroom clerk" during the phone conversation and "stated that he didn't 'give a s--- what [the judge] does.'"

COA Holds Economic Loss Doesn't Block Tort Recovery From Product Manufacturer

In Lord v. Customized Consulting Specialty, Inc., filed today, the COA held that plaintiff home buyers could recover in tort from a company that made defective trusses used in their home. Lord may signal a diminishing of the economic loss rule, which generally bars recovery in tort for economic losses in the products arena.

Generally, the economic loss doctrine bars recovery in tort for economic losses, e.g., damage to a product caused by the defective product and not, e.g., personal injury. The COA in Lord noted the rationale for the doctrine: The sale of goods is accomplished by contract, and the parties are free to include, or exclude, provisions as to the parties' rights and remedies, should the product prove to be defective.

NC law indicates that economic losses are not limited not to damage to a defective component in a larger product but cover damage to a whole product damaged by a defective component. See, e.g., Atlantic Coast Mech. Inc. v. Arcadis, Geraghty & Miller, 175 N.C. App. 339, 623 S.E.2d 334 (2006); Moore v. Coachmen Indus., Inc., 129 N.C.App. 389, 499 S.E.2d 772 (1998); Gregory v. Atrium Door and Window Co., 106 N.C. App. 142, 415 S.E.2d 574 (1992).

NC courts have applied the economic loss doctrine in cases involving component suppliers where there was no indication that those suppliers were in privity with the plaintiffs, and the courts indicated that the components were covered by the whole product's warranty, i.e., by contract law. See Moore, 129 N.C. App. 389, 499 S.E.2d 772; Land v. Tall House Bldg. Co., 165 N.C. App. 880, 602 S.E.2d 1 (2004).

In Lord, plaintiffs were in privity with the contractor (though they weren't in privity with subcontractor 84 Lumber), and apparently suffered only economic loss, but their tort suit against the sub for product negligence was upheld. The plaintiffs bought a house constructed by Customized Consulting Specialty. Plaintiffs discovered that the trusses underneath the house were sagging and sued Customized Consulting Specialty, as well as 84 Lumber Company, the subcontractor who supplied Customized Consulting Specialty with the trusses. At trial, the jury found for Customized Consulting Specialty but against 84 Lumber Company for negligent design or manufacture of the trusses. 84 Lumber appealed, arguing the negligence claim was barred by the economic loss doctrine.

The COA held that the plaintiffs' claim was not barred by the economic loss rule. In reaching its result, the COA relied on Oates v. JAG, Inc., 314 N.C. 276, 333 S.E.2d 222 (1985), which allowed later home buyers not in privity with the contractor to sue the contractor for negligent construction. In Oates, the Supreme Court indicated that equity demanded the contractor's exposure, as otherwise a later home buyer had no form of recourse. (Here in Lord, in contrast, plaintiffs were in privity with the contractor and in fact sued (albeit unsuccessfully) that contractor.)

The COA also relied on Ellis-Don Constr., Inc. v. HKS, Inc., 353 F. Supp. 2d 603, 606 (M.D.N.C. 2004), in which the court refused to block a contractor's tort claim against a building designer based on the economic loss doctrine and in the absence of privity. Notably, though, the designer was not a products manufacturer--the realm from which the economic loss rule hails--and North Carolina case law long recognized a contractor's ability to go after an architect or building designer in circumstances such as those in Ellis-Don. See, e.g., Davidson and Jones, Inc. v. New Hanover County, 41 N.C. App. 661, 255 S.E.2d 580 (1979).

In Lord, the COA seems to go beyond Oates and Ellis and allow plaintiffs, who were in privity with the contractor and who could and did sue the contractor, to sue directly a products manufacturer for economic losses caused by the manufacturer's defective component product--here, trusses. Lord seems to be in tension with prior case law such as Moore and would seem to indicate manufacturers' increased exposure to direct tort suits by plaintiffs who suffer only economic losses.

COA Vacates Chapter 75 Judgment

Today the Court of Appeals vacated a judgment for unfair and deceptive acts under G.S. 75-1.1 ("Chapter 75"). The case is Business Cabling, Inc. v. Yokeley. The Chapter 75 judgment had been entered against Vitafoam Inc. The case: (1) casts doubt on the propriety of imposing Chapter 75 liability in the context of bidded work; and (2) reiterates that a Chapter 75 plaintiff advancing a deception-based claim must prove detrimental reliance, a point ignored or contested by many litigants and judges.

Facts

Plaintiff, Business Cabling, Inc., employed Barry Yokeley for several years. Yokeley served as an officer and director of plaintiff and was a shareholder. His duties included soliciting new customers, making business proposals to customers, and entering into contracts with customers on plaintiff's behalf. He didn't have a non-compete or non-solicitation agreement.

Vitafoam was one of plaintiff's customers through bidded contracts. While Yokeley was employed by plaintiff he submitted bids to Vitafoam on behalf of plaintiff.

Yokeley was asked to seek other employment, and he landed a new job with one of plaintiff's competitors, Fleet.

A month before he resigned, he prepared a bid proposal to Vitafoam in his own name--for a project for which he already had submitted a bid on behalf of plaintiff six months earlier (the first bid was still pending when Yokeley resigned). Vitafoam accepted his solo bid (the more recent one) after he became employed in his new job with Fleet, and that work went to Fleet.

Moreover, after Yokeley went to work for Fleet, he submitted other bids to Vitafoam on behalf of Fleet, in competition with plaintiff, and some those bids were accepted, benefiting Fleet.

At the time, plaintiff was unaware that Yokeley was doing this.

Vitafoam accepted the bids through its IT director Jim Bridges, who happened to be Yokeley's father-in-law.

A month after Yokeley left plaintiff for Fleet, plaintiff contacted Vitafoam's Bridges for an update on bidded projects, and Bridges's reply email failed to mention that the projects had been awarded to Fleet--even though Bridges of course was aware that Vitafoam had contracted with Fleet through Yokeley.

When plaintiff learned what happened, it not only sued its former employee Yokeley (for wrongful interference and a Chapter 75 violation), it also sued Vitafoam alleging a violation of Chapter 75.

The Trial Court's Judgment

Plaintiff settled with Yokeley. After a bench trial on its claim against Vitafoam (Judge Craig in Guilford County) the trial court entered a judgment against Vitafoam, concluding that Vitafoam engaged in unfair and deceptive acts by "knowingly participat[ing]" with Yokeley (1) to solicit Vitafoam's business, (2) to interfere with plaintiff's prospective advantage in connection with projects that plaintiff otherwise would've or might've obtained, and (3) to divert plaintiff's business opportunity with respect to those projects awarded to Fleet through Yokeley.

The Court of Appeals' Decision

The Court of Appeals reversed. As a factual matter, the Court emphasized that Vitafoam never entered a contract with plaintiff on those projects, that Vitafoam didn't accept Yokeley's bids until after he resigned from plaintiff, and that Yokeley wasn't bound by a non-compete or non-solicitation agreement. As a legal matter, the Court emphasized that an act is not unfair unless it offends established public policy or is immoral, unethical, oppressive, unscrupulous, or substantially injurious to consumers, with some type of egregious or aggravating circumstances present. Vitafoam simply accepted bids.

The trial court had also found deception in the email that Vitafoam's Bridges sent to plaintiff (after Yokeley resigned) omitting any mention of the fact that the bids already had been awarded to Fleet (and suggesting that either the bids remained open or might not be awarded to anyone). The Court of Appeals held, however, that there could be no liability based on the allegedly deceptive statement by Bridges, because no evidence showed that plaintiff detrimentally relied on it. Recovery under Chapter 75, the Court reiterated, "is limited to those situations when a plaintiff can show that plaintiff detrimentally relied upon a statement or misrepresentation and he or she suffered actual injury as a proximate result of defendant's deceptive statement or misrepresentation." (This point should be beyond dispute after the NC Supreme Court's decision in Howerton v. Arai Helmet Ltd., 358 N.C. 440, 597 S.E.2d 674 (2004).)

The Court of Appeals also concluded "that the trial court failed to find as fact, and no evidence tends to show, plaintiff 'suffered actual injury as a proximate result of defendant's deceptive statement or misrepresentation.'" Proximate cause, of course, is an essential element of a Chapter 75 case, and in the context of a bidded contract, it's exceedingly difficult for a plaintiff to prove that, but for the challenged act, the plaintiff would've won the bid. Thus, in this case the Court of Appeals observed, "No evidence tends to show defendant would have accepted plaintiff's bid . . . ."

As a matter of public policy, an amicus brief submitted by North Carolina Citizens for Business and Industry urged that the trial court's reasoning would "put all businesses at risk of being unwittingly snagged on the isosceles angle of disputes between employers and their alleged disloyal employees" and that "[b]usiness should not be placed at risk by accepting one competitor's bid over another," as "[s]uch risk is beyond what is required by the law and would seem to be contrary to the spirit, as well as the letter, of Chapter 75 of the North Carolina General Statutes." The Court of Appeals embraced this argument, concluding: "Defendant cannot be placed at risk for accepting one competitor's bid over another. Such risk is beyond what the law requires and is contrary to Chapter 75 of the North Carolina General Statutes."

COA Holds Children, Spouses Don't Constitute "Direct Interest" In Corporate Director Conflict-Of-Interest Analysis

In Geitner v. Mullins, filed today, the COA held, inter alia, that a corporate director's voting in favor of his spouse or children doesn't constitute a conflict of interest.

In Geitner, family members of the founder of Southern Hoisery Mills, Inc., a closely held corporation, were also members of the company's board of directors. Plaintiffs, members of the family and the board, brought a declaratory judgment action seeking to invalidate the other family members' board votes regarding compensation of those family members and their immediate family members, as well as the election of one of those family member as company president, due to conflicts of interest.

N.C. Gen. Stat. sec. 55-8-31, which underpinned the plaintiffs' action, states "A conflict of interest transaction is a transaction with the corporation in which a director of the corporation has a direct or indirect interest. . . ." Citing to nothing beyond 55-8-31 itself, which defines indirect interest but does not define direct interest, the COA majority held that "[t]he General Assembly clearly and unequivocally did not define a director as having a conflict of interest solely based upon a familial relationship . . . ."

The COA majority also held that 55-8-31 did not provide a basis for challenging the allegedly interested directors' votes because the statute addressed only transactions with the corporation, and not electing officers and setting compensation as in this case. The majority provided little guidance as to what a "transaction with the corporation" is, but made clear that neither electing officers nor setting compensation is one.

Judge Geer concurred in the result, but disagreed with the majority's reasoning. Judge Geer found the suggestion that a director is not interested in a transaction benefiting his spouse or child to be "illogical." Judge Geer noted that direct interest as used in 55-8-31 was not defined, and that treatises and the Model Business Act indicate that a director indeed has a direct interest where a member of his immediate family has a material interest in a transaction.

Judge Geer would nevertheless affirm dismissal of the plaintiffs' claims on the ground that 55-8-31 provides no basis for simply automatically invalidating interested directors' votes. Judge Geer pointed out that 55-8-31 does not address who may vote. Rather, 55-8-31 makes interested transactions not per se invalid but only voidable, under certain conditions not pled here.

Arbitration Agreement Signed After Performance Of Oral Contract Unenforceable

In Edwards v. Taylor, filed today, the COA held an arbitration clause unenforceable where the clause was contained in a written contract signed after an oral agreement about the same subject had been performed without any mention of arbitration.

In Edwards, the plaintiffs had contracted to buy a house and hired The Home Inspector, Inc. to conduct a pre-purchase inspection. The plaintiffs and The Home Inspector orally agreed to the inspection and price. The inspection was conducted, and the parties met. At the meeting, The Home Inspector provided an inspection report, and plaintiffs paid The Home Inspector. The Home Inspector also then presented the plaintiffs with a written contract with an arbitration clause. The parties signed the contract.

Plaintiffs closed on the inspected house, which they allege had a number of defects. Plaintiffs sued The Home Inspector, who moved to compel arbitration pursuant to the written contract.

The COA upheld the trial court's denial of the motion to compel arbitration. The COA held that the inspection was performed pursuant to the oral agreement, not the later written agreement, and that the oral agreement as a matter of law could not require arbitration, citing N.C. Gen. Stat. sec. 1-567.2.

The COA also held that the trial court's written order deeming the arbitration clause unconscionable conformed to the court's oral pronouncement. The trial court's statement that the arbitration clause had never been discussed prior to the written contract "addresses the unconscionability of the contract."

En Banc 4th Circuit Rules Against UNC and its Women's Soccer Coach in Sexual Harassment Case

Today the en banc 4th Circuit issued its awaited decision in Jennings v. University of North Carolina, a sexual harassment case by a former member of UNC's women's soccer team against UNC's soccer coach Anson Dorrance and the University.

The Court reversed the summary judgment awarded to the defendants. It was an 8-2 decision written by Judge Michael (two judges were recused).

The Court rejected UNC's argument that Dorrance's sex-focused comments were merely of a joking or teasing nature. The Court chronicled allegations of Dorrance's alleged crude, sex-oriented comments and physical contact with members of the soccer team. The Court held that a jury could find his conduct sufficiently severe and pervasive to create a hostile environment in the women's soccer program. The Court also found sufficient evidence that UNC was deliberately indifferent, thus enabling the imputation of liability to UNC.

Significantly, the Court relied on Dorrance's sexually explicit comments directed to other players on the team, not to Jennings, insofar as those comments were overhead by Jennings or consistent with her account.

The dissent concluded that Dorrance's comments were sexual banter that didn't have any discriminatory effect because they didn't deny Jennings any educational opportunity or benefit (a showing required to advance a successful Title IX claim).

The next step is a trial---unless the case settles first.

Another Assignment of Error Deemed Inadequate

In an unpublished criminal case decided yesterday, the COA in State v. Anthony deemed an assignment of error inadequate.

The trial court permitted Captain Williams to testify as a character witness for Tony Wrighton. The defendant assigned error as follows: "The court erred when it overruled Defendant's objection to the State's question to Captain Williams whether he was familar with Tony Wrighton's reputation in the community."

The COA ruled that this assignment of error was deficient under Rule 10(c) because it purportedly "fails to articulate a particular rationale for why the trial court's actions were in error."

This teaches once again that certain judges on the COA are requiring that assignments of error not simply identify what the trial court did that is being challenged (e.g., admitting testimony by Captain Williams about Wrighton's reputation in the community) but also why that action by the trial court is alleged to be error. The why requires something identifying the legal argument that will be briefed on appeal. And this may be required even when the challenged act by the trial court is easily identified (e.g., the admission of Captain Williams' answer to a single question about Wrighton's reputation in the community).

Unfortunately, when the COA deems assignments of error deficient, it rarely takes the next step of informing members of the bar how the assignment could've been drafted differently to satisfy Rule 10(c). For example, in this case, could the appellant have satisfied Rule 10(c) simply by adding "on the ground that the character testimony was not admissible under Rules of Evidence 405 or 608"? If so, then what does that additional verbiage add in terms of putting the appellee (here, the State) or the Court on notice as to the issue to be briefed on appeal?

COA Upholds Employee's Malicious Prosecution Victory, Notes Rules Violations

In Nguyen v. Burgerbusters, Inc. d/b/a Taco Bell, the COA upheld a jury verdict finding an employer liable to the tune of $200,000 for malicious prosecution involving a former employee.

Burgerbusters, Nguyen's employer, received an anonymous tip that Nguyen's wife was submitting fraudulently inflated time sheets. Burgerbusters investigated the tip, and, based on the investigation, fired Nguyen and told the police that Nguyen had caused Burgerbusters to pay $25,000 to a merely nominal employee. In turn, a DA got an indictment charging Nguyen of embezzlement. But the DA ultimately determined insufficient evidence existed and dismissed the embezzlement charge.

Nguyen then brought a malicious prosecution action, which required that Nguyen show 1) that the defendant initiated an earlier proceeding; 2) malice in initiating such proceeding; 3) lack of probable cause for initiating the earlier proceeding; and 4) termination of the earlier proceeding in the now plaintiff's favor. The trial court let Nguyen's case go to the jury, which found for Nguyen and awarded him $200,000. The trial court let the verdict stand and refused to grant a new trial.

The COA upheld the trial court, holding, among other things, that Burgerbusters' call to the police about its embezzlement suspicion was enough to meet the first element, as "without the initial contact from defendant, it is unlikely there would have been a criminal prosecution of plaintiff." Striking is the seeming banality of this case's facts, and it should give employers pause.

The COA also refused to address a couple of Burgerbusters' arguments, in one instance because of the lack of authority in support of an argument, in another instance, because an assignment of error went to the trial court's denial of directed verdict and JNOV motions on a certain ground (warrant/indictment not introduced into evidence) while the corresponding argument in the brief went to the trial court's failure to dismiss the case on that very same ground.