COA: Indirect Purchaser's Price Fixing Suit States Sufficient Claim Even Where Task Of Proving Damages Is "Daunting"

Wednesday the NC Court of Appeals (COA) held that an indirect purchaser of products containing a chemical compound produced by the defendants could sue defendants for price fixing of that compound under Chapter 75, North Carolina's unfair and deceptive trade practices statute. The case is Teague v. Bayer AG.

Plaintiff claimed Defendants engaged in price fixing of the compound by agreeing to restrict output and raise prices. He argued that Defendants' alleged price fixing of the compound harmed consumers by passing the increased cost onto many commonly purchased products which contain the component (cars, rubber hoses, and roofing materials, for example). Defendants argued that the multiple variables involved in pricing made plaintiff's damages too speculative, and that he had thus not stated a sufficient claim. The COA disagreed. Although it characterized the calculation of Plaintiff's damages as "daunting," the COA held that the legislative intent of Chapter 75 was to give indirect purchasers, as aggrieved consumers, a cause of action, and that complicated questions of causation and damages requiring complex economic analyses did not warrant dismissal of Plaintiff's claim.

4th Circuit Finds Defendant Defaulted On Right To Arbitration

Today in Forrester v. Penn Lyon Homes the Fourth Circuit held that the defendant defaulted on its right to compel arbitration under the Federal Arbitration Act (FAA) because, before moving to compel arbitration, the defendant engaged in extensive litigation measures that caused the plaintiffs actual prejudice. The defendant waited until the eve of trial to file its motion to compel arbitration, after two years of litigation.

Under section 3 of the FAA, a party loses its right to a stay of court proceedings in order to arbitrate if it is "in default in proceeding with such arbitration." 9 U.S.C. § 3. Default in this context resembles waiver, but because of the strong federal policy favoring arbitration, courts have limited the circumstances that can result in statutory default. Today's case qualified for default and is a reminder that it's best to move early to compel arbitration.

Today's COA Decisions

Today the NC Court of Appeals released decisions today (a one-day delay since yesterday was a snow day. There are 14 published decisions. There's not much of note in this stack, since 10 of the 14 decisions are criminal, parental rights, and workers' comp cases. More on these cases later.

Split 4th Circuit Rejects CAFA Removal

In yet another case on removal under the Class Action Fairness Act (CAFA), the Fourth Circuit yesterday held that the defendant didn't establish CAFA's amount-in-controversy requirement. The case is Barnikowski v. NVR, Inc. Judge Gregory wrote the majority opinion. Judge Wilkinson dissented. (For other recent CAFA removal cases by the Fourth Circuit, see our posts here and here and here.)

In this case, plaintiffs represent a putative class of current and former N.C. sales reps of NVR. They allege that NVR wrongfully denied them overtime pay.

Their complaint didn't specify their damages. In its notice of removal, NVR asserted that the amount in controversy exceeded $5M. In response to plaintiffs' motion to remand, NVR submitted a declaration from its payroll director who provided data about average annual compensation to sales reps. Based on that figure, NVR calculated the average hourly wage and then the average hourly overtime wage. NVR then assumed that putative class members will claim to have worked an average of five overtime hours per week. This yielded projected damages of $2.6M. NVR then assumed that plaintiffs would seek statutory double damages under N.C.'s Wage and Hour Act, which would push the damages over CAFA's $5M jurisdictional line.

A majority of the Fourth Circuit held that NVR didn't satisfy its burden of of demonstrating by a preponderance of the evidence that jurisdiction was proper. To be sure, the majority agreed that NVR was correct to include statutory double damages in its calculation, i.e., doubling was proper. And the majority had no problem with NVR's figures on average annual compensation which led to an average overtime rate. But the majority found that one key variable in NVR's equation was too speculative: NVR's assumption that plaintiffs and the class members will each claim to have worked an average of five overtime hours per week. This was a key variable, the majority held, because if the average weekly overtime hours was less than four hours per class member, NVR wouldn't clear the $5M hurdle.

The majority recognized that the decision may prompt plaintiffs to plead tactically by leaving damages unspecified to block CAFA removal, without foreclosing an ultimate recovery of more than the jurisdictional minimum. But the majority noted that since Congress has eliminated the one-year time limit on CAFA removal (see 28 U.S.C. 1453(b)), a CAFA defendant can remove at a later stage of litigation once the amount in controversy is acertained.

In his dissent, Judge Wilkinson accused the majority of "conflat[ing] burdens of proof with burdens of production": once the defendant sets forth a prima facie case establishing jurisdiction, he argued, the burden of production shifts to the the plaintiffs to offer something in response (even though the burden of persuasion always remains with the defendant). Judge Wilkinson disputed the majority's finding that the five-hour estimate was too speculative. And he worried that the majority's approach puts defendants in a difficult position of serving voluminous discovery requests and document production at the preliminary stages of what is itself a preliminary jurisdictional issue. "Encouraging this sort of deluge," he warned, "adds more litigiousness to already litigious class action undertakings." Judge Wilkinson also took a swipe at plaintiffs, observing that they "have been litigation class action overtime pay cases against [NVR] since 2004, but have passed on every opportunity to submit an affidavit or even make a declaration as to the likely amount of damages they will claim."

Oddly, this split decision isn't published. The third member of the panel was a district court judge sitting by designation.

4th Circuit Rejects Pitt County's Suit Against Online Travel Companies

Yesterday the Fourth Circuit rejected a class action lawsuit by Pitt County, NC, which was based on the failure of online travel companies to pay the County's hotel occupancy tax. The case is Pitt County v. Hotels.com, L.P. The Court held that online travel companies aren't subject to the tax because they're not "retailers" (under the State's sales tax code) since they aren't businesses of a type similar to "hotels, motels, tourist homes, [or] tourist camps," as the statute provides. "A business that arranges for the rental of hotel rooms over the internet, but that does not physically provide the rooms, is not a business that is of a similar type to a hotel, motel, or tourist camp," the Court held.

Filling Judge Phillips's Seat On The 4th Circuit

Here's a piece commenting on the "Phillips seat" on the Fourth Circuit, which has been vacant since 1994, when North Carolina's J. Dickson Phillips took senior status.

4th Circuit Tosses Securities Fraud Class Action Against Deloitte

Two days ago the Fourth Circuit rejected a securities fraud class action arising out of fraudulent accounting by Royal Ahold. The case is Public Employees' Retirement Assn. of Co. v. Deloitte & Touche LLP. The opinion was written by Judge Wilkinson, and it has the flavor of the opinion he issued two weeks ago rejecting another securities fraud action (on which we posted here). Both cases apply Tellabs, Inc. v. Makor Issues & Rights, Ltd. (U.S. 2007) to put some teeth into the Private Securities Litigation Reform Act (PSLRA).

Ahold settled for $1.1 billion (after the SEC filed an enforcement action). But the plaintiffs went after Ahold's accountant, Deloitte & Touche, under Rule 10b-5. Emphasizing the PSLRA's heightened pleading standard for 10b-5 claims, the Fourth Circuit held that plaintiffs failed to state claim. Applying Tellabs, the Court ruled that, despite the complaint's factual allegations of wrongdoing by Deloitte, the inference that Deloitte knowingly or recklessly perpetrated a fraud on Ahold's investors was less compelling than the inference that Deloitte acted innocently or negligently--i.e., that Deloitte lacked the necessary scienter. The "stronger and more plausible inference," the Court held, "is that [Deloitte was], like the plaintiffs, victims of Ahold's fraud rather than its enablers." The Court added this assessment:

"Seeing the forest as well as the trees is essential. With respect to both frauds, plaintiffs point to ways that defendants could have been more careful and perhaps discovered the frauds earlier. But plaintiffs cannot escape the fact that Ahold and [its subsidiary] went to considerable lengths to conceal the frauds from the accountants and that it was [Deloitte] that ultimately uncovered the frauds. The strong inference to be drawn from this fact is that Deloitte . . . lacked the requisite scienter and instead were deceived by Ahold and [its subsidiary]. That inference is significantly more plausible than the competing inference that defendants somehow knew that Ahold and [its subsidiary] were defrauding their investors. It is not an accountant's fault if its client actively conspires with others in order to deprive the accountant of accurate information about the client's finances. It would be wrong and counter to the purposes of the PSLRA to find an accountant liable in such an instance."

COA Invalidates A Non-Compete And Non-Solicitation Agreement, While Limiting Trade-Secrets Damages

Yesterday the NC Court of Appeals (COA) invalidated a noncompete and nonsolicitaiton agreement as facially overbroad. The case is Medical Staffing Network, Inc. v. Ridgway. The decision required the COA to vacate a seven-figure judgment that the former employer obtained against the former employee and his new employer. The Court also gave direction (and limiting principles) for damages in trade secrets cases.

Plaintiff (MSN) is a medical staffing company (e.g., providing per diem nurses to hospitals and healthcare providers). The employee was hired to be manager of the MSN's Raleigh branch, with accounts including WakeMed. Five years later, he resigned to join a Raleigh competitor, and WakeMed went with him.

Although he had signed a noncompete with MSN, he contended it was unenforceable. The noncompete defined MSN (and thus the scope of his noncompetition duty) to include not only MSN but also "any parent, division, subsidiary, affiliate, predecessor, successor, or assignee" of MSN. "As drafted," the COA therefore observed, "the covenant not to compete would prevent Ridgway from working in any business within a 60-mile radius of Raleigh that competes with MSN's parent, or any of its divisions, subsidiaries, affiliates, predecessors, or assignees, even if Ridgway's employment duties for MSN had nothing to do with that business." The COA indicated that this ran afoul of the rule that a company has no legitimate interest in preventing an employee from competing with affiliated companies. The COA also held that it ran afoul of the rule that a noncompete is unenforceable if it prohibits the employee from work that is distinct from the duties he actually performed as an employee.

Likewise, the COA held that the nonsolicitation clause in his agreement was invalid because it prevented Ridgway not only from engaging in business with current and former clients of of MSN with whom he had developed a relationship, but also prohibited him from soliciting the business of any "MSN client," which the agreement defined to include clients of any MSN affiliates or divisions, which would include those outside the medical staffing business with whom he wouldn't have had any contact.

In sum, the COA held that MSN didn't show it had "any legitimate business interest in preventing competition with, or foreclosing the solicitation of clients and employees of, unrestricted and undefined affiliated companies that engage in a business distinct from the medical staffing business in which Ridgway had been employed."

Thus, as a result of overbroad drafting, the noncompete couldn't be enforced even though Ridgway was competing directly with MSN (not its affiliates) in the medical staffing business (not some unrelated business) and was soliciting clients of MSN with whom he had contact at MSN (not clients of an affiliate with whom he hadn't had contact). No blue penciling.

But the COA did uphold plaintiff's judgment for misappropriation of trade secrets. The COA, however, agreed with defendants that damages on that claim were based on an improper measure and remanded with instructions on how to calculate damages on that claim. This aspect of the opinion is an important cautionary decision limiting damages in trade secrets claims, underscoring that damages (or unjust enrichment) must be traced with reasonable certainty to the misappropriation itself.

COA Applies Foreign Workers' Comp Act To Bar Action For Local Injury

Yesterday the NC Court of Appeals (COA) issued an important decision barring tort claims by workers of foreign (out of state) companies who are injured in NC. The case is Burton v. Phoenix Fabricators and Erectors, Inc. Judge Geer wrote the opinion.

Under NC law, the receipt of workers' comp benefits doesn't bar the injured employee from bringing a civil action against an NC employer (a so-called Woodson claim). But suppose the employee is injured in NC but happens to work for a company based in another State and collects workers' comp benefits under that State's workers' comp law; and suppose that State's law says (unlike NC law) that workers' comp is the exclusive remedy so that the employer is immunized from suit in tort. Does that other State's law bar an employee from bringing the civil action here--i.e., does that other State's law trump NC law? Answer: yes.

In yesterday's case, the employees were killed here while helping construct a water tower. They worked for an Indiana corporation and were covered by Indiana workers' comp. After their deaths, their estates received workers' comp payments from Indiana. Indiana law says that workers' comp is the exclusive remedy; an injured employee can't also pursue a civil action against the employer.

Nonetheless, the estates filed civil actions here in NC against the employer, arguing that NC's substantive law (i.e., Woodson) should control because the injuries were sustained here (lex loci). The employer argued that, by electing to accept benefits under Indiana's workers' comp law, the estates were barred from pursuing civil actions here.

The COA agreed with the employer, holding: "the law of the state providing the workers' compensation benefits determines whether the workers' compensation statute of that state provides an exclusive remedy barring additional recovery through a tort action." This result is consistent with a 1991 NC Supreme Court case. It's also consistent with the Restatement (Second) of Conflict of Laws which says, "Recovery for tort or wrongful death will not be permitted in any state if the defendant is declared immune from such liability by the workmen's compensation statute of a state under which the defendant is required to provide insurance against the particular risk and under which . . . the plaintiff has obtained an award for the injury . . . ." As the COA observes, this rule is grounded on public policy concerns.

COA Rejects Fraud, UTPA Claims In Products Case

Yesterday in Hospira Inc. v. Alphagary Corp. the NC Court of Appeals (COA) rejected fraud, negligent misrep, and UTPA deception claims brought by a manufacturer of medical devices. It's an important case on the limits of indirect fraud and deception--i.e., when the plaintiff didn't deal directly with the defendant.

Plaintiff didn't deal directly with defendant. Rather, plaintiff had outsourced manufacturing to another manufacturer (we'll call it "middleman") who in turn contracted with defendant. Defendant's job was to produce a radiation-grade substance for use in manufacturing so that the product could withstand sterilization. But defendant used a non-radiation grade resin instead, and plaintiff wasn't informed of this switch. Uninformed, plaintiff purchased millions of the products from middelman and distributed them. Plaintiff then learned from its customers that the products were defective because they weren't radiation grade.

Plaintiff sued defendant for fraud, UTPA deception, and negligent misrepresentation, alleging that defendant concealed its use of an unapproved compound substitute and made false and misleading statements to middleman to cover-up the switch.

As for fraud, the COA held that defendant's misrepresentations to middleman weren't actionable by plaintiff. The COA distinguished Rowan County Bd. of Ed. v. U.S. Gypsum Co. (NC. 1992) as a case that involved indirect misrepresentations through the plaintiff's agent. Today's holding: misrepresentations conveyed through a non-agent aren't actionable fraud. On the facts of this case, the COA ruled that middelman wasn't plaintiff's agent. Thus, defendant was entitled to summary judgment on the fraud claim.

Likewise, the COA rejected plaintiff's negligent misrepresentation claim: "under a theory of negligent misrepresentation, liability cannot be imposed when the plaintiff does not directly rely on information prepared by the defendant, but instead relies on altered information provided by a third party", i.e., by middelman (emphasis in original).

The UTPA claim also failed, because plaintiff provided no record evidence to indicate that representations made by defendant to middelman had the capacity to deceive plaintiff. There was no evidence that plaintiff relied on defendant's statements. In fact, plaintiff's own employee testified that if he had seen the technical data sheet that defendant had given to middelman, he would've known that it wasn't radiation-grade material.

It wasn't a total loss for plaintiff, however. The COA held that the trial court erred in relying on the economic loss rule to dismiss plaintiff's negligence claim. The economic loss rule didn't apply here because there was no contractual privity between plaintiff and defendant, thanks to middleman. Thus, the negligence claim will go forward.

COA: Wage & Hour Default Judgment Triggers Double-Damage Liability

Yesterday the NC Court of Appeals (COA) upheld a $355,000 Wage & Hour Act judgment based on a default judgment that was entered after the former employer-defendant failed to answer the complaint. The defendant argued that its records showed it actually overpaid plaintiff by $32,777, but it was saddled with a $355,000 judgment nonetheless. The case is Luke v. Omega Consulting Group, LC.

That judgment included liquidated damages under the Act, which makes an employer liable for double the wages due unless "the employer had reasonable grounds for believing that the act or omission was not a violation of [the Act]." Defendant argued that it should've been permitted (in the post-default hearing on damages) to present a good faith defense to liquidated damages. The COA held that by defaulting, the defendant waived its right to defend against liability for liquidated damages: "it waived its chance to assert a good faith defense, by failing to respond to plaintiff's complaint."

In short, it's doubly dangerous not to answer a Wage & Hour Act complaint (or, as this defendant contended, exponentially dangerous since it owes $335k to a former employee it contends was owed nothing). The case is an extreme example of how a default judgment can operate to foreclose the defendant from raising damages issues that are also deemed to relate to liability.

COA Dismisses Inverse Condemnation Appeal As Interlocutory

In Wilfong v. NC DOT, property owners conveyed part of their property to DOT so that it could widen a road. The owners then alleged that the highway had been raised higher than planned and made their driveway too steep to reasonably access their property. They filed a motion for hearing under N.C. Gen. Stat. §§ 136-108 and 136-111 to have the trial court determine all issues except damages. The trial court held that the change in the level of the highway was a taking, but did not determine damages. The COA held that DOT's appeal was interlocutory because the trial court's ruling did not resolve all issues and did not affect a substantial right.

COA Upholds Arbitration Clause Dealing With Dissolution of Partnership

In In re Jarvis & Sons, members of a general partnership appealed the trial court's ruling denying parts of their motion to compel arbitration in a dispute over dissolution of the partnership. The trial court found that the paragraph of the arbitration agreement saying that the withdrawing partner "shall have the right to force compulsory dissolution by court order" exempted the means of dissolution from arbitration, and decided that the partnership should be dissolved by sale. The COA concluded that the entire matter should be sent to arbitration, and reversed the trial court. Even though the arbitration clause contemplated enforcement by court order, the COA held that the clause's general language requiring arbitration of "all disputes which arise under this agreement" trumped that provision.

COA Holds That Issues Regarding Decline In Property Value After DOT's Construction Of A Median Fall Within The Trial Court's Discretion

In Dept. of Trans. v. Blevins, the DOT filed a complaint and declaration of taking to widen a highway that ran in front of Blevins' convenience store. The taking involved 279 square feet of property and a drainage easement, and the widening involved construction of a median that Blevins claimed would further reduce the value of his property. Blevins claimed that the $2,375 DOT wanted to give him for the taking was not just compensation. The trial court found that the road widening and median construction reduced the fair market value of the property and awarded Blevins $74,000.01. On appeal DOT argued that the construction of a median to separate lanes of traffic is an exercise of the State's police power and is not a compensable injury. The COA majority disagreed and held that the trial court did not abuse its discretion in admitting evidence of the effect of the highway's median on the value of Blevins' property. Judge Jackson dissented, arguing that two NC Supreme Court cases, Barnes v. North Carolina State Highway Comm'n, 257 N.C. 507, 126 S.E.2d 732 (1962), and City of Concord v. Stafford, 173 N.C. App. 201, 618 S.E.2d 276 (2005), denied property owners compensation for the diminution in value resulting from median construction because this was a proper exercise of police power. The majority distinguished Barnes and Stafford, saying that those cases dealt with situations where the decrease in value resulting from construction of a median was the primary damage from the taking, whereas here there was also a taking of part of Blevins' property and a drainage easement. The majority characterized the issue as whether the trial court properly exercised its broad discretion in admitting evidence.

COA Releases First Decisions Of 2009

Today the NC Court of Appeals released 27 published opinions, of which eight are criminal. More on these cases later.