Agee Unanimously Confirmed To Fourth Circuit

Yesterday the Senate unanimously confirmed VA Supreme Court Justice Steven Agee to a seat on the Fourth Circuit. A story is here.

COA Issues Equitable Reformation Decision

Today the Court of Appeals (COA) issued a decision on the doctrine of equitable reformation. The case is Carter v. West American Ins. Co.

The basis for the suit was this: plaintiffs' home was destroyed by fire; the written insurance contract set the dwelling coverage amount at $119,500; plaintiff alleged, however, that the insurer, through an insurance agent, had orally agreed or impliedly assumed a duty to cover whatever it cost to replace the house (much higher than the coverage amount). Contending that the insurance policy therefore didn't reflect the true agreement between the parties, plaintiff contended it should be "reformed" on account of the insurance agent's allegedly inequitable conduct.

The COA rejected the reformation argument while clarifying the law on equitable reformation. The test: "to survive summary judgment in an action for equitable reformation of a contract on the basis of inequitable conduct by the promisor, a plaintiff must show a factual basis for four essential elements: (1) the written agreement did not properly express the intent of the parties, (2) the conduct of the promisor caused the improper expression, (3) relevant, competent evidence exists outside the written documents which shows the intention of the parties, and (4) injustice will result if the contract is not rewritten." (Citations omitted)

Applying that test, the COA ruled against the plaintiff. "The dwelling coverage amount was clearly stated on the face of the policy," the COA said, "and there is no evidence that plaintiff was unable to read and understand the policy." The COA also noted that plaintiff was improperly trying to defeat summary judgment by filing an affidavit that contradicted her prior sworn testimony (the affidavit testified about a conversation with the insurance agent that plaintiff never mentioned in her earlier deposition).

The COA also rejected plaintiff's UDTP claim. That claim was based in part on the insurer's delay in paying her claim; the COA observed, however, that the insurer offered the full amount of the dwelling policy limits but plaintiff chose to refuse it and hire an attorney. Plaintiff also tried to manufacture a UDTP claim from the fact that the adjuster told her to pretend she wasn't represented by counsel so that they could continue to confer directly: "Advising plaintiff to pretend that she was not represented by counsel may be inappropriate," the COA said, "but there is no evidence that plaintiff suffered damages as a result, as required in a claim for unfair or deceptive trade practices."

COA Rejects Aiding-And-Abetting Tort Liability

Today in Hinson v. Jarvis the Court of Appeals (COA) rejected plaintiff's claim that defendant could be liable for aiding and abetted her (defendant's) negligent operation of a vehicle.

Mr. Jarvis was driving with his wife, the defendant, when they struck head on a vehicle in which the Hinson family was riding. Mr. Hinson died, and members of his family were injured. Mr. Jarvis died too. They alleged that Mr. Jarvis was driving without a valid license (it hadn't been renewed), and that he may have had a seizure right before the impact. Ms. Jarvis testified that her husband had had seizures in the past and that she was not comfortable driving with her husband and had warned him not to drive.

Mr. Hinson's family brought a claim against Mrs. Jarvis on the theory she was negligent for aiding and abetting her husband's operation of the vehicle. The COA affirmed summary judgment against her.

In an effort to establish "aiding and abetting" in the context of a tort cause of action, plaintiffs relied on section 876 of the Restatement (Second) of Torts. Section 876, titled "Persons Acting in Concert," says: "For harm resulting to a third person from the tortious conduct of another, one is subject to liability if he (a) does a tortious act in concert with the other or pursuant to a common design with him, or (b) knows that the other's conduct constitutes a breach of duty and gives substantial assistance or encouragement to the other so to conduct himself, or (c) gives substantial assistance to the other in accomplishing a tortious result and his own conduct, separately considered, constitutes a breach of duty to the third person."

Reminding that the Restatement "is not the law of North Carolina unless a section has specifically been adopted," the COA noted that it and the NC Supreme Court had cited Section 876 four times, but they had never explicitly adopted it; and the COA found those earlier cases readily distinguishable, as they involved the negligence of joint tortfeasors. The Court held: "we decline to extend liability under section 876 of the Restatement of Torts to a third person whose conduct did not fall below an ordinary standard of care or involve an issue as to which person was the cause of the harm alleged." In this case, the COA concluded, Mrs. Jarvis gave no substantial encouragement to breach a duty of care owed by Mr. Jarvis to plaintiffs; if anything, she was only complicit in her husband's breach of ordinary care and didn't incite him to drive.

The COA also rejected plaintiffs' reliance on Blow v. Shaughnessy, 88 N.C. App. 484, 364 S.E.2d 444 (1988), which cited federal securities cases to justify the imposition of aiding-and-abetting liability on a defendant that encouraged a third party to breach his fiduciary responsibility in the context of a securities law violation. The COA observed that this case doesn't allege a breach of fiduciary duty.

But it should be noted that Blow should be of dubious precedential value even in fiduciary-duty cases. The precedential underpinnings of Blow were stripped away when the U.S. Supreme Court decided Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., 511 U.S. 164 (1994), which held that section 10(b) liability did not extend to aiders and abettors. As Judge Tennille of our Business Court has observed, including as recently as a year and a half ago (the order is unpublished, but you can find it by clicking the 11/28/06 order at this link), "The [Blow] court's basis for allowing the claim was that such a cause of action had been recognized by the federal courts in securities fraud cases based on violation of section 10(b) and the Securities Exchange Act of 1934 and Rule 10b-5. However, the United States Supreme Court has since made clear [in Central Bank of Denver] that Congress did not intend to allow for aiding and abetting liability under these provisions of the federal securities laws. . . . This decision [Central Bank] weakens the foundations of Blow, which is based upon federal recognition of the aiding and abetting claim. With federal recognition of the cause of action now absent, there is serious doubt as to the existence of an aiding and abetting claim in North Carolina in the securities context. The doubt is even more pronounced in a case such as this which falls outside the context of a securities law violation." (Citations and internal quotations marks omitted).

Judge Tennille is right. But the COA didn't have to address that issue in today's case, since today's case didn't allege a breach of fiduciary duty, much less one relating to securities law violations.

COA Applies "Evidentiary Admission" To Affirm Summary Judgment

Today in Hash v. Estate of Paige Walton Hensley the Court of Appeals confronted this situation: plaintiff, a passenger in defendant's vehicle at the time of an accident, was alleging in her complaint and in her affidavit opposing summary judgment that the defendant was negligent; but plaintiff had previously testified, in an earlier criminal trial against another party to the accident (Gordon), and in a deposition in an earlier civil case against Gordon, that it was Gordon who was at fault, and that defendant was not negligent. Plaintiff sought to repudiate that testimony in her case against defendant. The Court would have none of that. Applying the doctrine of evidentiary admission (not to be confused with judicial admission), see Woods v. Smith, 255 S.E.2d 174 (N.C. 1979), the Court held that defendant was entitled to summary judgment, because plaintiff's prior testimony (in the criminal and civil cases against Gordon) unequivocably repudiated the allegations in her complaint and affidavit in this case.

The key to this doctrine is that the party's prior testimony must unequivocably and unambiguously contradict the contentions in her present complaint or affidavit. Otherwise, "when a party gives adverse testimony in a deposition or at trial, that testimony should not, in most instances, be conclusively binding on him to the extent that his opponent may obtain either summary judgment or a directed verdict." Woods, 297 N.C. at 374.

COA Reaffirms That Waiver/Estoppel Can't Broaden Coverage Of Insurance Policy

Today in Hannah v. Nationwide Mut. Fire Ins. Co. the Court of Appeals (COA) reaffirmed that the doctrines of waiver and estoppel may not be used by an insured to broaden the overage of a policy to protect against risks not included in the policy or excluded from the policy (in this case, to obtain coverage for personal property not otherwise covered by the policy). The doctrines of waiver and estoppel simply don't apply.

Split Fourth Circuit Strikes Down VA's Partial Birth Abortion Statute

Today the Fourth Circuit, in a 2-1 decision, struck down Virginia's partial-birth abortion statute. The majority (Judges Michael and Motz) did so even though the U.S. Supreme Court last year, in Gonzales v. Carhart, upheld the federal partial-birth abortion statute that Congress passed in 2003. The dissenter (Judge Niemeyer) contends the VA statute is materially identical to the federal statute upheld in Carhart, and that the majority disregarded established law on facial challenges.

COA limits implied waiver of sovereign immunity afforded by Corum v. UNC

Today, in Petroleum Traders Corp. v. State, the Court of Appeals limited the waiver of sovereign immunity afforded by Corum v. University of North Carolina to claims arising under Article I of the N.C. Constitution, the Declaration of Rights.

An Indiana company that sold oil to the state and its entities sued the state, complaining about the 1.75% fee that was tacked onto its bids ostensibly to help pay for the state's mandatory "E-Procurement" online bidding system. The plaintiff brought several claims, including a claim for declaratory relief that the fee was really a tax, unconstitutional under Article II because not passed by the legislature, and a claim for refund of such taxes already paid. The state moved to dismiss those claims, arguing sovereign immunity. The Superior Court rejected the state's argument.

The Court of Appeals reversed. After noting that there was no express or statutory waiver of sovereign immunity, the Court of Appeals turned to whether the implied waiver affored by Corum v. University of North Carolina applied to a claim under Article II of the state constitution. After examining Corum and its progeny, the Court concluded that it did not - Corum applies only to claims under Article I, the Declaration of Rights that, for the most part, creates personal rights.

COA Decisions Today

Today the Court of Appeals released 26 published decisions (10 criminal, 16 civil). The Court reversed or vacated in nine of the 26 cases. There were two dissents. More on these cases later.

Fourth Circuit emphasises the line between breach of contract and False Claims Act/fraud in the inducement

In United States ex rel. Wilson, Warren v. Kellogg, Brown & Root, the Fourth Circuit held that a relator in a quit tam False Claims Act suit cannot use the Act to recover for what is essentially an alleged breach of contract by the defendant against the government. This holding mirrors the common-law principle that a fraud in the inducement claim cannot be merely that the defendant failed to perform the contract.

Shortly after 9/11, Kellogg, Brown & Root signed a contract with the United States under which KBR would provide various military support services in Iraq, pursuant to "task orders" issued under the contract. The government issued a task order in February of 2003 that directed KBR to transport fuel and supplies in the region. The order imposed various safety and maintenance requirements on KBR, including, for example, that it maintain its trucks in a "safe operating condition" and in "good appearance". Under the contractual scheme, KBR had to execute a DD Form 1155 in order to accept the task order and its terms and conditions, and relators alleged that it would not receive payment until it did so. KBR did not execute the form until July of 2003, although the form was effective from the date the task order was issued.

Relators were two truck KBR truck drivers who were fired after complaining to KBR that it failed to maintain its trucks by, for example, failing to change oil and fuel filters and broken windshields, thereby endangering them. Relators filed suit under the False Claims Act, which allows parties to sue on behalf of the government when the defendant submits "false statements" in order to receive payment from the government or, as the Fourth Circuit has held, engages in a fraudulent "course of conduct" to induce the government to contract in the first place. Essentially, relators alleged that when KBR signed the form in July of 2003, it had already not performed under the task order by failing to maintain its equipment and it had no intention to do so in the future. The district court eventually concluded that they could state no such claim.

The Fourth Circuit agreed with the district court, concluding that the DD Form 1155 was not a "false statement"or "fraudulent course of conduct" by KBR because it did not evince an "objective falsehood," as required by the Act, because the maintenance directives at issue were fairly vague and not susceptible to the true-of-false dichotomy required by the Act. Significantly, the court distinguished the case from other False Claims Act cases where the defendants fraudulently induced the government to contract, noting that in those cases the dichotomy was clear and the claims did not rely on one party's subjective interpretation of contractual duties, but rather on allegations of bald-faced lies. By contrast, the court held, here the relators' claim relied entirely on their subjective and debatable interpretation of contractual duties. The court did not discuss whether (hypothetical) conclusive proof of a subjective intention not to perform the contract, even in the face vague contractual terms - presumably a rare scenario - would be sufficient. The court also concluded that, under the Act, the DD Form 1155 was not "material" to any fraud in the inducement because KBR signed it months after receiving the task order, which was the operative document; that the relators failed to plead fraud with particularity; and that the district court properly mandated arbitration over employment-law claims.

This case further illustrates the principle that a fraud in the inducement claim cannot be based on mere non-performance of a contract, a principle often overlooked or misunderstood by practitioners. Of course, the case centered on the "objective falsehood" requirement of the False Claims Act, not common law, but the point remains - fraud in the inducement in a different animal than non-performance of a contract.

President Nominates Fourth Circuit Judge From VA

President Bush yesterday nominated District Judge Glen Conrad (W.D. Va.) to the seat held by Emory Widener. Here's a story on it.

COA Upholds Rule 11 Sanctions In Non-Compete Case

Today, in an unpublished decision, the Court of Appeals (COA) upheld Rule 11 sanctions. The case is Yadkin Valley Bank & Trust Co. v. AF Financial Group. Judge Stephens wrote the decision, joined by Judges Steelman and Calabria.

Two bank officers entered into employment agreements containing non-competition clauses. But each had a catch: a "change in control" provision. Each agreement said that if the bank underwent a "change in control," the officer could determine in his "sole discretion" if his responsibilities or authority would thereby be "diminished materially"; if the officer makes that determination in his sole discretion, the agreement is deemed terminated by the bank, with the consequence that non-compete has no prospective application.

When their bank merged into Yadkin Valley Bank (Yadkin), Yadkin considered the officers bound by the non-compete agreements. But the officers invoked their "sole discretion" under the "change of control" clause to render the agreements terminated, thus giving their non-compete agreements no prospective application. They then accepted jobs with AF Financial. Yet Yadkin sued AF Financial for tortious interference with the non-compete agreements, even though they were not binding under the plain language of the employment agreements. The tortious interference claims were tossed out on the merits. Then the trial court slapped Yadkin with Rule 11 sanctions for bringing the interference claims.

The COA affirmed. The COA held that Yadkin didn't undertake undertake a reasonable inquiry into the facts before filing its complaint and that Yadkin didn't reasonably believe that its position was well grounded in fact. The Court also concluded that Rule 11 sanctions were warranted for the independent reasons that Yadkin's claims were not legally sufficient and were brought for an improper purpose.

COA Splits Over Sanction For Failing To Attend Depo

Today, in Moore v. Mills, the Court of Appeals (COA), in a 2-1 decision, reversed a sanction entered against a defendant who failed to attend his deposition. Judge Elmore wrote the majority decision, joined by Judge Arrowood. Judge McCullough dissented.

The defendant was sued for negligence arising from a car accident. He pleaded contributory negligence as an affirmative defense. Plaintiffs noticed his deposition to be held at their counsel's office in Washington, N.C. Defendant drove to Washington from his home in Williamston but got lost in Washington. He brought no documents with him that could help him locate plaintiffs' counsel, and he couldn't remember the name of plaintiffs' counsel. He approached people in Washington asking if they had heard of his lawyer, which they hadn't, since his lawyer was from Greensboro. He gave up his search and went home. His lawyers offered to pay for plaintiffs' counsel's time and the court reporter and to reschedule the deposition. But plaintiffs would have none of that. They moved for sanctions, asking the trial court to award attorneys' fees and court reporter costs AND to strike defendant's contributory negligence defense. The trial court obliged. Defendant appealed.

The majority upheld the fee sanction but held that the trial court abused its discretion in striking defendant's contributory negligence defense. "Given defendant's attempts to cure his failure to attend his deposition, his affidavit explaining the misunderstanding, which was presented to the trial court at hearing, and the severity of the sanctions imposed, we find that the trial court's sanctions were 'manifestly unsupported by reason,'" the Court held. Judge McCullough accused the majority of having "freely substituted its judgment for that of the trial court," contrary to the abuse-of-discretion standard of review.

COA Splits In Coverage Dispute

Today in the Court of Appeals (COA) split on the issue whether insurance carriers had a duty to defend an insured for an underlying lawsuit. Specifically, they split on the application of an exclusion. The case is Harleysville Mut. Ins. Co. v. Buzz Off Insect Shield, L.L.C. Judge Tyson wrote the majority opinion, joined by Judge Stroud. Judge Geer dissented.

The policies cover "advertising injury" (such the insured's alleged disparagement of another's product), but the exclusion in question eliminates coverage for "'advertising injury' arising out of the failure of goods, products or services to conform with any statement of quality or performance made in [the insured's] 'advertisement.'" Judge Geer, in dissent, believed that the exclusion applied because, she concluded, the underlying lawsuit against the insured complains that the insured was making false assertions about the insured's products--that is, the underlying lawsuit complains that the insured's products were not as advertised.

The majority, however, concluded that the "crux" of the lawsuit's allegations is that the insured disparaged another company's products (the company that sued the insured). The majority thus concluded the exclusion doesn't apply, and therefore the insurers have a duty to defend.

At bottom, this was a dispute about how to read the allegations in the underlying complaint against the insured.

COA Dismisses TSPA Claim For Indefinite Pleading

Today the Court of Appeals (COA) reiterated that, to plead misappropriation of trade secrets, "a plaintiff must identify a trade secret with sufficient particularity so as to enable a defendant to delineate that which he is accused of misappropriating and a court to determine whether misappropriation has or is threatened to occur." When a trade-secrets complaint does not specifically indentify the alleged trade secrets or describe the acts by which the alleged misappropriation occurs, the complaint fails to state a claim under the Trade Secrets Protection Act (TSPA). The case is Washburn v. Yadkin Valley Bank & Trust Co.

In today's case the claimant, a bank, alleged that defendants "acquired knowledge of [its] business methods; clients, their specific requirements and needs; and other confidential information pertaining to Yadkin's business." The bank further alleged that this "confidential client information and confidential business information" constituted trade secrets as defined by the TSPA and that the bank "believes [they] used its trade secrets on behalf of [a new employer] without [the bank's] permission." The COA held that these allegations "do not identify with sufficient specificity either the trade secrets ... allegedly misappropriated or the acts by which the alleged misappropriations were accomplished." The identification of the trade secrets was "broad and vague," and the bank's allegation that it believes they used its trade secrets was too "general and conclusory." Accordingly, the TSPA claim was properly dismissed.

COA Decisions Today

Today the Court of Appeals released a bunch of decisions, including 45 published decisions. Twenty are criminal cases, 25 are civil. (There appear to be 27 civil decisions on the website, but two of those decisions are repeats of other decisions because they involved multiple appeals arising from the same underlying case.)

Three of the civil cases raise unconscionability challenges against pay-day lending agreements, and all three cases were remanded for findings in light of Tillman v. Commercial Credit Loans, Inc., 362 N.C. 93, 655 S.E.2d 362 (2008), which set forth a new framework for evaluating unconscionability. Of the remaining 22 civil cases, the Court reversed (in whole or part) 9 of them, which is a fairly hefty percentage (40%).

Among the civil cases, there were 7 dissents.

The case sure to grab the most news is the Court's decision in Wake Cares, Inc. v. Wake County Bd. of Educ., which (contrary to the trial court) holds that the Wake County Board of Education may establish year-round schools and assign students to those schools without obtaining the parents' consent.

More on these cases later.

Fourth Circuit Strikes Down NC's Campaign Finance Law ...

Today in North Carolina Right to Life, Inc. v. Leake, a split Fourth Circuit (in 101 pages of opinions!) held that key provisions of NC's campaign finance laws violate the First Amendment, including provisions regulating the "express advocacy" of candidates by organizations, defining "political committee," and limiting contributions. The majority opinion was authored by Judge Wilkinson and joined by Chief Judge Williams. Judge Michael dissented.

Judge Michael accused the majority of allowing organizations and individuals "to conceal their identities, spend unlimited amounts on campaign advertising masked as discussion of issues, and hide themselves from the scrutiny of the voting public." He voted to reject every aspect of the challenge.

The majority shot back that Judge Michael's dissent "contravened no fewer than three Supreme Court precedents." The majority further accused Judge Michael of "inventing a First Amendment standard out of whole cloth," a standard that (the majority said) would place political speech "in some meat locker before First Amendment implications arise." The majority concluded (in Wilkinsonian fashion), "Debate on political issues can be reasoned and calm. It can also be passionate, long-winded, funny, uplifting, dull, or downright outrageous. Whatever it is, speakers ought to be able to engage in it without wondering all the while whether a regulator now possessed of unprecedented discretion will find they have committed the mortal sin of uttering "the functional equivalent of express advocacy." Our dissenting colleague would permit the state to oversee political speech — no questions asked. The dissent would force political speech to navigate the Scylla of vagueness and all its chilling effects and the Charybdis of impossibly intricate regulation, which even the cognoscenti may be unable to divine. Indeed, the dissent replaces the Supreme Court’s faith in the workings of the First Amendment with a faith in the powers of government to manage what we say on what matters most. This approach surrenders to the state an awesome control over those political issues that determine the quality of our democracy and the values that give purpose and meaning to our lives."

See the post immediately below, where today, in a separate campaign finance case from North Carolina (involving NC's Judicial Reform Act), Judge Michael authored the opinion for a different panel that rejected the First Amendment challenge and upheld the law.

... But Fourth Circuit Upholds NC's Judicial Campaign Reform Act

In a separate campaign finance case today, bearing the similar title of North Carolina Right to Life Committee Fund for Independent Political Expenditures v. Leake, the Fourth Circuit rejected a First Amendment challenge to the State's Judicial Campaign Reform Act, which became effective in 2002. The Act's purpose is to promote the impartiality and independence of the judiciary and to deter corruption. It creates a system of optional public funding for candidates to the State's appellate courts. The lawsuit was filed by two judicial candidates who didn't participate in the Act's public financing system and two PACs. Judge Michael authored this decision, joined by Judge Traxler and a district judge sitting by designation.

There were three components of the challenge. First, plaintiffs challenged the Act's "matching funds" provision, which gives public matching funds (dollar-for-dollar) to a participating candidate whose nonparticipating opponent spends above a capped amount. Plaintiffs argued that this chills their political speech (as nonparticipating candidates) because spending in excess of the trigger results in public funds being disbursed to a participating candidate whom they don't support; therefore (the argument goes) they choose to spend less money (and thus engage in less political speech) in order to prevent candidates they oppose from receiving the public matching funds. The Fourth Circuit disagreed, concluding that candidates are not coerced either to participate in the public financing system or to refrain from spending in excess of the trigger amounts. This issue may make it to the U.S. Supreme Court based on a circuit split (the 8th Circuit has struck down a matching-funds provision).

Second, plaintiffs challenged the Act's reporting and disclosure requirements imposed on nonparticipating candidates and independent entities. The Court held that these requirements advance important state interests.

Third, plaintiffs challenged the Act's ban on contributions during the 21 days before an election (which applies only against contributions that would cause the nonparticipating candidate to exceed the trigger for matching funds). The Court held that strict scrutiny didn't apply to this challenge; instead it was governed by the looser standard of being "closely drawn to match a sufficiently important interest." Applying the looser standard, the Court deemed the ban a key component of the public funding system, which itself is designed to promote important state interests. A ban on contributions in the period immediately before an election, the Court held, helps minimize a nonparticipating candidate's ability to unfairly take advantage of a participating candidate by delaying contributions until the last minute, when it would be too late for additional matching funds to be disbursed to the participating candidate.