Non-Compete Agreements Cannot be "Reasonable-ized" by Court--Even with the Parties' Consent

Yesterday, the Supreme Court stiffened its stern treatment of non-compete agreements. At issue in Beverage Systems was a non-compete clause that allowed the trial court to modify its geographic scope if the court determined the original scope was unreasonable. The trial court, however, declined to shrink the agreement’s scope--even after finding it unreasonable. The Court of Appeals reversed, noting that the parties had expressly empowered the trial court to modify the agreement. Tailoring was appropriate, the COA held, because it “makes good business sense and better protects both a seller’s and purchaser’s interests in the sale of a business . . . . in a rapidly changing economy.”

But The Supreme Court rejected the COA’s premise. Because “parties cannot contract to give a court power it does not have,” the parties could not authorize the trial court to modify the agreement. “Allowing litigants to assign to the court their drafting duties as parties to a contract would put the court in the role of scrivener," the Court held. "We see nothing but mischief in allowing such a procedure.”

So it seems that court-may-modify clauses in non-compete agreements are now unenforceable in North Carolina.

COA Confirms That Any Appeals in Suits Designated Complex Business Cases After October 1, 2014 Must Go to the NC Supreme Court, or Face Dismissal

Today the Court of Appeals issued a decision addressing Session Law 2014-102, the 2014 Business Court Modernization Act, which requires that appeals in matters that are designated as mandatory complex business cases go straight to the NC Supreme Court.  The case is Christenbury Eye Center v. Medflow, Inc. and Riggi.  

This case involved a dispute between Christenbury, which offered opthalmalogic and eye services, and Medflow, which provided medical records management software and was founded by Riggi. Christenbury filed a Complaint on September 22, 2014 against Medflow and Riggi, alleging that they  breached an agreement to further develop and resell the software platform to other ophthalmological practices by failing to pay royalties owed to Christenbury. The case was designated as a mandatory complex business case on October 29, 2014. 

Judge Gale granted Medflow and Riggi's motions to dismiss Christenbury's claims for breach of contract and unfair and deceptive trade practices.  Christenbury appealed to the Court of Appeals.

The COA found that it lacked jurisdiction to consider the appeal, explaining that "[i]n 2014, our General Assembly enacted Chapter 102 of the 2014 North Carolina Session Laws, which, among other things, amended N.C. Gen. Stat. § 7A-27 so as to provide a direct right of appeal to the Supreme Court from a final judgment of the Business Court.[.]"  The Court further concluded that the effective date of the 2014 amendments to N.C. Gen. Stat. § 7A-27(a)(2) was October 1, 2014, and any case designated as a mandatory complex business case after that date (whether it was filed before that time or not) was subject to the 2014 amendments to N.C. Gen. Stat. § 7A-27(a)(2).

There are certainly myriad cases currently pending in Business Court that will lead to appeals.  Just remember that if your case was designated after the magic date, you'll face dismissal (and likely lose your right to appeal due to untimeliness) if you don't go straight to the Supreme Court.

And....we're back!

After a bit of a hiatus, the NC Appellate Blog is back to bring you (hopefully) quick and useful summaries of state appellate court decisions that relate to civil and business litigation...and anything else we think is particularly interesting for litigators in North Carolina, including judicial elections and appointments.  We hope you'll follow us and send us any comments or questions you may have!

NC COA: Tillman Substantive Unconscionability Test No Longer Valid

The North Carolina Court of Appeals' unanimous decision in Torrence v. Nationwide Budget Finances dramatically reshapes the law governing the unconscionability of arbitration clauses.  The Court of Appeals held that the United States Supreme Court’s recent rulings regarding arbitration clauses in AT&T Mobility LLC v. Concepcion and American Express Co. v. Italian Colors Restaurant have undermined North Carolina Supreme Court’s reasoning in Tillman v. Commercial Credit Corp., the leading North Carolina case on the unconscionability of arbitration clauses.  If Torrence stands, it will eliminate the current test for determining whether an arbitration clause is substantively unconscionable and, by extension, the entire test announced in Tillman regarding the unconscsionability of arbitration clauses.

This case arises out of the relationship between two borrowers, James Torrence and Tonya Burke, and County Bank of Rehoboth Beach, an FDIC insured Delaware bank that offered short-term consumer loans in North Carolina.  In 2003 and 2004, the borrowers obtained eighteen loans or loan renewals from County Bank.  The borrowers signed an identical note and disclosure agreement in connection with each loan or renewal which contained an agreement to arbitrate all disputes that arose from the loans and a waiver of the borrower’s right to participate in a class action related to the loans.  The National Arbitration Forum ceased conducting arbitrations shortly after the borrowers signed the loan agreements.

The borrowers subsequently brought claims against the defendants alleging violations of North Carolina’s Consumer Finance Act, the North Carolina unfair trade practice laws, and North Carolina usury laws.  The plaintiffs sought to have the matter certified as a class action.  The defendants responded by filing an answer, a motion to dismiss due to lack of personal jurisdiction, and a motion to compel arbitration.

 The trial court denied the motion to compel arbitration, denied the motion to dismiss, and granted a motion certifying the action as a class action.  The trial court denied the motion to compel arbitration based, in part, on the grounds that the arbitration agreements were procedurally and substantively unconscionable.  The defendants immediately appealed the trial court’s order.

 After reviewing the applicable cases, the Court of Appeals found itself “in the difficult position that the holdings of the North Carolina Supreme Court in Tillman conflict with those of the United States Supreme Court in Concepcion and Italian Colors.”
 The United States Supreme Court’s opinions, which were both issued after Tillman, rejected the various factors the North Carolina Supreme Court utilized in Tillman to determine that an arbitration clause was substantively unconscionable.  These factors were (1) prohibitively high arbitration costs; (2) an arbitration clause that is excessively one sided and lacking mutuality; and (3) a provision in the arbitration agreement which prohibited joinder of claims and class actions.

The Court of Appeals determined that the trial court should not have focused on the potential for prohibitively high arbitration costs because, in Italian Colors, the United States Supreme Court rejected the Second Circuit’s approach which focused on the cost of developing evidence which the parties could use to support their claims.  The reasoning of Italian Colors was construed by the Court of Appeals “as eliminating the type of cost analysis applied by the North Carolina Supreme Court in Tillman.”
 The one sided nature of an arbitration agreement was no longer a valid ground for finding the arbitration clause to be unconscionable because the United States Supreme Court “in Concepcion was dismissive of the idea that an arbitration agreement, apart from any other form of contract, could be found unconscionable based upon its adhesive nature.”  Given that most consumer contracts are now contracts of adhesion, “the one-sided quality of an arbitration agreement is not sufficient to find it substantively unconscionable.”

 Finally, the United States Supreme Court’s opinions in both Concepcion and Italian Colors precluded using the presence of a class action waiver in an arbitration agreement as a ground for finding the agreement to be substantively unconscionable.  Such an arrangement is not unconscionable because parties are able to “‘effectively vindicate’ their rights in the context of a bilateral arbitration.”

 After applying Concepcion and Italian Colors, there were no remaining grounds to find the arbitration agreement at issue to be substantively unconscionable.  Because under Tillman a contract must be both procedurally and substantively unconscionable to be declared unenforceable, the lack of substantive unconscionability required the reversal of the trial court’s order.

As the Court of Appeals’ analysis focused on the Tillman factors generally and not the specifics facts of this case, this case could spell the end of the Tillman test and broaden the ability of corporations to utilize arbitration clauses in consumer contracts.  However, given that the opinion finds that a North Carolina Supreme Court opinion is no longer applicable and will have a large impact on consumer transactions across the state, it is likely that the North Carolina Supreme Court will weigh in on Tillman’s continuing viability before this case is over.  

COA: Admission by Defendants That They Received Summons and Complaint is Sufficient for Proper Service

On Tuesday the Court of Appeals held that an individual defendant can be properly served even if they don't accept service of the summons and complaint; the defendant just needs to personally receive it from the party who was actually served.  The case is Washington v. Cline et al.

Plaintiff Frankie Washington was imprisoned for six years on charges of assault with a dangerous weapon, attempted robbery with a dangerous weapon, assault and battery, and attempted first-degree sex offense, and these charges were vacated by the COA due to violations of Washington’s right to a speedy trial. Frankie Washington and his son Frankie Jr. brought multiple claims against various officials of Durham, the City of Durham, and the State of North Carolina related to Frankie Sr.'s  imprisonment, including constitutional violations, malicious prosecution, negligence, negligent and intentional infliction of emotional distress, conspiracy, and supervisory liability.

The trial court dismissed  Plaintiffs' claims for insufficient service of process.  Defendants were served via FedEx, a designated delivery service.  However, one defendant was served by delivery of the package to his minor grandson who was playing in the front yard; another received the FedEx package after it had been left at her front doorstep; and several others were served by leaving the package with an employee for the City’s Police Department who was responsible for “receiving materials and supplies delivered to the Police
Department for use in its operations.”  All these defendants admitted in affidavits that they personally received the summons and complaint.

Plaintiffs appealed the trial court's dismissal of their Complaint.  Defendants argued that a designated delivery service must personally serve natural persons or service agents with specific authority to accept service with the summons and complaint in order to sufficiently “deliver to the addressee" under Rule 4(j)(1)(d) and N.C. Gen. Stat. § 1-75.10(a)(5).   The COA found that the plain language of N.C. Gen. Stat. § 1-75.10 allows a plaintiff to prove service by designated delivery service with evidence that copies of the summons and complaint were “in fact received” by the addressee, and it's not necessary to show that the delivery service agent personally served the individual addressee.  Thus, the Court noted, "the crucial inquiry is whether addressees received the summons and complaint, not who physically handed the summons and complaint to the addressee."  The COA further noted that the fact that the legislature failed to include a personal delivery requirement in Rule 4(j)(1)(d) when it did so in other subsections throughout the statute indicated its intention to exclude it, and Plaintiffs provided sufficient evidence in the form of delivery receipts and affidavits pursuant to Section 1-75.10 to prove that all defendants-appellees except the City were properly served under Rule 4(j)(1)(d). The COA unanimously found that Plaintiffs properly served all defendants except the City of Durham, and reversed the trial court’s dismissal of the claims against them.  The summons and complaint issued to the City were not addressed to either the mayor, city manager, or clerk as required by Rule 4(j)(5)(a), and were instead addressed to the City Attorney, which was insufficient to confer jurisdiction over the City. The only evidence plaintiffs provided that the City was properly served was a newspaper article wherein the mayor mentioned the lawsuit (which could indicate that he in fact received the summons and complaint).  Even though the mayor had actual notice of the lawsuit, this wasn't enough to give the Court jurisdiction over the City.

COA: Parties Facing Dismissal of Note Enforcement Action Should Clearly Plead the Chain of Title, and Request that Any Dismissal of The Complaint be Without Prejudice.

Tuesday the Court of Appeals made clear that, in order to avoid dismissal, parties seeking to enforce a note need to make a clear showing that they're the holder.  The Court also reminded litigants that they should take measures in advance to avoid a dismissal with prejudice.  The case is First Federal Bank v. Aldridge.

Plaintiff First Federal Bank ("FFB") sought enforcement of two promissory notes executed by defendant Aldridge. Both of the notes identified Aldridge as the borrower and “Cape Fear Bank” as the lender. FFB was not referenced in either note.  FFB attached an affidavit to its complaint that included a statement from an employee familiar with the books and records related to the notes, and that the notes were in default.  The trial court dismissed the Complaint with prejudice on the grounds that FFB had failed to sufficiently plead that it was the holder.

The Court found that "evidence that a plaintiff is the holder of a promissory note, or has otherwise acquired the rights of the holder, is an essential element of a cause of action upon such note."  Because neither the text of the complaint nor the affidavit indicated that FFB had acquired the debt from Cape Fear Bank or was otherwise entitled to enforce them as a holder in due course, the COA found that FFB had not demonstrated its right to enforce promissory notes which were executed by Aldridge with a third party bank, and affirmed the trial court's dismissal of the Complaint.   The COA also noted that if FFB had been a payee or endorsee of the notes that were attached to the Complaint, it would have been the prima facie owner and holder. Here, FFB did not plead that the notes had been assigned or transferred to it from the third party bank.

FFB also argued that dismissing its Complaint with prejudice was inequitable, and that it should have had an opportunity to amend the Complaint.  Noting that the decision to dismiss an action with or without prejudice is subject to an abuse of discretion standard, and that the party whose claim is being dismissed has the burden to show it deserves a "second chance," the COA found that the dismissal was proper because the record contained no evidence that Plaintiff sought to amend the complaint during the hearing or afterward, nor did it move for a dismissal without prejudice.

Court of Appeals Holds Michael Peterson Entitled to New Trial

Today, in the case of State v. Peterson, a panel of the North Carolina Court of Appeals (Hunter, Robert C.; Stroud; Ervin) unanimously affirmed the trial court's order granting Michael Peterson's motion for appropriate relief and granting him a new trial.  James P. Cooney, III of Womble Carlyle served as Peterson's appellate counsel.

Following a highly publicized trial, Peterson was convicted in 2003 of the first degree murder of his wife, Kathleen Peterson, and was sentenced to life in prison.  The State's theory at trial was that Peterson intentionally killed his wife by striking her repeatedly with a fireplace blowpoke, causing her to fall down a staircase.  Peterson, on the other hand, contended that his wife died as a result of an accidental fall.

In February 2011, Peterson filed a motion for appropriate relief ("MAR") based on alleged newly discovered evidence concerning misrepresentations made at trial by one of the State's key witnesses, State Bureau of Investigation Agent Duane Deaver, who had testified as an expert in bloodstain pattern analysis.  The newly discovered evidence concerned, among other things, Agent Deaver's representations regarding the number of cases involving bloodstain analysis in which he had participated, the number of reports he had written in cases involving bloodstain analysis, the number of times he had qualified as an expert witness in bloodstain analysis, and the number of times he had been to a potential crime scene involving an alleged accidental fall.  At the conclusion of the hearing on the MAR in December 2011, the trial court granted the MAR, vacated Peterson's conviction, and granted him a new trial.  The State appealed to the Court of Appeals.

On appeal, the State contended in part that Peterson was not entitled to a new trial because he failed to establish all of the prerequisites needed to prevail on a MAR based on newly discovered evidence.  There are seven elements which a defendant must establish in order to prevail on a MAR:

1. that the witness or witnesses will give newly discovered evidence,
2. that such newly discovered evidence is probably true,
3. that it is competent, material and relevant,
4. that due diligence was used and proper means were employed to procure the testimony at the trial,
5. that the newly discovered evidence is not merely cumulative,
6. that it does not tend only to contradict a former witness or to impeach or discredit him, and
7. that it is of such a nature as to show that on another trial a different result will probably be reached and that the right will prevail.

The Court of Appeals held that the evidence of Agent Deaver's misrepresentations concerning his qualifications satisfied the seven criteria.  As to the first and second elements, numerous witnesses testified at the MAR hearing regarding Agent Deaver's misrepresentations about his qualifications and the manner in which this evidence was discovered after Peterson's conviction, and the State did not contest this evidence.  Third, the evidence was relevant and material in that it was logically related to issues at Peterson's trial—specifically, Agent Deaver's testimony and, relatedly, his credibility; further, this evidence had a direct bearing on the issues at trial.  Fourth, Peterson attempted to procure this testimony at trial through extensive voir dire questioning.  Fifth, the evidence was not cumulative because Peterson was unable to demonstrate this evidence at trial.

Sixth, the evidence constituted much more than impeachment evidence.  The Court held that due to the importance of Agent Deaver's testimony, the evidence concerning his qualifications would have completely undermined the credibility of the State’s entire theory of the case, as he was the only witness to describe to the jury how he believed Peterson killed his wife, and was the only witness to testify that the bloodstains indicated that Peterson had tried to not only clean up the scene but was also close to his wife at the time she sustained her injuries.  Finally, as to the seventh element, the Court held that had Agent Deaver's testimony been undermined, the jury would probably not have unanimously agreed on a guilty verdict based on this evidence.  Therefore, the Court held that the trial court had not erred in vacating Peterson's conviction and ordering a new trial.

The Court of Appeals also rejected the State's argument that if the Court did not reverse the MAR order, it should, in the alternative, remand the case for a new hearing.  The State argued that the trial court erred in precluding the State from asking specific questions of Peterson's experts and in granting Peterson's motion in limine regarding certain experts the State intended to call.  However, the Court of Appeals held that the State was trying to collaterally establish that the jury would have reached the same verdict based on evidence not introduced at trial, and the trial court had properly excluded this evidence because it was beyond the scope of the MAR hearing.

Accordingly, the Court affirmed the decision of the trial court.

Court of Appeals Opinions

The North Carolina Court of Appeals released opinions this morning.  They are available for viewing here.

North Carolina Supreme Court Clarifies Rule Regarding "Initiation of Proceedings" in Context of Malicious Prosecution Claim

In N.C. Farm Bureau Mutual Insurance Co. v. Cully’s Motorcross Park, Inc., the North Carolina Supreme Court recently clarified an important rule regarding when a third party who provides investigative information to law enforcement may be held liable for malicious prosecution.  In this case, an investigator for the plaintiff, Farm Bureau, who was investigating a house fire found evidence of arson and reported his suspicions to a Wilson Police Department sergeant.  The investigator’s findings included allegations that the defendant, the president and sole stockholder of the company that owned the property at the time of the fire, had failed to report to Farm Bureau that there was a deed of trust on the property when she insured it, when she filed a claim of loss after the fire, or when she later sold the burned property to a purchaser who did not know it was still encumbered.  The defendant was later arrested and charged with obtaining property by false pretenses based on her sale of the encumbered property, although that charge was later dismissed.  When Farm Bureau brought a declaratory judgment action seeking a ruling it was not obligated under the property’s insurance policy, the defendant brought a counterclaim for malicious prosecution against Farm Bureau.

To prove a claim for malicious prosecution, the defendant had to show that (1) Farm Bureau initiated the criminal proceeding against her, (2) malice on the part of Farm Bureau in doing so, (3) lack of probable cause for the initiation of the criminal proceeding, and (4) termination of the earlier proceeding in favor of the defendant.  The issue on appeal was whether the trial court properly found that Farm Bureau had initiated the prosecution of the defendant.  The Court of Appeals held that Farm Bureau had initiated the criminal proceedings, reasoning that without the efforts of Farm Bureau’s investigator in investigating the claim and providing all of his information to the police, it was unlikely that the defendant would have been criminally prosecuted.

On appeal, the Supreme Court disagreed, citing Section 653 of the Restatement (Second) of Torts, which provides that giving a public official information of another’s supposed criminal conduct “or even making an accusation of criminal misconduct does not constitute a procurement of the proceedings initiated by the officer if it is left entirely to his discretion to initiate the proceedings or not.”  The Court reasoned that this rule protects important public interests by allowing citizens to make reports in good faith to the police and prosecutors without fear of retaliation if the information proves to be incomplete or inaccurate.  Moreover, the Court explained that this “sensible approach encourages independent investigation by those in law enforcement who receive the information.”

Applying this test to the facts, the Court held that Farm Bureau had not instituted the proceedings against the defendant, relying on testimony from Farm Bureau’s investigator that he never asked the police to arrest the defendant or initiate a prosecution against her and never made any suggestions as to what the police should do with the information he gave them, as well as testimony from the investigating officer that the decision to criminally charge the defendant was his entirely his decision.  The Court's full opinion can be found here.