COA Rules Against Terminated Employee Based On Absence Of Consideration To Support Employment Agreement

Today the Court of Appeals (COA) issued a split decision upholding a directed verdict for an employer in a contract action brought by a former VP of marketing after he was terminated. The case is Franco v. Liposcience, Inc. Judges Wynn and Hunter (the senior) were in the majority; Judge Ervin dissented.

The employer argued that plaintiff, Franco, was an at-will employee. Plaintiff contended he had an employment contract, relying on a letter the employer had issued after Plaintiff had already been serving as an at-will employee (the "Retaliation Letter"). The Retaliation Letter promised not to retaliate against Plaintiff based on his father's actions and not to take adverse employment action against him for two years absent approval of the new chairman. (The Retaliation Letter arose in the context of his father's severance agreement when his father was ousted as chairman of the company; when the board voted to remove his father as chairman, his father execute a release and received concessions, among them the Retaliation Letter protecting his son.)

The trial court ruled that the Retaliation Letter wasn't supported by any consideration from Plaintiff and thus wasn't an enforceable employment contract, with the consequence that Plaintiff was an at-will employee with no contract claim. The COA majority agreed, holding that Plaintiff couldn't rely on consideration given by his father in the context of the father's severance (i.e., couldn't rely on a third-party beneficiary theory) and that Plaintiff's continued employment wasn't valid consideration (no more so than it would be in the context of a non-compete executed by an employee without independent consideration).

Judge Ervin dissented. For consideration, he relied on the father's surrender of his right to take legal action against Defendant (the employer) when the father was ousted as chairman. Judge Ervin deemed there to be "ample consideration for the Retaliation Letter based upon [the father's] decision to enter into the Severance Agreement rather than pursue whatever legal rights he might have had against Defendant following his removal as Defendant's Executive Chairman."

COA Issues Significant Tax Decision Upholding Secretary's Authority To Force A Combination Of Corporate Entities For Tax Purposes

Today the Court of Appeals (COA) issued a significant tax decision for corporations that stratify their operations into multiple entities. The case dealt with the power of the Secretary of Revenue to force a combination of the corporate entities for purposes of reporting taxable income. The COA ruled in favor of the Secretary. The case is Wal-Mart Stores East, Inc. v. Hinton. (A related ruling today is Sam's East, Inc. v. Hinton, which simply relies on the Wal-Mart ruling to uphold the Secretary's forced combination.)

The case concerned Wal-Mart. In 1996 Wal-Mart reorganized its corporate structure. Plaintiff is the entity that operates Wal-Mart Stores stores in North Carolina and in 29 other states. Plaintiff owns companies that own Wal-Mart Property Company (PC), which in turn owns all the voting units of Wal-Mart Real Estate Business Trust (REIT). The REIT came to own all real property for Wal-Mart store premises. Plaintiff leased land and buildings from the REIT for the store premises; and for tax purposes Plaintiff deducted those rents that it paid the REIT. The REIT's rental income passed upstream to PC in the form of dividends. The REIT deducted those dividend payments from its income on its N.C. tax returns. PC then paid dividends to Plaintiff, which Plaintiff subtracted from its business income for tax purposes.

Plaintiff reported taxes to NC separately from the REIT. PC didn't file returns in N.C. because it doesn't do business here.

After an audit, however, the Secretary determined that the earnings of Plaintiff must be combined with REIT and PC in order to present true earnings in N.C. The combination approach substantially increased Plaintiff's tax and the aggregate N.C. tax owed by the three companies separately -- one of which, PC, didn't even do business in N.C. and thus had no prior reported tax liability here.

Plaintiff filed an action demanding a refund of taxes paid: about $30 million. The gravamen of the complaint was that the Secretary had no authority to force a combination of Plaintiff with the two affiliates for the purpose of reporting taxable income.

Plaintiff complained that the Secretary had never published any guidance indicating that a corporation may not deduct rents it pays to a related real estate trust. Plaintiff argued that "[a] combined return effectively treates multiple corporations, which are viable and separate legal persons, as a single unit and thus eliminates the effects of transactions between those separate legal entities; this occurs because the income and deduction items for the two sides of a transaction cancel each other or are disregarded. Plaintiff maintained that "no North Carolina court had ever held that related entities may be required to file a combined return if intercompany transactions are performed at arm's length."

The COA, however, held that the Secretary had the power to force the combination: "where a taxpayer's business is concededly unitary, and where, as here, the taxpayer attempts to reclassify income as nonbusiness or nonapportionable, the reclassification has the potential to distort true earnings in North Carolina even if all intercompany transactions are accounted for at arm's length, or fair value, prices," the COA concluded. After concluding that the Secretary didn't exceed his statutory authority, the COA rejected Plaintiff's numerous constitutional challenges to the forced combination.

Today's decision upholding the Secretary's combination authority may have significant consequences for a number of businesses using fragmented corporate structures.

Today's COA Decisions

The NC Court of Appeals released 19 published opinions today. Nine are criminal cases. Three are workers' and unemployment comp cases. As for the remaining seven, two are related corporate tax cases. More on today's cases later.

4th Circuit: Insurer Had No Duty To Defend Gov't Contractor Against Claims Alleging Torture At Abu Ghraib

Today the Fourth Circuit held that an insurer had no duty to defend its insured against claims alleging torture and abuse at Abu Ghraib and other prisons in Iraq. The case is CACI Int'l, Inc. v. St. Paul Fire & Marine Ins. Co.

The insured, CACI, was a government contractor that provided logistical and intelligence support for U.S. operations in Iraq, including screening and interrogating detainees at Abu Ghraib and other Iraq prisons. Because the insurance policies generally limit coverage to the U.S. and Canada and the injuries occurred in Iraq, the Court ruled there was no coverage.

CACI argued that the alleged abuses may be covered under the so-called "short time" exception to the territorial coverage provision--an exception for "injury or damage" that "result[s] from the activities of a person whose home is in the coverage territory, but is away from there for a short time on [CACI’s] business." The Court disagreed, holding that this limited exception can't encompass activities of the scope and magnitude of CACI’s operations in Iraq. The underlying complaints against CACI alleged a systematic pattern of activities lasting months and even years.

4th Circuit Lets "Market Timing" Fraud Action Proceed Against Janus

Today the Fourth Circuit reversed the Rule 12(b)(6) dismissal of a putative class action alleging securities fraud based on allegedly misleading prospectuses about "market timing." The case is In re Mutual Fund Investment Litigation.

The suit was filed by shareholders of Janus Capital Group, Inc. (JCG) alleging that JCG and its subsidiary violated § 10(b) and § 20(a) of the Securities Exchange Act of 1934 and SEC Rule 10b-5. The complaint alleged that JCG and the subsidiary were responsible for misleading statements appearing in Janus fund prospectuses. These statements represented that the funds’ managers did not permit, and took active measures to prevent, "market timing" of the funds. (Market timing, as it occurred here, refers to the practice of rapidly trading in and out of a mutual fund to take advantage of inefficiencies in the way the fund values its shares--strategies like time-zone arbitrage, which can occur when a fund is invested in foreign securities. Market timing has the potential to harm other fund investors by diluting the value of shares, increasing transaction costs, reducing investment opportunities for the fund, and producing negative tax consequences.) The complaint alleged that statements about market timing appearing in various Janus fund prospectuses were misleading because they falsely represented that the funds had policies of preventing market timing when, in fact, fund managers explicitly permitted significant market timing and late trading to occur. The complaint alleged that the class bought fund shares at inflated prices and thereafter lost money when market timing practices authorized by defendants became known to the public.

The district court concluded that plaintiffs had failed to sufficiently plead certain elements of their claims. The Fourth Circuit disagreed.

As for primary liability under § 10(b) of the Act, the Court offered an extensive analysis about the type of "attribution" required to establish reliance for the "fraud on the market" theory (i.e., before a court will assume that misleading information is reflected in the market price of the security). The attribution issue is whether the publicly disseminated information is attributable to the defendant. The Court held that the complaint's allegations were sufficient to attribute the misleading statements to JCG's subsidiary, but not to JCG itself, based on the subsidiary's role as investment advisor. Thus, the primary liability claim may proceed against the subsidiary, but not against JCG itself.

As for JCG, however, the Court held that the complaint adequately pleaded a claim for "control person liability" under § 20(a) of the Act. This was based on the complaint's allegations of JCG's complete ownership of the subsidiary, overlapping management between the two, control of the subsidiary by JCG executives, and presumptive authority by JCG to regulate market timing activity in the Janus funds.

COA: Revised Uniform Arbitration Act Does Not Permit Interlocutory Appeals from Orders Compelling Arbitration

Yesterday the COA held that the Revised Uniform Arbitration Act (RUAA) does not allow interlocutory appeals from orders compelling arbitration. The case is Bullard v. Tall House Bldg. Co.

In this case the Bullards entered into a Building Agreement with Tall House that contained an arbitration provision. A dispute between the parties over defects in a house was arbitrated and an arbitration award was issued. The trial court vacated part of the arbitration award and issued an order compelling a new arbitration proceeding to resolve outstanding issues. On appeal Tall House argued that the order compelling arbitration should be reversed, and that its interlocutory appeal should be allowed because because a new arbitration proceeding would force it to endure added expense and delay and cause “potential for multiple inconsistent arbitration awards,” affecting its substantial rights.

The COA noted that the Revised Uniform Arbitration Act does not permit an immediate appeal of an order compelling arbitration, which Tall House cited as the primary cause for impairment of its substantial rights. The COA also found that any new arbitration award would not be inconsistent with the prior award because the new arbitration would only address unresolved issues, and that “avoiding the time and expense of trial is not a substantial right justifying immediate appeal.” The COA thus dismissed the appeal.

Today's COA Decisions

The NC Court of Appeals issued 30 published decisions today. Nine are criminal cases.

More on today's cases later.

4th Circuit Clarifies Limitation Period In EEOC Cases

Yesterday the Fourth Circuit decided when an EEOC decision becomes "final" for the purpose of commencing the 90-day limitation period for filing suit under 42 U.S.C. § 2000e-16(c). The case is Cochran v. Holder.

The issue arose because the complainant filed a motion for reconsideration with the EEOC. He did file his federal suit within 90 days of denial of his recon motion, but that was more than 90 days after the conclusion of his initial EEOC appeal. The district court interpreted an EEOC regulation to require that the 90-day period begins running from the conclusion of the initial EEOC appeal—regardless of whether the employee timely files a motion for reconsideration. Thus, the district court dismissed the suit as untimely. The Fourth Circuit reversed.

The Fourth Court relied on a pair of Supreme Court decisions that, although interpreting different statutes, addressed the same question: whether timely petition for administrative reconsideration stays the running of the statutory limitation period until the petition has been acted on by the agency. See Stone v. INS, 514 U.S. 386 (1995); ICC v. Bhd. of Locomotive Engineers, 482 U.S. 270 (1987). In each case the Supreme Court held that the recon petition stays the limitation period. The Fourth Circuit said the district court should be excused from not considering those cases since the parties never brought them to the district court's attention.

Today's NC Supreme Court Decisions

Today the NC Supreme Court released orders on petitions as well as opinions.

With respect to petitions, the Court granted review in two cases, one civil, one criminal. The civil case concerns a trial court's decision to revoke the pro hac vice admission of two Indiana attorneys on the ground that they engaged in improper behavior and violated the Rules of Professional Responsibility. The Court of Appeals reversed that order, and one of the defendants (Abbott Labs) filed the PDR to reinstate the sanction.

Aside from orders, the Court issued 11 per curiam decisions and opinions. Five of the 11 are per curiam affirmances or reversals. Six are actual opinions. Half the cases are criminal, juvenile delinquency, or child abuse appeals.

The two newsworthy decisions of the day are Wake Cares, Inc. v. Wake County Bd. of Educ. and N.C. Dept. of Correction v. N.C. Medical Bd. Wake Cares is a 4-3 decision holding that school systems don't need parental consent to assign kids to year-round schools. Justice Timmons-Goodson wrote the majroity opinion; Justices Martin, Newby, and Brady dissented. (For a story on the case, see here.) The N.C. Dept. of Correction case is a 4-3 decision holding that the Medical Board can't punish physicians for taking part in executions. Justice Brady wrote the majority opinion; Justices Hudson and Timmons-Goodson and Chief Justice Parker dissented. (For a story on the case, see here.)

The Court also affirmed an unfair trade practice judgment in a case on which we blogged last August (see here).

Today's cases don't include any major developments for the business community.