COA 40th Anniversary Celebration

The NC Court of Appeals just held its 40th Anniversary Celebration. Governor Easley and Chief Justice Parker spoke. In addition to all sitting Court of Appeals judges, in attendance were the Supeme Court Justices, several former Chief Justices (including our own Burley Mitchell), and many former judges from the Court of Appeals and Supreme Court who have served over the past several decades.

Fourth Circuit: Arbitrator May Certify Opt-Out FLSA Class, Desite FLSA's Opt-In Requirement

Today, in Long John Silver's v. Cole, a collective action brought in arbitration under the Fair Labor Standards Act (FLSA), the Fourth Circuit confronted the following conflict. On the one hand, the FLSA contains an "opt-in" provision: section 16(b) of the FLSA says that "[n]o employee shall be a party plaintiff to any ... [FLSA] action unless he gives his consent in writing to become a party . . . ." On the other hand, the AAA rules for class arbitrations ("AAA Class Rules"), which were incorporated into the employer's arbitration agreements with its employees, provides that arbitrators may include in a class award those persons who have not elected to "opt out" of the class.

Thus, whereas the AAA Class Rules contemplate an opt-out class, section 16(b) of the FLSA contemplates an opt-in class. One can safely predict that in most cases an opt-in class will be smaller than an opt-out class.

In today's case the arbitrator issued a class award using the opt-out mechanism in the AAA Class Rules. Thus, employees were included in the class even though they never opted in, i.e., never gave written consent to become parties, as contemplated by section 16(b).

The employer argued that the arbitrator's use of an opt-out procedure (rather than an opt-in process) constituted a manifest disregard of law -- a manifest disregard of FLSA section 16(b). The employer argued that the opt-in right is a substantive right of an employee (a substantive right not to be made a party to a FLSA-related proceeding without his consent) that is not waivable by arbitration agreement. The Secretary of Labor filed an amicus brief in support of the employer's position.

The Fourth Circuit, however, held that the arbitrator didn't manifestly disregard the law. The Court held that the employer failed to demonstrate that Congress expressly intended to preclude a waiver of the section 16(b) opt-in procedure for class arbitration of FLSA claims. The Court deemed it "far from clear" -- a "debatable contention" -- that section 16(b)'s opt-in provision is a nonwaivable substantive right. Therefore, the employer didn't discharge its "heavy burden" of showing that the arbitrator manifestly disregarded the law.

The Court observed that employees are entitled to waive their right to collective action by agreeing to mandatory arbitration. See Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20 (1991). The Court concluded that, if the right to initiate collective action can be waived, "it may be inferred that an 'opt-in' procedure relating to any such right . . . can also be waived."

Note: the Court didn't hold that the FLSA's opt-in provision cannot apply in arbitration. Rather, the Court held only that an arbitrator could conclude that parties may waive the opt-in provision by agreeing to abide by arbitration rules that provide for an out-out procedure.

SCT: Punitive Damages Unavailable Against Deceased Wrongdoer

On Friday, in Harrell v. Bowen, the NC Supreme Court held that punitive damages are unavailable when the wrongdoer is dead.

Writing for the Court, Justice Brady relied on the plain meaning of G.S. § 1D-1. Entitled "Purpose of punitive damages," it provides: “Punitive damages may be awarded, in an appropriate case and subject to the provisions of this Chapter, to punish a defendant for egregiously wrongful acts and to deter the defendant and others from committing similar wrongful acts.” (Emphasis added) Relying on the conjunctive phrasing of that sentence, the Court held that punitive damages can't be imposed unless they accomplish all three statutory objectives: punishing the defendant, deterring the defendant, and deterring others. Because a dead person can't be punished or deterred, two of the three statutory objectives can't be accomplished when the wrongdoer has died. Thus, the Court held, punitive damages can't be assessed against a decedent's estate. Of course, the General Assembly may provide otherwise by amending the statute.

Justices Newby and Hudson dissented. They'd permit punitive damages to be awarded solely to deter others, even if the wrongdoer, having died, can't be punished or deterred.

NC SCT Declares Arbitration Agreement Unconscionable In Landmark Case

On Friday, a fractured NC SCT held in Tillman v. Commercial Credit Loans, Inc. that an arbitration agreement attendant to a consumer loan was unconscionable -- a first in NC appellate law. In the wake of that opinion, businesses will have to grapple with how to secure arbitration agreements with consumers while ensuring that they expose themselves to neither "bargaining naughtiness" nor substantive unconscionability claims.

In Tillman, the plaintiffs brought a purported class action against subprime lenders. The lenders sought to compel arbitration. The trial court refused to compel, determining that the arbitration agreements were unconscionable. The lenders appealed, won at the NC COA, and plaintiffs appealed to the SCT.

The plurality opinion, referred to in Tillman as a majority, was authored by Justice Timmons-Goodson and joined by Justices Hudson and Brady. The plurality adopted a framework that to successfully assert unconscionability, a party must prove procedural and substantive unconscionability.

The plurality held that procedural unconscionability is "bargaining naughtiness," set out as "unfair surprise, lack of meaningful choice, and an inequality of bargaining power." Here, the plurality held procedural unconscionability was established by the trial court's determinations that 1) plaintiffs were "rushed" through the loan closing process, 2) the loan closing officer(s) did not specifically mention the arbitration provision (though it was set off in a box, bolded, capitalized, and underlined and required separate signature, which plaintiffs provided), 3) defendants admitted they would have refused to negotiate the terms of the arbitration provision, and 4) the status of the consumers versus the corporate defendants.

What the SCT did not do is provide any sense of what "rushed" means, not to mention how lenders or other businesses might avoid committing that particular "bargaining naughtiness." The SCT also didn't really square a "mention" of the arbitration provision with the provision's prominent appearance on the documents, or the plaintiffs' signing of that specific provision, or indicate what kind of "mention" clears the "naughtiness" hurdle. As to bargaining power, any consumer beyond the Warren Buffetts of the world will have vastly unequal bargaining power to the likes of CitiGroup, a defendant in the case. Inescapable "bargaining naughtiness"? And as for the lack of choice because defendants wouldn't negotiate the arbitration provision, the plurality doesn't address whether the plaintiffs could simply have gone to another lender with another agreement and gotten choice that way.

The plurality held that substantive unconscionability "refers to harsh, one-sided, oppressive contract terms." The plurality held substantive unconscionability was established by the trial court's determinations that 1) the arbitration costs borrowers may face were prohibitively high, 2) the provision is one-sided and lacks mutuality, and 3) the provision prohibits class actions.

In deciding that the costs were prohibitive, the plurality focused, inter alia, on the purportedly low likelihood that plaintiffs' attorneys will take relatively low-damages cases such as these individual arbitrations -- despite the fact that the plaintiffs' claims are Chapter 75 claims, which provide for attorneys' fees and costs above and beyond damages precisely to enable consumers to bring small-damages cases against businesses. As to one-sidedness, the plurality focused on the fact that foreclosures and claims under $15 K were exempt from mandatory arbitration and prohibition of class claims. The plurality focused on these provisions' benefiting only defendants in practice -- though they apply in theory equally to plaintiffs, and small claims exemptions from arbitration are, as Justice Newby noted in his dissent, intended to benefit plaintiffs and leave open for them the small claims arena. As for the class prohibition, the plurality doesn't really square declaring a bar of a class action, which is a discretionary and procedural device, with the "substantive" in substantive unconscionability.

Justice Edmunds concurred in result only, being joined by Justice Martin. It appears as if the concurring justices' main concern with the plurality opinion was that it looked to federal law rather than just NC law and then established the procedural and substantive framework that allows itself to be projected onto NC precedent but wasn't explicit in that precedent. However, as for substance, the concurrence looks to the same determinations as the plurality and gives the plaintiffs the green light.

(Interestingly, the concurrence posits that the "lopsided effect of the arbitration clause is best demonstrated by the fact" that defendants had given 68 K loans with the arbitration agreement, had had no arbitrations brought against them, but had themselves instituted over 3 K lawsuits against borrowers. The causation issue is, however, unaddressed. Maybe CitiGroup has an excellent customer service department that nips potential consumer complaints in the bud, for example.)

Justice Newby, joined by Chief Justice Parker, dissented. Justice Newby noted that this is the very first case in which an NC appellate court has found a contract to be unconscionable. Justice Newby believed that grounds on which the plurality invalidated the arbitration agreement are unique to and common among arbitration agreements -- which is verboten under federal law. Justice Newby also noted that a number of grounds for unconscionability are not specific to the arbitration provision but rather go to the entire contract (e.g., plaintiffs were "rushed" through the loan closings, not the arbitration provision specifically), and that the US SCT ruled 40 years ago in Prima Paint that challenges to the contract as a whole were for the arbitrator, not the court, to decide. Justice Newby would hold that there was no procedural unconscionability -- he noted that "the majority's analysis criticizes aspects common to all consumer transactions..." He also would find no substantive unconscionability on numerous grounds. Justice Newby stated that "[a]t its core, this case is about plaintiffs' challenge to an arbitration agreement that substitutes individual arbitration for class action litigation" and he "did not believe this case presents the landmark occasion for invalidating a bargain due to unconscionability."

Fourth Circuit Banter On Suppression Of Evidence

This is off subject for this blog, but today's Fourth Circuit decisions include a very interesting dispute between Chief Judge Williams (writing the lead opinion) and Judge Gregory (dissenting) on the issue of "reasonable suspicion" in the context of a Terry stop -- and in particular whether a seasoned officer's hunch can satisfy that standard. The majority reversed the district court's suppression of evidence. (In another case today, a Fourth Circuit panel reversed a district court's failure to suppress evidence obtained as a result of a warrantless search of his apartment, holding that the search was illegal.)

NC Supreme Court Action Today

Today the NC Supreme Court released orders and opinions.

As for opinions: the Court released 12 decisions. Six are per curiam reversals or affirmances. The other six are opinions. The 12 decisions include five reversals. Four of the 12 decisions are termination-of-parental-rights cases (the Court of Appeals had reversed termination in several cases); it appears that, when the dust settles from the various affirmances and reversals in these cases, the result in each case is termination of parental rights. There are four criminal cases, and it appears the criminal defendants prevailed in three of the four.

But by far the biggest case of the day, one with enormous ramifications, is Tillman v. Commercial Credit Loans, Inc., in which a divided Court held a consumer arbitration agreement unenforceable under the doctrine of unconscionability. Sarah will post on that case later.

As for orders, the Court did not grant discretionary review in any cases. Among the cases in which review was denied: a Court of Appeals decision holding that, when parties have an arbitration agreement, it is for the arbitrator, and not the trial court, to determine whether the plaintiff's claims are barred by the preclusive effect of a prior arbitration under the doctrines of res judicata and collateral estoppel. The Court of Appeals held that a case must be submitted to arbitration even when the trial court is convinced that the claims are barred by res judicata and collateral estoppel. State and federal courts elsewhere (applying the Federal Arbitration Act, which also governed the subject case on which the Court denied review today) have ruled that courts, not arbitrators, apply res judicata and collateral estoppel, absent a clear agreement by the parties to the contrary.

Fourth Circuit Upholds ADA Punitive Damage Award

Today in EEOC v. Federal Express Corp. the Fourth Circuit rejected a challenge by FedEx to a punitive damages award in an ADA case. A jury found an ADA violation and awarded the employee $100,000 in punitive damages on top of $8,000 in compensatories. (In the case of an employer with more than 500 employees, the ADA limits the sum of compensatory and punitive damages to $300,000.) On appeal FedEx made two arguments.

First, FedEx argued that the evidence was insufficient to support the punitive damages award. The Fourth Circuit disagreed. The Court concluded that the evidence was sufficient to find that a managerial official of FedEx perceived the risk that his failure to provide the plaintiff with reasonable accommodations would violate the ADA -- and thus that FedEx acted with recklessness. The Court also rejected FedEx's argument that, because it had adopted an ADA compliance policy and an internal grievance policy, it had acted in "good faith." "Unfortunately for FedEx," the Court held, "the mere existence of an ADA compliance policy will not alone insulate an employer from punitive damages. Rather, in order to avoid liability for the discriminatory acts of one of its management officials, an employer maintaining such a compliance policy must also take affirmative steps to ensure its implementation." The Court concluded there was evidence that "FedEx failed to sufficiently take affirmative steps to ensure the implementation of its ADA compliance policy with respect to [plaintiff]."

Second, FedEx argued that the $100,000 punitive award was excessive in amount, in violation of the federal due process clause. The Fourth Circuit held that the 12.5 to 1 ratio between punitives and compensatories didn't render the award excessive as a matter of law. The problem with that ruling: the Supreme Court has indicated that a ratio above single digits fails the reasonable-relationship guidepost of BMW's due process test. Indeed, in State Farm v. Campbell (2003) the Supreme Court said that "few awards exceeding a single-digit ratio between punitives and compensatory damages . . . will satisfy due process" and reiterated that a punitive award of four times compensatory damages was likely to be "close to the line of constitutional impropriety." State Farm also indicated that a higher multiple may be permissible when (i) "a particularly egregious act has resulted in only a small amount of economic damages; (ii) "the injury is hard to detect"; or (iii) "the monetary value of non-economic harm might have been difficult to determine." The Fourth Circuit didn't examine or apply any of these factors in upholding the 12.5 to 1 ratio today.

The Fourth Circuit also found the award reasonable in that it fell well below the ADA's statutory cap. Plaintiffs often argue that a punitive award that falls under a statutory cap is immune to an excessiveness challenge, and the district court in this case may have bought that theory. While the Fourth Circuit didn't go quite so far, the Court plainly relied heavily on the statutory cap as one of the factors supporting the reasonableness of the award. The notion that an award is beyond due process review for excessiveness if it falls within a statutory range is misplaced. See, e.g., Kent v. A.O. White, Jr., Consulting Eng'r, P.C., 559 S.E.2d 731, 736-40 (Ga. Ct. App. 2002) (holding that punitive award that had been reduced by trial court to $250,000 statutory cap remained unconstitutionally excessive and ordering reduction to $85,964). Otherwise a state could set the cap sufficiently high--say, $5 million--and awards below the cap would be immune from challenge no matter how disproportionate they may be in relation to actual damages. In fact, the Supreme Court and Fourth Circuit historically have reviewed criminal sentences, civil forfeitures, taxes, False Claims Act penalties, and other statutorily-based penalties for excessiveness.

Split Fourth Circuit Panel Rules Against Employer In ADA Case

Today in Wilson v. Phoenix Specialty Mfg. Co. the Fourth Circuit affirmed an ADA judgment against an employer. The district court, after a bench trial, found that the employer terminated plaintiff's employment because it regarded him as disabled by his Parkinson's disease, i.e., believed his Parkinson's disease was substantially more limiting than it actually was. The employer's defense was that a downtown turn in sales in its industry after 9/11 (it makes parts for manufacturing aircraft) necessitated a reduction in force, including plaintiff's position (supervisor in the shipping department). The employer contended that plaintiff's position was eliminated because he was unable to do efficiently some of the tasks required in the shipping department; made many errors; and failed to master the new computer system. The district court found the defense unsupported by the evidence. Judge Niemeyer wrote a lengthy dissent. Focusing on the district court's finding that plaintiff was not disabled, Judge Niemeyer emphasized that plaintiff prevailed on an alternative theory that, though he wasn't disabled, the employer regarded him as such. (The ADA prohibits an employer from discriminating against an employee on the basis that the employer "regarded" the employee as having an "impairment that substantially limits one or more of [his] major life activities.") Judge Niemeyer argued that plaintiff failed to show that the employer was mistaken in its belief that he was suffering a substantial limitation of one or more major life activities. "There is simply no evidence from which to conclude that [the employer] had a misperception about [plaintiff's] impairments at the time it terminated his employment, nor did the district court find any," Judge Niemeyer emphasized.

Split Fourth Circuit Affirms Denial Of Benefits In ERISA Case

Today in Stanford v. Continental Casualty Co., an ERISA case, the Fourth Circuit affirmed the denial of long term disability benefits to an employee who was at risk of relapse into drug addiction for a painkiller-narcotic he administered in the course of his employment as a trained nurse anesthetist. His addiction problems had begun when he started self-administering the drug, and he had relapsed twice before. The majority upheld the determination that his present risk of relapse was not a form of disability under the plan. Judge Wilkinson dissented. "All record evidence indicates that, because of his addition, [plaintiff] cannot return to work in anesthesiology with an reasonable degree of safety," Judge Wilkinson said, emphasizing that plaintiff has a chemical dependency and addiction. After accusing the majority of ignoring the language of the plan and mistakenly distinguishing a risk of relapse into addiction with a risk of a heart attack, Judge Wilkinson ended with this statement: "I believe my colleagues mistake the moral balance. [Plaintiff] is not currently taking drugs; he is trying to cease taking drugs. We should give people like him a chance to get back on their feet. . . . Judge-made exceptions are often assumed to be humane, while law is thought to be a cold, hard thing. But equity here is a sword that strikes against the needy but unfavored. Law would be kinder."

SCT To Issue Decisions This Friday

As a reminder, the NC Supreme Court is scheduled to issue orders, and presumably also opinions, this Friday, January 25.

Fourth Circuit Nominee Withdraws

Duncan Getchell of Virginia, one of President Bush's more recent Fourth Circuit nominees, has withdrawn his nomination after concluding that Democrats in the Senate would block confirmation.

NC COA Splits Over NC SCT Authority V. US SCT Authority

In Andrews v. Haygood, a divided COA panel held that NC's Division of Medical Assistance has an automatic lien on all settlement funds of a medicaid recipient. The COA majority based its ruling on NC precedent, while Judge Wynn, dissenting, would have held that US SCT precedent should have been considered and controlled.

In Andrews, the plaintiff was injured at birth. Her guardian sued the doctors and hospital, and a settlement was reached. The plaintiff receives medicaid benefits, and under NC statutory law, the State has an automatic lien on the settlement funds for the medicaid benefits the plaintiff receives. At issue in the appeal was whether the State's lien could reach settlement funds allocated, e.g., for pain and suffering, i.e., for something other than medical expenses.

The COA majority held yes, and relied on a 2006 NC SCT case, Ezell v. Grace Hosp., 360 N.C. 529, 631 S.E.2d 131 (2006), which reversed per curiam based on a 2005 dissent. Neither of those opinions appeared to have considered a 2006 US SCT decision in which the Court held that a statute similar to the one at issue in Andrews was preempted by federal law.

In Arkansas Dep't of Health & Human Servs. v. Ahlborn, 547 U.S. 268 (2006), the US SCT held that Arkansas statutory medicaid law, which appears to be similar to NC's, conflicted with and was preempted by federal medicaid law. The Court held that the Arkansas law allowed recovery of funds pegged for things other than medical care and that so doing fatally conflicted with federal law, which allows states to recover proceeds pegged for medical costs only.

Judge Wynn dissented in Andrews. Judge Wynn noted that the NC SCT had not addressed the preemption issue in Ahlborn, would hold that Ahlborn dictates that the State's lien on the plaintiff's funds is limited to those for medical costs, and does not appear see the NC COA as being boxed in by NC SCT precedent not addressing an issue presented by US SCT precedent.

4th Circuit Refuses to Delve Into N.C. Tax

The Fourth Circuit, in DIRECTV, Inc. v. Tolson, refused last week to delve into the arena of NC state taxation. DIRECTV and Echostar Satellite, LLC brought suit, arguing that a state taxation system was unconstitutional. The Fourth Circuit affirmed the dismissal of the suit and held that federal courts won't enjoin states from levying taxes, won't alter the state's allocation of taxation authority, and that suits alleging constitutional violations due to state taxation are barred in federal court so long as state courts also provide adequate remedies.

Split COA Invalidates Restrictive Covenants

Yesterday the Court of Appeals (COA) held in a split decision that restrictive covenants were enforceable on the ground that they weren't sufficiently definite. The case is Southeastern Jurisdictional Administrative Council, Inc. v. Emerson. It is an important case about how to draft covenants for developments and whether owners/developers can lawfully collect service fees from lot owners when their restrictive covenants don't delineate the fees. The majority: Judges Bryant and Wynn. Judge Hunter dissented.

Plaintiff (the "Council") is the owner/developer of a development in which the defendants are lot owners. The Council assessed them with service charges for police protection, street maintenance, street lighting, drainage maintenance, administrative costs, and upkeep. When defendants refused to pay the service charges, the Council sued. The trial court upheld the service charges, and the lot owners appealed.

All three judges on the panel agreed with the standard for evaluating covenants. A covenant that imposes an affirmative obligation on a property owner (such as a duty to pay money) is strictly construed and unenforceable unless it is "sufficient definite" to assist courts in applying it. To be enforceable, it must contain an "ascertainable standard" by which a court "can objectively determine both that the amount of the assessment and the purpose for which it is levied fall within the contemplation of the covenant." The judges disagreed on how the standard applied in this case.

Two versions of covenants were at issue, with each applicable to different lot owners. The first version was a covenant binding lot owners to bylaws, rules, and regulations "hereafter adopted" by the Council, with the bylaws, rules, and regulations to be treated as if they had been a part of the deed. The covenant did not mention service charges. After the defendants bought their lots, the Council adopted a regulation requiring each owner to pay an annual service charge "in an amount fixed by" the Council for a variety of enumerated services (police protection, street maintenance, street lighting, drainage maintenance, administrative costs and upkeep of the common areas). The COA majority held that this was unenforceable because the covenant didn't specifically state an affirmative obligation to pay any money and the post-covenant regulation incorporated into the covenant wasn't sufficiently definite. "Defendants could not have foreseen from the wording of the restrictive covenants that they would be subject to assessments levied [after] they executed the deed." The problem was the lack of "an express authorization to levy assessments in the text of the covenants"; the covenants did "not explicitly authorize assessments and such power cannot be inferred from the ability to set rules and regulations." Thus, the fact that the covenant authorized the Council generally to adopt regulations wasn't good enough.

The other version of restrictive covenant (a later version) governed other lot owners in the development. This covenant, unlike the earlier one, provided for service charges. It said that each owner must pay an annual service charge "in an amount fixed by" the Council for various services enumerated in the covenant ("garbage and trash collection, police protection, fire protection, street maintenance, street lighting and upkeep of common areas"). It also identified the property subject to these covenants as "Hickory Hill, section one," and included a plat showing four lots. The COA majority held that, although the covenant contained an explicit authorization to collect service charges, "the authorizing clause is not sufficiently definite to be enforceable," because it does not "[1] give sufficient information to determine the amount of the assessment, [2] nor describe with particularity the property to be maintained, nor [3] give guidance as to the facilities actually maintained . . . ." In other words, to be enforceable, the majority seemingly would require (1) that the dollar amount of the charges or a methodology for calculating the dollar amount must be included in the covenant and (2) that all the properties benefited and maintained by the charges must be identified in the covenant.

Judge Hunter dissented. He deemed the covenants reasonable and sufficiently definite. He relied on the Supreme Court's observation that "[d]eclarations of covenants that are intended to govern communities over long periods of time are necessarily unable to resolve every question or community concern that may arise during the term of years.” Accordingly, Judge Hunter said, "homeowners' associations must be allowed some latitude, so long as the amendments follow the requirements of being reasonable and definite." With respect to the later and more specific version of the covenant declared unenforceable by the majority, Judge Hunter suggested that the majority's standard is absurd: "To hold that plaintiff should somehow determine the cost of maintaining 'garbage and trash collection, police protection, fire protection, street maintenance, [and] street lighting' for these four houses is to reduce the restrictive covenant to a logical absurdity," he wrote.

This much is clear: under the majority's decision, the enforceability of service charges assessed on many owners today may now be called into question; and careful consideration must be given to the drafting of covenants in order to satisfy the majority's "specificity" standard.

Justice Timmons-Goodson Addresses Fort Bragg

Here's a story on Supreme Court Justice Timmons-Goodson's address yesterday at a Fort Bragg event honoring MLK.

COA Starts New Year With Mass Reversals

Of the 34 published opinions released today by the Court of Appeals (the first batch of opinions for 2008), 17 of them -- 50% -- reversed or vacated trial court orders in whole or in part. Obviously that's a pretty high reversal rate.

COA: State's Alter Ego Allegation Insufficient To Establish Personal Jursidiction

Today in State v. Ridgeway Brands Mfg., LLC the Court of Appeals (COA) rejected the State's effort to establish personal jurisdiction over an Arizona corporation in a suit to collect money arising from obligations under the tobacco Master Settlement Agreement.

The State argued that personal jurisdiction could extend to the defendant Arizona corporation, Trevally, Inc., on the theory that it is an alter ego of the defendant North Carolina company, Ridgeway Brands. But the only supporting allegation in the State's complaint was this: "Defendant Trevally is the alter ego of Defendant Ridgeway Manufacturing." The COA held that this "conclusory allegation in the Second Amended Complaint is insufficient to establish that Trevally is the alter ego of Ridgeway for purposes of determining whether the courts of North Carolina have jurisdiction over Trevally." The COA added that the State "cites no authority for its proposition that if an out-of-state corporation is the alter ego of a North Carolina corporation, then the courts of North Carolina have personal jurisdiction over the out-of-state corporation."

COA Vacates Criminal Contempt Because It Was Based On Acts Occuring After Show Cause Order

Today in State v. Coleman the Court of Appeals (COA) clarified that (generally) a party cannot be held in criminal contempt based on acts committed on dates other than the dates charged in the show cause order. In this case, after the plaintiff moved to hold the defendant in criminal contempt for violating a TRO, the trial court issued a show cause order, which in the criminal contempt context is akin to an indictment. The trial court then made a finding of (indirect) criminal contempt based on TRO violations occurring after the show cause order. Because those incidents post-dated the show cause order, they weren't part of the show cause order, and the defendant wasn't on sufficient notice of them. It was akin to a variance from an indictment. So the criminal contempt was vacated. The holding: "A defendant's constitutional right to notice and a hearing at which the State bears the burden of proving the alleged contemptuous acts beyond a reasonable doubt compels us to hold that findings of fact based solely on acts which occurred after the issuance of the show cause order are insufficient to adjudge the defendant in criminal contempt."

COA Holds That Prelim Injunction Entered Without Notice Is Immediately Appealable

Today in Perry v. Baxley Dev. Co., the Court of Appeals (COA) held that a preliminary injunction (PI) entered without notice affects a "substantial right" and thus is immediately appealable even though it's an interlocutory order. (Under NC law, like federal law, a PI can issue only after notice and a hearing.) The COA then held that the trial court abused its discretion by failing to set aside the PI because defendant didn't receive proper notice of the PI hearing. Notice had been sent to a lawyer representing defendant in a separate matter, but that lawyer hadn't entered an appearance in this matter, and thus wasn't an attorney of record. Therefore, notice to that lawyer was not sufficient to constitute notice to defendant.

COA Splits On "Substantial Fault" Standard For Unemployment Benefits

Today the Court of Appeals (COA) issued a split decision applying the "substantial fault" standard governing unemployment benefits claims. The majority (Judges McGee and Elmore) ruled in favor of the employee and reversed the decision of the Employment Security Commission (ESC). Judge Tyson dissented. The case seemingly lowers the barrier for employees seeking to excuse their failure to comply with employer policies, particularly in cases of absenteeism and tardiness. The case is Applewhite v. Alliance One Int'l, Inc.

By statute, an employee is disqualified from receiving unemployment benefits if he is discharged "for substantial fault on his part" in failing to comply with the employer's reasonable job requirements. The statute defines "substantial fault" to include acts or omissions over which the employee "exercised reasonable control."

Thus, when an employee is discharged for failing to comply with the employer's reasonable policy (e.g., attendance), the question boils down to this: Did the employee have the physical and mental ability to comply?

So, for example, in a 2006 case, James v. Lemmons, the COA upheld the ESC's finding of no substantial fault (i.e., upheld the award of benefits) in the case of an employee discharged for excessive absenteeism, based on the ESC's finding that she missed work after failing to take medication prescribed for her bipolar disorder. James was based on precedent stating that "serious physical or mental illness" can support a finding of no substantial fault.

Today's case involved an employee discharged for excessive absenteeism. Her employer has a three-strikes-and-you're-out policy: after two written warnings, the third infraction results in dismissal. The employee, who had multiple incidents of excessive breaks and tardiness, committed the third infraction when she took an excessive break by returning 15 minutes late from lunch. She was late because, according to her account, she had become sick and needed to go to the bathroom before returning to work. The ESC nonetheless concluded that she bore substantial fault for her dismissal. Thus, she was denied benefits.

The COA majority reversed. The COA held that the employee didn't have reasonable control over her tardiness for the third incident that triggered her dismissal, because she was late "due to illness"; she "had become sick, and needed to go to the bathroom before returning to her work area." The majority concluded that this was enough to find no substantial fault, and thus the majority voted to reverse the ESC and award the employee benefits.

Judge Tyson dissented, emphasizing that the employee's "undescribed and undiagnosed 'personal illness'" didn't constitute a serious physical or mental condition that prevented her from conforming to the employer's policy. He deemed James inapplicable because the employee in James had a previously diagnosed mental illness which was serious (bipolar disorder); the ESC in James had found that her absences were caused by her condition; and the employee in James had provided doctors' excuses for the time she missed work.

Judge Tyson emphasized that, in contrast to James, in today's case there was no evidence or diagnosis of serious illness. The record showed that the employee had exhausted her entire lunch break before returning to her workplace, and then used an additional 15 minutes without informing her employer she was sick. And the earlier incidents of tardiness that preceded the third infraction and which contributed to her discharge were not linked to her alleged illness. "Despite the repeated written and oral warnings and [her] awareness of [the] employer's policy regarding termination, [she] failed to give [her] employer any notice of her 'illness' to excuse her actions or provide any medical excuse for her repeated absenteeism while employed." Thus, Judge Tyson would uphold the ESC's conclusion that bore "substantial fault" for her discharge.

Judge Tyson warned that the majority's decision "would subject the Commission and our Courts to a number of claims and appeals asserting unsubstantiated claims of 'illness' with no medical evidence or excuse as a pretext to excuse employees' non-compliance with employers' rules and regulations in order to receive unemployment benefits." An employee could simply claim that he was sick without any diagnosis and competent substantiation of illness.

Today's case does seem to depart from the COA's earlier cases which have said that the employee's failure to comply with the employer's policy must result from "a serious physical or mental illness."

COA Reminds: Rule 60 Is Not Substitute For Appeal

Today, in Catawba Valley Bank v. Porter, the Court of Appeals (COA) delivered a harsh reminder: if a judgment is entered against your client based on an error of law, you must appeal the erroneous judgment rather than seek relief pursuant to Rule 60; if you seek Rule 60 relief rather than appealing, you will bound by the erroneous judgment, even if the trial court agrees with you.

Today's case presented a familiar pattern. After prevailing on their UTPA claim, the claimants moved for attorney fees under G.S. 75-16.1. The motion was denied, and a judgment was entered without a fee award, apparently because the trial court believed that attorney fees can't be awarded under the UTPA absent evidence of a failed attempt to settle the case. Rather than appealing the judgment (the denial of fees), claimants filed a Rule 60 motion asking the trial court to reconsider its ruling on the ground that the UTPA doesn't require evidence of a failed attempt to settle. The trial court agreed that it had applied the wrong legal standard and awarded fees. The party saddled with the fee award appealed.

The COA vacated the fee award. The COA reiterated that Rule 60(b)(6) doesn't cover relief from errors of law; the avenues for relief from errors of law are a notice of appeal or a Rule 59 motion in the trial court (the latter of which, of course, must be filed within 10 days of judgment). "Rule 60 is an improper mechanism for obtaining review of alleged legal error." Accordingly, the UTPA claimants were bound by the trial court's original judgment refusing to award attorney fees, which they hadn't appealed.

The COA stressed that a trial court does have inherent authority to correct its own errors, but in this case the trial court acted on a Rule 60 motion, not on its own initiative pursuant to its inherent authority.

COA Opinions Released

Today the Court of Appeals released its first batch of opinions for 2008. There are 34 published opinions, of which 14 are criminal and 20 are civil. There appear to be eight dissents. More on these decisions later.

COA To Hear Wake Schools Case Tomorrow

Tomorrow the Court of Appeals will hear argument in the highly publicized case arising from the Wake County School Board's plan to convert 22 elementary and middle schools to a mandatory year-round schedule. In a challenge to the plan brought by a parents' group, Judge Howard Manning ruled against the Board, holding that the students couldn't be reassigned to year-round schools without parental permission. This made the year-round decision a voluntary one for parents, and many parents opted out, leaving enrollment at year-round schools below capacity. A story on the appeal is here.

"My Computer Ate My Homework" May Work To Extend Notice Of Appeal Deadline At Federal Level

The federal courts seem to take a softer approach to violations of their rules of appellate procedure than NC's courts have, particularly over the past 2 years. An example of this was seen today, when the U.S. Court of Appeals for the Federal Circuit held in Gilda Industries Inc. v. U.S. that the trial court could entertain a motion to extend the deadline for filing a notice of appeal where trial counsel unsuccessfully tried to file electronically his client's notice of appeal on the last possible day.

More On Last COA Drop

As Sean noted below, the next COA drop date is not for another 12 days. In the interim, some more about the cases from the last COA drop in December:

Baker v. Lanier Marine Liquidators, Inc.:

In Baker, the COA held that the trial court had personal jurisdiction over a Georgia defendant in a case brought by an NC consumer. The defendant had pretty minimal contacts with the plaintiff: Plaintiff contacted defendant in GA about buying a boat. At a later point, defendant called the plaintiff in NC about an available boat and referred the plaintiff to the defendant's website. The plaintiff went to the site and bought the boat using a debit card and wiring money to GA. The defendant then arranged for an independent contractor to ship plaintiff the boat. This was enough to snag the defendant under NC's long arm statute and to comport with due process, the COA held.

Important, though, seemed to be the fact that the plaintiff was an individual NC consumer and that the defendant was a foreign business that sent the plaintiff a boat that sank when put in water. The COA emphasized that NC has a "manifest interest" in providing a convenient forum to its residents for redressing injuries inflicted by out-of-state actors.

21st Mortgage Corporation v. Douglas Home Center, Inc.:

In this short procedural case, the COA reminded counsel that if you want to rely on pleadings in the context of a summary judgment motion, those pleadings must be verified. In 21st Mortgage, because an affirmative defense that was the subject of a pending motion to amend was not verified (the original answer and defenses were verified) but was relied on by the trial court in granting summary judgment, the COA reversed.

Curl v. American Multimedia, Inc.:

In Curl, the COA reviewed a partial summary judgment order, holding that the order became final (i.e., no longer an interlocutory order) once the plaintiffs voluntarily dismissed their remaining claims.

The COA then refused to "recognize in toxic contamination cases [such as this well contamination case] at least three new causes of action": 1) infliction of loss of chance of continued health, 2) invasion of autonomy/the right not to be compelled to undergo heightened medical monitoring, and 3) the instilling of fear of deadly disease. The COA held that none of the claims was pled in plaintiffs' complaint, but that even if they had been, they present "complex policy questions" and are for the legislature, not the court, to institute.

The COA also refused to "create" the "type of damages urged by Plaintiffs" for costs for medical monitoring, stating that that, too, was a legislative issue. It appears, though, that medical monitoring damages have been granted in the past in NC (see mention of same in the context of a property suit in Smith v. State Farm, 109 N.C. App. 77 (1993)). The COA also stated that the plaintiffs' cases supporting such damages required a present injury. There is case law elsewhere allowing for medical monitoring damages in the absence of present injury (see, e.g., Merry v. Westinghouse, 684 F. Supp. 847 (M.D. Pa. 1988) -- a well contamination case brought by property owners, just like Curl), but Curl indicates that without legislative action, that outcome likely won't happen anytime soon in NC.

Schedule For January 2008

As we embark on 2008, here are a few scheduling items of interest:

* Opinions: The NC Court of Appeals has only one opinion drop this month, and it's on Tuesday January 15. The NC Supreme Court is scheduled to release orders (on petitions) on January 25, and because the Court typically releases opinions the same day, we can expect opinions that same day.

* Oral Arguments: The NC Supreme Court has not scheduled any for January. The NC Court of Appeals has scheduled 14, to be heard on January 8-9 and 14-17. The Fourth Circuit won't sit until Tuesday January 29, when it begins a four-day session lasting through Feb. 1.